According to the second-quarter 13F report for Mohnish Pabrai (Trades, Portfolio)’s Pabrai Investments, which details the firm’s U.S.-listed common stock holdings as of the end of June, the fund manager dumped almost all of his remaining shares in Seritage Growth Properties (SRG, Financial).
Following this transaction, the report shows that the hedge fund only owns one remaining major U.S. equity holding, Micron Technology (MU, Financial). This position was worth just over $100 million at the end of June. While Seritage is still there, the holding only amounted to just 3,375 shares as of the quarter's end.
I say it only owns one remaining U.S. common stock holding because 13F reports do not show international equity holdings. Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
According to the hedge fund’s letters to investors, it manages around $700 million in assets in total. Most of these assets are invested in emerging markets, predominantly Turkey and India.
Therefore, investors need to be careful when analyzing the 13F report and its published data. It does not provide a comprehensive picture of Pabrai’s investment portfolio. Still, the report does give us an insight into how he is investing in U.S. common stocks.
What we can learn from the Seritage trade
The value investor’s involvement with Seritage is quite interesting as it shows how the idea has evolved from being a top holding for the manager to falling out of favor.
Pabrai first bought a holding in the real estate company in the first quarter of 2016 worth 530,000 shares. However, the fund manager did not stay invested for long. He started reducing the position in the first quarter of 2017 and had sold out entirely by the end of June 2017.
At the time, both Warren Buffett (Trades, Portfolio) and Guy Spier’s Aquamarine Capital also had a holding in the stock. Spier and Pabrai are close friends who share investment ideas, so it is hardly surprising that both investors owned a position simultaneously.
Pabrai dumped his holdings in the second quarter of 2017 but returned significantly in the second quarter of 2020, when he acquired just under 5 million shares in the real estate company.
Based on the value investor’s comments, the decision to re-enter the stock was based on the fact that the shares had fallen to such a low level due to the pandemic that the company was trading at a significant discount to the value of its assets. Previously, Pabrai had owned the business because he thought it could create value by developing its real estate assets, according to his communications with investors.
While the business was unlocking value from these assets, the stock was relatively expensive. However, during the early months of the pandemic, the stock declined from more than $50 per share to around $11 per share. Suddenly, the investment case had completely changed as this was a deeply undervalued business with room to unlock value. Pabrai Funds re-entered the stock in a big way.
Unfortunately, this trade did not work out as expected. The company saw its share price recover briefly, but it has continued to struggle fundamentally, which did not help its share price.
Seritage was created with the real estate assets from fallen retail giant Sears. The idea was that the company would convert old Sears stores into new properties, which would be worth more and generate enhanced rental income.
The company has been making progress generating value in this way, but progress has been slower than expected and the bureaucracy involved has damaged the investment case.
Unable to create value, the company has become somewhat of a value trap. Its stock price has fallen more than 90% from all-time highs, and as the situation has changed, Pabrai has jumped ship. This case shows why it is important for investors to be able to decisively accept when a situation has changed for a company and act accordingly, even if it means taking losses.
