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3 Stocks Value Investing Legend Seth Klarman Bought in Q3 (and 2 He Dumped)

Tim Frederick

Billionaire investing legend, author and philanthropist Seth Klarman founded Baupost Group in 1982 and has grown it into one of the largest and most successful hedge funds in the world since. The fund currently controls about $30 billion in assets and manages a 13F portfolio containing $13.06 billion in holdings as of September 30.

The iconic value investor, whose 1991 book on the subject (Margin of Safety) sells for obscene amounts on Amazon, recently took aim at the short-termism which appears to be heavily infecting both the market and corporate boardrooms. During a speech he gave on October 1 during celebrations for the opening of Klarman Hall at Harvard Business School, Klarman questioned the wisdom of management teams being focused solely on their company's share price and on creating value primarily, or only, for shareholders.

"What longer-term good would this possibly accomplish?" Klarman wondered. "And does anyone really believe that shareholders are the only constituency that matters: not customers, not employees, not the community, or the country, or planet Earth?"

BAUPOST GROUP Seth Klarman

As short-termism, which clashes with the fund's investment philosphy, has grown, Baupost's returns have struggled to keep up with the market, especially when it comes to its small- and mid-cap stock picks. Our analysis of the fund's historical holdings revealed that between 2008 and 2016, those picks returned just 0.45% per month on average, widely trailing the S&P 500's 0.68% monthly returns during that time. Despite slowing returns, Klarman remains one of the wealthiest people on planet Earth, as according to Forbes' real time ranking of the world's billionaires, he has an estimated personal wealth of $1.5 billion, placing him 1,476th on that list.

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Consistent with his value investing approach, the billionaire's hedge fund made only a small number of moves in its highly concentrated portfolio during Q3, opening new positions in six stocks while selling out of just one former holding. Communications stocks continued to grow in weighting within Baupost's 13F portfolio, rising to 31.19% by the end of Q3, compared to just 8.17% a year earlier. Utilities also jumped to 6.87% from just 1.73% in the middle of 2018. On the other hand, Baupost has cut its exposure to nearly every other sector in recent quarters, including energy, IT, finance, and real estate. Baupost largely eschews popular stocks as well, as it owned just one of the 30 Most Popular Stocks Among Hedge Funds on September 30.

On the next page we'll look at five of Seth Klarman's most noteworthy moves made during the third quarter as he positioned his fund's 13F portfolio for the closing stretch of 2018.

Stocks Bought in Q3

YPF Sociedad Anonima (NYSE:YPF)

- Shares Bought During Q3: 6.00 million - Value of Holding (as of September 30): $92.70 million

- Q4 Return (through December 14): -6.86%

- Trailing P/E Ratio: 4.60

Baupost opened a new position in Argentinean energy company YPF Sociedad Anonima (NYSE:YPF) during Q3 following a steep 31% decline in the stock during the first-half of 2018. Baupost may have also been attracted by the state-owned company's Q3 announcement that it would seek to sell as much as $500 million in bonds to fuel its aggressive expansion efforts.

Univar Inc. (NYSE:UNVR)

- Shares Bought During Q3: 1.77 million - Value of Holding (as of September 30): $54.30 million

- Q4 Return (through December 14): -39.17%

- Trailing P/E Ratio: 13.37

Baupost's new stake in chemical distributor Univar Inc. (NYSE:UNVR) has gotten off to a rocky start, as the stock has lost nearly 40% in Q4. Baupost may have been compelled to buy shares after Univar announced in September that it will acquire Nexeo Solutions for $1.05 billion in a deal valued at $2 billion including debt. The transaction is expected to close by the first-half of next year and boost Univar's earnings and free cash flow within its first full year.

Twenty-First Century Fox, Inc. (NASDAQ:FOX)

- Shares Bought During Q3: 3.71 million - Value of Holding (as of September 30): $794 million

- Q4 Return (through December 14): +5.89%

- Trailing P/E Ratio: 18.64

- Forward Dividend Yield: 0.73%

One of the 10 Most Conservative Companies in America, Twenty-First Century Fox, Inc. (NASDAQ:FOX) has two classes of shares, each of which were owned in great quantities by Baupost at the end of Q3, with the fund boosting the size of both positions during the quarter as well. Its stake in FOXA remains its largest by a factor of well over 2, being valued at $2.41 billion. Baupost was up by 5.1% in the first-half of this year thanks to a 20% surge in Fox's share price during June courtesy of the escalating bidding war for its entertainment assets between Walt Disney Co (NYSE:DIS) and Comcast Corporation (NASDAQ:CMCSA).

Stocks Sold in Q3

AT&T Inc. (NYSE:T)

- Shares Sold During Q3: 9.48 million - Value of Holding (as of September 30): $0

- Q4 Return (through December 14): -10.01%

- Trailing P/E Ratio: 5.72

- Forward Dividend Yield: 6.62%

AT&T may be one of the 30 Stocks Billionaires Are Crazy About, but Seth Klarman is no longer part of that group. Baupost sold off its position in AT&T Inc. (NYSE:T) during the third quarter, which had been valued at over $304 million on June 30. That represented a quick exit from the position, which had just been bought in Q2.

Synchrony Financial (NYSE:SYF)

- Shares Sold During Q3: 12.96 million - Value of Holding (as of September 30): $508 million

- Q4 Return (through December 14): -22.46%

- Trailing P/E Ratio: 7.66

- Forward Dividend Yield: 3.49%

Lastly, Baupost sold off 12.96 million shares of Synchrony Financial (NYSE:SYF) during Q3, which amounted to 44% of the position it held on June 30. Baupost still owns $508 million worth of Synchrony shares as of September 30 and has owned the stock since the third quarter of 2016.

Disclosure: None