Not too much has changed in Seth Klarman's portfolio over the past few months, according to his recent SEC filings. His top five positions remained the same during the third quarter. Klarman's Baupost Group did sell more than half of his large stake in paper producer Domtar (NYSE: UFS), and he added two new positions, in Alere (NYSE: ALR) andRegeneron Pharmaceuticals (Nasdaq: REGN).
We also recently learned that Klarman will be returning 5% of the fund's capital to investors over the remainder of the year because he is finding few good investment opportunities. It is extremely rare for fund managers to return money to investors, since they make money on assets under management. However, this is just one of the reasons that Klarman's moves are always worth watching. Not only is he successful, but his honesty even at his own expense makes him a pretty unique figure in this industry.
One of my favorite methods of finding discounted stocks is by using Ben Graham's Net Current Asset Value model (NCAV). Whereas book value measures assets less liabilities, NCAV is a bit more complex. Graham's value screen includes only current assets such as cash, inventory, and accounts receivable, then subtracts all liabilities. Basically, the idea is to look for companies that trade near or below a conservatively calculated liquidation level if the company were to go out of business or liquidate. Graham liked to buy stocks that trade at near two-thirds or less of their NCAVs. Many of the companies in Klarman's Baupost portfolio are on my radar. However, there is one of special interest: Audiovox (Nasdaq: VOXX)
Audiovox doesn't quite meet Graham's exact specifications, but it is certainly near levels where he might pull the trigger and buy it. The company does a little bit of everything in the consumer electronics space with products such as car stereo speakers, iPod docks, satellite radio kits, camcorders, and digital picture frames. Many of the products are value-added or "me too" products that give consumers a less expensive option than brand name electronics from Sony (NYSE: SNE) or Panasonic. With American consumers still recovering from the recession, these off-brand products should continue to stay popular.
In addition, the reemergence of Ford (NYSE: F) and General Motors (NYSE: GM) should help Audiovox drive sales of their aftermarket car stereo products. Audiovox continues to gain traction with dealerships who install these products.
While I believe the fundamentals of the company are strong, it is the valuation that really makes the company attractive. Audiovox trades at a price-to-book ratio of just 0.4 and has $73 million in cash and short-term investments with just $14 million in debt.
The company has a market capitalization of about $158 million, so if you wanted to buy the entire company today, not only would you get a strong business but just about 40% of the value of the company handed to you as well in the form of cash and short-term investments.
As of Monday's close, the stock was trading at $6.87, which is just about 74% of its NCAV of $9.25. So the stock only misses Graham's threshold of 66% by a few percentage points. However, in a market that has increased by more than 12% since the beginning of September, that is about as good of a valuation as I can find, and I like the business as well.
I believe Klarman saw the same value that Graham would see in Audiovox when he made the purchase. While I would never recommend buying a company because it could be an acquisition target, when I see a reasonable business at such an inexpensive valuation, the potential can't be dismissed. In addition, the company's strong cash position in terms of its market capitalization provides a nice cushion under the business. But don't take my word for it; take Seth Klarman's.
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