The Baupost Group’s 13F Stock Holdings & Strategy

Updated on January 22nd, 2021 by Nikolaos Sismanis

Founded in 1982 by Harvard Professor William Poorvu and his partners, the Baupost Group is a long-only hedge fund, embodying a distinct focus on risk management. Among Mr. Poorvu’s founding partners was Seth Klarman, who built his billion-dollar fortune at the helm of the fund over these years, remaining the key executive today.

The fund has over $27 billion in assets under management (AUM), $7.7 billion of which is allocated to the firm’s public equity portfolio. The Baupost Group is headquartered in Boston, Massachusetts.

Investors following the company’s 13F filings over the last 3 years (from mid-November 2017 through mid-November 2020) would have generated annualized total returns of -2.89%. For comparison, the S&P 500 ETF (SPY) generated annualized total returns of 12.20% over the same time period.

You can download an Excel spreadsheet with metrics that matter of the Baupost Group’s current 13F equity holdings below:

 

Keep reading this article to learn more about The Baupost Group.

Table Of Contents

Baupost Group’s fund manager, Seth Klarman

Upon founding Baupost, Poorvu asked Klarman and his associates to handle some funds he had raised from the selling of his stake in a local TV station, and the fund was commenced with US$27 million in start-up capital. Amongst Baupost’s founder, Mr. Klarman was considered relatively inexperienced, thus the fund was taking a big rik with his involvement.

It wasn’t until 2008 that Mr. Klarman began growing the celebrity status he has today when he managed to raise $4 billion in crisis-liquidated capital from large foundations and Ivy League endowments. He would allocate $100 million of these funds in stocks and other assets per day, including distressed securities and bonds, resulting in multi-bagger returns post-2008.

Baupost Group’s investment philosophy and strategy

The Baupost Group’s investment philosophy revolves heavily around Mr. Klarman’s investing principles which can be summed into the following:

  • Risk evaluation: While this may sound like a well-known and trivial principle, in reality, sophisticated risk-aversion is far from commonly practiced in the investing world. This is especially true in times of low volatility, such as the current incredible bull market, in which market participants tend to ignore the systemic risks that arise in the underlying economy. Therefore, Mr. Klarman and his team will make sure that their risk is well-mitigated, usually by holding put options against a market index.
  • Capitalizing on “Motivated sellers”: A motivated seller is someone who, as Klarman puts it, is letting go of their shares for a non-economic reason. One such reason, for instance, can be the exclusion of stock from a major index. This can cause a stock to trade lower without anything changing in regards to its everyday operations, which can create very completing buying opportunities.
  • Capitalizing on “Missing buyers”: One of Warren Buffett’s more famous proverbs is that if you have been in a poker game for 30 minutes and still don’t know who the patsy is, you can be fairly certain it’s you. Mr. Klarman’s version is that he never wants to appear at an auction (i.e. stock buying) to discover that all the other bidders (Mr. Market) are more knowledgeable and have a lower entry cost than he does. Therefore, Baupost is likely to be buying unpopular assets if it sees value in them, in an attempt to be ahead of the overall market, despite the “missing buyers.”

Baupost Group’s portfolio & 10 largest public-equity investment

Baupost’s public-equity portfolio is not heavily diversified. Instead, its holdings are concentrated, featuring high-conviction ideas. The portfolio numbers only 27 equities, the 10 most significant of which account for 68.6% of its total composition. The fund’s largest holding, by far, is eBay, occupying nearly 1/5 of the total portfolio.

Source: 13F filing, Author

eBay Inc. (EBAY):

eBay is distinctly Baupost’s largest holding, currently accounting for 19% of its portfolio. The company’s revenues have remained mostly stagnant for nearly a decade, generating around $11 billion in sales per annum. However, the company has excelled in maximizing its profitability, consistently expanding its net income margins over the years. eBay is currently enjoying net income margins of around 50% and is essentially a cash cow that can remain wildly profitable under any economic environment.

During the ongoing pandemic, for example, the company’s financials have remained very stable, as people have been flipping their old items, have been buying second-hand home decorations, etc, causing eBay’s results to remain consistent, without any disruptions. Because eBay has struggled with growing its revenues, management has been returning massive amounts of cash to its shareholders, primarily in the form of stock buybacks.

As you can see in the graph below, since 2006, the company has retired half its shares outstanding, which is utterly staggering. That is in addition to paying a modest dividend.

