A Surprising Bet on Tech Giant

 | Aug 16, 2011 | 10:15 AM EDT
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It's that time of year again when investment professionals file their quarterly 13F filings and reveal any investment activity during the prior quarter. As a value guy, one of my favorite 13F filings to peruse is from Baupost Group, the firm headed by the exceptionally talented Seth Klarman. I have gotten a lot of great ideas from Baupost's 13F filings over the years, so I continue to watch Baupost's moves very closely. With a nearly 30-year track record of 20% annualized returns, Baupost boasts one of the best long-term performance histories in the business.

Fort the past several quarters, Baupost's 13F filings have shown little, if any, investment activity. News Corp. <TICKER TYPE="EQUITY" SYMBOL="NWSA" EXCHANGE="Nasdaq" PRIMARY="NO"/> remains the firm's top equity position and has been so for quite some time now as Klarman used the financial crisis to scoop up shares when its stock was trading in the single digits. Aside from that, Baupost was sitting still on the equity front; instead, Klarman was buying inexpensive insurance like bets on interest rates going up.

Baupost was quiet again this quarter except for a brand-new $300 million position in Microsoft (MSFT), a company that everyone is treating like a "has been" technology stock. Microsoft is now the second largest equity position for Baupost after News Corp. Given Klarman's extreme aversion for risk in making investments, this bet on Microsoft appears to reconfirm the low risk nature of the company today based on its current share price of $25. With most tech investors enamored with Apple (AAPL) and Amazon (AMZN), Microsoft is being treated more like Research In Motion (RIMM). Indeed, if Microsoft were a dying company, then it might not matter that the stock is trading for 8x forward earnings -- or nearly 6x earnings when you strip the net cash. But the company is hardly dying. Gaming enthusiasts consistently rate the Xbox as one of the best platforms. And as the transition from Windows XP to the next operating system evolves over the next couple of years, that cash generation will grow.

Another non-traditional bet for value investors has been gold. But Klarman is successful because he dances to his own beat. Following an initial position in the first quarter, Baupost bought more of Allied Nevada Gold (ANV) in the second quarter. Allied currently potentially mines some of the most abundant gold producing land. It is more of an exploration play that will reap huge windfalls if it actually mines the gold it claims to have discovered.

Baupost also opened up a small position in Central Pacific Financial (CPF), which is a small-cap commercial bank in Hawaii. Shares have sunk to $11 from a 52-week high of $50 and now trade at book value. Commercial lending seems to be the only bright spot for lenders today, so maybe that aspect along with Hawaii having hit rock bottom appeals to his value investing philosophy. Shares currently trade for less than 10x earnings and filings show insider ownership of more than 60%.

Klarman's bets are often esoteric and unexpected. But his success as a value investor has been anchored on investing in areas that others view unfavorably.

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