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Rupert Hargreaves
Rupert Hargreaves
Articles (1261)  | Author's Website |

Mohnish Pabrai Boosts Holding of Deep-Value Investment in 3rd Quarter

A look at what Pabrai was buying in the most recent quarter

November 18, 2019 | About:

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 (NYSE:FCAU) 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 (NASDAQ:MU) and GrafTech (NYSE:EAF).

New holdings

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.

Further research

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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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website

Rating: 4.5/5 (2 votes)



Vgm - 8 months ago    Report SPAM

Thanks for the write-up, Rupert.

Yesterday EAF announced stock sales by Brookfield (which owns EAF) and purchases/buybacks by EAF. Do we know what prices were paid? The CEO said the buybacks would be value accretive, which of course they would be if prices paid were below intrinsic value. However, the stock dropped 10%. I'd value your thoughts.

Rupert Hargreaves
Rupert Hargreaves - 8 months ago    Report SPAM

Hi Vgm, the press release states that the price paid was equal to the price paid by the broker executing the transaction on behalf of Brookfield. I expect this was the market price before the deal was announced, but even if EAF paid up to $20, my numbers imply it would still be value accreditive.

Vgm - 8 months ago    Report SPAM

Thanks Rupert.

Do you think Pabrai sees EAF as a spin-off situation?

Rupert Hargreaves
Rupert Hargreaves - 8 months ago    Report SPAM

No I think it would fall into his "High-uncertainty, low-risk opportunities" bucket which I've outlined before here https://www.gurufocus.com/news/704001/mohnish-pabrai-lowrisk-highuncertainty-100baggers

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