Value Investor Seth Klarman's New Moves
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Seth Klarman manages one of the largest hedge funds in the world, The Baupost Group, founded in 1983 and managing some $7 billion. Klarman and his hedge fund invest across a number of areas and investments, including value-oriented stocks and distressed debt. Of late, it appears that Klarman is overly bearish on the tech industry, while being bullish on a highly popular insurance stock.
Baupost Group took a new stake in American International General (NYSE: AIG), now making up the sixth-largest position in Baupost's portfolio. Even amid the "bailout" upheaval, AIG remains one of the top sellers of workers comp, professional liability, and property coverage. The company remains committed to de-risking and re-focusing on core insurance operations, which I think is a long-term positive.
Around 60% of revenues are generated by its general insurance segment, which underwrites various business insurance products, including large commercial or industrial property insurance and liability. Meanwhile, another 20% of revenues is generated from SunAmerica Financial, the domestic life insurance and retirement services segment.
Both of these major insurance segments are a big part of of AIG revenues, and should also help the company continue its post bailout growth. From a valuation standpoint, at the end of 2012 AIG's book value per share, rose to $66, a 24% increase year over year. Yet, the stock trades at just over half this.
Tech is out of favor
Baupost had 7.4% of its portfolio invested in HP at the end of the third quarter. HP continues to see weakness related to its PC and PC-related products business. This is in part due to the competitive pressures the company is faced with, coming from the likes of other tech companies, such as IBM, EMC, Dell, Apple, BMC Software, Canon, Lexmark and Samsung, just to name a few.
The notable pressures for HP should continue, as the tech company still gets more than 50% of its revenue from PC and printer sales. Challenges for these industries (PCs and printers) are tied to secular declines and cannibalization by mobile computing devices.
If there were a tech company that I think Klarman should own, it would be the impressively diverse Microsoft, but he chose to exit the stock last quarter. The company is undoubtedly seeing pressure from a declining PC market, thanks in part to its dominant position in the desktop and notebook market, with respect to operating systems. However, the company is making strides to hedge this exposure with its recent launch of a tablet and embarking on mobile with a mobile operating system. As far as how HP and Microsoft's growth stacks up, HP is expected to grow EPS at only 0.25% over the next five years, while Microsoft is expected to grow at 9%.
As far as downsizing, Baupost cut stakes in Oracle (NYSE: ORCL) and News Corp. (NASDAQ: NWSA), selling off 22% and 36% of its 3Q stake, respectively. Oracle has a relatively high amount of debt, with over $19 billion in notes payable as of last quarter, compared to the $15 billion in the previous quarter.
Acquiring Sun Microsystems propelled Oracle to the forefront with respect to database software. But the full integration has taken longer than expected, and it could take a number of years before Sun starts providing EPS growth. The integration will likely continue to require a large portion of working capital, and also pull Oracle away from its core software-only business model.
Oracle is also seeing pressure in its general hardware business, with revenues down 18% year over year for the first half of fiscal 2013. Part of its troubles in hardware also stem from the fact that competition is robust in the market, with Oracle now competing with the likes of IBM and HP, who are looking to expand beyond their own troubled industries.
News Corp, another Klarman selloff, appears to be in "fair value" range, trading at 18 times earnings, in line with its major media peers. Management has also revised 2013 operating income projections, lowering expected growth from the low double digits to mid-single digits, on the back of lower than expected performance from SKY Italia and Fox. SKY had a second quarter fiscal 2013 operating loss of $20 million, compared to the $6 million from the same quarter last year.
Despite the impending spin off of its publishing unit, there will still be fundamental issues to address that involve a downtrend in advertising spending, which is the company's main revenue stream. The fundamental shift from advertising dollars being spent on print and TV to internet is expected to continue, another key headwind for the company.
Don't be fooled
Seth Klarman is an impressive value investor, and it appears his big theme for this year is that major tech companies will continue to struggle as PC demand declines further. Although I can agree with the Oracle and HP sell offs, I still believe there is value to be had in investing in Microsoft. Also, Klarman dumped News Corp, a good decision, and he invested heavily in AIG. The insurer should prove to continue its growth as it refocuses on core insurance operations.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group, Microsoft, and Oracle. and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!