Seth Klarman Sounds Alarm On Amazon, Facebook

Largely echoing Howard Marks' famous July letter to investors, in which the Oaktree investing legend warned about bubble markets, FAANGs and the threat of ETFs to efficient markets, and which he said was his most popular report ever, the WSJ reports that in his 2017 year-end letter, Seth Klarman’s Baupost Group told clients that Amazon and Facebook "are not necessarily great investments going forward" as "many of these companies seem very fully valued."

Asked whether value investors can prevail in a world dominated by index funds, and musing if "Baupost itself can be disrupted", Klarman cited companies like Amazon that pose 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.”

Klarman even hinted at the anathema to value investors everywhere: that he may put money in growth stocks, suggesting 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 also "exploring ways to put a value on raw data, researching top technology firms and attending more tech conferences", Klarman wrote.

"Disruptive change is already driving differences in the assumptions we are comfortable making and the cash flow projections that underpin our financial models," he added in the letter.

Even more bizarre, Baupost may soon be a Unicorn investor:

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.

That said, we doubt Baupost will be a white knight investor in Theranos.

Going back to Klarman's far stronger suit, valuation, what will be of biggest interest to FOMOed dip buyers  everywhere, he warned 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."

Meanwhile, Baupost is finding value among some firms attacked by the likes of Amazon, for example department stores: "Even for Macy’s, the correct price today is not zero," adding that the company owns valuable real- estate assets and "there may be ways to navigate through the current environment while salvaging some value for shareholders."

Finally, the WSJ notes that the letter doesn’t mention Baupost’s investments in distressed Puerto Rican bonds, which attracted criticism last year; in Baupost’s Q3 letter, Klarman told clients that Puerto Rico debt investors should be prepared to take a haircut.

Comments

halcyon spastic_colon Fri, 01/19/2018 - 09:58 Permalink

1. indexing. buy & hold etf automatically allocates a large chunk into FANGS due to their weight in indexed

2. Klarman is always early. Always was, always will be.

3.Klarman getting into unicorns, 'knowledge' leaders and growrh companies is a desperate sign of trying to chase yield in markets where CBs have destroyed price discovery and true value investing. Its get yield or see the capital fly out from your fund, sanity and risk control be damned.

The world reall has gone topsy turvy when Seth Klarman is abandoning his trued and tested value approach.

Guess it had to happen, but it ain't gonna end well.

 

 

In reply to by spastic_colon

Chupacabra-322 Pool Shark Fri, 01/19/2018 - 10:01 Permalink

"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."

 

They’re fully valued alright.  By the Criminal Deep State “Intelligence” Agencies & Community.

In reply to by Pool Shark

asteroids Fri, 01/19/2018 - 09:45 Permalink

Traditional valuation metrics haven't worked since 2009 when the FED got rid of mark-to-market and printed up trillions to backstop the boyz.

VW Nerd Fri, 01/19/2018 - 10:00 Permalink

Weak article.  Nowhere in the article is Amazon's current PE of 300 mentioned.  Even at 100% Y/Y earnings growth, the price is way too far ahead of earnings. Talking heads on financial pimp programs are still peddling these lousy "investments".  I'll leave this one to desperate pension fund managers.

Quivering Lip Fri, 01/19/2018 - 10:04 Permalink

How can it be? Amazon has peaked? Isn't Amazon earning $20 a share? I vividly remember reading back in 2014 that they would be by now. 

Since then both Amazon stock and earnings have quadrupled. Back then the stock was trading in the 300's and they were earning around a $1 per share. Today $1300 and they're earning $4.

If it wasn't so comical it would be funny.

Consuelo Fri, 01/19/2018 - 10:52 Permalink

 

 

"...it may be possible for Baupost to step in on preferential terms when promising companies stumble, says the letter."

 

Remedial translation:  'Come to Schlomo...'

TeaClipper Fri, 01/19/2018 - 11:54 Permalink

How do you save companies that were originally funded by CIA money then pumped to obesity by years of central bank money printing. The word reality does not even come into it.

Really, who is brave or foolish enough to put any true price realisation on the likes of Amazon or Facebook. 

Come on Veritasium the stock market needs some transparent and open honesty.

DipshitMiddleC… Fri, 01/19/2018 - 14:06 Permalink

the markets are a sham and the only way to "beat" them is to be an insider or use algos to figure out what the plunge team is doing

 

"value investing" is some bullshit from the old world order ala prior to 2008

 

algos are the future

 

 

GotGalt Fri, 01/19/2018 - 14:55 Permalink

Wow, Seth Klarman is getting bullish on tech disrupters and private unicorns?  If that doesn't signal the top is getting closer I don't know what will!