A Look at the Deep Value Stocks of Kahn Brothers

The firm invests following the principles laid out by Benjamin Graham

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May 13, 2020
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Irving Kahn was one of the great value investors of the last century. He began his career on Wall Street in 1928 and continued to hunt for value right up until he died in 2015.

Like most well-known value investors of the last century, Kahn followed the principles laid out by Benjamin Graham. He had much more of a connection to Graham than most, as he served as the teaching assistant to Graham at Columbia Business School. He also helped contribute to Graham's value investing bible, "Security Analysis."

Kahn was a traditional value investor in the sense that he wanted to buy lots of statistically cheap investments. He also stayed away from market trends. One of his famous quotes was:

"You must have the discipline and temperament to resist your impulses. Human beings have precisely the wrong instincts when it comes to the markets. If you recognize this, you can resist the urge to buy into a rally and sell into a decline. It's also helpful to remember the power of compounding. You don't need to stretch for returns to grow your capital over the course of your life."

Today, Kahn's reputation lives on in the Wall Street brokerage he founded, Kahn Brothers (Trades, Portfolio) Group. The firm seeks to invest with the same principles as its founder, digging deep to find undervalued securities. On its website, the firm described its approach to investing as follows:

"Kahn Brothers employs a bottom-up stock selection approach, and invests in undervalued equity securities that are usually out-of-favor in the market. We select securities, one at a time, based on asset valuations, operating performance metrics and long-term fundamental business prospects. Unlike many investment managers, we spend a considerable amount of effort evaluating the downside risk of every investment."

Considering the history of Kahn Brothers (Trades, Portfolio) and its founder, I like to keep an eye on the investments that have found their way into the portfolio. The firm recently filed its 13F form with the SEC for the first quarter of 2020, which lists the investments held in the portfolio at the end of the quarter.

During the quarter, the firm revealed that it made several significant changes to its portfolio. The asset manager sold virtually all of its position in the New York Times (NYT, Financial), which once accounted for nearly 2.1% of the overall portfolio. It also reduced its position in Apple (AAPL, Financial) by 71%, or 723 shares, but this was never a significant portfolio position.

There was one notable acquisition in the portfolio during the first three months of 2020. The firm acquired shares in JP Morgan Chase (JPM, Financial), and the position now accounts for 0.06% of the overall portfolio, which is still small in the grand scheme of things.

I should point out that the four largest positions in the portfolio, Merck & Co. (MRK), GlaxoSmithKline PLC (GSK, Financial), Bristol-Myers Squibb (BMY, Financial) and New York Community Bancorp (NYCB), make up a total of more than 40% of assets under management. There are a total of 48 positions in the $550 million portfolio overall.

Other positions that Kahn Brothers (Trades, Portfolio) added to in the first quarter included BP (BP, Financial) (which is now a 7.3% portfolio weight), BlackBerry (BB, Financial) (which now makes up 4.4% of the portfolio), Patterson UTI-Energy (PTEN, Financial) (1.3%), ViewRay Inc. (VRAY, Financial), Berkshire Hathaway B shares (BRK.B), Bank of America Corp. (BAC), Coal Creek Company (OTCMKTS: CCRK) and Navient Corp (NAVI).

Disclosure: The author owns shares in Berkshire Hathaway.

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