Kahn Brothers (Trades, Portfolio) has released its third-quarter portfolio. Throughout the portfolio holdings were reduced or sold completely, with the largest changes coming from Merck & Co. Inc. (MRK, Financial), Bristol-Myers Squibb Company (BMY, Financial), GlaxoSmithKline PLC (GSK, Financial), Citigroup Inc. (C, Financial) and Seaboard Corp. (SEB, Financial).
The firm, founded by the late Irving Kahn and his two brothers, has evolved from Benjamin Graham's model of value investing into a contrarian value strategy. It now focuses on metrics such as margin of safety and long-term capital appreciation to serve institutional and high net worth clients.
Portfolio overview
At the end of the quarter, the portfolio contained 42 stocks, with two new holdings in Provident Financial Services Inc. (PFS, Financial) and Deutsche Bank AG (DB, Financial). Top Holdings in the portfolio include Merck, Bristol-Myers Squibb, GlaxoSmithKline, New York Community Bancorp Inc. (NYCB, Financial) and Citigroup.
By weight, the top three sectors represented are health care (40.58%), financial services (27.77%) and energy (10.40%).
Merck
The largest impact on the portfolio was a 13.21% reduction in the long-standing Merck holding, selling 122,175 shares. The stock traded at an average price of $82.09 during the quarter. Overall, the sale had an impact of -1.60% on the portfolio and GuruFocus estimates the total gain over the lifetime of the holding at 11.30%.
Merck makes pharmaceutical products to treat several conditions in a number of therapeutic areas, including cardiovascular disease, asthma, cancer and infections. Within cancer, the firm's immuno-oncology platform is growing as a major contributor to overall sales. The company also has a substantial vaccine business, with treatments to prevent hepatitis B and pediatric diseases as well as HPV and shingles. Additionally, Merck sells animal health-related drugs. From a geographical perspective, close to 40% of the company's sales are generated in the United States.
On Nov. 9, the stock traded at $81.43 with a market cap of $206.22 billion. The GF Value Line shows that the stock is currently fairly valued.
GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 4 out of 10. The company has a subpar cash-to-debt ratio of 0.36 due to high levels of debt over the last five years. Exemplary operating and net margin percentages have carried the company to its strong profitability rank.
Bristol-Myers Squibb
Another top holding in the portfolio that saw a reduction was Bristol-Myers Squibb. The holding was reduced by 7.86% with the sale of 79,827 shares. The shares traded at an average price of $60.17 during the quarter. The reduction had an overall impact of -0.79% on the portfolio and GuruFocus estimates the total gain of the holding at 44.26%.
Bristol-Myers Squibb discovers, develops and markets drugs for various indications, such as cardiovascular, oncology and immune disorders. A key focus for Bristol is immuno-oncology, where the company is leading in drug development. Unlike some of its more diversified peers, Bristol has exited several non-pharmaceutical businesses to focus on branded specialty drugs, which tend to support strong pricing power.
Nov. 9 saw the stock trading at $64.86 with a market cap of $146.77 billion. The GF Value Line gives the company a fair value rating after being overvalued prior to 2018.
GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 6 out of 10. There are currently three severe warning signs issued for declining gross margin percentage, assets building up faster than revenue is growing and new long-term debt. Prior to 2019, debt had remained at consistent levels before the major increase.
GlaxoSmithKline
During the third quarter, the firm reduced its GlaxoSmithKline holding by 7.33%, selling 111,229 shares. The reduction had a -0.77% impact on the portfolio and GuruFocus estimates the total loss of the holding at 6.28%. The shares sold traded at an average price of $40.07 during the quarter.
In the pharmaceutical industry, GlaxoSmithKline ranks as one of the largest companies by total sales. The company wields its might across several therapeutic classes, including respiratory, oncology and antiviral, as well as vaccines and consumer health care products. Glaxo uses joint ventures to gain additional scale in certain markets like HIV and consumer products.
As of Nov. 9, the stock was trading at $37.80 per share with a market cap of $95 billion. The GF Value Line shows the company is currently trading at a modestly undervalued level.
GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 9 out of 10. There are currently two severe warning signs issued for assets growing faster than revenue and an Altman Z-Score of 1.56, placing the company just into the distress column. Debt has increased over the last three years, but cash flows have managed to increase slightly each year during that period.
Citigroup
Citigroup rounded out the top holdings to see a reduction during the third quarter. The holding was reduced by 8.84% with the sale of 82,574 shares. The shares traded at an average price of $49.87 during the quarter. Overall, the reduction in the holding had a -0.71% impact on the portfolio and GuruFocus estimates the total gain of the holding at 39.16%.
Citigroup is a global financial services company doing business in more than 100 countries and jurisdictions. Citigroup's operations are organized into two primary segments: the global consumer banking segment, which provides basic branch banking around the world, and the institutional clients group, which provides large customers around the globe with investment banking, cash management, and other products and services.
On Nov. 9, the stock was trading at $47.68 per share with a market cap of $99.27 billion. The GF Value Line shows that the company is a possible value trap, so investors should think twice before investing.
GuruFocus gives the company a financial strength rating of 3 out of 10, a profitability rank of 4 out of 10 and a valuation rank of 9 out of 10. There are currently two severe warning signs issued for poor financial strength and a low Piotroski F-Score that implies poor business operations. Revenue has remained consistent throughout the last decade and net income has recovered since taking a dive in 2017.
Seaboard
The reduction in Seaboard rounded out the top five biggest impacts on the portfolio during the quarter. The holding was thinned by 10.25% with the sale of 1,276 shares. The shares traded at an average price of $2,839.67 during the quarter. Overall, the reduction had an impact of -0.63% on the portfolio and GuruFocus estimates the total gain of the holding at 118.96%.
Seaboard is a conglomerate of food production and transportation businesses. The group operates six business segments: pork, commodity trading and milling, marine, sugar and alcohol, power and turkey. The group offers hog production and pork processing, biodiesel production, agriculture commodity trading, agriculture commodity processing and logistics, grain and feed milling, cargo shipping, sugarcane production, alcohol production, sugar refining, power production, turkey production and processing and production of jalapeno peppers. The largest end markets by revenue are the Caribbean and Central and South America.
As of Nov. 9, the stock was trading at $3,344.90 with a market cap of $3.88 billion. The GF Value Line shows that the stock is modestly undervalued at the moment.
GuruFocus gives the company a financial strength rating of 7 out of 10, a profitability rank of 6 out of 10 and a valuation rank of 4 out of 10. There are currently three severe warning signs issued for assets growing faster than revenue and operating and gross margin percentages declining. The return on invested capital outweighs the average cost of capital, which will see value grow alongside the company.
Disclosure: Author owns no stocks mentioned.
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