Hedge Fund Kahn Brothers’ Stock Picks for 2013

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Hedge funds and other major investors continue to file their 13Fs for the fourth quarter of 2012 this week, disclosing many of their long equity positions as of the end of December. We believe that there are multiple ways to take advantage of this information. One technique we use is to pool 13F filings in our database and use them to formulate investment strategies; the most popular small cap stocks among hedge funds as of the end of June 2012, as listed in our August newsletter, beat the S&P 500 index by 18 percentage points between September and January despite the significant delay from when these positions were actually held (read more about our hedge fund investing strategies).

Of course, investors can also treat individual 13F filings as a list of recommended stocks to be researched further if a quick look shows that they may be good values. Kahn Brothers, a fund Irving and Thomas Kahn have managed since 1978, recently filed its 13F. Read on for our thoughts on the fund’s five largest holdings and compare them to previous filings.

Kahn Brothers owned 2.5 million shares of Pfizer (NYSE: PFE), making the pharmaceutical company its largest holding by market value. Pfizer was also billionaire Ken Fisher of Fisher Asset Management’s top stock pick for 2013 (see more of Fisher's stock picks). The stock currently trades at 14 times trailing earnings, though revenue did decline last quarter compared to the fourth quarter of 2011. Analyst expectations imply a forward P/E of 12. Pfizer also pays a dividend yield of 3.6% at current divided levels, so it offers at least something of a combination of value and income.

Another of the fund’s top picks was Citigroup (NYSE: C), with Kahn Brothers reporting a position of 1.3 million shares. Citi had been one of the ten most popular stocks among hedge funds in the third quarter of 2012, and there is a value case to be made given the substantial discount to book value (the P/B ratio is 0.7) and the forward P/E of 8. However, we think that peers offer considerably better stability and trailing earnings performance at a slight premium in asset-based terms; JPMorgan Chase, for example, has a trailing P/E of 9 and a P/B of slightly less than 1.

New York Community Bancorp (NYSE: NYCB) was another of Kahn Brothers’ favorite stocks. It is a $6 billion market cap bank holding company offering an attractive dividend yield. It is also valued at about the book value of its equity and at 12 times trailing earnings, so while not a screaming buy in value terms we would not be calling it overvalued either. With the business seeing slight growth it may be a good prospect for income investors.

Merck (NYSE: MRK) joined Pfizer as a pharmaceutical stock in the fund’s portfolio. The 1.1 million shares which Kahn Brother owned was roughly even with its stake from three months earlier. As a pharmaceutical company it’s unsurprising that Merck has a relatively low correlation with the broader market at a beta of 0.4 as well as a fairly high dividend yield. Point State Capital, managed by Sean Cullinan and other portfolio managers from Duquesne Capital, owned 6.5 million shares of Pfizer at the end of the third quarter.

Kahn Brothers slightly increased its holdings of The New York Times Company (NYSE: NYT) to a total of 4.8 million shares. The fund was the largest holder of the stock in our database of 13F filings, as many hedge funds shy away from the newspaper business. Revenue was down 10% in the fourth quarter of 2012 versus a year earlier, and Wall Street analysts expect the decline to continue. Even so, the forward earnings multiple is a fairly high 18. 11% of the outstanding shares are held short.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has long positions in C and NYT. The Motley Fool owns shares of Citigroup Inc . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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