Mohnish Pabrai Still Likes Automotive Stocks, Goes Into Aircraft Leasing

Mohnish Pabrai began his career as an entrepreneur but switched to money management. Pabrai though is most famously known for the $650,100 he paid for having lunch with billionaire investor Warren Buffett. Pabrai is in fact a big fan of  Buffett and has even structured his hedge fund in the same way as Buffett did when he began more than five decades ago.

Pabrai manages Dalal Street, which he founded the fund in 1999. At the end of June quarter, the fund had an equity portfolio worth approximately $296.27 million, down from $345.10 million reported at the end of the previous quarter. The Consumer Discretionary sector accounted for 43% of the equity portfolio value, while other 16% were invested in the Technology sector. In fact, Dalal Street’s last 13F indicated just seven holdings, and, in this article, we are going to take a closer look at some of Pabrai’s top stock picks, as well as one stock in which the fund initiated a stake heading into the third quarter. 

An everyday investor doesn’t have the same resources and capabilities to analyze different publicly-traded companies as hedge funds do. This is why it is a good idea to see what stocks hedge funds like the most and try to imitate some of their bullish moves in an attempt to reap market-beating returns. At Insider Monkey, we follow the activity of several hundred of the best-performing hedge funds as part of our strategy. We analyze their 13F filings and use the data to see what stocks they are collectively bullish on. Through extensive research we have determined that the best approach to outperform the broader indices is to follow hedge funds into their top small-cap ideas. In our backtests, a portfolio of the 15 most popular small-cap stocks generated monthly alpha of 81 basis points, versus 0.7 percentage points posted by hedge funds’ top large- and mega-cap picks (see more details here).

Let’s start with Pabrai’s new position at the end of June, which is represented by AerCap Holdings N.V. (NYSE:AER). Pabrai acquired 624,160 shares of AerCap during the second quarter the value of the position stood at $20.96 million at the end of June, accounting for 7.08% of the fund’s equity portfolio. Earlier this week, AerCap announced the delivery of its first Airbus A320neo on lease to Volaris. AerCap also has six A321neo aircraft on order, which will be delivered through 2018. The number of hedge funds tracked by us long AerCap at the end of June stood at 36, down from 49 at the end of March, while the total value of their holdings slid to $1.45 billion from $1.85 billion during the second quarter, but, nevertheless, represented over 22% of the company’s float at the end of June.

In Seritage Growth Properties (NYSE:SRG) Pabrai’s fund held 529,113 shares worth $26.37 million at the end of June. During the quarter, Pabrai trimmed its position in Seritage by 1,540 shares. Seritage Growth has recently announced that Sears Holdings Corp (NASDAQ:SHLD) has exercised its right to terminate master lease with regards to 17 stores. Sears expects to vacate the stores in January 2017. Seritage is also entitled to a termination fee from Sears, which equals one year of aggregate annual base rent, plus estimated operating expenses. Of the 749 funds in our database, 22 held $382.43 million worth of Seritage Growth shares at the end of June, down from 27 funds holding $514.74 million in stock a quarter earlier.

On the next page, we are going to discuss three companies that represented Pabrai’s largest positions at the end of the second quarter.

Dalal Street’s stake in Ferrari NV (NYSE:RACE) amassed 14.69% of its equity portfolio, containing 1.07 million shares, down by some 208,200 shares over the quarter. The value of the position amounted to $43.52 million. In the second quarter, Ferrari’s net revenue grew by 5.9% to 811 million euro ($904 million), while earnings for the quarter came in at 0.55 euro ($0.61) per share. Heading into the third quarter, 17 investors we track were long Ferrari’s stock, holding $288.70 million worth of shares, down from 19 funds with stakes worth $318.80 million a quarter earlier.

Alphabet Inc (NASDAQ:GOOG)  is next in line with Dalal Street holding 69,188 class C shares worth $47.88 million. Earlier this week, Alphabet announced that it will release its third-quarter results on October 27 and analysts expect the tech giant to report earnings of $8.64 per share on revenue of $22.04 billion. The number of funds holding shares of Alphabet’s class C stock declined to 126 from 142 during the second quarter, while the value of their positions slid to $11.20 billion from $14.90 billion. 

Fiat Chrysler Automobiles NV (NYSE:FCAU) represented Pabrai’s biggest holding at the end of the second quarter. The fund held 13.78 million shares of Fiat Chrysler valued at $84.36 million at the end of June. The position amassed over 32% of the equity portfolio. Fiat Chrysler recently has announced that it is recalling 1.9 million cars due to airbag defects. The vehicles are being recalled worldwide after the airbag defect was linked to three deaths and five injuries. The recall put more pressure on the stock, which is already down by more than 54% year-to-date. Among the funds we track Insider Monkey, 27 held $534.79 million worth of Fiat Chrysler shares at the end of June, compared to 28 funds that held $645.66 million worth of stock a quarter earlier.

Disclosure: none