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Mohnish Pabrai is an Indian-American businessman, investor and philanthropist. In his Pabrai Investment Fund, which is a family of hedge funds inspired by Buffett Partnerships, he successfully manages over $500 mln of assets and consistently achieves over-average rates of return.

The following is a list of his top holdings from the last quarter.

Stock

Symbol

Shares Held - 09/30/2011

% of Portfolio

Change in shares vs last quarter

Bank of America Corporation

BAC

7053551

18.72

7053551

Brookfield Infrastructure Partners LP

BIP

1767960

18.66

-1800

Potash Corp. of Saskatchewan Inc.

POT

796000

14.92

-198854

Brookfield Properties Corporation

BPO

2359215

14.09

-51

Wells Fargo & Company

WFC

1225101

12.81

850686

Capitalsource Inc.

CSE

2813141

7.49

0

Cresud Inc.

CRESY

1027887

4.82

-258474

Source: 13F filing

For aggressive traders, I would recommend Bank of America. Bank of America is trading at just 30% of its book value and 45% of its tangible book value. I have not been too big a fan of this one and have been recommending selling it since August. The stock has underperformed S&P500 (NYSEARCA:SPY) and broader financial services sector in last 3 months declining by ~30%. The stock is now available at a cheaper price than what Warren Buffett paid for it back in August.

I am becoming incrementally more positive on Bank of America, and would like to change my opinion now. I believe the market is completely neglecting some of the important steps taken by the bank to improve liquidity. Over the past several weeks, BofA has executed on several asset sales that are consistent with management’s efforts to strengthen the balance sheet and improve the company’s overall capital position. For example:

  • BofA recently announced an agreement to sell most of its remaining stake in China Construction Bank. At September 30, BofA held 12.1 billion shares (~5%) of CCB with a carrying value of $7.2 billion, and a fair value of $7.7 billion. Out of this Bank of America will sell approximately 10.4 billion common shares through private transactions with a group of investors. Earlier also, on August 29, BofA sold 13.1 billion shares of CCB reducing its risk-weighted assets by $7.3 billion under Basel I. Together with some further realization of the deferred tax asset, the sale of the 10.4 billion CCB shares should generate about $2.9 billion of Tier 1 common capital boosting that ratio by 24bps.
  • BofA recently sold its stake in the Pizza Hut franchisee, for $755 million.
  • BofA’s previously announced sale of the Canadian card business is expected to close in 4Q11. It will free-up approximately $8 billion of RWA and as such will add another 7bps to the Tier 1 common capital ratio.

In addition to these transactions, Bank of America is also taking advantage of current market conditions, which are putting downward pressure on the market values of BofA’s debt and preferred stock issues, some of which are now trading below par. Management is issuing up to 400 million shares of common stock (3.9% of outstandings) and $3 billion in new senior notes to effectively replace roughly $6 billion of higher-cost preferred stock and/or trust preferred capital debt securities.

Once the eurozone stabilizes, the market will take a notice of these confidence-building measures, which will be a positive catalyst for the stock.

For low risk investors I would suggest Wells Fargo. Wells Fargo is one of the well capitalized banks available at low valuations (8x forward PE). It can prove to be a very good investment at current levels, if broader macro environment improves going forward.

I would also recommend buying Potash (despite of the broader macro concerns) as I don't think a 2008-like correction in fertilizer stocks is in the cards.

During the last downturn in 2008, excess inventory in the supply chain coupled with anticipation of decline in fertilizer prices by farmers caused fertilizer producers and retailers to take a hit. However, the current situation is different. Due to the hit fertilizer retailers had taken in 2008, they were cautious this time and have not overstocked fertilizer inventories. Thus, the supply chain remains very tight.

Further, grain prices corrected very sharply along with other commodities during the last downturn. Thus, farmers anticipated that fertilizer prices will come down as well. I don't see a similar commodity correction this time given the excess amount of money supply that has entered the system thanks to bailouts, quantitative easing and stimulus. In particular, when we talk of food grains where demand is inelastic, the trend is likely headed up in the mid-long term even if we consider a prolonged recession scenario.

Fertilizer prices are usually correlated with food prices, and I believe fertilizer companies are the best bet in the long term to hedge one's portfolio against inflation in these recessionary times.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Mohnish Pabrai's Top 7 Holdings