Value investing legend billionaire Seth Klarman has been struggling to generate significant returns over the last two consecutive years despite holding big positions in the fastest-growing sectors including communications, information technology, and consumer discretionary. After underperformance in the past two years compared to the broader market index, the founder of Baupost Group has diversified his portfolio towards energy and financial sectors in the last two quarters to capitalize on profit-making opportunities in 2021. Meanwhile, the $30 billion hedge fund has slashed its stake in healthcare stocks, which is weighted around 6% of the overall 13F portfolio at the end of the fourth quarter compared to 15.33% at the end of Q2.
Seth Klarman's Favorite Stocks in 2021
Billionaire Seth Klarman believes in buying stocks at a discount and waiting for them to reach their potential value. His strategy of buying energy and financial stocks on the dip worked for his hedge fund. This is because the energy sector is leading the S&P 500 gains in 2021 while the financial sector is ranked second-best performer among the S&P 500 sectors.
The hedge fund has created a big stake in Marathon Petroleum (NYSE: MPC) during the fourth quarter by buying shares worth $7.6 million. The shares of MPC rallied 37% since the beginning of this year, extending the six-months gain to 60%. The value investor has also bought a stake in several financial stocks in Q4. Interestingly, the Boston-based billionaire created several new positions in SPACs, ending the last year with almost $740 million invested in SPACs or warrants on SPAC shares. These positions include a $62 million investment into Dan Och and Glenn Fuhrman's Ajax and a $21 million investment into Investindustrial Acquisition.
The firm hasn’t limited its investments towards these two sectors. Baupost Group has initiated a big position in Intel Corp (NASDAQ: INTC) during the fourth quarter, accounting for 8.34% of the overall portfolio and valued at $906 million. We will discuss later in the article why Baupost Group bought Intel Corp. INTC is among billionaire Seth Klarman’s top 10 stock picks for 2021.
Seth Klarman also remained active when it comes to selling stocks and lowering positions in certain companies due to the strategy of minimizing losses or to capitalize on recent gains. For instance, the hedge fund slashed its stake in ViacomCBS (NASDAQ: VIAC) by 75% during the fourth quarter to capitalize on a more than 180% surge in the share price. The biggest stock sale include HD Supply (NASDAQ: HDS) which accounted for 3.04% of the equity portfolio at the end of the third quarter.
Besides stock positions, the billionaire investor often talks about the economic environment and the situation of the financial markets. He has recently criticized the Federal Reserve and the US government for flooding the markets with new money by offering loans at a lower rate.
“With so many stimuli unfolding, trying to figure out if the economy is in the recession is like trying to assess if you have a fever after taking a lot of aspirin. But like frogs in water that are slowly heated to boil, investors are conditioned to be unaware of the danger.”
Billionaire Seth Klarman's Top 10 Stock Picks for 2021
Seth Klarman of Baupost Group
While Seth Klarman’s reputation remains intact, the same can’t be said of the hedge fund industry as a whole, as its reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017. Between March 2017 and February 5th 2021 our monthly newsletter’s stock picks returned 187.5%, vs. 75.8% for the SPY. Our stock picks outperformed the market by more than 111 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Let’s start reviewing Seth Klarman’s top 10 stock picks for 2021 to see whether the portfolio adjustments would help the legendary investor outperform the market this year.
Seth Klarman’s strategy of holding a stake in biotechnology company Translate Bio, Inc. (NASDAQ: TBIO) appears to be benefiting his hedge fund. This is because shares of Translate Bio soared 19% since the beginning of this year, extending the twelve-month gains to 180%. The Boston-based hedge fund first initiated a position in Translate Bio during the second quarter of 2018.
Translate Bio is a clinical-stage messenger RNA (mRNA) therapeutics company, which develops medicines to treat diseases caused by protein or gene dysfunction.
Baupost Group initiated a position in New York-based Pershing Square Tontine Holdings, Ltd. (NYSE: PSTH) during the third quarter and slashed the position by 27% during the fourth quarter. Despite that, Pershing Square is among billionaire Seth Klarman's top 10 picks for 2021. The position accounted for 3.24% of the overall portfolio at the end of the latest quarter.
