Mohnish Pabrai’s New Stock Picks

Many money managers follow Warren Buffett’s footsteps. They try to imitate Buffett’s investment style, invest in Buffett’s Berkshire Hathaway Inc (BRK-B), and even set up the fee structure of their hedge funds the same way Buffett did. One of these Buffett imitators is Mohnish Pabrai, an Indian-American investor who once paid $650,100 for lunch with Buffett in June 2007. Pabrai also admits that his investment style is copied from Buffett, the legendary money manager that he highly admires. He is one of our favorite investment idea sources as he occasionally uncovers some hidden gems. Let’s take a closer look at his new stock picks and see what he has for us.

MOHNISH PABRAI

Terex Corp (TEX): TEX is the largest new position opened by Pabrai over the fourth quarter of 2011. Pabrai initiated a brand new $31 million position in TEX during the fourth quarter. A few other hedge fund managers were also bullish about TEX. At the end of last year, there were 17 hedge funds with TEX positions, up from 14 hedge funds at the end of the third quarter. Cliff Asness’ AQR Capital Management had $33 million invested in this stock at the end of 2011.

The company experienced a tough year in 2011. Its annual net income was only $45.4 million, compared with $358.5 million in 2010. It only made $0.35 per share in the past year. As a result, it has a high current P/E ratio of above 60, versus 21 for the average of Machinery industry. However, the company is expected to make $1.77 per share in 2012 and $2.81 per share in 2013. Therefore, its forward P/E ratio is much lower. TEX’s 2012 P/E ratio is about 12.4, versus 14 for the industry average. However, the stock’s 2013 PE ratio is slightly more than 7. Mohnish Pabrai probably invested in this stock for the long-term.

Terex has a relatively small market cap of $2.56 billion, versus $71.29 billion for Caterpillar Inc (CAT) and $32.88 billion for Deere & Company (DE). We think CAT and DE are have more stable business and are less risky. Moreover, they have attractive valuation levels and higher growth expectations. CAT’s forward P/E ratio is 11.6 and DE’s is 10.2. Both companies are expected to grow at about 15% annually.

Citigroup Inc (C): C is also a new position in Pabrai’s portfolio. Pabrai did not disclose owning any shares of C at the end of the third quarter and he reported to own $13.3 million worth of C shares at the end of the fourth quarter. C is very popular among hedge funds tracked by us. There were 92 hedge funds reported owning C in their 13F portfolios at the end of 2011. Bill Ackman was the most bullish hedge fund manager about this stock. His Pershing Square had $687 million invested in C at the end of last year. Lee Ainslie, Ken Heebner, and Eric Mindich were also bullish about C.

Citigroup did not perform very well in the fourth quarter last year. The company reported net income of $956 million, down from $1.31 billion for the same quarter a year earlier. Its EPS for the fourth quarter was also down from $0.40 to $0.38 per share. The worse-than-expected results were mainly due to higher expenses and the losses in Citi’s trading business. Despite that, the company still experienced strong corporate loan growth, improving capital levels and credit quality, and higher net interest margin in the fourth quarter. C is also currently trading at low multiples due to the aftermath of the European crisis. Its current P/E ratio is 9.38, versus 18 for the industry average. In 2012, the company is expected to make $4.04 per share, so its forward P/E ratio is about 8, compared with 10 for its peers. C is expected to make about $4.71 per share in 2013 and its earnings are estimated to grow at an average of about 9% per year in the long term. We think Citigroup will grow much faster than that. However, the stock is very cheap even when we use analysts’ conservative growth estimates. C’s P/E ratio for 2013 is 6.8, versus 6.95 for Bank of America Corp (BAC) and 9.95 for HSBC Holdings Plc (HBC).

Pabrai also bought new stakes in Directv (DTV) during the fourth quarter last year. He initiated a brand new $17 million of DTV in that period. Pabrai followed Buffett on this investment. Buffett increased his DTV stakes by about 400% over the fourth quarter to $870 million. We have discussed DTV in detail in our previous article. The stock is more popular among hedge funds compared with its peers. We also think it is more attractive than other media stocks such as Time Warner Cable Inc (TWC) and Comcast Corp (CMCSA).

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