Kahn Article:
Kahn-Trary Opinions
Kahn Brothers beats the market by bucking trends and staying
true to Ben Graham
By ANDREW BARY
Irving Kahn not only can boast of being one of the oldest active investors on
Wall Street, but also being among the few who sold stocks short before the 1929
Crash. At 96 years old, he still is chairman of Kahn Brothers, a New York
investment management firm, which can point to some exceptional
accomplishments of its own, notably that it is thriving in the current bear market.
That owes much to hewing to the value precepts laid down by Kahn's friend and
mentor, the late Benjamin Graham, who's considered the father of modern
security analysis.
Through August, a representative equity account managed by Kahn Brothers was
up 7% after gaining 23.9% in 2001 and 16.8% in 2000 -- quite a showing in the
worst bear market since 1973-1974. For the nearly 10 years ended in August, this
account was up 19%, double the returns on the Standard & Poor's 500 index.
Like father, like sons: The Kahns, with paterfamilias Irving
flanked by Thomas (left) and Alan, are making money by sticking
to their value principles that went out of fashion in the bubble of
the 1990s.
This performance reflects the Kahns' focus on stocks -- many of them relatively
obscure -- that have what Graham called a "margin of safety" in that they sell at or
close to book value or for a modest price/earnings ratios. Kahn Brothers' results,
however, can have little correlation with the S&P 500; the firm's accounts badly
trailed the index during the technology-dominated bull market of the late 1990s.
But their portfolios got hit along with the rest of the market in September, with
equity accounts now about flat for the year.
Founded in 1978, the firm, which runs $570 million, doesn't have a mutual fund
and instead runs separate accounts for each of its clients. "We lost assets in the
tech bubble and now we're starting to attract new money, mostly from total
strangers" says Thomas Kahn, Irving's 60-year-old son, who runs the firm's
operations. He says the firm generally wants new investors to put up at least $1
million, but some exceptions are made.
Tom shares the title of co-chief of investments with his brother Alan Kahn, 64,
who has gained a reputation as one of the country's leading advocates for
shareholder rights from his lawsuits over the past two decades against Ronald
Perelman, Charles Hurwitz of Maxxam and Harold Simmons.
The Kahns don't advertise and they don't have a marketing staff. Yet the firm has
attracted about $50 million in new money in the past year, largely by word of
mouth. Turnover is low at 10% to 20% annually, which means their portfolios
tend to be quite tax-efficient.
Irving, meanwhile, remains a guiding force at the firm, which has just 12
employees. He's in the office daily and sometimes on weekends. On pleasant
evenings, he'll walk the mile from the firm's Madison Ave. offices to his apartment
on the Upper East Side. "I'm often asked why I'm still working at 96, and my
reply is that I find the security-analysis profession very rewarding and I get the
opportunity to make use of a 70-year career on Wall Street." The longevity of
Irving and his three siblings, also 90-plus, has made them subjects of a Harvard
University study seeking a genetic secret to long life.
Irving recalls 1929, when he was convinced the market was overpriced and
shorted 50 shares of Magma Copper. "Everyone said I'd lose my money but I
ended up doubling it after the break in '29." A voracious reader of scientific
journals, he remains very much in the present.
"Irving would rather talk about a new investment in photonics than reminisce
about the crash of 1929. He's very focused and forward looking," says Carl
Schecter, the head of the risk-arbitrage trading group at Nomura Securities who
has known the Kahns for two decades.
Irving, for instance, is a nuclear-power proponent, arguing that it will continue to
play a vital role in electricity generation around the world. This led the Kahns to an
investment in USEC, the leading supplier of enriched uranium to the nuclear
industry. The formerly government-owned USEC now trades under 7, below its
book value of more than $11 a share.
Graham's investment philosophy, laid out in such books as "The Intelligent
Investor" and in lectures at Columbia Business School, emphasized stocks of
companies with ample book value and little debt. These stocks were plentiful in
the 1930s, 1940s and 1950s, when Graham ran a lucrative investment partnership.
Irving helped Graham prepare the Columbia lectures and acted as a "bird dog" in
search of investment ideas for Graham's partnership.
Reflecting Graham's influence, the
Kahns often favor companies whose
shares trade at a discount to book
value. But Irving says they seek to
"augment" financial analysis with an evaluation of management and a company's
competitive position. Unlike many value investors, the Kahns will buy technology
stocks, including Hologic, a maker of an innovative digital X-ray plate that has
been licensed to Siemens.
The single biggest element of the Kahns' success in the past decade has been their
investment in a gaggle of New York-area thrift institutions, some of which are up
tenfold in price. One of the firm's larger holdings is New York Community
Bancorp, which now trades at 27, up 15% this year and way above its initial
public offering price of 1.65 in 1993. This buy-and-hold approach borrows from
Graham's most famous protege, Warren Buffett, the chairman of Berkshire
Hathaway.
