Feb. 16, 2012, 1:34 p.m. EST
Article from The Marketwatch
Bruce Berkowitz , the manager of the Fairholme Capital Management's Fairholme Fund FAIRX +0.18% , recently took part in an in-house interview designed to answer some of the questions shareholders have about the fund and its investment choices. In it, Berkowitz provides insights into a number of stocks — insights that do-it-yourself investors can use to their own advantage.
Fairholme Fund is performing spectacularly this year, returning 17.5% in a month and a half. This follows a less-than-stellar 2011 which saw the fund lose a little more than 32% on poor performance by stocks like St. Joe, among others. The fund had $580 million invested in Bank of America BAC +4.00% at the end of December, and the stock's 40% return has contributed significantly to Fairholme's strong performance over the last several weeks. Let's take a look at the stocks Berkowitz is currently most bullish about:
Sears
Sears Holding Corp SHLD +4.28% was a bullish mention, and his fund had $512 million invested in the stock at the end of December. The way he sees it, there is the well-known brand, the massive amounts of real estate the company owns and its online business.
In addition, Sears also has a service component to its business and long leases with Kmart. The company has additional value in the fact that it is frequently an anchor in shopping malls. Combined, these factors make Sears extremely valuable - perhaps even more valuable than many analysts say it is.
Mr. Berkowitz feels Sears is like Berkshire Hathaway - a value company that someone, in this case fund manager Eddie Lampert , tries to turn around, finds that it can't be fixed, then decides to fix what he can and sell the rest. Warren Buffett did this to Berkshire Hathaway, taking it from a textile mill to an insurance company and finally a conglomerate holding company. Berkowitz thinks that Lampert may be on the same track. For investors, getting in on the ground floor could be hugely profitable - over the long term.
AIG
Mr. Berkowitz is also a fan of American International Group AIG +2.92% . It is actually the largest holding in the Fairholme Fund. The stake was valued at $2.14 billion at the end of the third quarter. AIG has a market cap of $50.3 billion, and the US government owns 77% of the company.
While some investors may be deterred by a company that has such a high degree of government ownership, to Mr. Berkowitz, it is a positive. The way he sees it, government ownership in the company lets investors buy more at a cheaper price. He explains, "If you're truly a long-term investor, and you like to buy cheap and cheapen your value base, then the worst that could happen is you get to buy more at a cheaper price. That's the situation that we're in, and that's the reason why we bought more at a cheaper price, because of this fear. Going back, AIG, starting in this business, was the champion of the insurance business."
Mr. Berkowitz says that AIG has a tangible book value of $45 a share, which he thinks could actually be as high as $55 a share after tax-deferred assets are realized. Right now, AIG is trading at $26.68. If he is right, investors buying into AIG now could double their investment once the company rebounds.
Again, this is a long position, but for the investor who prefers that, AIG is a good buy. "A fixable problem is covering up all that's good at the company. When the problem is fixed in total, and you see the normal cash flows of the business in a more normal environment, then it will be obvious to everyone the earnings power and the balance sheet strength of the company, and many of our other companies," says Mr. Berkowitz. We think it is too early to invest in AIG. There isn't a lot of hedge fund interest in the stock. Larry Robbins' Glenview Capital is the only other hedge fund with a $100+ million position in the stock.
Bank of America, MBIA
Bank of America and MBIA Inc MBI -0.34% are also favorite picks. He had a $580 million position in Bank of America and $539 million in MBIA at the end of the fourth quarter. Like AIG, Berkowitz considers the two to be good value investments and in a good position to rebound as the financial services market enters its new cycle.
However, he has been questioned over his fund's investment in both Bank of America and MBIA because they are in the process of suing each other. Mr. Berkowitz is not fazed by this fact at all, and actually sees a major positive here. He imagines that enough time has passed that Bank of America should have high enough cash flow to afford the lawsuit.
When that happens, it will be a huge win for MBIA. The extra capital will bolster its business and help it shake off everything that has happened in recent years. It will also develop the company's reputation as one that sticks by its word.
Bank of America will likely not take a hit, but rather the conclusion of these suits will clear the way for the company moving forward. In turn, when the case is finalized and the dust clears, it will remove all the uncertainty surrounding the lawsuit, allowing both Bank of America and MBIA stock to rise.
Mr. Berkowitz also expects big things for real estate development company St Joe JOE +1.92% , Citigroup C +3.09% and Berkshire Hathaway BRK.B +1.00% . However, he cut his Citigroup stake by more than 90% during the fourth quarter. He had more conviction about Bank of America. Berkowitz also reduced his Berkshire Hathaway position significantly. Fairholme's nearly $1 billion position in Berkshire was reduced to $670 million.
We are long-term bullish about Citigroup. Berkshire Hathaway is a decent investment as well, but we don't think JOE is a good investment. David Einhorn made the case against JOE more than a year ago, and the stock significantly underperformed the market since Einhorn's presentation.
Disclosure: Meena Krishnamsetty has a long position in Citigroup.
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About Meena Krishnamsetty
Ms. Krishnamsetty is editor and co-founder of Insider Monkey, a finance website that provides free insider trading and hedge-fund stock-holdings data. Her articles draw upon the research and analytics of co-founder Dr. Ian Dogan, Insider Monkey's research director, who holds a Ph.D. in financial economics with a specialization in insider trading. Dogan has provided consulting services to institutional investors and hedge funds, and managed a $200+ million fund using a strategy he developed tracking insider transactions. Dogan authored the insider trading chapter of the soon-to- be-published “The Handbook of Investment Anomalies” by Zacks Investment Research. Prior to Insider Monkey, Krishnamsetty worked for Bloomberg Television, CNBC, NPR and in risk management at Marsh & McLennan. Krishnamsetty has an M.S. in Journalism from Columbia University’s Graduate School of Journalism.
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Article rom The Marketwatch