Kahn Brothers’s Top Stock Picks Include Citigroup Inc (C)

In May, Kahn Brothers, a hedge fund which has been managed by Irving and Thomas Kahn since 1978, filed their 13F for the first quarter of 2013 with the SEC, disclosing many of their long equity positions as of the end of March. We’ve found that 13Fs can be useful sources of investment information- for example, the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year- and despite the information being somewhat old investors can also use them as sources of initial investment ideas. Read on for our quick take on Kahn Brothers’ five largest holdings by market value from its most recent 13F or see the full list of stocks the fund reported owning.

The investment team reported a position of 2.6 million shares in Pfizer Inc. (NYSE:PFE) as of the end of the first quarter of 2013. The drug manufacturer’s business has shrunk a bit as it has spun off assets and, hopefully for bulls, become more focused on its core operations. With the stock trading at 14 times trailing earnings, even modest growth could make it a candidate for value status. Pfizer had been billionaire Ken Fisher of Fisher Asset Management’s top stock pick for 2013; it has slightly lagged the S&P 500 year to date (find Fisher’s favorite stocks).

Kahn Brothers moved heavily into Citigroup Inc (NYSE:C) between January and March, increasing its stake in the bank to a total of 1.4 million shares. Citigroup Inc (NYSE:C) had been one of the most popular stocks among hedge funds in Q1 (check out the full top ten list). Indeed, the stock does look somewhat appealing given that it trades at a discount to book value (the P/B ratio is 0.8). While trailing earnings numbers aren’t great, net income rose by 20% in the first quarter of 2013 versus a year earlier and Wall Street analysts are predicting further growth, to the point where the forward P/E is only 9.

Another financial stock in Kahn Brothers’ portfolio was New York Community Bancorp, Inc. (NYSE:NYCB). The bank has made quarterly dividend payments of 25 cents per share each quarter since 2004, and at current prices that results in a high dividend yield. The valuation metrics aren’t particularly attractive (for example, the P/B is 1.1), but neither do they show New York Community Bancorp has being incredibly overvalued in the market. As a result it might be worth considering as an income stock, though we would note that the payout ratio does look high and so current dividend payments might not be sustainable.

According to the 13F, the fund owned 1.2 million shares of Merck & Co., Inc. (NYSE:MRK) at the beginning of April. With a dividend yield of 3.6% and a beta of 0.4, Merck is in those terms a slightly more interesting income stock than Pfizer. However, from a value perspective it doesn’t look quite as good: both revenue and earnings declined in its last quarterly report compared to the first quarter of 2012, and the trailing P/E is 24. Our database shows that Citadel Investment Group, managed by billionaire Ken Griffin, had 3.5 million shares of Merck in its own 13F portfolio (research more stocks Citadel owned).

Disclosure: I own no shares of any stocks mentioned in this article.