Pabrai Funds Portfolio Review: POT, BPO, BIP, CRESY, CSE, ZINC, WFC
In his letters he shows how even a small investor can research a company quickly and effectively over the Internet. In his books and letters he discusses the important topic of the art of selling or when exactly to get out of an investment; after all, buying a bargain stock implicitly requires that the buyer someday sell that stock once its value is realized. Different from Buffett, Pabrai sells an investment as soon as it gets to a fair value. He does not have the vision of holding them forever, as Buffett does with his main holdings.
Mr. Pabrai has been a managing partner at Pabrai Investment Funds since its inception in 1999. Prior to the fund, Mohnish worked for Tellabs, a telecom company, and later founded TransTech Inc., an IT consulting company. From his experience working in tech world, he does not like to invest in the tech sector because most tech companies are unpredictable and sometimes difficult to analyze.
Here we can see his biggest holding positions. It is interesting to note that Pabrai left his biggest positions unchanged from the last quarter. All these holdings represent collectively 87% of his total portfolio. His conviction is high in each of these companies.
Potash (POT): 23% of his portfolio. Potash is one of the biggest basic material companies and top agricultural holding in some Guru's long-term conservative portfolios. There is a worldwide need of corn and soybeans to eat, feed to rising social classes in emerging markets, use for cooking oil and for alternative energy sources. To grow these products on an ever decreasing agricultural base fertilizers are essential to increase yields. This stock is in the middle of that need and its recent drop in price offers an excellent opportunity to acquire a world class stock at a bargain basement price. I think that Pabrai believes that as potash inventories are below trend levels in the US and China, global potash demand will recover faster than the market expects. He also thinks that ethanol production in the US will remain unchanged despite the fact that there have been efforts in Congress to remove the ethanol blending credit.
Brookfields Properties (BPO): 18% of his porttflio. I think that Pabrai got attracted because he saw a relative value arbitrage. The REIT industry is currently trading at a PE ratio of about 14 times earnings. BPO trades at 6x. Brookfield should not have such "material discount" to peers according to Stiefel Nicolaus analyst John Guinee. It is interesting that the stock can double and still trade at a discount to its peers. Pabrai loves hard-assets stocks with quality holdings, high dividends (BPO offers 4.09%) and low multiples compared to peers.
Brookfield Infrastructure Partners (BIP): 18% of his portfolio. Brookfield Infrastructure Partners, L.P. is a publicly traded partnership that was spun off from Brookfield Asset Management (BAM). Brookfield Infrastructure's holds four utilities, six gas transportation companies, two timber businesses and one social infrastructure company. BIP either owns or holds a joint venture in the business. Brookfield has the advantage of a publicly traded partnership that is not subject to as much double taxation as corporations are. When a corporation makes a profit, they are heavily taxed on that profit. Since BIP is a partnership, it means that an investor receives tax advantages as a unitholder compared to a shareholder in a corporation. Pabrai got attracted by the opportunity to invest in high quality, safe, cash-generating assets like utilities while also buying higher growth assets that are more sensitive to global economic trends.
Cresud (CRESY): 8.6% of portfolio. Cresud is very similar to Berkshire Hathaway, a company that holds attractive assets at reasonable costs. Cresud has a huge inside ownership (40%) plus a good dividend yield (2.5%) plus quality hard assets such as farmland and real estate businesses both in Argentina and Brazil. Cresud is led by Eduardo Elsztain, who is one of the savviest Argentinian investors.
CapitalSource (CSE): 7.5% of portfolio. CapitalSource is a well-managed financial institution that has the main priority of converting to a more traditional California-chartered commercial bank. In the last earnings call, CSE management indicated that it has decided to delay the application for bank status in order to provide time for meaningful improvement in the bank's credit metrics. Also, CSE decided to begin to return parent company capital to shareholders in the form of buybacks and dividends, which I view as a positive for the stock. Pabrai maybe observed that shares trade at roughly a 8% premium to current tangible book value per share, a low-end of the historical trading range.
HorseHead Holdings (ZINC): 7.4% of portfolio. ZINC is a leading mining company that pursue acquisitions in order to expand the environmental service business and enhance the current product offerings. The management has the goal of growing Horsehead into an environmental services and metals reclamation business, to critical mass that recovers a broad range of metals from a broad range of waste streams. My assumption is that Pabrai made a Zinc bet in a well-managed company with hard assets in the balance sheet. Some research reports describes Zinc as the "next cooper."
Wells Fargo (WFC): 4.32% of portfolio. This is the favorite Warren Buffett bank. It is possible that near-term headwinds will cause some revenue pressure in the banking sector. However, declining credit costs and improving efficiency with proposed expense reductions are expected to provide incremental earnings leverage. Longer term, I expect WFC to rank among the best in terms of revenue growth as the merger with Wachovia represents a significant opportunity. WFC is well positioned with strong distribution power, as well as potential for incremental growth given ability to cross-sell to the WB customer base. Pabrai maybe saw the fact that the stock sells at a cheap price to tangible book considering historical trends. Wells Fargo management said in the last earnings release that the Tier 1 common equity ratio improved 20bps q/q to 9.35% and repurchased 22 million shares in the second quarter 11. Management indicated that an additional estimated 6 million shares through a forward repurchase transaction that will settle in fourth quarter 2011. Management expects to continue to repurchase shares in fourth quarter 2011. I think WFC is the best managed U.S. bank and prices below $25 represent buy opportunities.