2 Buys for Canada's Chou Associates Management

by: GuruFundPicks
Summary: Chou Associates Management Inc., a Toronto based mutual fund headed by Francis Chou, manages $800 million in assets, including $340 million in U.S. equity assets and another $100 million in Canadian, Asian and European traded equities. Two attractive buys from his portfolio include generic and branded drug manufacturer Watson Pharmaceutical Inc. (WPI) and paper products manufacturer Abitibibowater Inc. (ABH). There are no conviction sells in its portfolio.
U.S. equity assets are managed under the Chou Associates Fund that over the last 15 years has returned 14.1% compounded annual return or 623% cumulative vs. 8.0% annualized or 217% cumulative for the S&P 500. Mr. Chou is widely regarded as a Canadian investment giant. A business acquaintance of Mr. Prem Watsa of Fairfax Financial, another Canadian investment veteran, both Mr. Chou and Mr. Watsa immigrated to Canada from India. Mr. Chou famously, with just a 12th grade education, worked as a telephone repair man and technician for seven years at Bell Canada and came across Ben Graham’s Security Analysis in the late 1970s. He started an investment club with seven co-workers and $51,000 in capital and by 1986, it had grown to $1.7 million when the investment club was converted into a mutual fund, Chou Associates.
The fund holds a concentrated portfolio of 24 positions, with more than a quarter in large caps, just over one-half in mid caps and the remaining 20%-25% in small caps. Its portfolio turnover is around 15% implying an average holding period of over six years. Based on the most recent SEC 13-F filing for the March 2011 quarter, we determined that about a third of its portfolio is invested in the services sector, another one-quarter each is invested in financial and healthcare sectors, and most of the remaining 17% is invested in the basic materials sector.
The following summarizes its largest new buys and sells in the latest reported 13-F filing for the March 2011 quarter, and updated based on any 13-G filings since the end of the quarter:
  • Service sector: Chou’s position in the service sector remained unchanged at $110 million, with no significant cuts or additions to any position in the sector. Its largest positions in the sector include a $28 million position in wireless services provider Sprint Nextel Corp. (NYSE:S), $35 million in close-out and discount e-commerce provider Overstock.com (NASDAQ:OSTK), and $28 million in department and discount store retailer Sears Holding Corp. (NASDAQ:SHLD) that operates Sears and Kmart Stores. The position in OSTK was opened probably in the high-$20s at the end of 2007, the stock has performed poorly since and is currently trading in the mid-teens, so Chou is not taking any losses and reducing its large position in this stock is a sign of its conviction in this hold. Furthermore, it holds 9.6% of the OSTK outstanding shares which is also indicative of its conviction in this position. However, it has been on the wrong side of this trade since the beginning, and the company continues to miss analyst estimates, so its conviction may not be that informative here. The position in SHLD was opened in the $120s at the end of 2007, and it has done poorly since, putting it on the wrong side of this position, so its conviction in holding this position has no informative value. The position in S was also opened at the end of 2007 in the high-teens, and the stock has been weak since trading currently in the $5 range, so it has been on the wrong side of the trade since the beginning and its conviction in holding this position has got no informative value.
  • Healthcare sector: Buy Watson Pharmaceutical Inc. (WPI). Chou’s fund cut $26 million from its prior quarter $108 million position in the healthcare sector, including cutting $26 million from its $42 million position in Valeant Pharmaceuticals (NYSE:VRX), a developer of primarily branded drugs to treat central nervous system disorders, pain and cardiovascular disease. The position was opened in the low-$20s in the summer of 2010, so the fund selling a large portion in the last quarter in the $50s at a 150%-plus profit in just over six months is profit-taking. The fund’s largest position in the sector is a $36 million position in Watson Pharmaceuticals Inc. (WPI), a developer of generic and branded drugs, including oral contraceptives, analgesics and smoking cessation aids. The position was opened in the $30 range at the end of 2007, so the fund not taking any profit by selling some of its position is a sign of its conviction in the stock. WPI is selling at a forward price-to-earnings (P/E) of 15 based on December 2011 projections, near the low-end of its historical P/E range. Also, both revenue and earnings growth is expected to accelerate going forward to between 20% and 30%, so the stock should be considered as an attractive buy.
  • Financial sector: Chou’s position in the sector remains unchanged at $68 million. The fund’s largest position in the sector is $32 million in Bank of America Corp. (NYSE:BAC). The position was opened in the mid-teens in mid-2010, so the fund maintaining its position as the stock is falling toward $10 is a sign of its conviction in this hold.
  • Basic materials sector: Buy Abitibibowater (ABH). The fund’s holdings in this sector remain unchanged at $51 million, and it includes the fund’s largest position in Abitibibowater Inc. (ABH), a manufacturer of coated, specialty paper, newsprint, lumber products and bleached market pulp. The position was opened in the low-$20s at the end of 2010 and the stock was trading in the high-$20s last quarter. ABH trades at a forward P/E of 6 based on projected December 2011 fiscal year analyst estimates, which is very cheap. Furthermore, analyst targets are currently at $35 making this an attractive buy.
  • Energy sector: International Coal Group (NYSE:ICO) was acquired by Arch Coal (ACI).
Market Value at end of March 2011 Quarter
Change in Value from Prior Quarter
Percent of Portfolio
Percent Shares Owned
Top Buys and Sells
Valeant Pharmaceuticals Intl.
$ 16 million
($26) million
International Coal Group Inc.
$ 5 million
($23) million
Top Holdings
Abitibibowater Inc.
$ 61 million
$0 million
Watson Pharmaceuticals Inc.
$ 36 million
$0 million
Overstock Com Inc.
$ 35 million
$0 million
Bank Of America Corp.
$ 32 million
$0 million
Sprint Nextel Corp.
$ 28 million
$0 million
Sears Holdings Corp.
$ 28 million
$0 million
Berkshire Hathaway Inc.
$ 24 million
$0 million
$ 14 million
$0 million
Flagstone Reinsurance Holdings
$ 14 million
$0 million
Wells Fargo & Co.
$ 11 million
$0 million
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are my ‘opinions’ and I may be wrong. I may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to my thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.