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.