Earnings season has commenced on Wall Street, marking an intense period where the majority of S&P 500 companies disclose their latest quarterly results. These insights offer a window into the overall health of the U.S. economy and consumer behaviors. Beyond earnings reports, investors also pay close attention to the mandated filings of Form 13F by institutional investors with over $100 million in assets, providing a glimpse into the strategic moves of prominent money managers. Although these filings may contain information up to 45 days old, they still shed light on the stocks and sectors captivating Wall Street's elite.
In a particularly active June-ended quarter, billionaire investor Seth Klarman, CEO of Baupost Group, made headlines with his strategic investment decisions. Known for his value-oriented investment approach inspired by Benjamin Graham, Klarman oversees $3.6 billion spread across nearly 24 holdings. Notably, Klarman significantly reduced Baupost's position in Alphabet, the parent company of Google, amid other noteworthy moves. Klarman's fund slashed its stake in Alphabet's Class C shares by 64%, unloading a substantial portion from the initial 2.9 million shares held since March 31. This decision comes amid a broader perception of an overvalued market, with the S&P 500's Shiller price-to-earnings ratio recently reaching its highest point of the year.
Despite Alphabet's reasonable forward P/E ratio of 19, Klarman's team might have anticipated pressure on Alphabet's stock if the broader market were to experience a downturn. Concerns about a potential recession, given a historic decline in M2 money supply, may have also influenced the decision. Additionally, the U.S. Department of Justice's scrutiny of Alphabet's dominance in internet search could pose future legal challenges, adding to the uncertainties faced by the company. Such looming legal risks can deter investors, aligning with Klarman's value-investment philosophy that prioritizes reducing exposure to potential volatility.
While divesting from Alphabet, Klarman focused on increasing Baupost's stake in Jazz Pharmaceuticals, a lesser-known but historically undervalued drugmaker. The addition of 440,552 shares during the quarter bolstered Baupost's investment in Jazz by 53%, positioning it as the ninth-largest holding at $136 million. Central to Jazz's success is its oxybate franchise, comprising medications like Xyrem and Xywav aimed at treating sleep disorders. This franchise is projected to generate $1.6 billion in annual sales by 2024. Moreover, Jazz is expanding its pharmaceutical offerings with Epidiolex, a treatment for rare forms of epilepsy acquired through its $7.2 billion purchase of GW Pharmaceuticals.
With limited competition in its field, Epidiolex is set to bring in approximately $900 million in 2024, demonstrating robust growth potential. Jazz's oncology segment, driven by therapies like Rylaze for acute lymphoblastic leukemia, contributes significantly to its revenue, projecting over $1.1 billion this year. Despite concerns about market competition from Avadel Pharmaceuticals’ Lumryz, Jazz remains competitively valued at just over five times Wall Street's EPS forecast for 2025, marking a 32% discount compared to its average forward P/E over the past five years. The potential for future growth in Jazz’s comprehensive drug pipeline, including research targeting cancers like small-cell lung cancer and acute myeloid leukemia, positions it for strategic advantages, aligning with Klarman's investment focus on undervalued, high-potential assets.
