Mohnish Pabrai Increases Micron Holding to About 12% of Portfolio
- By Rupert Hargreaves
Over the past few years, Mohnish Pabrai (Trades, Portfolio), the managing partner of Pabrai Funds, has been moving his portfolio away from the U.S. and Europe, replacing Western equities with stocks that he likes in India. In fact, during the third quarter of 2018, there was only one U.S.-listed stock in his portfolio, Fiat Chrysler (FCAU).
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The intrinsic value of MU
But, during the fourth quarter of 2018, Pabrai started building another position in another U.S. stock. The company he decided to start buying was semiconductor manufacturer Micron (MU).
Pabrai Funds adds Micron
According to Pabrai Funds' fourth-quarter 2018 13F filing with the Securities and Exchange Commission, Pabrai acquired 546,847 shares during the last three months of 2018, spending nearly $17.5 million.
And it seems as if Pabrai wasn't happy to stop there. He continued to buy throughout the first quarter of 2019, more than doubling his position to just under 1.7 million shares, accumulating about $70 million worth of the stock.
According to my figures, Pabrai Funds managed just under $600 million across its three funds at the end of March 2019. Based on this total, Micron now accounts for approximately 12% of the overall portfolio.
Unfortunately, Pabrai hasn't yet talked in any detail about why he decided to buy into Micron and why he likes the company. That being said, he commented on the position briefly, telling GuruFocus in an interview in March:
"So I noticed this very low P/E, and then a fund manager friend of mine mentioned that he owned the stock. And so I said, 'Okay, this person isn't exactly an idiot, so why don't I drill down and just see what's going on with Micron?' And when I drilled down, I decided it was worth taking a position."
It is notable that the position also appears on Pabrai's blog, Chai with Pabrai, where he regularly publishes his "Free Lunch" portfolio. This portfolio has three main buckets, the Uber Cannibals, Shameless Cloning and Spinoffs. Uber Cannibals are those companies that are in the process of repurchasing a significant number of their own shares. Shameless Cloning is a list of companies that appears in the portfolios of the hedge fund managers Pabrai follows, and the final bucket, Spinoffs, is pretty self-explanatory.
Micron has appeared in the Shameless Cloning bucket for the last few quarters, primarily thanks to Appaloosa Management's ownership of the stock.
Appaloosa Management is also a buyer
David Tepper (Trades, Portfolio)'s Appaloosa Management has owned Micron since the fourth quarter of 2010 when it acquired an initial position of 17.8 million shares at an average price of around $8. Since then, the hedge fund has traded in and out of the stock, increasing its position to a maximum of 40.5 million shares in the second quarter of 2018.
At its peak, the position accounted for 29% of the overall equity portfolio. However, in the third and fourth quarters of 2018, Tepper reduced his holding by around 24 million shares. The position is still the largest in Appaloosa's portfolio.
It will be interesting to see if this trend has continued into the first quarter of 2019. If it has, it could be a sign that Tepper has decided that the company is no longer worth owning. Although I should also point out at this time that Tepper reduced his holdings of stocks across the board during the last quarter of 2018, which seems to be more of a portfolio positioning move rather than a play on single names.
According to interviews with the hedge fund manager, the main reason Tepper likes Micron is that he believes that the demand for microchips will remain healthy over the long term, supported by growth in demand for connected devices and cloud computing. He's also bullish on the company's management team after it announced a $10 billion stock buy-back commitment in the middle of last year and announced the company would be returning 50% of free cash flow to shareholders beginning in fiscal 2019.
These factors might make the company look attractive, but note that Wall Street analysts expect earnings per share to fall 45% this year and a further 28% in 2020. On this basis, the stock's valuation of eight times 2020 earnings seems appropriate.
Still, only time will tell if Micron is really undervalued at current levels or is just a value trap.
Disclosure: The author owns no share mentioned.
Read more here:
Seth Klarman: 'Over Time the Returns Will Come'
Ben Graham's Advice on Growth Stocks
Warren Buffett: Book Value Does Not Intrigue Us
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This article first appeared on GuruFocus.
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The intrinsic value of MU
