Irving and Thomas Kahn are value investors who have been running their investment firm since 1978. Irving Kahn was one of legendary value investor Benjamin Graham’s students, and the firm’s emphasis on a stock’s pricing relative to its book value and historical earnings is much in line with that tradition. In early November Kahn Brothers filed its 13F for the third quarter of 2012, which discloses many of its long equity positions as of the end of September. Read on for our quick take on its top five holdings and compare their picks to previous filings.
The fund’s top pick was pharmaceutical manufacturer Pfizer Inc. (NYSE:PFE), with Kahn Brothers reporting a position of 2.5 million shares- essentially unchanged from three months earlier. The $184 billion market cap giant reported earnings growth of 25% in its most recent quarterly report compared to the same period in 2011 despite somewhat lower revenue. It trades at 18 times trailing earnings, but an optimistic analyst group projects continued strong growth that implies a forward P/E of only 11. With a 3.5% dividend yield as well, Pfizer’s got our attention; however, we’d need to do due diligence on that projected path to such an attractive P/E multiple. Billionaire Ken Fisher’s Fisher Asset Management has been another large investor in Pfizer.
New York Community Bancorp, Inc. (NYSE:NYB) was another of Kahn Brothers’ favorite stocks, though as with Pfizer the fund’s position was more or less unchanged at 3.6 million shares. The retail bank holding company trades at somewhat higher P/E and P/B multiples than many large banks- it is priced at 1.1 times the book value of its equity, and 12 times trailing earnings- but on an absolute basis New York Community Bancorp does not look particularly overpriced. The stock also offers a 7.2% dividend yield, having paid a 25 cent per share dividend every quarter since April 2004. Value investors should look at other banks, but income investors should take it into consideration.
Kahn Brothers’ position in Merck & Co., Inc. (NYSE:MRK) was also kept steady at 1.1 million shares. Like Pfizer, Merck is not a particularly good value stock when looking at trailing earnings- the P/E multiple is 21- but if Wall Street analysts are right then the company is in for some very good quarters that will bring its earnings up. That P/E becomes 12 on the basis of forward estimates. Merck’s dividend yield is also good, at 4.5%. As with Pfizer, we like that pricing as long as the company can deliver on those earnings targets- and would like to check the company out more closely.
The firm did slightly increase its stake in, of all things, The New York Times Company (NYSE:NYT), with the 4.7 million shares in its portfolio at the end of September being just a bit higher than the 4.6 million that it had owned three months earlier. The New York Times experienced a 16% decline in revenue in the third quarter of the year versus Q3 2011, which contributed to an 86% decrease in earnings over the same period. At 17 times consensus earnings for 2013- a figure which reflects a dramatic improvement in its business- we don’t think that investors should be buying.
Citigroup Inc. (NYSE:C) gave Kahn Brothers some exposure to the big banks in the second quarter, when the firm had bought the stock heavily, and it broke into the top five holdings in the 13F portfolio by the end of the third quarter. The megabank is getting a new CEO with the departure of Vikram Pandit, and is up 33% year to date. This has brought it to a multiple of 8 times expected earnings for next year, which we’d normally consider to be value territory, and it also trades at a steep discount to book value. We looked at Citi recently and decided that investors could buy it, JPMorgan Chase, or Wells Fargo depending on how much they valued low multiples versus safety and stability. Read our recent analysis of Citigroup.