• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing

Mega-Hedge Fund Manager Seth Klarman's Five Best Stock Picks

Klarman's hedge funds' top small-cap picks generate significant alpha.
By MEENA KRISHNAMSETTY Feb 01, 2013 | 06:00 PM EST
Stocks quotes in this article: VSAT, THRX, GSK, ANV, NG, GNW

Though he doesn't have the name recognition of a Warren Buffett or a David Einhorn, Seth Klarman can easily be classified as a mega-investor. Klarman's fund, Baupost Group, is the world's 11th largest hedge fund, and it manages a sizable equity portfolio.

Though it's tempting to assume that retail investors should pay attention to Klarman's large-cap holdings, our research actually shows that hedge funds' top small-cap picks generate significant alpha.

With this in mind, let's take a look at Klarman and Baupost Group's top five small-cap picks; each had a market capitalization between $1 billion and $5 billion at the end of the third quarter. This is the same criterion used in our research that's mentioned above.

ViaSat (VSAT) is Klarman's favorite small-cap stock, sitting at the No. 3 spot in his 13F portfolio. Shares of the high-speed broadband provider have had an uneventful 2013, losing a little more than 1%, and the company has reported a loss in three straight quarters. ViaSat's launch of its own communications satellite in 2011 has many long-term investors sold on the idea that satellite-supported broadband can eventually be on equal ground against its more traditional competitors.

ViaSat isn't valued particularly well at the moment, but the sell-side expects a massive leap in earnings growth over the next half-decade. Early estimates predict annual EPS expansion of 19% to 20% a year; ViaSat's bottom line shrank by nearly 30% a year over the preceding five-year time frame. In addition to Klarman, hedge fund managers Murray Stahl and Israel Englander are both key names invested in this stock.

Theravance (THRX) meanwhile, is the hedge fund manager's second favorite small-cap stock. Theravance is up a little more than 18% in the past 12 months, and investors are optimistic on the biopharmaceutical company's partnership with GlaxoSmithKline (GSK). Last month, the two announced they're seeking approval of Anoro, a drug for chronic obstructive pulmonary disease. Generally speaking, respiratory treatments represent the best growth potential for Theravance, but shares don't look particularly attractive at 16x sales and 12x book. Ardent investors may be best served by waiting for a more attractive entry point into this stock.

Next up we have Allied Nevada Gold (ANV). As its name suggests, Allied Nevada has the majority of its operations focused in Nevada. Allied's Hycroft property represents the biggest growth driver for the gold miner, but full capacity isn't expected to be reached until 2015. The sell-side does expect EPS growth in excess of 150% next year -- they're predicting flat growth this year -- and investors aren't paying an arm and a leg for the stock at the moment.

ANV currently trades at a mere 15.8x forward earnings, and while there's nothing here for income-seekers, seven of the 11 Wall Street analysts that cover this stock hold buy ratings. As a whole, the group's average price target on Allied Nevada represents an upside in excess of 80%. It's easy to see why Klarman is invested in this stock.

NovaGold Resources (NG) is Klarman's fourth largest small-cap holding, and unlike Allied Nevada, shares aren't particularly cheap at the moment. Bullish investors expect NovaGold to sell at least half of its Galore Creek stake this year, though nothing has been confirmed as of this writing. Wall Street expects earnings growth in excess of 100% this year, and analysts' average price target forecasts that shares will double to a price north of $9.50.

Genworth Financial (GNW) rounds out Klarman and Baupost's top five. The diversified insurer, which also offers wealth management services, has seen its stock price pop by more than 22% year-to-date. Much of this appreciation has been on the back of reports that it will splinter off its mortgage insurance operations into a separate business. In addition to this bullish move, shares of Genworth trade at generally depressed forward earnings (7.3x), book (0.3x) and cash flow (1.2x) multiples. With Q4 earnings on deck next week, a solid quarter will likely pull more value-seeking investors into this stock moving forward.

-- Written by Jake Mann

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Krishnamsetty and Mann had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity

More from Investing

It's Big-Cap AI Stocks Vs. Everything Else

James "Rev Shark" DePorre
May 30, 2023 4:35 PM EDT

The biggest problem now is that the big-cap names are not acting as leaders.

Beyond Meat and Peloton: Zombie Stocks Can Turn Portfolios Into the Walking Dead

Brad Ginesin
May 30, 2023 3:30 PM EDT

Don't confuse a stock revival masquerading as a living, breathing business revival.

In Case You Missed It: Apple Just Hit a New 52-Week High

Bruce Kamich
May 30, 2023 2:45 PM EDT

Let's not ignore the strength in AAPL.

Where Can Investors Slip Into Shares of Skechers?

Bruce Kamich
May 30, 2023 2:29 PM EDT

The charts show where SKX's prices would be the perfect fit.

How Many Forward Gears Does Ferrari Stock Have?

Bruce Kamich
May 30, 2023 1:51 PM EDT

Let's check under the hood.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 09:48 AM EDT CHRIS VERSACE

    Latest AAP Podcast With Portillo's CEO!

    Listen in as we talk with a rising star in the Chi...
  • 03:25 PM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    Don't Just Sit There and 'Hope' for Your Stocks, M...
  • 07:32 AM EDT BOB LANG

    Webinar Thursday After the Close: Option Spread Trading

    Thursday, my good friend and colleague Sam DeMarco...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login