Top Buys of Seth Klarman’s Baupost Group

By Sandeep Gupta - September 9, 2012 | Tickers: BP, CVX, HPQ, ORCL, SAP | 0 Comments

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Baupost Group, LLC, is a hedge fund founded and run by Seth Klarman who is widely regarded as one of the best investors of all time. In the last 28 years, the assets under his management have grown from $27 million to well over $22 billion and according to a report by Bloomberg, Baupost Group is the fourth largest hedge fund in net gains (~$16 billion) since its inception. In this article I will be discussing its top five buys from the last quarter.

My favourite long candidates among the above stocks are Oracle Corporation (NASDAQ: ORCL) and BP Inc (NYSE: BP).

Oracle Corporation’s multiple has contracted significantly (~30%) over the last 4 years and the company is now trading at a significant discount to its peers. Oracle’s forward P/E is just 10.84 as compared to SAP AG’s (NYSE: SAP) 18.29. I believe such a highly discounted valuation is not justified as I don’t expect SAP HANA to replace the Oracle databases. Though, HANA is a good choice for customers utilizing a single data warehouse environment it will face technology and adoption barriers to replace Oracle's database. Moreover, with the release of Exalytics, Oracle also has a similar product in the market in the same price range. In addition, Oracle has two significant opportunities in mobile and cloud storage which are still in thier infancy. The big storage market is likely to grow at a fast rate and Oracle with its future engineered systems appears well positioned to tap this opportunity. Moreover, the company has announced a $10 billion share repurchase program which could contribute a $0.05 FY’13 EPS upside, if fully implemented over the next year.

BP Inc suffered back to back setbacks with the Gulf of Mexico (GOM) oil spill in 2010 and the failed Russian Arctic deal. As a result, the stock prices have taken a beating and the company is trading at a 16% discount to Chevron Corporation (NYSE: CVX), despite having better growth prospects and a higher dividend yield.

Going forward, the company is starting new sources of production with significantly higher margins than the existing portfolio and attractive unit costs. The company will be significantly increasing its activity levels in the Gulf of Mexico and is going to have eight rigs operating in 4Q12, which should ultimately support the start up of new projects. With the big three (Thunderhorse, Mad Dog and Atlantis) having their infrastructure already in place, growing production from them should prove to be one of the highest margin activities the company can undertake and one of the highest return projects in the company’s portfolio.

However, among these stocks, Hewlett-Packard (NYSE: HPQ) doesn’t appear to be a good stock to buy. I would suggest investors to avoid this stock as a further deterioration in sales and continued secular challenges in PCs and printers are big risks associated with the stock. I expect the inkjet market to continue to decline due to the success of media consumption devices (tablets & smartphones) as well as social media to share photos in the consumer segment and relatively high unemployment and an uncertain macro environment impacting the commercial segment.

Oracle and BP are low PE stocks and look consistent with the fund’s investment strategy of holding only those securities that are significantly undervalued (and holding cash when they cannot find alternatives).  SAP HANA’s threat to Oracle seems to be overblown and BP is recovering well from the Gulf of Mexico oil spill accident. Therefore, I see a huge upside potential in these two stocks.

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