Chou Associates Remains Resolute on Top Picks Following Rough Quarter

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Note: This article’s title and content have been changed since its original publication. We were notified that Chou Associates’ initial 13F filing for the current reporting period contained some incorrectly stated figures. Chou Associates has since filed an amendment to that filing with the correct figures and we have updated the article accordingly. We apologize for any inconvenience. 

Francis Chou-led Chou Associates Management suffered a setback during the second quarter, as we calculated the returns of the fund’s equity portfolio as coming in at a loss of 20.9% for the period (the fund’s actual returns may differ). However, according to an amended 13F filing submitted by the Toronto-based asset management firm, its portfolio was left virtually untouched during the period, as Mr. Chou and his team continue to show faith in their holdings. Just two new derivatives positions were added to Chou Associates’ portfolio during the quarter, while two other positions were moderately increased in size. In this article, we’ll take a look at five prominent holdings of the fund and will discuss their performance so far in 2016.

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

Francis Chou

Citigroup Inc (NYSE:C)

– Shares Owned by Chou Associates Management (as of June 30): 410,000

– Value of Holding (as of June 30): $17.38 Million

Let’s start with Chou Associates Management’s seventh-largest equity holding, Citigroup Inc (NYSE:C). The banking behemoth lost a significant chunk of its market capitalization at the beginning of 2016, which it has yet to recoup, as its stock currently trades down by over 13% year-to-date. Last month, the bank hiked its quarterly dividend by 220% to $0.16 per share, which currently translates into an annual dividend yield of 1.41%. According to a report published in Bloomberg on July 26, Citigroup Inc (NYSE:C) has lost a quarter of its customers and 40% of its workforce over the last ten years due to the restructuring measures it took following the financial crisis in 2008. Several analysts who track the company think that trading at a forward P/E multiple of 9.62 and a price-to-book multiple of 0.62, makes its stock extremely cheap at current levels. On July 18, analysts at BMO Capital Markets reiterated their ‘Buy’ rating on the stock while upping their price target on it to $66 from $63, which represents potential upside of 45.2%. Edgar Wachenheim‘s Greenhaven Associates increased its stake in Citigroup by 37% to 10.64 million shares during the second quarter.

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Nokia Corp (ADR)(NYSE:NOK)

– Shares Owned by Chou Associates Management (as of June 30): 3.75 Million

– Value of Holding (as of June 30): $21.25 Million

Moving on, Nokia Corp (ADR)(NYSE:NOK) was the fifth-largest equity holding of Chou Associates Management at the end of June. Shares of the telecommunication service provider have been on a gradual decline since the second quarter of 2015 and have lost 20% of their value so far this year. At the end of last month, Nokia Corp (ADR)(NYSE:NOK) and BCE Inc. (USA)(NYSE:BCE) [which incidentally is the company where Mr. Chou worked as a telephone repairman over three decades ago, before starting his investing career] announced that they have completed the first trial of Fifth Generation (5G) mobile technology at Bell’s Wireless Innovation Centre in Mississauga, Ontario. For its second quarter, Nokia Corp reported EPS of $0.03 on revenue of $5.58 billion, missing analysts’ estimates of EPS of $0.04 on revenue of $5.80 billion. Most analysts who track the stock are currently bullish on it, including analysts at BMO Capital Markets, who reiterated their ‘Outperform’ rating and $7 price target on it on August 10. Louis Navellier‘s Navellier & Associates sold off its miniscule position of 455 shares of Nokia Corp during the second quarter, .

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Three more stock picks of Chou Associates are detailed on the next page.

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