In his annual meeting presentation to investors of Pabrai Investment Funds, Mohnish Pabrai (Trades, Portfolio) revealed he would be willing to sell his long-standing Fiat Chrysler Automobiles (FCAU, Financial) investment for the right opportunities.
Pabrai first added Fiat to his portfolio in 2012 and built a large holding over the following years. At one point in 2018, the position was the only stock holding in his U.S. equity portfolio, valued at around $240 million or approximately 37% of Pabrai Funds' total assets under management.
Writing in his second-quarter 2019 letter to investors, Pabrai explained that he acquired the position in the automaker for around $6 per share in 2012.
Of this price, Pabrai calculated that Fiat itself was worth around $3.50, while Ferrari was worth $2.50. Since then, the value of the holding has exploded.
The value investor believes he will have recovered his entire $3.50 initial investment in Fiat with dividends alone (based on figures he published in the second-quarter letter before the recently announced merger with Peugeot) by 2021.
Earlier this year, he reckoned the combined value of the Fiat and Ferrari holdings were worth $31 per share, nearly 10 times the initial purchase price.
Following this performance, Pabrai is now selling, and it is interesting to note the companies he is buying as he reinvests profits.
Back to the U.S.A.
For the past several years, Pabrai has focused his investment activities on India. He believes there are many more opportunities here for value investors to take advantage of, as there are thousands more publicly-traded companies, the majority of which fly under the radar.
The country also has a young, growing population with increasing wealth that it is happy to spend. In comparison, Pabrai believed that the U.S. equity market was fully valued, and there were limited opportunities for value investors.
However, over the past 24 months, Pabrai has been reinvesting proceeds from the sale of his Fiat holding back into U.S. equities. The two stocks he has been buying are Micron (MU, Financial) and GrafTech (EAF, Financial).
In the third quarter, according to Pabrai Funds' 13F filing, the value investor reduced his holding in Fiat by around 32% across his funds, reducing the stake to 8.8 million shares and making it 43.4% of the U.S. portion of the equity portfolio.
As he was selling Fiat, he was increasing his holdings in Micron and GrafTech. Pabrai boosted his position in Micron by 0.5% to 1.8 million shares, making it a 29.4% U.S. portfolio weight (13F filings only include U.S. equity holdings and do not take into account any international positions, so these portfolio weightings are a bit misleading in terms of overall portfolio weight).
According to Pabrai Funds' investor correspondence, the investment manager manages around $600 million for clients, which is a better value to compare portfolio sizes. At the end of the third quarter, the Micron holding was worth around $77 million in total.
Pabrai also boosted his holding in GrafTech. He increased the position by 34.5% to $71 million, implying that his conviction for the name is almost the same as that of Micron.
GrafTech is a fascinating company that I think is a traditional value investment. The company makes electrodes used in the steel making process, which is traditionally a highly cyclical industry. That seems to explain why the market has placed a low multiple of just 5 times earnings on the stock.
However, over the next several years, GrafTech has more than two-thirds of its sales linked to take or pay contracts, which virtually guarantees a set level of sales for the company through 2023. This is the sort of "high-uncertainty, low-risk opportunities" that Pabrai specializes in and has made so much money from in the past.
With that being the case, if you are looking for a traditional value investment, it could be worth taking a closer look at GrafTech.
Disclosure: The author owns shares of GrafTech.
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