Tag Archives | Mohnish Pabrai

Five Smart Money Dividend Stocks

Now and then it is nice to take a peek over the shoulder of a successful investor to see what their high-conviction buys are.  When you read a headline that “Warren Buffett is buying Company X,” you’re naturally inclined to do a little digging into Company X’s financials.  After all, if it’s good enough for Buffett, it might be good enough for you.

You have to be careful with this line of thinking, of course.   The SEC filings that disclose the holdings of large investors are generally pretty dated by the time we have access to them.  For all we know, the conditions that made a guru buy a given stock may no longer be valid by the time we read about it, and there are no guarantees that they haven’t already sold it.  For these reasons, I tend to focus on larger holdings, the conviction buys that they are likely to hold onto for a while.

Today, I’m going to look at one high-conviction dividend stocks each from five well-known superinvestors.  My criteria is simple enough: the stock must be a significant holding in the guru’s portfolio and it must pay a respectable dividend.

Guru

Stock

Ticker

Yield

Warren Buffett Wal-Mart

WMT

2.10%

David Einhorn Apple

AAPL

1.80%

Joel Greenblatt Northrop Grumman

NOC

3.30%

Bill Ackman General Growth Properties

GGP

 2.20%
Mohnish Pabrai Goldman Sachs

GS

1.8%

 

We’ll start with Mr. Buffett.  Warren Buffett’s Berkshire Hathaway ($BRK-A) has been accumulating shares of retail behemoth Wal-Mart ($WMT), and it’s not hard to understand why.  Wal-Mart is exactly the kind of company that Buffett is famous for buying.     It has a dominant position as the leading discount retailer in the world.  It has competitive “moats” in its size and logistical efficiency that competitors have a hard time scaling.  And naturally, it’s attractively priced. Wal-Mart trades for 14 times 2013 expected earnings and at 0.55 times sales.  Its 2.10% dividend, while not exceptionally high, is growing at a nice clip.  Wal-Mart raised its dividend 9% last year and 20% the year before.

Our next guru is David Einhorn.  Einhorn is better known for some of his high-profile short positions—he even wrote a book about his short of business development company Allied Capital, Fooling Some of the People All of the Time—but he is certainly not afraid to make large, concentrated long bets as well.

As of his most recent filings, former high-flyer Apple ($AAPL) was his largest holding by a wide margin at fully 15% of Greenlight Capital’s publicly-traded long portfolio.

It is debatable whether Apple should be considered a “dividend stock” given that the company only recently started paying a dividend and yields less than the broader S&P 500.  Still, given Apple’s gargantuan $100 billion cash hoard and continued shareholder agitation, it is safe to assume the dividend will be rising in the years ahead.

Joel Greenblatt of Gotham Capital is one of my favorite gurus. His “Magic Formula” is one of the best stock screeners I have ever come across, and he gives away access to it for free.  I’ve stumbled across more great investment ideas than I can count from browsing his site, and I recommend that you give it a look.

Greenblatt is heavily invested in defense firms these days, and one that caught my eye was Northrop Grumman Corporation ($NOC).

Northrop Grumman is not a “high conviction” pick of Greenblatt, per se, as its weighting is not materially higher than any of his other holdings.  It is, however, a highly-profitable company selling at a very attractive price.  Northrop Grumman trades for just 9 times expected 2013 earnings and yields an impressive 3.3% in dividends.

Next on the list is Bill Ackman, Greenblatt’s former partner at Gotham Capital and the principal of Pershing Square Capital Management.  Ackman is an activist investor with a history of taking large positions in companies and then agitating for radical change.

One such company in need of radical change is the iconic American retailer JC Penney Company ($JCP).  Penney is Ackman’s largest position, comprising fully 17% of his portfolio.

The company recently cut its dividend and is in the midst of an existential crisis, so we’ll move down the list to his first dividend stock of any size, diversified REIT General Growth Properties ($GGP).

A retail REIT may raise eyebrows when consumer spending appears to be slowing, but investors don’t appear to be worried. General Growth is up 20% year to date, roughly double the return of the S&P 500.

With a yield of 2.20%, General Growth is certainly not a big income generator, particularly by REIT standards. Still, a reliable 2.2% is attractive in a low-yield world.

As a side note, Ackman has a large position in Sizemore Investment Letter recommendation Beam Inc ($BEAM), the maker of Jim Beam bourbon whiskey.  Though not much of a dividend stock, it is attractive as a recent spin-off and as a money-minting sin stock.

Finally, we come to Mohnish Pabrai, author of the Dhandho Investor and one of my favorite investors. Pabrai is known for running a highly-concentrated portfolio and for good reason.  As of his most recent filings, two thirds of his portfolio was invested in the financial sector.

Pabrai’s largest holding that pays a dividend of any size is Wall Street superbank Goldman Sachs (GS), which yields a modest 1.8%.

Pabrai is betting big on the financial sector, and Goldman alone accounts for over 19% of his portfolio.  To say that this was a “high-conviction” investment for Mr. Pabrai would be an understatement.

Of all the guru stocks profiled in this article, the one I find most compelling is Mr. Buffett’s Wal-Mart, which I own both personally and in client accounts.  Though considering the track records of each of the gurus, a case could be made for considering any of these dividend-paying stocks.

