Seth Klarman is one of the world’s greatest value investors.

So we were astounded when we heard he recently bought a company that’s 20 times more expensive than the overall market.

Klarman wrote the book on safe investing: Margin of Safety.

His philosophy is to buy stocks when they are unpopular and undervalued.

If he’s right about the stock, the market will realize it and bid the stock up. And if he’s wrong, he won’t lose any money because he bought the stock so cheaply.

That gives his picks a “margin of safety.” And so far, his strategy has paid off.

Klarman started his Baupost Group fund in 1982. Since then, it has returned about 16.4% per year.

If you invested $10,000 in the fund back then, it would be worth over $1.5 million today. That track record puts him up among the best.

Here’s the thing, though… Guys like Klarman don’t change their horses midstream.

That’s why his recent purchase surprised us. This past quarter, he put 6% of his fund’s money into a company that’s trading at 576 times earnings.

That’s not a typo.

This is a guy who probably considers anything over 20 times earnings to be expensive. But we think Klarman is onto something.

We did a deep dive into the company… And we’ve found a hidden margin of safety underneath that high valuation.

Digging Deeper

Regular readers know we love pick-and-shovel plays.

Over the past week, we’ve introduced you to several of them. They’re a safe way to play hot trends like driverless cars and social media.

Pick-and-shovel businesses supply the “tools” necessary for companies to operate. The analogy comes from the 19th-century gold rush.

The guys who supplied picks and shovels to the miners made money regardless of whether miners went boom or bust.

We looked into Klarman’s latest play… And the company falls into this category. It’s a main supplier of wireless technology for smartphones.

Uncovering a Hidden Margin of Safety

Klarman’s surprise purchase is Qorvo (QRVO).

The company was created by the 2015 merger of RF Micro Devices and TriQuint Semiconductor. It makes components for wireless communications.

Qorvo’s price-to-earnings (P/E) ratio is 576. That means investors are willing to pay $576 for every dollar of current earnings.

That’s over 20 times more expensive than the average stock.

But that didn’t stop Klarman from putting 6% of his fund’s money into Qorvo.

After doing some digging, we think we’ve found out why: All of the world’s largest smartphone makers use Qorvo’s wireless technology.

The company’s biggest clients are Apple, Samsung, LG, and Chinese giant Huawei.

So no matter which smartphone brand you use, Qorvo’s technology is probably inside. That makes it the perfect pick-and-shovel play.

And as we told you before, these types of companies are a safer way to play trends.

We bet that’s the underlying “margin of safety” Klarman is banking on—despite QRVO’s high valuation.

In other words, once the market realizes Qorvo is a main supplier of these smartphone giants, it will bid up the stock’s price in anticipation of future profits.  

Next year, QRVO is projected to earn about $5.50 per share in profits. That gives the stock a forward P/E ratio of 14. And that would be about 50% lower than the market.

That kind of thinking is right out of Klarman’s Margin of Safety playbook.

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That being said, Qorvo is a relatively new company. And any stock that trades at 576 times earnings is somewhat speculative.

So don’t bet the farm on it. Qorvo still needs to meet these lofty targets. But if it does meet projections, it will be cheaper than the overall market.

We think it has a bright future as a pick-and-shovel business in the wireless communications industry.

And you can sleep easier at night knowing this stock has been vetted by one of the world’s best investors.


Nick Rokke, CFA
Analyst, The Palm Beach Daily

P.S. In addition to being a great value investor, Klarman has shown a knack for buying tech companies. In late 2015, he bought data storage company EMC. Nine months later, Dell acquired EMC and Klarman took home a quick 20% profit. Also in late 2015, he bought PayPal. It’s up over 60% since then. So we’re confident Qorvo will follow suit.


Palm Beach Confidential editor Teeka Tiwari has been on a tear with his cryptocurrency recommendations, and subscribers want to let him know…

From Carolyn H.: Last year, I bought $500 worth of one of your crypto plays. But I became so confused and frustrated about cryptocurrencies that I canceled my subscription and ignored my position.

Thanks to Hawaii’s recent (and ridiculous) decision to close down the Coinbase exchange, I was forced to go into my account and remove my holdings. Imagine my surprise to see almost 1,000% gain!

I learned the value of looking long-term… and I promptly signed back up and took a lifetime membership. Thank you, Teeka!

From George W.: Here’s my brief experience with cryptocurrencies since November: My initial $20,000 stake is now over $100,000, which is… ridiculous. I know this level of silly returns never lasts, but it’s fun stuff while it does!

I’m pretty happy with the $1,500 I spent for your Confidential! Thanks!

We want to hear how your cryptocurrency journey has been going. Share your story right here. Meanwhile, lots of reader interest in Dash, a cryptocurrency Palm Beach Confidential analyst Greg Wilson wrote about in the May 19 Daily

From Suzzane I.: I read your recent commentary on Dash yet it is not in the portfolio of cryptocurrencies. Reason for this?

From Jody G.: Is Dash an official recommendation? It has done extraordinarily well, and I’m up 400% on all the other recommendations. Thanks for the great work.

From Richard T.: When it comes to digital cash, I feel you have really missed the boat. Dash has solved all the bitcoin problems. Faster, cheaper, user friendly. Hope you will reconsider and investigate Dash.

Editor’s Reply: We reached out to Teeka and Greg and they tell us that Dash and several other cryptocurrencies are on their radars. No one knows the space better than these two. In fact, they’re both at a major blockchain conference in New York this week researching a new crop of ideas. When they find one that passes their proprietary cryptocurrency trading system, they’ll add it to the portfolio and notify subscribers.

Teeka and Greg aren’t the only ones out in the field. Nick started his Rust Belt Tour today and readers have some ideas for him to cover. If you want to meet up with Nick on his tour, you can reach him right here

Rory B.: Hi Nick. I’m a small businessman in the health care field. I would be happy to discuss how regulations are hurting both patients and health care itself.

And in the May 19 3-Minute Market Minder, we asked readers who they blamed for the sell-off in the stock market: the Trump administration or the Washington establishment and mainstream media?

From Tim M.: CLEARLY it is the establishment and the media. There are SO many examples! The most recent being the news that President Trump released secrets about laptop bombs. Come on, that’s been in the news for two months.

Whoever released that to the media should be locked up and the media who repeated it need a civics lesson. I know that wasn’t Trump because if it was, there would be dancing in the streets! Hypocrites!

From Anthony V.: Regarding the recent sell-off in stocks: With the VIX at extreme lows, the market was looking for any excuse to pull back. Impeachment rumors filled that role perfectly. Great opportunity to pick up some quality positions at bargain prices.