Enigmatic investing legend Seth Klarman runs the Boston-based Baupost Group hedge fund that has around $27 billion in assets under management. 

The billionaire is a value investor in the vein of Benjamin Graham, considered the father of value investing. Warren Buffett is a Graham disciple, too. Yet where the Oracle of Omaha likes to be out front giving speeches and publicly sharing his investment wisdom, Klarman is much more elusive and rarely gives addresses.

Yet for investors wanting to learn the wisdom of this Wall Street wunderkind whose hedge fund has generated annualized returns of about 20% since its founding in 1982, they can pick up a copy of his cult classic book Margin of Safety that will set you back a cool $3,000 on Amazon. And that’s for a used copy.

Klarman holds some two dozen stocks in Baupost Group, but recently announced a change in focus. According to HedgeWeek, the billionaire sent a letter to investors announcing he was restructuring the hedge fund to narrowly focus on equities and real estate. He would also be increasing his “exposure to distressed debt, special situations, event-driven equities, private investments, and capital solutions.”

To do so, he made a number of new stock purchases while selling off several others. Below are two of the biggest buys he made and one of his largest sells.

Key Points About This Article:

• Famed value investor Seth Klarman tends to shy away from the public spotlight, but he lets his investing success talk for him. His Blaupost Group has annualized returns of 20% stretching back to 1982.
• Klarman is changing the focus of his hedge fund to narrowly concentrate on certain areas, meaning he bought several new stocks in line with his new thinking while jettisoning others from the portfolio.
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.

Stock Buy No. 1: Humana (HUM)

Health insurer Humana (NYSE:HUM) was the largest new addition to Klarman’s portfolio. He bought 420,000 shares that are currently valued at $157 million, good for 4% of Baupost’s total holdings, which places it as his eighth largest position. With an average buy price of $360, Klarman is down 13% at the moment.

There is good reason to believe this could change for the better in the future. Healthcare stocks like Humana are currently depressed because of the uncertainty surrounding the Medicare Advantage program and its changing admission rules and reimbursement rates. Cigna (NYSE:CI), for example, just sold its Medicare Advantage business for $3.7 billion to free itself from the vagaries of compliance.

Because Humana is paid the same rate as traditional Medicare insurers, it tries to improve the health of the insured while offering additional benefits in an effort to be profitable. So it tries to place users with doctors offering value-based arrangements, incentivizing them to give better care and lower costs.

As Humana owns the largest home healthcare practice, it sees this as a key competitive advantage. Considering U.S. demographic trends and how deep Medicare Advantage is penetrating the market, this is a major growth opportunity for Humana going forward.

Solventum (SOLV)

Healthcare products maker Solventum (NYSE:SOLV) was the second-biggest purchase Klarman made in the second quarter, buying 1.8 million shares valued at $96 million. It represents 2.7% of the portfolio, but with an average buy price of $16 per share, he is sitting on a 14% gain to date.

Solventum is relatively new to the market, having been spun off in April from industrial conglomerate 3M (NYSE:MMM). It got off to an inauspicious start. Shares began trading at around $69 each and promptly fell, ultimately declining to $47 a stub. Yet since the low point, SOLV stock is up almost 50% even if it is still in the red since the separation.

The company is one of the largest providers of medical supplies such as sterilization devices, dressings, tapes, and other consumables. It generated some $8.2 billion for 3M in 2023, and organic sales are up 1.3% in 2024.

One of Solventum’s biggest issues weighing it down is the debt 3M saddled it with. At the end of the second quarter it had $8.3 billion in long-term debt and just $897 million in cash and equivalents. However, management is focused on paying down that figure over the next two years. It also raised its full-year guidance. 

The company is looking for sales growth of as much as 1% organically with adjusted earnings of $6.30 to $6.50 per share compared to its previous outlook of as much as a 2% decline in sales and adjusted profits of $6.10 to $6.40 per share.

With sales and profits growth in store and management committed to reducing its debt load, Solventum looks like a good long-term winner.

Stock Sale No. 1: Theravance Biopharma (TBPH)

Klarman completely sold off his significant stake in biopharmaceutical stock Theravance Biopharma (NASDAQ:TBPH). He had owned 4.2 million shares of the stock and sold them at an average price of $8.25 per share.

While the sale probably has more to do with the change in Baupost Group’s change in direction than with anything wrong at the company, Theravance stock is down 30% year-to-date. Klarman still owns biotech stocks, including Jazz Pharmaceuticals (NASDAQ:JAZZ) (a top 10 holding) and Fortrea Holdings (NASDAQ:FTRE). Notably, those positions are also in the red by double-digit percentages.

While Theravance has several marketed therapies, the company is still producing significant losses. Investors had been hoping its pipeline of treatments could narrow the losses, but were disappointed when the biotech reported a Phase 2 trial for izencitinib, an ulcerative colitis drug, failed to meet its endpoints. As it occurred after Klarman sold his shares, he was spared the 34% single-day drop in the stock.

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