When Barron's profiled Irving 7 1/2 years ago ("True Believer," March 13, 1995),
he and his sons recommended several New York savings and loans, including
Albank Financial, JSB Financial and Reliance Bancorp, that have all been taken
over. The Kahns' view of New York Community is that it's a "hold" owing to
valuation -- almost three times book value and 10 times earnings. "New York
Community is one of the best-managed banks in the country," says Tom. "If it
gets cheaper, we'll buy it for clients that don't now own it."
The Kahns did make mistakes, including purchases of Imperial Holly and
Mississippi Chemical in the 1990s. "Most of our mistakes turn out to be
dead-money investments, not lost-money investments," Tom says.
Owing to its modest size, Kahn Brothers can play in many small and midsize
companies, but it lately has been putting money into some big stocks, including
Bristol-Myers Squibb and Merck. "We bought the drugs in 1993 when they were
depressed by the Clinton health-care plan, and several of them yielded 5%. We're
nibbling again," says Tom.
The three Kahns often work independently on their investment ideas, although
agreement among them is required for the firm to buy or sell individual stocks.
Irving's favorites include Advanced Marketing Services, a distributor of books
that's become a major force in the business by selling to warehouse clubs such as
Costco. He originally recommended it in March 1995, when it traded around 2.
Advanced Marketing now trades at about 14, off from a peak of 27 earlier this
year. It fetches a modest 11 times projected profit in the fiscal year ending March
2003 and less than two times book value. "It's a growing company," he says.
"Management owns about a third of the stock and it has very little debt."
Irving also likes Seaboard, a thinly traded conglomerate run by the secretive
Bresky family that trades at about 220 a share, a little more than half its book value
of $363 a share. Seaboard has a large hog operation in rural Oklahoma and also
owns Seaboard Marine, one of the largest cargo operators in the Caribbean and
South America. The company amounts to a Cuba play because it's poised to
benefit if U.S. trade relations with Cuba are normalized.
"You have to think of Seaboard as an investment in a private company and not pay
attention to the stock quote," Tom says, adding that he thinks the company is
worth at least double its current price.
Nam Tai Electronics, a low-cost contract maker of electronics with substantial
operations in China, is another favorite of Irving's. It trades at 18, about 10 times
earnings and a small premium to its book value of $16.
Alan is partial to American National Insurance, a low-profile Texas life insurer
whose thinly traded shares are around 70, a discount to their book value of $110.
"American National is a wonderful statistical bargain," he says. The stock trades at
14 times projected 2002 profit and yields 3.5%. Alan thinks the controlling Moody
family eventually will sell it. "This is a stock that could double or triple overnight,
but they aren't going to tell you ahead of time when that will happen," he observes.
Kansas City Southern, the railroad best known for its former ownership of the
Janus mutual-fund company, is one of Alan's favorites because of the takeover
appeal of its rail network, which runs through the midsection of the country and
down into Mexico. "It's a NAFTA play," he says. The stock trades at about 12,
just above book value and 16 times depressed profits of 80 cents projected for
2002. "In the short run, their business will reflect the economy, but ultimately
Kansas City Southern won't exist as an independent company. Fair value is twice
the current price," he argues.
Alan also likes Knight Trading Group, the Nasdaq market maker whose stock has
crashed to 4 from a high of 78. "It's trading below book value of $6.50 a share
and also selling below cash per share when you include Knight's investment in its
hedge fund," he says. Knight had $503 million in cash on its balance sheet on June
30, including $153 million in funds run by its investment-management unit, worth
$4.15 a share. "Nobody is more aggressive, entrepreneurial or profit-oriented than
an OTC market maker," notes Alan. He believes Knight, now operating at a slight
loss, will find ways to make money or sell out at a sizable premium to its current
price.
Tom is partial to CNA Financial, the property-and-casualty insurer, which trades
at 25, a steep discount to its book value of $37. CNA has had poor operating
results in recent years but he is encouraged that Loews, which controls 90% of
CNA, pumped nearly $1 billion into the company in a rights offering in September
2001. "The Tisches wouldn't have done this if they thought the reserves were
inadequate," Kahn says, referring to Loews' controlling shareholders. He thinks
CNA, benefiting from the property-and-casualty upturn, can earn $4 a share in
2004. If that happens, the stock could easily top 40, he adds.
MONY Group, the depressed life insurer, also appeals to Tom because it trades
for 25, a fraction of its book value of $41. Its valuation is high based on projected
profits of just 80 cents a share this year, but he says those weak returns could
prompt a takeover of MONY after November 2003. That's when a New York
state rule capping an investor's ownership in the company expires. Tom puts
MONY's value at 40 to 50 a share.
Tom calls Audiovox, a distributor of cellphones to Verizon and others, a "value
investor's Nokia;" at 7, it's just half book value. He's also partial to 3Com at 4 --
below book value of $5 and little more than the cash on its balance sheet. Those
are numbers the Kahns can really connect with. |
