Updated on June 22nd, 2021 by Nikolaos Sismanis
The Baupost Group is a long-only hedge fund founded in 1982 by Harvard Professor William Poorvu and his partners.
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 $30 billion in assets under management (AUM), $12.5 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-May 2018 through mid-May 2021) would have generated annualized total returns of 2.1%. For comparison, the S&P 500 ETF (SPY) generated annualized total returns of 18.60% over the same time period.
Note: 13F filing performance is different than fund performance. See how we calculate 13F filing performance here.
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
- Introduction & 13F Spreadsheet Download
- Baupost Group’s Fund Manager, Seth Klarman
- Baupost Group’s Investment Philosophy & Strategy
- Baupost Group’s Noteworthy Portfolio Changes
- Baupost Group’s Portfolio & 10 Largest Public Equity Investments
- Final Thoughts
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 founders, Mr. Klarman was considered relatively inexperienced. Therefore, the fund was taking a big risk with his involvement.
In 2008 Klarman 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.
Klarman wrote the book Margin Of Safety which details his risk-adverse and value-driven investment philosophy. The book is an investing classic that is out of print. Copies on eBay sell from hundreds to thousands of dollars.
Baupost Group’s Investment Philosophy & Strategy
The Baupost Group’s investment philosophy revolves heavily around Mr. Klarman’s investing principles, which can be summed into the following key points:
- 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 compelling 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.”
The Baupost Group’s Noteworthy Portfolio Changes
During its latest 13F filing, The Baupost Group executed the following notable portfolio adjustments:
- Willis Towers Watson plc (WLTW)
- International Flavors and Fragrances, Inc. (IFF)
- Vista Oil & Gas Sab De Cv (VIST)
- Marathon Petroleum Corp (MPC)
Baupost Group’s Portfolio & 10 Largest Public Equity Investments
Baupost’s public-equity portfolio is not heavily diversified. Instead, its holdings are concentrated, featuring high-conviction ideas. The portfolio numbers only 23 equities, the 10 most significant of which account for 73.5% of its total composition. The fund’s largest holding is Intel Corp. (INTC), occupying around 13.7% of the total portfolio.
Source: 13F filing, Author
Intel Corp. (INTC):
Intel is Baupost’s largest holding, despite the fund initiating its equity stake as recently as Q4-2020. The semiconductor giant performed well over the past year, delivering revenues of $77.8 billion, 8.2% higher YoY, despite the challenges caused by the pandemic. The company enjoys massive margins, with $20.9 billion making it to the bottom line in FY2020.
In its most recent results, Intel raised its full-year 2021 guidance, beating investors’ expectations. The company is now expecting GAAP revenue of $77.0 billion vs. $72.84 billion consensuses, and non-GAAP EPS of $4.60 vs. $4.30 consensus.
Despite its resilient performance, investors have been lately worrying about competition catching up, especially from Advanced Mirco Devices (AMD). As a result, shares are currently trading at around 13.4 times their forward net income. Considering the company’s blue-chip status and strong buybacks, we can see the stock’s valuation expanding if AMD doesn’t end up taking as much market share as expected.
Intel counts 7 years of consecutive annual dividend increases, with its most recent one being a decent 5.3% raise. The stock currently yields around 2.4%, while the dividend itself is well-covered, as Intel is currently featuring a payout ratio of around 30%.
Baupost raised its equity stake by 28% during the quarter.
eBay Inc. (EBAY):
eBay is Baupost’s second-largest holding, currently accounting for around 11.9% of its portfolio. The company’s revenues have remained mostly stagnant for nearly a decade, generating around $11 billion in sales per year.
However, the company has excelled in maximizing its profitability, consistently expanding its net income margins over the years. eBay has the capacity to post net income margins of around 30% 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 remained very stable, causing eBay’s results to remain consistent. 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 apparently not willing to pay a premium for the stock due to its lack of growth.
However, the stock presents a value proposition, trading at a reasonable multiple and offering hefty capital returns. The stock is a clear example of Klarman’s preference for underappreciated companies with a wide margin of safety. Baupost holds around 2.69% of the company’s total shares outstanding.
