Kahn Brothers’ Top Stock Picks for Early 2016; Citigroup Inc. (C) Leading the Pack

The Kahn Brothers Group, formerly known as Kahn Brothers & Company Inc., was founded in 1978 by renowned investor Irving Kahn, who died last year at the age of 109. Irving Kahn served as Benjamin Graham’s part-time teaching assistant at Columbia Business School in the 1930s, so the Kahn Brothers’ investment philosophy continues to rely on Graham’s value investing principles. Kahn Brothers Group mainly invests in undervalued and unpopular securities that offer “both a margin of safety and attractive prospects for capital appreciation”. This is the kind of securities that long term-oriented investors should look for, so it will be particularly interesting to take a glance at Kahn Brothers’ equity portfolio if you’re that kind of investor. The New York-based asset management firm recently filed its quarterly 13F for the fourth quarter of 2015, and this article will discuss the top five stock picks of the investment firm. The U.S equity portfolio of Kahn Brothers had a total value of $559.66 million on December 31, up from $540.19 million registered at the end of the September quarter.

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# 5 Pfizer Inc. (NYSE:PFE)

• Shares Owned by Kahn Brothers (as of December 31): 1.57 Million
• Value of Holding (as of December 31): $50.68 Million

Pfizer Inc. (NYSE:PFE) was Kahn Brothers’ fifth-largest equity position at the end of the fourth quarter, making up 9.72% of the fund’s entire portfolio. The New York-based investment firm cut its position in the biopharmaceutical company by roughly 6% during the three-month period. Let us remind you that Pfizer and Allergan plc (NYSE:AGN) sealed a merger agreement that will create the largest drug maker in the world during that quarter. Under the terms of the deal, Allergan shareholders will receive 11.3 shares of the combined company, to be named Pfizer PLC, for each share of Allergan, while Pfizer shareholders will receive one share of the combined company for each share of Pfizer owned. The deal represents the largest inversion deal ever, as Pfizer will move its tax address to Ireland. Brent Saunders, Allergan’s Chief Executive Officer, will become President and Chief Operating Officer of the combined company, reporting to Chief Executive Officer Ian Read. The merger is anticipated to close in the second half of 2016. Earlier this month, Pfizer generated net income of $7.75 billion on revenue of $48.85 billion in 2015, compared with net income of $9.14 billion on revenue of $49.61 billion reported for 2014. Meanwhile, the shares of Pfizer are down by 16% over the past 12 months. Ken Fisher’s Fisher Asset Management reported owning 32.33 million shares of Pfizer Inc. (NYSE:PFE) during the current round of 13Fs.

#4 Hologic Inc. (NASDAQ:HOLX)

• Shares Owned by Kahn Brothers (as of December 31): 1.35 Million
• Value of Holding (as of December 31): $52.24 Million

Kahn Brothers increased its exposure to Hologic Inc. (NASDAQ:HOLX) by 8,239 shares during the final quarter of 2015, ending the year with 1.35 million shares. The medical service and diagnostics company had enjoyed exceptional stock performance over the past several years through mid-August 2015, thanks to activists’ involvement, including that of Carl Icahn. The shares of Hologic are up by 8% over the past 12 months, but have lost 15% thus far in 2016. The company operates through four business segments, which includes Diagnostics, Breast Health, GYN Surgical, and Skeletal Health. All four segments experienced growth in the first quarter of fiscal year 2016 that ended December 26, while the company’s product revenue for the quarter grew to $587.2 billion from $546.6 billion year-over-year. Hologic’s diagnostics product revenue, which account for 43.6% of total revenue, increased by 2.4% year-over-year due to higher revenue from Molecular Diagnostics and Cytology & PeriNatal. The recent decline in Hologic’s share price has made the company more attractive, but the stock still trades at a forward P/E multiple that is above the ratio for the healthcare industry (15.74 versus 14.40). Columbus Circle Investors, managed by Clifford G. Fox, lifted its position in Hologic Inc. (NASDAQ:HOLX) by approximately 608,000 shares during the fourth quarter, to nearly 952,000 shares.

