- By Graham Griffin
Seth Klarman (Trades, Portfolio), manager of The Baupost Group, has revealed his portfolio for the third quarter. The portfolio saw the addition of many new holdings, including Pershing Square Tontine Holdings Ltd. (NYSE:PSTH), Micron Technology Inc. (NASDAQ:MU), Applied Materials Inc. (NASDAQ:AMAT), Healthpeak Properties Inc. (NYSE:PEAK) and Liberty SiriusXM Group (NASDAQ:LSXMA).
Klarman's Boston-based hedge fund searches for value opportunities through a wide array of options, including stocks, distressed debt, liquidations and foreign equities. Despite investing around the world in many different options, Klarman does not mind holding cash when opportunities are scarce. He adamantly warns people against investing without considering the risks incurred to generate returns.
At the end of the quarter, Klarman's portfolio contained 36 stocks, with 10 new holdings. Top holdings in the portfolio include eBay Inc. (NASDAQ:EBAY), Liberty Global PLC (LBTYPK), Fox Corp. (NASDAQ:FOXA), Viasat Inc. (NASDAQ:VSAT) and ViacomCBS Inc. (NASDAQ:VIAC).
By weight, the top three sectors represented are communication services (38.69%), technology (20.29%) and consumer cyclical (17.01%).
Pershing Square Tontine Holdings
During the third quarter, Klarman established a new stake in Pershing Square Tontine Holdings with the purchase of 17.50 million shares. The shares traded at an average price of $22.47 during the quarter. Overall, the purchase represented a 4.30% impact on the portfolio and GuruFocus estimates the total gain on the holding at 4.27%.
Pershing Square Tontine Holdings is a newly organized blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with a private company. Pershing Square Tontine Holdings' sponsor is 100% owned by the Pershing Square Capital Management funds.
Bill Ackman (Trades, Portfolio) is Pershing Square Tontine Holdings' chairman and CEO. He will work closely with the Pershing Square Capital Management investment team and the other employees to fulfill the company's corporate mission.
On Nov. 16, the stock was trading at $23.79 with a market cap of $4.76 billion.
The company has not yet selected any specific business combination target, but it intends to pursue merger opportunities with private, large capitalization, high-quality growth companies. They will seek targets in four principal market segments: high-quality initial public offering candidates, mature unicorns, private equity portfolio companies and family-owned companies.
Pershing Square Tontine Holdings differs from other blank check companies in its payout structure. Each unit consists of one share of common stock, one-ninth of a redeemable warrant that is exercisable at $23 and two-ninths of a warrant that is exercisable at $23, provided it is not redeemed in connection with a proposed business combination.
The unique payout structure is intended to encourage investors to seek long-term profits and stay invested throughout the process of acquisition or combination according to CNBC.
Klarman established a new holding in Micron Technology for the first time since 2016. He purchased 5.22 million shares, which traded for an average price of $48.39 during the quarter. The purchase had an overall impact of 2.66% on the portfolio and GuruFocus estimates the total gain of the holding at 87.73% over its lifetime. Micron historically focused on providing dynamic random-access memory (DRAM) for PCs and servers. The company then expanded into the NAND flash memory market. It increased its DRAM scale with the purchase of Elpida in mid-2013 and Inotera in December 2016.
As of Nov. 16, the stock was trading at $61.09 with a market cap of $68.01 billion. According to the GF Value Line, the stock is trading at a modestly overvalued level.
GuruFocus gives the company a financial strength rating of 7 out of 10, a profitability rank of 9 out of 10 and a valuation rank of 3 out of 10. There is one severe warning sign issued for assets growing faster than revenue. The return on invested capital is outweighed by the weighted average cost of capital, yet the company maintains an Altman Z-Score of 4.35, implying a strong financial position.
Klarman's portfolio also saw another first-time addition with Applied Materials. The guru purchased 2.30 million shares, which traded for an average price of $61.75 during the quarter. Overall, the purchase had a 1.49% impact on the portfolio and GuruFocus estimates that Klarman has already gained 19.37% on the holding.
Applied Materials is one of the world's largest suppliers of semiconductor manufacturing equipment, providing materials and engineering solutions to help make nearly every chip in the world. The company's systems are used in nearly every major process step with the exception of lithography. Key tools include those for chemical and physical vapor deposition, etching, chemical mechanical polishing, wafer- and reticle-inspection, critical dimension measurement and defect-inspection scanning electron microscopes.
Nov. 16 saw the stock trading at $73.76 with a market cap of $67.35 billion. The GF Value Line shows that the stock is trading at a modestly overvalued level.
GuruFocus gives the stock a financial strength rating of 7 out of 10, a profitability rank of 9 out of 10 and a valuation rank of 3 out of 10. The strong profitability rank comes in part due to high levels of cash flow that more than support dividend payouts.
The guru added a new holding in Healthpeak Properties with the purchase of 4 million shares during the third quarter. The shares traded at an average price of $27.43 during the quarter. The purchase had an impact of 1.18% on Klarman's portfolio and GuruFocus estimates the total gain of the holding at 10.75% since it was added.
Healthpeak is a fully-integrated real estate investment trust that invests in assets serving the health care industry. It owns a diversified portfolio of over 650 in-place properties spread across senior housing, medical office, life science, hospital and skilled nursing/post-acute care.
On Nov. 16, the stock was trading at $30.40 with a market cap of $16.34 billion. The GF Value Line suggests that the company is trading at fair value.
GuruFocus gives the company a financial strength rating of 3 out of 10, a profitability rank of 6 out of 10 and a valuation rank of 5 out of 10. There are currently six severe warning signs, including declining gross margin percentage and an Altman Z-Score of 1.21 placing the company in the distress column with bankruptcy a possibility in the next two years. A cash-to-debt ratio of 0.03 ranks the company lower than 72.87% of the industry and reflects the severe warning sign for extremely low interest coverage.
Liberty SiriusXM Group
Klarman also jumped back into Liberty SiriusXM after selling out of the holding in the second quarter. He purchased 2.92 million shares, which traded at an average price of $35.04 during the quarter. Overall, the purchase had an impact of 1.05% on the portfolio and GuruFocus estimates the total gain of the holding at 11.39%.
Liberty SiriusXM Group through its subsidiary holding is engaged in providing a subscription-based satellite radio service. It transmits music, sports, entertainment, comedy, talk, news, traffic and weather channels, as well as infotainment services. The company distributes its satellite radio through automakers and rental car companies, as well as through its retail locations and website.
On Nov. 16, the stock was trading at $42.39 with a market cap of $16.20 billion. The GF Value Line shows that the stock is trading at a modestly undervalued level.
GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rank of 7 out of 10. There are currently three severe warning signs issued for poor financial strength, increasing long-term debt and an Altman Z-Score of 0.83 placing the company in the distress column. Despite high levels of debt, the company has managed to slightly increase cash flows year over year.
Disclosure: Author owns no stocks mentioned.
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This article first appeared on GuruFocus.