Qorvo, Inc. (QRVO):
Qorvo develops and markets technologies and products for wireless and wired connectivity worldwide. It is the fund’s third-largest holding. If the forecasts regarding 5G are realized, the semiconductor industry (along with Qorvo) is likely to enjoy massive growth over the next few years.
At the same time, the company’s revenues are expanding, and Qorvo has started delivering sturdy profits as well. Shares are currently trading at around 16 times the company’s forward net income, which is most likely justified given Qorvo’s growth catalysts.
Baupost hiked its position by around 17% during the latest quarter.
Viasat, Inc. (VSAT) & Nexstar Media Group, Inc. (NXST)
These two media conglomerates comprise Baupost’s 4th and 10th most significant holdings, collectively accounting for nearly 12% of its portfolio. In the current landscape, the legacy media conglomerates have been in trouble, as content creation is becoming increasingly decentralized.
Companies such as Netflix (NFLX), Amazon (AMZN), and even Apple (AAPL) have started producing their own content, while the news outlets have moved mostly online, generating sales through ads or a subscription fee.
In our view, Baupost holds these two equities as an activist investor. The fund holds 23.7%, and 4.80% of their total shares outstanding, respectively. This indicates the possibility that Baupost wants to have active influence in how the companies are run, with a potential aim towards modernizing.
For retail investors, these positions could be risky long-term bets, though admittedly attractively priced ones.
Alphabet, Google’s parent company, occupies around 7.2% of Baupost’s total holdings with the fund increasing its position by around 265% from its last 13F filing. The company has become increasingly more attractive to investors amid excellent financials and growth.
Net margins are juicy above 25%, while revenue has seen uninterrupted growth. However, Alphabet still does not pay a dividend.
As a result of steady, robust organic growth, and stock buybacks, the company displays a 5-year EPS CAGR of 25%. This is quite impressive, considering its sheer size.
Additionally, by accumulating $135 billion of cash on its balance sheet, the company should not face any sort of liquidity problems.
Willis Towers Watson Public Limited Company (WLTW):
Willis Towers Watson is one of Baupost’s latest additions to its portfolio, and currently the fund’s sixth-largest holding. The company operates as an advisory, broking, and solutions company worldwide, generating around $9.35 billion of revenues and nearly $1 billion of net income annually.
In its most recent Q1 results, Willis Towers posted total revenue growth of 5% to $2.6 billion and adjusted EPS of $3.64, up 9% over the prior year. Willis Towers’ EPS features a 3-year EPS CAGR of nearly 50%, further boosted by stock buybacks. Overall, the company’s financials point towards strong fundamentals for continuous shareholder value creation moving forward.
Micron Technology, Inc. (MU):
Baupost’s seventh-largest holding is Micron, which accounts for around 4.6% 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 in Q3-2020. This means that Baupost believes the stock has more room to run. At a forward P/E of around 8 and growing forward EPS expectations, the stock could reasonably rally higher.
Baupost increased its position by around 3% during the quarter.
Facebook Inc. (FB):
Facebook is a tremendous cash cow, but with a problem. On the one hand, with strong financials, one of Wall St.’s healthiest balance sheets, and the best platform for advertisers to utilize, Facebook has been dominating the social media industry. The company has reported an all-time high bottom line of $33.7 billion over the past four quarters, amid great user growth, which remained in the double-digits once again in its latest report.
On the other hand, the stock has failed to attract an appropriate valuation multiple, as the steep scrutiny it has faced over the past few years have made Facebook, a non-investor-friendly company. Facebook missteps have been quite detrimental in creating this narrative, especially now that investors are increasingly more eager for ESG-friendly investments. The stock is only trading at around 25 times its underlying earnings, despite its rapid growth.
With its ARPU (average revenue per user) still very strong, Facebook’s financials are more than likely to continue expanding rapidly. Facebook’s investment case today does not only include the potential for a significant upside but also comes with a margin of safety.
If such a valuation expansion never appears, and Facebook continues to trade at a forward P/E of around 25, at an EPS growth rate of 20%-30% in the medium term (which the current user and APRU growth trajectory could easily sustain), investors should achieve equally satisfactory returns with a constant valuation multiple.
The stock is Baupost’s 8th largest holding, boosted by the latest quarter’s 40% equity stake hike.
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 many 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, as the company attempts to recover financially. It is Baupost’s ninth-largest holding.
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.