Kahn Brothers Group’s top three stock picks heading into this year are detailed on the following page.

#3 New York Times Co (NYSE:NYT)

• Shares Owned by Kahn Brothers (as of December 31): 3.93 Million
• Value of Holding (as of December 31): $52.69 Million

The Kahn Brothers Group slightly reduced its stake in the iconic newspaper during the final quarter of 2015, ending the quarter with 3.93 million shares. Specifically, the hedge fund firm cut its stake by less than 10,000 shares during the three-month period. New York Times Co (NYSE:NYT)’s shares are down by 16% over the past 12 months, after having lost nearly 10% in 2016. Just recently, the global media organization released its financial results for the fourth quarter and full 2015 year. The company’s revenue reached $1.58 billion last year, down from $1.59 billion reported for 2014. Circulation revenue, which accounted for almost 54% of total revenue, grew by 1% year-over-year, whereas ad sales dropped by 3.6% year-over-year. The New York Times has focused and is anticipated to continue focusing its efforts on expanding its digital audience to tackle declining print readership. Earlier this week, the company launched an online Spanish edition website in an effort to expand its reach, which will cover news and stories for Spanish speakers. Given that Spanish is among the most widely spoken languages in the world, it is highly likely that the company will be able to boost its ad revenue from the venture. Royce & Associates, founded by Chuck Royce, owns approximately 455,000 shares of New York Times Co (NYSE:NYT) as of the end of the fourth quarter.

#2 Merck & Co. Inc. (NYSE:MRK)

• Shares Owned by Kahn Brothers (as of December 31): 1.01 Million
• Value of Holding (as of December 31): $53.40 Million

Kahn Brothers was mildly bullish on Merck & Co. Inc. (NYSE:MRK) in the fourth quarter of 2015, as it lifted its stake in the company by 4,719 shares during the quarter. The shares of the pharmaceutical giant have lost about 16% over the past 12 months, thus pushing the company’s valuation towards attractive levels. Earlier this month, Merck & Co. reported 2015 sales of $39.50 billion, down from $42.24 billion for 2014. The decrease in top-line results was mainly attributable to the adverse impact of foreign exchange. Its non-GAAP earnings per share (EPS) increased to $3.59 from $3.49 year-over-year. The company’s management anticipates 2016 EPS to be in the range of $3.60 to $3.75 and revenue to be in the range of $38.7 billion to $40.2 billion. Meanwhile, analysts expect EPS of $3.70 for 2016, which results in a forward P/E of 13.32, slightly below the 15.20 average for the pharmaceuticals industry. Fisher Asset Management holds 6.82 million shares of Merck & Co. Inc. (NYSE:MRK) as of December 31.

#1 Citigroup Inc. (NYSE:C)

• Shares Owned by Kahn Brothers (as of December 31): 1.12 Million
• Value of Holding (as of December 31): $58.17 Million

Kahn Brothers’ position in Citigroup Inc. (NYSE:C) remained largely unchanged during the fourth quarter, being boosted by just 560 shares during the quarter. This position accounted for 10.39% of the fund’s U.S.-focused equity portfolio at the end of the fourth quarter. Financial stocks have been plummeting since the beginning of the year on worries about a potential U.S economic slowdown and concerns about worsening credit quality, especially in the energy sector. Of course, Citigroup is no exception, as its shares have lost more than 31% since the beginning of the year. In fact, Citigroup’s market value is at a huge discount to its tangible book value at the moment. A potential U.S recession would result in higher loan defaults, deteriorating credit quality, and lower interest rates. However, there aren’t any serious indicators that the U.S economy is heading towards a recession just yet. Citigroup’s shares currently trade at a forward P/E multiple of just 6.38, significantly below the ratio of 12.00 for the financials sector. John A. Levin’s Levin Capital Strategies upped its stake in Citigroup Inc. (NYSE:C) by 367,451 shares during the October-to-December quarter, to 5.23 million shares.

Disclosure: None