Billionaire Seth Klarman Says the ‘Everything Bubble’ Might Pop Soon, but Stays Heavily Invested in These 2 Stocks
Unprecedented temperatures are a common theme this summer, making it very possible this year will be the hottest year ever recorded on Earth. Meanwhile, as the scorching heat bears down on many corners of the globe, investors are enjoying an extended moment in the sun.
The markets have been on a consistent upward trend, evoking memories of the euphoric days during the pandemic when gains seemed to come free and easy. In fact, billionaire Seth Klarman suggests that the so-called pandemic bubble may not have burst at all, and what we’re experiencing now might be an extension of those times.
“You had a bubble, it was really a credit bubble, that became an everything bubble,” Klarman recently said.
The value-minded Klarman, who runs the Baupost Group and oversees ~$25 billion in assets, concedes the bubble did a “pretty good job of collapsing” last year but warns that there could be more carnage on the way. “We haven’t seen a lot of bodies float up,” added the hedge fund boss ominously. “I don’t know what that means. But I’d be worried.”
That’s not to say those worries have Klarman packing up his portfolio and taking a vacation from the investing world. Despite the concerning take, he remains heavily invested in several names. We ran a pair of his picks through the TipRanks database to find out if the Street’s analyst corps agree these make good additions to a portfolio right now. Let’s check the results.
Liberty Global (LBTYA)
Accounting for one of his biggest holdings in his portfolio (16.55%), and worth more than $896 million, the first Klarman-backed stock we’ll look at is Liberty Global, a global telecommunications and media conglomerate.
Established in 2005 and based in London, UK, the company has solidified its position as a leading provider of cable and broadband services, delivering high-speed internet, TV, and voice solutions to millions of customers. Operating under various brand names in different countries, including Virgin Media in the UK and Ireland, Sunrise in Switzerland, and Telenet in Belgium, Liberty Global has built a substantial network infrastructure and a diversified portfolio of entertainment offerings.
Additionally, the firm’s global investment arm, Liberty Global Ventures, has a portfolio of over 75 companies with stakes in names such as ITV, Lionsgate and Univision.
Liberty will deliver Q2 earnings next week, but we can look back to Q1 for its most recent financials. In the quarter, Liberty felt the effect of rising energy and labor costs for its core FMC (fibre-mobile-convergence) businesses. The result was a Q1 earnings loss of $713.5 million, amounting to a 166.3% year-over-year decline and translating to EPS of -$1.59 vs. a $1.93 profit in 1Q22. Total revenue reached $1.87 billion, a 1.1% year-over-year increase, and edging ahead of the forecasts by $70 million.
Liberty is committed to buybacks, and through May 5th this year, had already repurchased $330 million of stock. That is one of the reasons why Berenberg analyst Carl Murdock-Smith thinks investors should pay attention here.
“There are two main reasons to be supportive of Liberty Global shares in the medium term: 1) remaining synergy delivery in the UK and Switzerland; and 2) consistent buybacks driving cash flow per share growth over time,” Murdock-Smith said, before expounding on the latter. “Liberty has reduced its share count from 895m at the end of 2016 to 445m at the Q1 2023 results. At its Q2 results, we will be interested to see whether it boosts its plan to buy back 10% of shares this year. This reduction in share count should drive considerable cash flow per share growth over time.”
To this end, Murdock-Smith rates LBTYA stock a Buy, while his $26 price target implies shares will post growth of ~38% in the months ahead. (To watch Murdock-Smith’s track record, click here)
Elsewhere on the Street, the stock collects an additional 3 Buys and 4 Holds, for a Moderate Buy consensus rating. Going by the $25.68 average target, a year from now, investors will be locking in returns of 36%. (See LBTYA stock forecast)
Fidelity National Information Services (FIS)
Next up on our Klarman-endorsed list is Fidelity National Information Services, a leading global financial tech company that offers a wide range of solutions and services to the financial industry. The company caters to a diverse clientele, including banks, credit unions, insurance companies, government entities, and merchants, providing them with innovative technology solutions, payment processing services, risk management tools, and consulting expertise.
Over the years, Fidelity National Information Services has expanded its global footprint through strategic acquisitions and partnerships, cementing its position as a reliable partner for financial institutions worldwide.
Acquisitions have been on the Fidelity menu recently but in the other direction. An agreement has been reached with private equity firm GTCR, which stipulates the company will purchase a majority stake (55%) in Fidelity’s Worldpay business for a total of $18.5 billion. The transaction is expected to close in 1Q24.
The sale comes off the back of a strong Q1 report. Fidelity dialed in revenue of $3.51 billion, representing a modest 0.6% increase from the same period a year ago, yet beating the consensus estimate by $100 million. Adj. EPS of $1.29 also fared better than the analysts’ forecast, by $0.08.
The full-year outlook also Impressed. The company is calling for revenue in the range between $14.285-$14.535 billion, compared to consensus at $14.39 billion. Adj. EPS is expected to come in between $5.76-$6.06. The Street was looking for $5.86.
These results must have pleased Klarman, who holds 4,841,549 shares of FIS. At present, these shares are valued at over $294 million.
The hedge magnate is not the only bull here. Assessing the company’s prospects, Raymond James analyst John Davis thinks that FIS has made a strategic move with the Worldpay sale.
“We are maintaining our Strong Buy rating on FIS following the announcement of the sale of a 55% stake in its Worldpay business to GTCR at a $17.5B valuation, excluding $1B of contingent consideration. In our view, the $17.5B valuation is not only fair and likely better than expected (9.8x 2023E EBITDA), the transaction also gives FIS shareholders the chance to participate in the potential upside of a Worldpay turnaround in the very capable hands of CEO Drucker and GTCR,” Davis opined.
“Simply put,” Davis further said, “we think investors are overly focused on near-term EPS dilution (~mid-teens in 2024) and a complicated deal structure (no clean break), but we firmly believe this is in the best interest of shareholders longer-term… All told, we believe once the dust settles, the current pro-forma valuation imply doesn’t reflect the quality of the business, and we expect shares to re-rate higher…”
Davis’ Strong Buy rating on FIS is backed by a $79 price target, suggesting the shares will climb 30% higher in the year ahead. (To watch Davis’ track record, click here)
Looking at the consensus breakdown, based on 9 Buys vs. 6 Holds, the view is that this stock is a Moderate Buy. The forecast calls for 12-month gains of ~14%, considering the average target stands at $69.60. (See FIS stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
