As we move closer to Tuesday's deadline, I continue to go through the early 13F filings of some of my favorite value and activist investors. I will leave it to others to debate and decide what the election results may or may not mean for the markets. That is way beyond my skill set, and it is not going to make me any money, so I see no point in spending a lot of time thinking about the subject. Using the world's best free research service that is made available by the 13F filings every quarter has made me quite a bit of money over the years, so I will focus my efforts there instead.
Kahn Brothers was an early filer again this quarter. The value firm is one of a handful of investment management firms that can track their history all the way back to Benjamin Graham's classroom at Columbia, as founder Irving Kahn was Graham's teaching assistant. They have stayed faithful to the concepts of value investing and have compiled a decent track record over the decades.
The firm appears to have been doing more selling than buying in the third quarter. The company added to just four positions and reduced its position in 25 stocks during the third quarter. Kahn Brothers was a seller of some of its blue-chip stocks, including IBM (IBM) , AT&T (T) , Bank of America (BAC) and GlaxoSmithKline (GSK) . Kahn added to a few others it still liked at the price at the time, including Citigroup C, Pfizer (PFE) and BP (BP) . As has been the case for the previous eight quarters, the firm added to its holdings of BlackBerry (BBRY) . (AT&T is part of TheStreet's Dividend Stock Advisor portfolio. Citigroup is part of the Action Alerts PLUS portfolio.)
The firm sold some of its regional bank stocks in the quarter, reducing holdings of Sterling Bancorp (STL) and all its shares of New York Community Bancorp (NYCB) . The firm was a big buyer of the regional banks in the aftermath of the credit crisis and has done very well with holdings in the sector over the past five years or so.
Donald Smith cannot trace his value lineage to the Columbia classroom, but he did help Ben Graham crunch the numbers for the extensive value investing study he completed shortly before Graham died. Smith started his namesake firm back in 1975 and is said to have returned an average of about 15% a year since then. The firm focuses on stocks trading in the lowest decile of stocks as ranked by price to book value, one of a very few firms to do that. Smith also has one of the longest average holding periods of the many investors I follow, with the average stock in the portfolio held for almost 20 quarters.
The firm was also more of a seller than a buyer in the quarter as it purchased 20 stocks and sold or reduced its stake in 48 companies. The sole new investment in the quarter was Verso (VRS) , a paper company that emerged from bankruptcy in July. Verso primarily sells coated freesheet and coated groundwood papers, Northern bleached hardwood kraft pulp and recycled paper used in magazines and commercial printing. CFO Allen Campbell said on the second-quarter conference call that the company had free cash flow of about $60 million in the first half of the year and if it continues to produce free cash flow at that level, the stock is trading for less than 2x free cash flow.
Smith was also a buyer of two of his favorite metals and mining stocks in the third quarter. He more than doubled his holding of Iamgold (IAG) and increased his Primero Mining (PPP) stake by about 13%. The firm has been a buyer of the miners for a few years, and it appears to finally be paying off.
The firm was also a buyer of the aircraft leasing industry in the quarter, adding shares of both AerCap Holdings (AER) and Fly Leasing (FLY) . Both stocks still trade well below book value and look like they could reward patient investors with solid returns over the next several years.
Not too many firms can say their founders worked directly with Ben Graham. Both Kahn Brothers and Donald Smith & Co. learned the craft directly from the father of value investing, and that makes their filings a must-read every quarter.
