Kahn Brothers (Trades, Portfolio) recently released its portfolio update for fourth-quarter 2019.
The hedge fund did not establish any new positions during the quarter, though it did sell out of Consolidated Edison Inc. ED, impacting the equity portfolio by -0.02%. It made additions to its existing holdings in BlackBerry Ltd. BB, ViewRay Inc. VRAY and Apple Inc. AAPL and reduced its holdings of Merck & Co. Inc. MRK, Citigroup Inc. C and Assured Guaranty Ltd. AGO.
The Kahn Brothers (Trades, Portfolio) group is a hedge fund that serves institutional and high-net-worth clients. Its founding chairman, Irving Kahn, got his start shortly before the stock market crash of 1929, so the firm’s original strategy was based on Benjamin Graham’s school of value investing. Over time, the firm's investment philosophy has changed to more of a contrarian value strategy, focusing on metrics such as margin of safety and long-term capital appreciation. As of the end of the quarter, the group’s equity portfolio is valued at $825 million.
Kahn Brothers (Trades, Portfolio) owns shares of 47 stocks. In terms of sector weighting, the group is primarily invested in health care (35.94%), financial services (34.37%) and energy (11.00%).
BlackBerry
During the quarter, Kahn Brothers (Trades, Portfolio) increased its position in BlackBerry by 153,254 shares, impacting the equity portfolio by 0.12%. Shares traded at an average price of $5.51 over the period.
The Canada-based enterprise software company was once famous for its smartphones, though it was later left in the dust in that regard by companies such as Apple and Samsung (XKRX:005930). BlackBerry now primarily focuses on cybersecurity, communications software and internet of things applications.
As of Jan. 28, the company has a market cap of $3.54 billion, a forward price-earnings ratio of 39.37 and a cash-debt ratio of 1.15. GuruFocus has assigned BlackBerry a financial strength score of 5 out of 10 and a profitability score of 3 out of 10.
The company’s stock continues to trade low, though its turn from low-margin phones to high-margin IoT products could provide an avenue for future growth as 5G rolls out and businesses continue increasing the scale and complexity of their internet resources.
ViewRay
The group bought 193,750 more shares of ViewRay, impacting the equity portfolio by 0.10%. Shares traded at an average price of $3.26 during the quarter.
ViewRay is a medical devices company based in Cleveland, Ohio that develops ways to treat cancer with radiation therapy. The company’s founder, James F. Dempsey, guided the development of MRI-guided radiation therapy, which ViewRay holds the exclusive worldwide license for. Research is primarily aimed at improving this technology through enhanced real-time visualization and accumulated records.
As of Jan. 28, the company has a market cap of 450.4 million, a price-earnings ratio of 2.82 and a cash-debt ratio of 1.32. The three-year revenue growth rate of 54.2% is mirrored by the annual increases in net loss.
At a price of around $3.16 per share, the company trades near half of its initial public offering. Its monopoly on MRI-guided radiation therapy could provide a powerful economic moat, especially as the U.S. population ages. According to the U.S. Bureau of Labor Statistics, health care demand and job growth are expected to increase 14% from 2018 to 2028 as Americans live longer and experience more health problems.
Apple
The group also increased its position in Apple by 523 shares, impacting the equity portfolio by 0.02%. Shares traded at an average price of $258.41 during the quarter.
Based in Cupertino, California, Apple is one of the Big Four technology companies, with iconic products such as the iPhone, AirPods, MacBook and Apple Watch. The company’s stock price exploded in 2019, nearly doubling from $151 to $300 even as revenue and net income declined slightly compared to fiscal 2018.
As of Jan. 28, Apple has a market cap of $1.39 trillion, a price-earnings ratio of 26.81 and a cash-debt ratio of 0.93. GuruFocus has assigned the company a financial strength score of 6 out of 10 and a profitability score of 10 out of 10.
With a mature bull market, a return on capital of 178.04% and strong growth drivers such as 5G behind it, some analysts are saying the stock is undervalued even at current prices. One popular valuation metric, the free cash flow-based discounted cash flow model, estimates the stock’s intrinsic value at $359.92, though more conservative metrics give lower value estimates.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful analysis or consult registered investment advisors before taking action in the stock market.
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