The stock market has seen plenty of ups and downs in the past 25
years. Through it all,
Baupost Group's Seth Klarman has managed to stay on the right side
of the ledger, racking up an average annual gain of about 20%.
, the power of
can work magic with numbers like that. If you invested $10,000 with
Klarman back in 1985, it would be worth about $950,000 today. Most
impressively, he's bagged those returns with the relative safety of
value stocks, eschewing the stomach-churning gyrations of growth
stocks. And Klarman often holds lots of cash, making those returns
even more stunning. Even if you're not one of Klarman's clients,
you can still piggyback on his efforts by reading up on his latest
report from the U.S. Securities and Exchangecommission points to a
pair of new names in Klarman's portfolio that look quite
Aveo Pharma (Nasdaq: AVEO)
Despite his predilection for value stocks, Klarman likely sees a
potential blockbuster with little-known Aveo Pharma. He bought 2
millionshares last quarter, worth about $28 million. Aveo is
developing a range of cancer-fighting drugs, led by tivozanib,
which inhibits vascular endothelial growth factor (VEGF). VEGF
allows for the creation of new blood cells that can provide a
lifeline to cancer cells. Cut back on VEGF, and you can shrink or
Aveo has a ways to go before fulfilling its promise. Tivozanib
showed very promising results in a Phase 1 clinical trial with the
U.S. Food and Drug Administration, but the next two phases of
testing will be far more rigorous. Even if everything goes
according to plan, it will be several years before tivozanob hits
the market, though Klarman may be betting on Aveo being acquired
well before then. These days, any biotech firm with a potentially
promising drug in development seems to bebuyout bait for larger
pharmaceutical companies facing costly patent expirations on their
existing blockbuster drugs.
Klarman's play here is already on the move. Japan's Astellas said
it will pay Aveo $575 million if tivonazib is approved, and
potentially $780 million more if sales targets are met. After the
news, Aveo's value rose more than $100 million to about $600
million on Thursday, Feb 17, well below the potential value created
by the Astellas endorsement.
PDL BioPharma (Nasdaq: PDLI)
This biotech play has seen better days.
traded above $30 back in 2006, but now trade for less than $5.
Klarman originally owned this stock back in 2008, but sold off his
stake in the summer of 2009 at a loss. Shares have drifted yet
lower since then, leading Klarman to jump back in, buying 5.6
million shares in the last quarter, which are currently worth about
PDL holds the patent to a number of antibody technologies that are
used by other drug companies with their drugs. Klarman's latest buy
comes at a time when the company is pursuing a potentially large
legal settlement. PDL is seeking unpaid royalties from Roche's
Genentech division. Some suspect that Genentech may be liable for
hundreds of millions in royalty payments if PDL prevails in a
Besides this potentially big upside event, PDL typically generates
$300 to $400 million a year in sales and earns roughly $1 a share.
Not bad for a $5 stock. Shares are so cheap because PDL's key
intellectual property rights will lose patent protection in 2014.
To offset that cliff, the company is working on a range of new
drugs that are currently undergoing clinical trials.
Shares are also being discounted after PDL agreed to pay
MedImmune division $92.5 million to settle a royalty dispute
regarding PDL's virus treatment Synagis. Klarman, who bought shares
at slightly higher levels, may not have seen this coming as courts
had ruled in MedImmune's favor last month -- after Klarman bought
into PDL. Some had seen the MedImmune dispute as an overhang to the
stock, and with the bad news out of the way, shares may finally
start to post the upside that Klarman envisions.
Beyond potentialcapital appreciation , Klarman and others see PDL
as a near-term soliddividend play. PDL issued a pair of $0.50
dividends in 2010 (equating to a combined 18%dividend yield ), and
analysts think the company will issue at least $0.50 in dividends
this year (equating to a 9%yield ). That Genentech legal squabble
-- if resolved in favor of PDL -- appears to represent the major
upside for this stock. In its absence, the stock is only worth
about $7, according to some analysts. Even that is a 40% upside
from current levels.
Action to Take -->
Seth Klarman may not be as well known as Warren Buffett or John
Paulson. But he should be. He has an uncanny knack for picking
winners, and these two new positions, though they are a small part
of his portfolio, could help to fuel yet another strong year for
one of the Street's most consistently winning investors.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.