SumZero Takes on Seth Klarman (Baupost Group)

In 1982, Seth Klarman founded the Baupost Group with just $30mm. Now with current assets under management surpassing $30bn, Klarman has become one of the most successful hedge fund managers in the world. This week we take a look at some of his recent moves and how SumZero sentiment relates to those moves.

Baupost's strategy is denoted by extreme concentration in the firm's long-only, public equity fund (which tends to constitute between 5-15% of the total value of the firm--the balance is in real estate, bonds, cash, hedges, etc.). By September of 2013, the firm’s top three equity holdings made up more than 73% of the firm's long-only, public equity book. The most notable change to Baupost’s portfolio has been its investment in Micron Technology (MU:US), a company that manufactures a number of different semiconductor devices. More specifically, MU’s major products include DRAM, SDRAM, flash memory, SSD, and CMOS image-sensing chips. Interestingly, since 2012, every SumZero analyst that has posted an idea on Micron Technology has given the stock a "Long" recommendation.

What makes Klarman’s bet on Micron Technology different from Baupost’s other investments is the sheer size of the investment. At the start of 2013, Baupost held no position in Micron Technology. By September of 2013, however, MU’s stock made up 32% of Klarman’s fund, which is double the portfolio weight of his largest holding at the start of the year, BP (BP:US). With such a large investment in Micron Technology, Baupost has obtained a 6% stake in a company that has a market cap of just over $25 billion.

While it is difficult to determine exactly when Baupost began investing in MU, the stock has performed remarkably well. In fact, Micron Technology has been one of the best performing stocks of 2013, as shares have climbed 230% from its 52-week lows. Micron Technology’s stock price has exceeded the price target of every SumZero analysts who recommended the stock. In recent weeks, Micron Technology’s stock has continued to rise. In fact, on Wednesday of this week (1/8), Micron Technology’s stock jumped more than ten percent following the release of its first quarter earnings report. Assuming Klarman is holding the same number of shares today as he did in September, Baupost’s net gain on Wednesday alone would have amounted to somewhere between $100mm and $150mm in gains. These are the fruits of extreme concentration.

At first glance, MU seems to fit the profile of a stock that Klarman would be interested in. Over the past few years, Baupost’s portfolio of stocks has become increasingly tech heavy. Today, roughly 60% of Klarman’s fund is invested in technology stocks. Some notable tech names that Klarman has held over the past year include Microsoft (MSFT:US), Oracle (ORCL:US), Rovi Corporation (ROVI:US) and Ituran Location and Control, Ltd. (ITRN:US). Over the past two years, Klarman has been slowly selling out of his position in Microsoft. While Klarman seems to have become less bullish on Microsoft, SumZero’s analysts disagree. Over the past year, only one analyst has said that Microsoft was a short, while seven have promoted holding a long position.

Another stock that Klarman and SumZero analysts seem to disagree on is Oracle (ORCL:US). Over the past year, Klarman has been selling his Oracle stock. Between December 2012 and March 2013, Klarman had sold roughly 7 million of the 10 million Oracle shares he had previously owned. While he has continued to sell his shares, SumZero analysts have generally been more positive about Oracle’s potential. In September of 2013, when Klarman had reduced his position in Oracle to only 2 million shares, one SumZero analyst had this to say about the stock, “Where else can you buy a growing business with 100%+ ROIC, a fortress balance sheet, and trading at only 10x free cash flow (ex-cash)? As management continues to take their ~$14bn in annual FCF and return it to shareholders via buybacks and dividends the stock could easily be worth $55-80 with in the next few years (~60%-135% upside).”

Take note of Klarman's big tech bets these days. He is, undoubtedly, one of the industry's best performers of all time. We at SumZero have profound respect for the man and the strategy he employs.