Irving Kahn Buys Stake in GlaxoSmithKline During Q3 2014

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Nov 12, 2014
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During the third quarter, Irving Kahn (Trades, Portfolio) of Kahn Brothers added only one position to the portfolio, and increased his holdings in just two companies. The majority of his activity was reducing his positions in 13 companies.

At 108 years old, Kahn is the oldest living active investment manager today. Kahn learned the principles of value investing directly from Benjamin Graham himself while serving as his teaching assistant at Columbia University in the 1930s.

Kahn founded the Kahn Brothers Group in 1978, which manages about $1 billion in institutional and private funds today.

Kahn Brothers utilizes a bottom-up stock selection approach, and while the firm’s website states that its philosophy has evolved over the years, it continues to stress the most important principle of Graham’s value investing strategy: margin of safety.

It’s no surprise then that each of the three companies that were added or increased in the portfolio were undervalued either according to the Peter Lynch chart or the DCF valuation.

Buy

Kahn’s only new holding for the quarter is 51,000 shares in GlaxoSmithKline (GSK, Financial) at an average price of $49.01 per share.

GlaxoSmithKline develops and markets pharmaceutical products such as vaccines, over-the-counter medicine and other health-related products. Its products address a wide variety of therapeutic areas including respiratory, anti-virals, cardiovascular, anti-bacterial, dermatology, and HIV.

GSK’s net income in FY 2013 was $8,956 million, an increase of about 3% year over year.

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The operating margin was 26.52% for FY 2013, which is much higher than the industry median of 7.3%.

An attractive reason to hold a position in GSK is its dividend yield of 5.9%, which is close to its 10-year high. The five-year growth rate for the dividend is 6.5%, which is ranked higher than 84% of companies in the drug manufacturing industry.

Add

Kahn added 4,000 shares to his position in IBM (IBM, Financial) at an average price of $190.57, for a total of 7,258 shares. Over the past five years, the highest number of shares Kahn owned was 18,715 during the fourth quarter of 2009. IBM’s stock has climbed steadily until this past quarter and Kahn gradually unloaded shares at a profit.

However, year-to-date, the stock has dropped 12%, including a steep drop from Oct. 17-22. This has contributed to the company’s margin of safety of 49% according to its DCF true valuation. In addition, IBM is now undervalued according to its Peter Lynch chart.

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IBM’s current dividend yield is 2.6%, which is close to the 10-year high. The five-year dividend growth rate is 14.6%.

Kahn also added 5,400 shares to his holding in Flushing Financial Corp (FFIC, Financial) at an average price of $19.22, for a total of 15,519 shares.

This is the first quarter in the past five years in which Kahn added to the position.

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Flushing Financial is a federally chartered mutual savings bank, whose revenues come mainly from interest on mortgage and other loans, the mortgage-backed securities portfolio, and interest and dividends on other investments.

The company recently became undervalued according to the Peter Lynch chart.

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Reduce

Kahn reduced the position in Patterson-UTI Energy (PTEN, Financial) by 277,500, leaving a total of 626,254 shares. The average price of his sold shares is more than those bought, at $28.92 and $16.57, respectively.

Patterson-UTI provides contract services to North American oil and natural gas companies. It also operates a fleet of land-based drilling rigs numbering 314.

The company’s operating margin has been decreasing since FY 2011, while the gross margin has been declining over the long term at a rate of 1.5% per year.

When comparing the stock price to the Peter Lynch earnings line, it’s clear that Patterson-UTI may be overvalued.

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Kahn also reduced the positions in 12 other companies during the quarter including Citigroup (C, Financial), Pfizer (PFE, Financial), BP PLC (BP, Financial), and New York Times Co (NYT, Financial).