Guru in Focus: What is Mohnish Pabrai Buying?

Warren Buffett is known for keeping the investment process simple.  He avoids complex models, and once joked that if calculus were required, he’d have to give up the money business and go back to his childhood job of delivering papers.

But not even Warren Buffett can match Mohnish Pabrai when it comes to having a Spartan investment philosophy.  Pabrai has effectively boiled the entire process down to the logic of a coin flip: “Heads, I win.  Tails, I don’t lose too much.”

I love it.  Short, simple, and yet profound.

For anyone not familiar with Pabrai, he is the principal of Pabrai Funds and the author of The Dhando Investor, a book on value investing I strongly recommend.

Pabrai is a Warren Buffett disciple who takes Buffett’s comments on diversification seriously:  “Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”

According to his latest SEC filings, Pabrai has just six stocks in his $340 million portfolio—and half of its value in just two stocks: Citigroup ($C) and Bank of America ($BAC).

So what is Mr. Pabrai buying these days?

Zinc…and a lot of it.

Throughout the month of June, Pabrai made several large additions to his holdings in Horsehead Holding Corporation ($ZINC), a producer and seller of zinc- and nickel-based products and the leading supplier of zinc in North America.

This is not a sexy business…as there is nothing particularly interesting or exciting about a company that mines zinc or produces zinc power…and it’s not even a particularly profitable one.  In fact, ZINC posted a loss in its last full year of reporting.

It’s not exceptionally cheap for a commodity producer either.  Horsehead sells for 13 times forward earnings and at 1.5 times book.  To put that in perspective, Teck Resources ($TCK), a diversified miner, trades for 8 times forward earnings and 0.63 times book.

I’m having a hard time seeing Pabrai’s angle here.  He has a long track record of buying distressed companies and what he calls “low-risk, high-uncertainty businesses.”   Horsehead could certainly fall into this latter camp, as commodities businesses are anything if not uncertain.

But this essentially looks like a large bullish call on the price of zinc.  It appears that Pabrai is making a large bet that zinc—which has drifted lower for most of the past three years—is about to get a lot more valuable.

He might have another angle, and I expect that he does.  It would be unlike Pabrai to wager a decent chunk of his investors’ capital on the price of a traded commodity.  But because I can’t figure out what that angle is, I’m not going to follow suit.

But might any of Pabrai’s other holdings have potential?

I’m somewhat bullish on Chesapeake Energy ($CHK), as I am bullish about the long-term prospects for natural gas and I see this as a “scandal stock” with most of the bad news long ago priced in.  I also like Pabrai’s bet on General Motors ($GM) via long-term warrants

Otherwise, Pabrai is essentially just long financials in a big way.  Buying Citi or Bank of America at substantially below book value should be a fairly low-risk investment.  Bank stocks will continue to get knocked around with every Fed announcement, but if you are content to “buy and forget” for a few years, it’s hard to see losing a lot of money on that trade.  And the upside could easily be 100% or more over the course of the next 2-3 years.

Or, as Pabrai likes to say, this is a case of heads, you win.  Tails, you’re not likely to lose too much.

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