Coho Capital Management, which generated a return of 81% for 2020, commented on few stocks including Pershing Square Tontine Holdings. Here’s what Coho Capital Management stated:
“We acquired our Pershing Square shares, the Bill Ackman SPAC, through purchasing units (SPACs often go public with units including a common share and a fraction of a warrant). We bought at an average price of $21.39, slightly below the offering price of Pershing common stock at $20.00 when including the bundled one-ninth of a warrant (Pershing warrants started trading around $6.20), and two ninths per share additional warrants if held through merger $(2.07 altogether if held through merger and warrant prices hold). This provided us the opportunity to engage in nearly risk-free arbitrage on Bill Ackman finding a suitable candidate to take public. Of course, there is no guarantee that Ackman will find an attractive company to merge with his SPAC, potentially creating opportunity costs due to stranded capital. There is also the risk of combining with an enterprise with unappealing investment prospects. In such a case, we would not receive our two additional warrants but would be able to redeem our SPAC shares at $20.00 and sell our 1/9th of a warrant on the open market. In that scenario, we would be risking a 3% loss on our Pershing Square holdings (common stock and warrants combined). In short, if we don’t like the merger, 3% of our investment is as risk, where as if we like it, we were able to build the position in a risk-free manner. Given the dearth of investment opportunities as of late, as well as our immense respect for Bill Ackman’s investing acumen, we thought this was a suitable place to park our funds, creating the ultimate Dhando investment – heads I win, tails I don’t lose much.”
Seth Klarman has been holding a position in the struggling PG&E Corporation (NYSE: PCG) since the first quarter of 2018. The Boston-based legendary value investor’s stock-picking strategy didn’t go the right way in the case of PCG. Shares of PG&E Corporation fell 27% in the last twelve months. It is the eighth largest stock holding of Baupost Group, accounting for 3.52% of the overall portfolio.
In a Q2 investor letter, Baupost Group commented on few stocks including PG&E Corporation. Here’s what Baupost Group said:
“Fortunately, our investment in the subrogation claims and equity of Pacific Gas and Electric, the firm’s largest position, was not impacted by the COVID-19 fallout. As we expected, PG&E’s bankruptcy plan was confirmed by the judge overseeing the case, and the company emerged from bankruptcy on July 1st. Importantly, upon emergence, cash was placed in a trust for the benefit of the subrogation creditors. A substantial initial distribution from this trust, estimated to be roughly 80% of anticipated recoveries, is expected to be paid later this month.”
Baupost Group’s strategy of buying Micron Technology Inc (NASDAQ: MU) during the third quarter and keeping the position unchanged during the December quarter benefited the hedge fund. Shares of the chipmaker rallied 90% in the last six months on the back of strong demand for its products. MU stock price jumped 21% so far in 2021 compared to just over 4% broader market growth.
Bonsai Partners, which returned 247% for the fourth quarter, stated reasons for Micron’s share price gains in Q4. Here’s what Bonsai Partners said:
“Micron is a manufacturer of memory semiconductor chips. Micron’s stock appreciated 60.1% during the quarter.
Micron’s shares significantly appreciated this quarter for a couple of reasons. First, and most importantly, the DRAM market appears to have begun its cyclical rebound. As a result, we will likely see higher pricing and profitability through at least the calendar year 2021, hopefully meaningfully longer.
Another (and less meaningful) driver was that semiconductor stocks have become ‘en vogue’ once again. I may not be old, but I’ve been around the sector long enough to know that when generalists start getting excited about a ‘new paradigm’ around semiconductors, it’s time to be wary.
I wouldn’t call Micron overvalued, but I’d certainly say it’s more fairly priced today compared to when we first purchased it a few months ago.”
Seth Klarman first initiated a position in Viasat, Inc. (NASDAQ: VSAT) in 2018 but things went wrong for the broadband and communications company during 2019 amid the emergence of competition and consumers' shift towards new platforms. Shares of Viasat are down 28% in the last five years despite a massive 51% upside in the last three months.
“Our keen focus on business optimization generated excellent financial results in the third quarter of fiscal year 2021 (Q3 FY2021) – even with ongoing COVID-19 headwinds in several business areas. We also earned important market wins, executed strategic transactions, and achieved key development milestones, which, along with the prospects of a potential end to the pandemic, create an exciting potential for sustained growth in FY2022, the company said in a Q3 shareholders letter.
