Billionaire Seth Klarman Pulls the Trigger on These 3 Value Stocks

·7 min read

While value investing hasn’t necessarily been the decade’s most beloved strategy, no one is a bigger proponent than billionaire Seth Klarman. The tactic, which has been a favorite of fellow Wall Street gurus like Warren Buffet and Benjamin Graham, involves seeking out stocks that appear cheap when compared to their peers based on a price-to-earnings basis. For quite some time, investors have been shying away from the strategy as the Russell 1000 Growth Index has outperformed the Russell 1000 Value Index since 2007.

Even though the billionaire’s $29 billion hedge fund, Baupost Group, returned significantly less than the broader market in 2019, Klarman has defended the tactic. He believes that “selling pressure of value names has contributed to mis-pricings that represent potential opportunity for long-term investors”, arguing that value investing will pay off when “the rocket fuel that propelled markets in 2019 will run out.”

It should also be noted that value stocks are typically cheaper, making them more likely to hold up during times of volatility, especially important given the market’s recent dramatic swings.

Taking all of this into consideration, we used TipRanks’ Stock Comparison feature to look at 3 value stocks Klarman’s fund snapped up in the most recent quarter side-by-side. The tool revealed that each is not only Buy-rated, but also boasts some hefty upside potential. Here’s what we found out.

Eldorado Resorts (ERI)

Based in Reno, Nevada, Eldorado Resorts owns and operates 28 properties throughout the country, making it one of the top casino entertainment companies.

In the fourth-quarter, Klarman's fund decided to acquire a stake in ERI, pulling the trigger on 389,026 shares worth over $23.2 million.

Back in February, ERI reported that adjusted EBITDAR came in at $146.2 million, falling $1.3 million below Deutsche Bank’s Carlo Santarelli’s forecast. Having said that, the five-star analyst still views its long-term growth narrative as being strong, specifically citing its possible merger with Caesars. “Given the CZR upside yesterday, as well as recent trading action and the valuation dislocation created by said action, we don’t think the $1.3 million shortfall…will be overly meaningful,” he commented.

Part of the issue when it comes to ERI is that due to the coronavirus induced sell-off, names inhabiting the regional gaming space have taken a significant portion of the impact. According to Santarelli, this is because gaming stocks “are levered equities and in a risk off environment, this is what tends to happen, they happen to be more trafficked in by trading oriented investors, and some, including ERI to a lesser extent, have had considerable moves higher on longer term aspirations that likely extend beyond investment horizons.”

Despite the fact that like other players in the space, ERI has taken some major hits over the last few years, each drop of more than 20% has ultimately presented a compelling opportunity. This scenario is likely to play out this time around, in the Deutsche Bank analyst’s opinion.

With ERI potentially being able to acquire financing and the Caesars merger likely to close, the deal is sealed for Santarelli.

Along with his reiteration of a Buy rating, the analyst bumped up the price target from $66 to $68. Should the target be met, shares could be in for a 96% twelve-month gain. (To watch Santarelli’s track record, click here)

Looking at the consensus breakdown, the rest of the Street is on the same page. 3 Buys and 1 Hold add up to a Strong Buy consensus rating. The $61.67 average price target puts the upside potential at 80%. (See Eldorado stock analysis on TipRanks)

HP Inc. (HPQ)

The tech giant best known for its printers and PCs has also found itself under Klarman’s microscope.

Representing a new holding for the fund, Baupost spent $205.5 million to purchase 10 million HPQ shares during the fourth quarter.

Based on its most recent quarterly results, the Street has also been thouroghly impressed. For EPS, HPQ flew past the consensus estimate if $0.54, with the result coming in at $0.65. On top of this, a stable revenue trajectory can be attributed to continued positive PC performance and EPS upside driven by impressive margins across both PCs and printing.

That being said, the real takeaway for Amit Daryanani of Evercore ISI is that the company broke the news of a buyback program. This program stands to push shares significantly higher and is a better option than the Xerox tender offer, in the analyst’s opinion. “We think HPQ presented a credible and aggressive shareholder return policy that is an attractive alternative to the XRX $24 per share offer, which would be done heavily on HP’s balance sheet,” he noted.

Daryanani points out that during a call with management they stated “HPQ remains open to a combination with XRX but needs to agree on value ascribed to HPQ, responsible capital structure and a realistic synergy target.” He added, “We think the call was incrementally insightful to understand HP’s framework going forward, though we think there remains a probability that HP could bid for XRX and in that scenario the buybacks could be more muted but FY22 EPS could end-up being higher. Our sense is investors likely prefer HPQ doing the $16 billion buyback vs. acquiring XRX.”

As HPQ’s A3 platform has the superior cost structure compared to its peers and there are potential opportunities for margin expanision, Daryanani’s bullish thesis remains intact.

Bearing this in mind, the five-star analyst reiterated an Outperform call and $26 price target, suggesting 23% upside potential. (To watch Daryanani’s track record, click here)

What does the rest of the Street think? It turns out that other analysts take more of a cautious approach. With 2 Buys and 5 Holds, the consensus rating lands at a Moderate Buy. At $26, the average price target matches Daryanani’s forecast. (See HP stock analysis on TipRanks)

ViacomCBS (VIAC)

As one of the leading producers of premium entertainment content, ViacomCBS connects billions of people located all over the world. While shares have shed 49% of their value in the last six months, some members of the Street see the weakness as a buying opportunity.

During the fourth quarter, Klarman’s fund added VIAC shares to its portfolio, 17 million to be exact. The new holding, which is worth $713.5 million, makes up 7.9% of the total portfolio.

As for the analyst community, several believe that VIAC still looks like a solid buy even after it reported lackluster quarterly results. For Q4, not only did the figures land well below the Street’s predictions, but the outlook for 2020 OIBDA was also seen as a disappointment; management guided for $5.8-6.1 billion compared to the consensus’ $6.141 billion. Given this development, investors have expressed concerns about VIAC’s investment spend.

Wolfe Research analyst Eric Katz doesn’t dispute the fact that the print was somewhat of a red flag, but argues that now, the worst could be behind Viacom. “Viewing the stock from a rosier lens, we believe mgmt. threw in the ‘kitchen sink’ for this Q4 report and we expect to see improvement in H2’20…At this point, it feels like a lot of the bad news is priced in with the stock trading at only 6.3x ’20E OIBDA & 5.5x ’20 EPS,” he explained.

Additionally Katz highlights its new 3-pronged strategy for the year ahead. “At the new VIAC, the new strategy will focus on: 1) maximizing its content globally and across many platforms, with spend directed at growthier areas (i.e. streaming); 2) accelerating topline growth by leveraging its scale across distribution, advertising, and content licensing; and 3) continuing its strong momentum in streaming – VIAC already has 11 million domestic streaming subs and generates $1.6 billion in revenue,” he stated.

Based on all of the above, Katz is optimistic about the stock’s long-term growth prospects, reiterating his bullish call. Even though he reduced the price target from $52 to $40, this still leaves room for a possible twelve-month gain of 82%. (To watch Katz’s track record, click here)

Out on Wall Street, VIAC’s Moderate Buy consensus rating breaks down into 10 Buys, 8 Holds and 2 Sells assigned in the last three months. The $41.11 average price target brings the upside potential to 87%, just above Katz’s forecast. (See ViacomCBS stock analysis on TipRanks)