Disclosures: Sizemore Capital is long BEAM and WMT.

 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

Read full story · Comments { 4 }

When in Doubt, Follow the Greats

Stocks fell sharply as we started trading this week on fears that Europe’s sovereign debt crisis was again spiraling out of control.  Of course, I could have used that same opening sentence at almost any point in the last 10 months and it would have been equally true.  The remarkable thing about 2011 is that it has been largely devoid of any real news.  The macro concerns driving the market haven’t changed much in two years—and yet we continue to see some of the most volatile daily price swings since the Great Depression.

The art of investing is an exercise in making decisions under conditions of uncertainty.  But today, it seems that the cloud of uncertainty is a little thicker than usual.  Despite having two years to discount the likelihood and consequences of default by one or multiple “PIIGS,” the market’s persistent volatility shows that investors are as uncertain as ever.

I’ve been consistently bullish for most of the past year, arguing that the low prices on offer more than compensated investors for the risk of meltdown.  But I’m also the first to admit that the volatility of recent months has thoroughly frayed my nerves.

During times like these, I like to do what your college professor might have called “cheating.”  I like to look over the shoulders of other investors and see what they are doing.

As I wrote last week in an article on Warren Buffett’s recent acquisitions, you should never mindlessly ape the trading moves of another investor.  But studying the moves of successful investors can be an effective way to step back and get a little perspective on your own trades.

With all of this said, today I’m going to take a look at the portfolios of three of my favorite institutional investors: Mohnish Pabrai, Joel Greenblatt, and Prem Watsa.

Mohnish Pabrai

We’ll start with Pabrai, the author of the must-read The Dhandho Investor and a well-respected value investing guru.  Based on his SEC filing for the 3rd quarter, Pabrai went on a buying spree in the financial sector.  After initiating a massive position in Bank of America ($BAC) and adding to his already-large positions in Wells Fargo ($WFC) and Goldman Sachs ($GS), Pabrai’s weighting to the financial sector jumped from 39 percent of his portfolio to a whopping 58 percent with a fair bit of the reduction coming from basic materials. Materials dropped from 46 percent to 33 percent of the portfolio (see Pabrai’s portfolio here).

Though his returns are not reported, we can assume that Pabrai’s high allocation to financials has hurt his returns this year.  He wouldn’t be the first.  John Paulson’s flagship fund was at one point down by nearly half this year due to his high allocation to financials and his use of leverage (see Don’t Mess Up Like Paulson).  Still, Pabrai has proven to have a sharp eye for value over the years, even if he—like many other high-profile value investors—tends to be a little early.

Joel Greenblatt

Moving on, let’s now take a look at what Joel Greenblatt is buying these days.  Greenblatt runs Gotham Capital and is the author of the eminently readable The Little Book that Beats the Market.  Unlike Pabrai, Greenblatt tends to have a relatively high portfolio turnover.  He made few major moves in the third quarter, though he was a net buyer and added to his already large holdings in technology and industrials (see Greenblatt’s portfolio here).

Greenblatt is conspicuously under-allocated to the financial sector because much of the money he runs today follows his “magic formula,” which stresses high returns on capital.  Suffice it to say, the big banks are a little light on profits these days, so financials are not showing up on Greenblatt’s screen.  But with more than 40 percent of his portfolio invested in the cyclical technology and industrials sectors, Greenblatt is every bit as aggressively invested as Pabrai.

Prem Watsa

Finally, let’s take a look at Prem Watsa.  Watsa is the CEO of Fairfax Financial Holdings and is considered by many to be the “Warren Buffett of Canada.”  He has certainly earned the nickname.  He and his team have grown Fairfax’s book value per share by 25 percent per year for the past 25 years.  He was also one of the few managers that made money during the crisis year of 2008.  Not a bad run indeed.

Watsa’s portfolio moves will certainly raise a few eyebrows. In the 3rd quarter his added to his already large position in battered BlackBerry maker Research in Motion ($RIMM). He also increased his position in Citigroup ($C) by 50 percent.  Overall, his exposure to the financial sector rose from 9 percent to 24 percent in the third quarter (see Watsa’s holdings here).

Watsa was a slight net seller in the 3rd quarter, though the composition of his portfolio hardly suggests excessive bearishness at the moment.  More than 80 percent of his equity holdings are in technology, financials, and telecom.

As a caveat, there is a limit to what you can glean from reading SEC 13-F filings.  For example, only long positions are reported; short position and derivatives hedges are not.  And Prem Watsa, for example, does indeed hedge his equity positions.  Still, his willingness to be so heavily invested in some of the most volatile sectors would imply that he’s not quite as bearish as some of his public comments would suggest.

So there you have it.  Given the recent volatility, it’s entirely possible that the Dow has moved 100 points in the time it has taken you to read this article.  That’s nerve-racking, of course, even for an experienced investor.  Still, I see compelling bargains at current prices, and I consider the pervasive fear and bearishness among rank-and-file investors to be a contrarian bullish sign.  And when I start to get that feeling in the pit of my stomach, I take comfort in knowing that I’m on the same side of the trade as some of the brightest value investors in the business.

If you liked this article by Sizemore Insights, you’d probably enjoy The Sizemore Investment Letter, our premium members-only newsletter. Click here for more information.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

Read full story · Comments { 3 }