Earlier this week, Kahn Brothers (Trades, Portfolio) released its portfolio update for the quarter ended Sept. 30. New positions included PepsiCo Inc. (NASDAQ:PEP) and KeyCorp (NYSE:KEY), while major sells included Sterling Bancorp (NYSE:STL) and Merck & Co. Inc. (NYSE:MRK).
The Kahn Brothers group is a hedge fund that serves institutional and high-net-worth clients. Its founding chairman, Irving Kahn, got his start shortly before the stock market crash of 1929, so the firm's original strategy was based on Benjamin Graham's school of value investing. Over time, Kahn Brothers' investment philosophy has changed to more of a contrarian value strategy, focusing on metrics such as margin of safety and long-term capital appreciation.
As of the end of the quarter, the group's portfolio is valued at $798 million, and it has a turnover rate of 3%. It currently holds shares in 48 stocks, five of which are new, though the largest new position, PepsiCo, only impacted the portfolio by 0.04%. In terms of sector weighting, the group is primarily invested in financial services (35.02%), health care (33.99%) and energy (11.57%).
Kahn Brothers sold all 522,594 of its remaining shares of Sterling Bancorp. The stock traded at an average price of $20.26 during the quarter.
The regional bank holding company provides banking and financial services to businesses and consumers through its subsidiaries, the largest of which is Sterling National Bank. It has a market cap of $4.13 billion and an enterprise value of $3.69 billion. According to its earnings, the stock has recently reached the undervalued range.
Sterling Bancorp has a GuruFocus financial strength score of 2 out of 10 and a profitability score of 5 out of 10. It has a price-earnings ratio of 10.11, a price-book ratio of 0.95, a cash-to-debt ratio of 0.21 and an equity-to-asset ratio of 0.15.
Despite its increasing revenue and net income and recent undervaluation, the holding company has exceptionally poor financial strength, and it has recently seen an increase in insider selling and short interest. There have been 16 insider transactions in 2019 (all sells), compared to 17 insider transactions in 2018 (all sells) and 10 insider trades in 2017 (all sells).
The firm sold 8,648,511 shares of Merck, a reduction of 81.05% that impacted the equity portfolio by 9.07%. The stock traded at an average price of $84.08 per share during the quarter.
Merck is one of the largest pharmaceutical companies in the world. Based in the U.S., it is a key producer of diabetes and HIV treatments, as well as vaccines for established and emerging diseases. It has a market cap of $213.15 billion and an enterprise value of $232.74 billion. The stock's price is currently not far from the all-time high of $87.57 that it reached in late December of 2000.
Merck has a GuruFocus financial strength score of 5 out of 10 and a profitability score of 8 out of 10. It has a price-earnings ratio of 23.27, a price-book ratio of 7.81, an equity-to-asset ratio of 0.33 and an operating margin of 26.83%. According to its earnings, the stock may currently be overvalued, though earnings are catching up to the stock price.
In the previous quarter, Kahn Brothers added a whopping 1,183.53% to its Merck & Co. holding (a transaction worth approximately $788 million), only to turn around and sell the new additions in the third quarter for a 5% profit. The pharmaceutical giant is still the firm's largest holding, now comprising 11.3% of the equity portfolio.
During the quarter, the firm established a new position of 2,100 shares in PepsiCo, impacting the equity portfolio by 0.04%. During the quarter, the stock traded for an average of $132.93 per share.
PepsiCo is a famous U.S.-based beverage and snack company that owns popular brand names such as Pepsi, Lay's and Quaker Oats. It has a market cap of $187.16 billion and an enterprise value of $214.03 billion.
The company has a GuruFocus financial strength score of 5 out of 10 and a profitability score of 9 out of 10. It has a price-earnings ratio of 15.36, a price-book ratio of 13.37, an interest coverage ratio of 7.1 and an operating margin of 15.18%. According to the Peter Lynch chart, the company's earnings recently spiked, making the stock slightly undervalued during the quarter, which is rare for a stalwart.
The firm also bought 12,349 shares of KeyCorp, impacting the equity portfolio by 0.03% and establishing a new position after selling out of the stock in the first quarter of 2016. The stock traded at an average price of $17.30 during the quarter.
Keycorp is a bank-based financial services company with headquarters in Cleveland. It operates in 15 states and holds approximately $143.6 billion in assets. Currently, it has a market cap of $19.07 billion and an enterprise value of $9.77 billion.
GuruFocus has assigned the company a financial strength score of 2 out of 10 and a profitability score of 4 out of 10. It currently has a price-earnings ratio of 11.93, a price-book ratio of 1.27, a cash-to-debt ratio of 0.04 and an equity-to-asset ratio of 0.12. According to the Peter Lynch chart, the stock is currently trading below what its earnings are worth.
Disclosure: Author owns no shares in any of the stocks mentioned.
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This article first appeared on GuruFocus.