Beating the Benchmarks: 3 Seth Klarman Value Stocks to Own Now


  • These are the Seth Klarman value stocks to buy before they surge higher on positive business developments
  • Eagle Materials (EXP): Likely to benefit from impending rate cuts that has the potential to boost the housing and infrastructure market
  • Alphabet (GOOG): Only beginning to scratch the surface of what’s possible with AI and the launch of Gemini is the first step towards the next leg of growth
  • Willis Towers Watson (WTW): Stable growth across businesses with cost cutting measures likely to support EBITDA margin expansion
Seth Klarman value stocks - Beating the Benchmarks: 3 Seth Klarman Value Stocks to Own Now

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The best way to invest is to pursue rigorous personal research and find quality ideas. However, it’s equally important to look at what some of the big investors are doing. Some of the best investing ideas might come from following the portfolio of legendary investors. Before taking a big plunge, these investors have pursued ample due diligence. With this overview, the focus of this column is on Seth Klarman value stocks to buy.

As an overview, Klarman is the CEO and portfolio manager of the Baupost Group hedge fund. The fund has delivered annual returns of 20% since 1983 with focus on risk-conscious value investing. By looking at the latest holdings of Baupost Group, I have picked three stocks that look interesting.

In my view, these quality stocks are trading at attractive valuations. An equal weighted portfolio of these stocks could beat broader indices on a consistent basis over the next 24 to 36 months. Let’s talk about the business and the stock upside catalysts.

Eagle Materials (EXP)

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Eagle Materials (NYSE:EXP) is a new addition in the Baupost Group fund. The company is a manufacturer of heavy construction and light building materials in the United States. EXP stock has trended higher by 38% in the last 12 months. However, the stock remains attractively valued at a forward P/E of 14.5.

An important point to note is that multiple rate cuts might be on the cards in the next 12 to 18 months. This is likely to be positive for the real estate and construction industry in the U.S. The company expects “increased residential construction activity as mortgage rates stabilize and the well-documented housing supply shortage continues.” I therefore expect EXP stock to remain in an uptrend.

It’s also worth noting that Eagle is the best among peers in terms of operational efficiency. The company’s average EBITDA margin over a 10-year period has been 29.5%. This is superior to all peers in the heavy and light building materials business.

I must add that Eagle has a strong balance sheet with leverage at 1.4. This is attractive for a capital-intensive business. With healthy cash flows, the company has created value through share repurchase and dividends.

Alphabet (GOOG)

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Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) is another stock that has been among the top buys for Seth Klarman’s hedge fund. The blue-chip technology stock has rallied by almost 26% for year-to-date, but remains attractive at a forward P/E of 23.6. I am not surprised that the stock is being accumulated by a well-known value investor.

For Q1 2024, Alphabet reported revenue growth of 15% on a year-on-year basis to $80.5 billion. This was on the back of strong performance for Search, YouTube, and Cloud. However, like all technology majors, Alphabet is focused on AI. The launch of Gemini in December 2023 is a first step towards gaining leadership in AI research and infrastructure.

It’s worth noting that at the launch of Gemini, the company’s CEO opined that the company is “only beginning to scratch the surface of what’s possible.” Therefore, the next few years will be exciting for Alphabet in terms of exploring possibilities powered by AI. This is likely to help in sustaining and possibly accelerating the company’s growth momentum.

Willis Towers Watson (WTW)

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Willis Towers Watson (NASDAQ:WTW) is among the largest holdings in Seth Klarman’s hedge fund. Wills Towers is a provider of data-driven and insight-led solutions in the areas of people, risk, and capital. Besides trading at an attractive forward P/E of 15.3, WTW stock also offers a dividend yield of 1.41%.

In the health, wealth and career segment, Willis Towers reported organic revenue growth of 4% on a year-over-year basis. The wealth segment benefited from higher levels of retirement in North America and Europe. Considering the demographics, growth in this segment is likely to be steady. Further, the health segment benefited from Global Benefits Management client portfolio expansion in Europe and other international markets. The risk & broking segment growth was also healthy at 8%.  

Besides this, Willis Towers expects $425 million in annualized savings through 2024. This is likely to translate into EBITDA margin expansion and cash flow upside. With an investment grade credit rating, Willis will continue to create value through dividends and share repurchase.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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