Seth Klarman (Trades, Portfolio), the founder and CEO of The Baupost Group, is known for his dedication to value investing, having been dubbed “the next Warren Buffett (Trades, Portfolio)” due to similarities in his strategy with those of Berkshire Hathaway’s (BRK.A, Financial)(BRK.B, Financial) leader.
Overseeing around $31.6 billion in assets, the guru’s Boston-based hedge fund searches for value opportunities among a broad range of options, including stocks, distressed debt, liquidations and foreign securities. With a long-term horizon, the renowned investor typically seeks securities trading well below his estimate of intrinsic value and waits for the price to rise.
In his popular book, “Margin of Safety,” Klarman discusses risk-averse value investing strategies. With a possible recession looming on the horizon, investors may be interested in some of the stocks in the guru’s $6.11 billion equity portfolio that are undervalued according to an earnings-based discounted cash flow model.
GuruFocus portfolio data, which is based on 13F filings as of Dec. 31, shows current positions in Klarman’s equity portfolio that have a solid margin of safety and high predictability include Gray Television Inc. (GTN, Financial), Lithia Motors Inc. (LAD, Financial), Herbalife Nutrition Inc. (HLF, Financial), Alphabet Inc. (GOOG, Financial) and Meta Platforms Inc. (META, Financial).
Investors should be aware 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
Gray Television
Shares of Gray Television (GTN, Financial) are trading at a 92.87% discount to their fair value of $145.33 according to the earnings-based DCF model.
The Atlanta-based broadcasting company, which owns or operates 180 TV stations across the U.S., has a $952.67 billion market cap; its shares were trading around $10.32 on Thursday with a price-earnings ratio of 2.38, a price-book ratio of 0.42 and a price-sales ratio of 1.37.
The GF Value Line suggests the stock, while undervalued, is a possible value trap currently based on its historical ratios, past financial performance and analysts’ future earnings estimates. As such, potential investors should do thorough research before making a decision on the stock.
At 86 out of 100, the GF Score indicates the company has good outperformance potential. While it received high ratings for growth and profitability, the GF Value and momentum ranks more moderate and the GF Value was low.
The company is also supported by a predictability rank of 4.5 out of five stars. According to GuruFocus research, companies with this rank return an average of 10.6% annually over a 10-year period.
Of the gurus invested in Gray Television, Klarman has the largest stake with 3.77% of its outstanding shares. Mario Gabelli (Trades, Portfolio), John Hussman (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies and Paul Tudor Jones (Trades, Portfolio) also have positions in the stock.
Lithia Motors
Generating a DCF fair value of $1,516.44, shares of Lithia Motors (LAD, Financial) are trading with an 82.75% margin of safety.
The auto retailer headquartered in Medford, Oregon has a market cap of $7.15 billion; its shares were trading around $261.58 on Thursday with a price-earnings ratio of 5.94, a price-book ratio of 1.37 and a price-sales ratio of 0.26.
According to the GF Value Line, the stock, while undervalued, is a possible value trap. As such, potential investors should tread lightly.
The GF Score of 95 implies the company has high outperformance potential, driven by solid ratings for four of the criteria and a moderate financial strength rank.
Lithia also has a 4.5-star predictability rank.
With an 8.60% stake, David Abrams (Trades, Portfolio) is the company’s largest guru shareholder. Other top guru investors of Lithia Motors are Barrow, Hanley, Mewhinney & Strauss, Glenn Greenberg (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Chuck Royce (Trades, Portfolio) and Ruane Cunniff (Trades, Portfolio).
Herbalife Nutrition
Herbalife Nutrition’s (HLF, Financial) stock is trading at a 52.12% discount to its DCF fair value of $43.24.
The Los Angeles-based nutrition company, which sells health and wellness products, has a $1.99 billion market cap; its shares were trading around $20.31 on Thursday with a price-earnings ratio of 6.31 and a price-sales ratio of 0.39.
Based on the GF Value Line, the stock appears to be significantly undervalued currently.
With a GF Score of 78, the company is likely to have average performance on the back of high profitability and growth ratings, middling marks for financial strength and GF Value and a low momentum rank.
Further, the company has a 3.5-star predictability rank. GuruFocus found companies with this rank return, on average, 9.3% annually.
Simons’ firm has the largest position in Herbalife with 6.65% of its outstanding shares. First Pacific Advisors (Trades, Portfolio), Steven Romick (Trades, Portfolio) and Hotchkis & Wiley also have significant holdings.
Alphabet
With a DCF fair value of $156.60, Class C shares of Alphabet (GOOG, Financial) are trading with a 38.98% margin of safety.
The communications services company headquartered in Mountain View, California, which owns the Google search engine, YouTube and a number of other businesses, has a market cap of $1.21 trillion; its Class C shares were trading around $94.84 on Thursday with a price-earnings ratio of 20.84, a price-book ratio of 4.74 and a price-sales ratio of 4.39.
The GF Value Line suggests the stock is significantly undervalued currently.
The GF Score of 97 means the company has high outperformance potential. While it received high ratings for four of the criteria, the momentum rank was more moderate.
Alphabet also has a 4.5-star predictability rank.
Holding 0.34% of Alphabet’s Class C stock, Dodge & Cox is the largest guru shareholder. PRIMECAP Management (Trades, Portfolio), Baillie Gifford (Trades, Portfolio), Tom Russo (Trades, Portfolio), the late Spiros Segalas’ Harbor Capital Appreciation Fund (Trades, Portfolio), First Eagle and several other gurus also have sizeable position in the stock.
Meta Platforms
Yielding a 36.78% margin of safety, Meta Platforms (META, Financial) is trading below its DCF value of $295.24.
The Menlo Park, California-based social media company, which was formerly known as Facebook, has a $471.68 billion market cap; its shares were trading around $181.93 on Thursday with a price-earnings ratio of 21.20, a price-book ratio of 3.78 and a price-sales ratio of 4.13.
According to the GF Value Line, the stock is significantly undervalued currently.
The company has high outperformance potential based on the GF Score of 93. It raked in high ratings for profitability, growth, financial strength and momentum as well as a more moderate rank for GF Value.
Meta also has a three-star predictability rank. GuruFocus data shows companies with this rank return an average of 8.2% annually.
Dodge & Cox is Meta’s largest guru shareholder with a 0.45% stake. Other top guru investors include Ken Fisher (Trades, Portfolio), Chase Coleman (Trades, Portfolio), Chris Davis (Trades, Portfolio), First Eagle, Steven Cohen (Trades, Portfolio), Philippe Laffont (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio) and Grantham.
Additional opportunities
Other stocks in Klarman’s equity portfolio as of the fourth quarter that were undervalued on a DCF basis were SS&C Technologies Holdings Inc. (SSNC, Financial) and Micron Technology Inc. (MU, Financial).
