Value Investor Seth Klarman's Shakeups

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Seth Klarman's Baupost Group, led by the famed value investor and author of Margin of Safety, recently revealed its public equity portfolio in its quarterly filing with the SEC. Klarman founded Baupost in 1983, and now has assets under management of nearly $30 billion. Outlined below are five takeaways from Baupost's portfolio, which include some interesting additions (check out Klarman's cheap stock picks).

Baupost kept BP (NYSE: BP) as its top stock holding after a 56% increase in shares owned. The oil and gas supermajor now makes up 23.3% of Baupost's 13F portfolio. BP reported below-consensus EPS for the first quarter, which has kept the stock in check year to date, up only 2.8% compared to the S&P 500's 15.6% upward move for the same time period. 

Part of the company's initiatives includes offloading non-core upstream properties, having already sold off its refinery in Carson, Calif. and Texas City, Tex. refineries, which hold half of its U.S. capacity. These divestures will help the company pursue other initiatives in Russia. The other appealing thing about BP is its 5% dividend, which is well above most of the other oil and gas Supermajors.

Another key pick for Baupost was American International Group (NYSE: AIG)which is the hedge fund's third-largest holding, following a 69% increase in shares owned. AIG now makes up 14.8% of Baupost's13F portfolio. In addition, AIG's key segment, property & casualty (making up 70% of revenues), saw operating income up 76.3% during 1Q from the year-ago quarter. The stock also continues to trade at a steep discount to book value, with a P/B of only 0.6. Meanwhile, another hedge fund manager, Bruce Berkowitz of Fairholme, has serious conviction in the stock, with 43% of Fairholme's portfolio invested in the stock going into 2013 (see what else Berkowitz is up to).

One of Baupost's selloffs was Oracle (NYSE: ORCL)which at the end of 2012 was the fund's third-largest holding. After a 67% selloff of shares owned during the first quarter, Oracle is now its seventh-largest holding. Part of the selloff could be a result of Oracle's slowing growth and high debt load. After having grown at an annualized 17% over the last the five years, analysts expect the tech company to grow at 10% over the next five. 

Oracle is expected to have to pay some $1.25 billion in debt repayment for fiscal 2013. It faces competition in most of its markets from IBM, Microsoft, Sybase, SAP and Teradata, and in its hardware segment, from the likes of IBM and Hewlett-Packard. Oracle also recently lost its patent infringement claims against Google for using Sun Java code to build Android. The headwinds remain afoot for this tech giant. 

A couple new additions to the Baupost portfolio include Elan (NYSE: ELN) and DirecTV (NASDAQ: DTV), ranking 8th and 17th in Baupost's portfolio, respectively. Elan is a leading worldwide specialty pharmaceutical company. S&P sees a 49% decline in 2013 revenues for the company due to the conversion of Tysabri revenues to a royalty-based structure from a co-ownership arrangement. This in part could lead to the stock's becoming undervalued. 

Elan has agreed to buy a 21% stake of Theravance's royalty rights to some respiratory programs partnered with GlaxoSmithKline for a $1 billion upfront payment. In April 2013, the company repurchased 89 million shares, retiring 14% of its shares. Although Klarman is very bullish on the stock, the analysts' predictions have the company growing EPS at an annualized 2.2% over the next five years. 

Some of the reasons that Klarman might find DirecTV attractive is its big initiatives for breaking out of the saturated pay-TV market. Its strategies include streamlining cost structure and introducing online video streaming. The company also plans to launch two more satellites in 2014 and 2015, which will further improve its service quality.

The real focus of DirecTV going forward should be Latin America. Some of its key initiatives in the region include penetration of the untapped pay-TV market and implementing wireless broadband and online on-demand video facilities. DirecTV also appears to be super cheap, with a PEG of only 0.56. Billionaire Warren Buffett also loves DirecTV (see why Buffett loves the stock).

The bottom line 

Seth Klarman is a famed value investor and he's up to his old tricks, finding deep value opportunities in a number of stocks last quarter. He kept BP as his top pick, which I also like. This stock pays investors an impressive dividend yield and still appears to have some overhang from the Deep Horizon incident back in 2010 that could lead to future price appreciation. Meanwhile, I also like AIG, which appears to be undervalued. Klarman's selloff of Oracle comes as the tech giant might be seeing slowing growth, while his new positions in Elan and DirecTV are great undervalued plays worth checking out. 

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends American International Group and DirecTV. The Motley Fool owns shares of American International Group 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!

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