Good news for value investors as the WSJ reports that Seth Klarman at Baupost is still finding value opportunities in firms being attacked by the likes of Amazon, saying:
“Increasing technological disruption is already pushing some securities well below our assessment of underlying value,” writes Mr. Klarman, “as legitimate concerns are, in some cases, carried to excess.”
Klarman also sees potential value in so-called unicorns, private companies with billion-dollar-plus valuations, that collapse on disappointment. In the thin markets for such private companies, it may be possible for Baupost to step in on preferential terms when promising companies stumble, says the letter.
Here is an excerpt from the WSJ:
How can value investors, who seek to buy stocks at depressed prices, prevail in a financial world dominated by market-matching index funds?
That’s the main question posed by Seth Klarman, chief executive of the Baupost Group, the $32 billion hedge-fund group, in his 2017 year-end letter to shareholders.
“Could Baupost itself be disrupted?” asks Mr. Klarman in a copy of the letter reviewed by The Wall Street Journal.
He cites companies like Amazon posing an existential threat to existing businesses. “Today, taxi medallion owners, traditional newspapers, shopping malls and department-store chains are gravely threatened,” he writes.
“Discussions in the Baupost conference rooms are increasingly likely to include an assessment of what Amazon executives are discussing in their conference rooms.”
He suggests that Baupost, which historically has shied away from most rapidly-growing industries, could venture into investing in “the new firms that are seeking to displace the older incumbents.” The firm is exploring ways to put a value on raw data, researching top technology firms and attending more tech conferences, writes Mr. Klarman.
“Disruptive change is already driving differences in the assumptions we are comfortable making and the cash flow projections that underpin our financial models,” he says in the letter.
Mr. Klarman also sees potential value in so-called unicorns, private companies with billion-dollar-plus valuations, that collapse on disappointment. In the thin markets for such private companies, it may be possible for Baupost to step in on preferential terms when promising companies stumble, says the letter.
Mr. Klarman warns that “while companies such as Amazon and Facebook are driving enormous change and have themselves been growing rapidly, they are not necessarily great investments going forward…many of these companies seem very fully valued.”
On the other hand, Baupost is finding value among some firms attacked by the likes of Amazon. “Increasing technological disruption is already pushing some securities well below our assessment of underlying value,” writes
Mr. Klarman, “as legitimate concerns are, in some cases, carried to excess.”
As an example, he cites department stores: “Even for Macy’s, the correct price today is not zero,” says the letter.
“Macy’s owns valuable real-estate assets, and there may be ways to navigate through the current environment while salvaging some value for shareholders.”
The report doesn’t mention Baupost’s investments in distressed Puerto Rican bonds, which attracted criticism last year.
You can read the original letter at the WSJ here.
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