Mohnish Pabrai might not be a household name but he is a value investor very similar to Warren Buffett. One of his famous quotes about how to approach investing and which stocks to buy is “Heads I win, tails I don’t lose too much.”
Much like his idol Buffett, the Mumbai-born Pabrai doesn’t look for stocks to buy. Rather, he scours a company’s SEC filings looking for a reason to say no. He once told The London Business School, “The model is not to find investments. The model is to find the flimsiest reason to say no.” Pabrai only wants to own extraordinary businesses and the very best stocks to buy are few and far between.
He shared his investment philosophy in his highly readable book “The Dhando Investor.” But today, his Pabrai Investment Funds, a group of value funds, mostly invests in India. However, his Dalal Street fund has invested in literally just a handful of U.S.-listed stocks. The portfolio, which has about $216 million in assets under management, includes only four companies and the top three stocks comprise 90% of the total.
They are all in the coal and energy sector as Pabrai tends to go all-in on a theme. While Buffett has panned diversification, I’m not sure a concentrated portfolio like this is the right strategy for everyone.
Yet, it is still instructive to see where Pabrai is placing his bets in this industry. Even including some of these stocks as part of a broader investment strategy could be useful. So here are the three stocks to buy that Pabrai is going all-in on.
Warrior Met Coal (HCC)
Small-cap coal stock Warrior Met Coal (NYSE:HCC) was first purchased in the third quarter of 2023. Although Pabrai sold off a quarter of the holdings in the fourth quarter, he still owns 470,000 shares valued at $28.6 million. It is the third largest position in Dalal Street and represents over 13% of the portfolio (the fourth stock Pabrai owns is Arch Resources (NYSE:ARCH)).
Met coal is short for metallurgical coal, or hard coking coal (HCC — hence the company’s ticker symbol). Warrior bills itself as a low-cost provider of met coal to international markets. Critical to steel production, Warrior’s HCC is used by metal manufacturers in Europe, South America and Asia.
Although steel demand is in a state of flux, it is coming out of a period of contraction, according to the World Steel Association. Particularly in the markets of Warrior Met Coal services, demand is expected to rise for the rest of 2024 and through 2025. That will require coking coal to produce, setting up Warrior for future growth.
HCC stock is up 15% year-to-date and is 79% higher over the past 12 months. Shares go for 9 times earnings and estimates and twice sales, making it an attractive stock to buy still.
Consol Energy (CEIX)
Pennsylvania coal miner Consol Energy (NYSE:CEIX) is the second-largest position in Dalal Street. Pabrai owns 366,000 shares valued at $30.7 million, which represents over 14% of the portfolio.
Consol Energy is another coal stock focused on the export market. As U.S. regulators cracked down on “dirty” coal, producers began looking overseas and found a welcoming market. Some 70% of Consol’s coal is sold into international markets.
That has worked out well for investors. Although the stock is flat so far this year, it is up 53% over the past year and almost 490% higher over the last three years.
Much of that is due to its flagship project, the Pennsylvania Mining Complex, which produced 60% of its output for the export market. The complex, which is a series of coal mines, had some maintenance work done in the first quarter. Its export terminal in Baltimore was also blocked for an extended period when a ship ran into the Francis Scott Key Bridge spanning the waterway. The combination resulted in a decline in revenue that should soon reverse itself.
To return value to shareholders in the period, Consol Energy used 90% of its free cash flow to buy back company shares.
Alpha Metallurgical Resources (AMR)
The biggest holding in Pabrai’s Dalal Street fund is Alpha Metallurgical Resources (NYSE:AMR), a coal miner that operates 21 underground mines in the Virginias that, as its name suggests, focus primarily on met coal. It also serves markets globally but it also has a thermal coal component used for heating.
Pabrai went big on his bet in Alpha. The stock comprises over 62% of the Dalal Street portfolio. It owns over 404,000 shares worth $133.9 million. With an average buy price of around $174 per share, the value investor is sitting on returns of about 78%.
Alpha Metallurgical Resources found global market demand for coal softening towards the end of the first quarter and it spilled into the early part of the second quarter. That led to declining sales and earnings that fell 25% year-over-year to $9.59 per share.
Tellingly, the steel market is expected to rise over the remainder of this year and next as noted previously but India is expected to be a large source of that demand. Fully 37% of Alpha’s exports are to India.
AMR stock is down 9% in 2024 but 93% higher in the last 12 months. Expect Alpha Metallurgical to reverse course and turn higher in the quarters ahead.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