Those who are looking to start a position in eBay may be happy to hear that the stock is only trading at 16 times its forward net income. Investors are not willing to pay a premium for the stock, due to its lack of growth. However, the company presents a fantastic value proposition, trading at a reasonable multiple, and offering hefty capital returns. The stock is a clear example of Mr. Clarman’s preference for underappreciated companies with a wide margin of safety. Baupost holds around 4.3% of the company’s total shares outstanding.

Fox Corporation (FOX), Viasat, Inc. (VSAT), ViacomCBS Inc. (VIAC):

These three media conglomerates comprise Baupost’s next most significant holdings, collectively accounting for nearly 1/4 of its portfolio. In the current landscape, the legacy media conglomerates have been in trouble, as content creation has mostly been decentralized. Companies such as Netflix, Amazon, and even Apple have started producing their own content, while the news outlets have moved mostly online, generating sales through ads or a subscription fee.

As a result, Fox’s, Viasat’s and Viacom’s stock prices have massively under-performed the market over the past few years, currently trading at depressed valuations. In our view, Baupost holds these three equities as an activist investor, holdings significant stakes percentages. The fund holds 4.5%, 24%, and 3% of their total shares outstanding respectively, indicating the possibility that Baupost wants to have active influence in how the companies are run, potentially aiming towards modernizing them, and reaping great rewards afterward.

For retail investors, these positions could be risky long-term bets, though admittedly attractively priced ones.

Qorvo, Inc. (QRVO):

Qorvo develops and markets technologies and products for wireless and wired connectivity worldwide. If the forecasts regarding 5G are to be true, then the semiconductor industry, along with Qorvo, are likely to enjoy massive growth over the next few years. At the same time, the company’s current revenues are quite stable as well, while the company has recently started delivering robust profits as well. Still, shares are currently trading at around 20 times the company’s forward net income, which while an extended valuation for such a cyclical industry, is most likely justifying Qorvo’s medium-term growth catalysts.

PG&E Corporation (PCG):

PG&E is a risky company. In 2017 and 2018, wildfires ignited by its grid infrastructure caused the death of more than 100 people. The Campfire also destroyed the town of Paradise. The company barely dodged bankruptcy with $38 billion in debt. We have found the stock in may funds focusing on distressed equities, which are hoping for PG&E to gradually recover from its prolonged challenges. In any case, the company is a rather risky bet, and shareholders are not likely to see any tangible capital returns any time soon.

HD Supply Holdings Inc (HDS):

As you can see in the company’s 13F filing download, its seventh-largest holding is HDS. However, the company was recently acquired by Home Depot for $8 billion a few weeks ago. Therefore, it’s quite likely that we will see HD in the company’s next 13F filing.

McKesson Corporation (MCK):

McKesson Corporation sells pharmaceuticals and medical supplies in the U.S. and internationally. The company is worth around $29 billion, despite generating more than $231 billion in revenues, as its margins are razor-thin. Its net income margins average at around 1%, which means that they are very vulnerable to potentially unprofitable quarters. As a result, the stock’s compressed valuation currently stands at around 13 times its net income.

Management has never cut the dividend and does increase it whenever the company’s net income levels up. Still, the stock’s yield remains under 1% as the company maintains a safe payout ratio due to its thin bottom line.

Micron Technology, Inc. (MU):

Baupost’s ninth-largest holding is Micron, which accounts for around 3.5% of its holdings. The stock has skyrocketed over the past few years, currently trading 8 times higher than its 2016 levels. The fund is a bit late to the party, initiating the position just last quarter. While this means that Baupost believes the stock has more room to run, at a forward P/E of around 16 the stock could be quite expensive due to semiconductors’ cyclical nature, thus making for a risky bet at its current price levels.

Translate Bio, Inc. (TBIO): 

Translate Bio is amongst the numerous companies that develop RNA-based therapeutics which could possibly reconstruct the entire biopharma space. As with most of the small-cap companies in the biopharma industry, the stock could potentially deliver massive returns should its own product succeed, or none if it fails. The competition is brutal in the space, with no clear plans towards commercialization. Investors who are not industry-insiders at the least should probably avoid such equities.

Final Thoughts

The Baupost Group’s holdings provide several interesting positions for investors to consider. Based on our calculations, the fund’s public equity portfolio has been underperforming the overall market. However, this could be due to clients joining/leaving Baupost, as well as the fund’s various hedging instruments, distorting our return results. In any case, investors are likely to find several appealing investing ideas inside its holdings, which you can download below.