Chou Associates Remains Resolute on Top Picks Following Rough Quarter

Note: This article’s title and content have been changed since its original publication. We were notified that Chou Associates’ initial 13F filing for the current reporting period contained some incorrectly stated figures. Chou Associates has since filed an amendment to that filing with the correct figures and we have updated the article accordingly. We apologize for any inconvenience. 

Francis Chou-led Chou Associates Management suffered a setback during the second quarter, as we calculated the returns of the fund’s equity portfolio as coming in at a loss of 20.9% for the period (the fund’s actual returns may differ). However, according to an amended 13F filing submitted by the Toronto-based asset management firm, its portfolio was left virtually untouched during the period, as Mr. Chou and his team continue to show faith in their holdings. Just two new derivatives positions were added to Chou Associates’ portfolio during the quarter, while two other positions were moderately increased in size. In this article, we’ll take a look at five prominent holdings of the fund and will discuss their performance so far in 2016.

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Citigroup Inc (NYSE:C)

– Shares Owned by Chou Associates Management (as of June 30): 410,000

– Value of Holding (as of June 30): $17.38 Million

Let’s start with Chou Associates Management’s seventh-largest equity holding, Citigroup Inc (NYSE:C). The banking behemoth lost a significant chunk of its market capitalization at the beginning of 2016, which it has yet to recoup, as its stock currently trades down by over 13% year-to-date. Last month, the bank hiked its quarterly dividend by 220% to $0.16 per share, which currently translates into an annual dividend yield of 1.41%. According to a report published in Bloomberg on July 26, Citigroup Inc (NYSE:C) has lost a quarter of its customers and 40% of its workforce over the last ten years due to the restructuring measures it took following the financial crisis in 2008. Several analysts who track the company think that trading at a forward P/E multiple of 9.62 and a price-to-book multiple of 0.62, makes its stock extremely cheap at current levels. On July 18, analysts at BMO Capital Markets reiterated their ‘Buy’ rating on the stock while upping their price target on it to $66 from $63, which represents potential upside of 45.2%. Edgar Wachenheim‘s Greenhaven Associates increased its stake in Citigroup by 37% to 10.64 million shares during the second quarter.

Nokia Corp (ADR)(NYSE:NOK)

– Shares Owned by Chou Associates Management (as of June 30): 3.75 Million

– Value of Holding (as of June 30): $21.25 Million

Moving on, Nokia Corp (ADR)(NYSE:NOK) was the fifth-largest equity holding of Chou Associates Management at the end of June. Shares of the telecommunication service provider have been on a gradual decline since the second quarter of 2015 and have lost 20% of their value so far this year. At the end of last month, Nokia Corp (ADR)(NYSE:NOK) and BCE Inc. (USA)(NYSE:BCE) [which incidentally is the company where Mr. Chou worked as a telephone repairman over three decades ago, before starting his investing career] announced that they have completed the first trial of Fifth Generation (5G) mobile technology at Bell’s Wireless Innovation Centre in Mississauga, Ontario. For its second quarter, Nokia Corp reported EPS of $0.03 on revenue of $5.58 billion, missing analysts’ estimates of EPS of $0.04 on revenue of $5.80 billion. Most analysts who track the stock are currently bullish on it, including analysts at BMO Capital Markets, who reiterated their ‘Outperform’ rating and $7 price target on it on August 10. Louis Navellier‘s Navellier & Associates sold off its miniscule position of 455 shares of Nokia Corp during the second quarter, .

Three more stock picks of Chou Associates are detailed on the next page.

Resolute Forest Products Inc (NYSE:RFP)

– Shares Owned by Chou Associates Management (as of June 30): 4.90 Million

– Value of Holding (as of June 30): $25.84 Million

Canada-based paper manufacturer Resolute Forest Products Inc (NYSE:RFP) was the third-largest equity holding of Chou Associates Management at the end of June, in terms of value. The fund has held a stake in the company since the second quarter of 2012, when the stock used to trade above the $10 level. Due to a long-term decline in the demand for newsprint and mechanical papers, the largest newsprint manufacturer in the world by volume has lost almost two-thirds of its market capitalization since the beginning of 2015 and one-fourth of its market cap this year. Though several analysts who track the company think that its future is uncertain, most of them agree that trading at an enterprise-value-to-adjusted-EBITDA multiple of only 4.1, makes it significantly undervalued at current levels. On August 10, analysts at TD Securities reiterated their ‘Reduce’ rating on the stock, but upped their price target on it to $5 from $4.75. Chuck Royce‘s Royce & Associates left its position in Resolute Forest Products Inc (NYSE:RFP) unchanged during the second quarter. It continued to own 100,000 shares of the company at the end of June.

Valeant Pharmaceuticals Intl Inc (NYSE:VRX)

– Shares Owned by Chou Associates Management (as of June 30): 1.45 million

– Value of Holding (as of June 30): $29.14 Million

Despite the 24% decline that its stock suffered during the second quarter, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) rose to occupy the second-spot in Chou Associates’ equity portfolio at the end of June, from the fourth-spot at the end of March, as the fund added 470,000 shares to its holding. The beleaguered pharmaceutical company lost nearly three-fourths of its market capitalization during the first quarter of 2016, when Chou Associates Management initiated a stake in it, and it hasn’t yet been able to recover from that blow. On August 9, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) reported its second quarter results, declaring EPS of $1.40 on revenue of $2.42 billion, below analysts’ expectations of EPS of $1.48 on revenue of $2.47 billion. A day after its earnings results were released, Dow Jones published a report which revealed that the company is under federal investigation over allegations that it defrauded insurance companies by hiding its close ties to the mail-order pharmacy Philidor, which boosted sales of its drugs. According to industry experts, this could be the most serious probe among the ones that Valeant Pharmaceuticals is facing. On August 11, analysts at Guggenheim reiterated their ‘Buy’ rating and $55 price target on the stock. Aleem Mawji’s Nebula Capital drastically cut its holding in Valeant Pharmaceuticals during the second quarter, by 74% to 31,770 shares.

Berkshire Hathaway Inc. (NYSE:BRK.A)

– Shares Owned by Chou Associates Management (as of June 30): 150

– Value of Holding (as of June 30): $32.55 Million

2016 is turning out to be a great year for investing legend and billionaire Warren Buffett, as shares of Berkshire Hathaway Inc. (NYSE:BRK.A) have outperformed the S&P 500 by over 450 basis points year-to-date. Though there have been several articles of late stating that Berkshire Hathaway Inc. (NYSE:BRK.A) isn’t performing as well as it used to, that’s arguably to be expected, as over the last 20 years, it has outperformed the S&P 500 by a wide margin, delivering a return of 585% versus the S&P 500’s return of 374%. For its most recent quarter, the investment behemoth reported operating EPS of $2,803, 18.4% more than it reported for the same quarter of last year. Despite all of that, Berkshire Hathaway is still trading at a reasonable valuation of a trailing P/E of only 14.18 compared to the S&P 500’s trailing P/E of 25.17. Billionaire Ken Fisher‘s Fisher Asset Management lowered its holding in the Class A shares of Berkshire Hathaway by 38% to five shares during the second quarter.

Disclosure: None