AIG Warrants (AIG.WS)
American International Group Inc. is a world leader in insurance and financial services. It is an international insurance organization with operations in more than 130 countries and jurisdictions. American International Group Inc. has a market cap of $53.18 billion; its shares were traded at around $28.04 with and P/S ratio of 0.8.
AIG is the top holding of Bruce Berkowitz, accounting for 10.76% of his portfolio. In addition to his common shares, he owns 23,722,000 AIG warrants. Technically, Berkowitz got the warrants for free, as they were issued by the company in January to existing shareholders. AIG issued the warrants in order to help recapitalize after coming to the brink of bankruptcy during the credit crisis of 2008.
The warrants are available to other investors and are listed on the NYSE. Each warrant entitles the holder to purchase one share of AIG’s common stock at an exercise price of $45 per share through Jan. 18, 2021.
Bruce Berkowitz received the warrants when they were trading around $15 per share. On Friday, AIG warrants traded for $9.14 per share.
AIG generated net income of $16.6 billion in 2010, down slightly from $18 billion in 2009. In the first quarter it lost $5.3 billion, mainly due to major expenses incurred by several natural disasters around the world. The company also had to pay the last $3.3 billion charge for paying back its debt to the Federal Reserve Bank of New York more than two years early. The government still owns more than 70% of AIG.
“If you can buy a great story name at half book value and a significant discount to tangible book value, well, what more do you need?” Berkowitz said of AIG on Bloomberg TV in June.
MBIA Inc. (MBI)
MBIA Inc. is a holding company with subsidiaries that provide financial guarantee insurance, fixed-income asset management and other specialized financial services to clients around the world. MBIA Inc. has an enterprise value of $22.5 billion; its shares were traded around $8 with a P/S ratio of 1.8.
Berkowitz has been adding to his MBIA stake since the second quarter of 2010, when the average price was $7.65. By the end of the first quarter of 2011 he owned 41,253,300 shares and average price was $11.27. Since he bought the purchase price has declined 28.7%.
Witney Tilson has made a significant profit on the price decline as he shorted the stock this year, he reported in his May letter.
The net loss to common shareholders for the first quarter of 2011 was $1.1 billion, or $5.68 per share, compared with a net loss of $1.5 billion, or $7.22 per share, in the first quarter of 2010. The net loss in the first quarter of 2011 was driven primarily by a $1.3 billion pre-tax unrealized net loss on the fair value of insured derivatives resulting primarily from an improved market perception of MBIA Corp.'s credit quality. MBIA also has a gross margin and operating margin of 74% and 32.2% respectively.
Cisco Systems (CSCO)
Cisco Systems Inc. is the worldwide leader in networking for the Internet. Cisco Systems Inc. has a market cap of $83.2 billion; its shares were traded at around $15.05 with a P/E ratio of 10.4 and P/S ratio of 2.1. The dividend yield of Cisco Systems Inc. stocks is 1.6%. Cisco Systems Inc. had an annual average earnings growth of 23% over the past 10 years. GuruFocus rated Cisco Systems Inc. the business predictability rank of 2.5-star.
Berkowitz bought shares of Cisco for the first time at about $19.50 per share in the first quarter 2011. The price has since declined 22.8% to $14.97. He owns 35,818,600 shares.
Cisco is a stock many gurus are piling into. In mid-2000, near its peak, Cisco traded around 120 times earnings and had the second largest market cap of any company in the United States at over $500 billion. Today its market cap is much smaller, but is still double that of its top 11 North American competitors.
Cisco is planning possibly the biggest round of layoffs in its history, cutting up to 4,000 jobs in an attempt to cut costs by $1 billion. It has maintained steady free cash flow and net income in the last several years. In 2010 it generated $9.2 billion, increased from $8.9 billion in 2009. Net income was $7.8 billion, also up from $6.1 billion in 2009. Nevertheless, on Cisco’s third-quarter 2011 conference call, CEO John Chambers said of earnings, “As a result, while Q3 met expectations, Q4 will continue to show weakness, while we do hard work behind the scenes to be able to execute these changes. And we will provide for Q4 guidance that reflects that lag.”
Chambers also noted that it will have to overhaul its business dramatically to maintain its market position, which will take time.
Citigroup Inc., the global financial services company, has some 200 million customer accounts and does business in more than 100 countries, providing consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, and wealth management. Citigroup Inc. has a market cap of $109.35 billion; its shares were traded at around $37.63 with a P/E ratio of 12.1 and P/S ratio of 1.3. The dividend yield of Citigroup Inc. stocks is 0.1%.
Citigroup is the fourth largest holding of Bruce Berkowitz. He bought 2,130,560 shares in the first quarter at an average price of $47.20 per share. The share price has declined 20.4%, and investors can now buy Citigroup stock for about $38.27.
The bank’s share price continues to fall due to various factors, including uncertainty as to when the financial sector will rebound and the ramifications of the end of QE2. Nobody can say for sure when bad loans will be off of the bank’s books, either.
“How can you not buy companies selling tangible book value that are essential to the country?” Berkowitz said of his financial stocks in a June interview with CNBC.
Citigroup generated $35 billion in free cash flow in 2010, dramatically increased from a loss of $50 billion in 2009. Net income was also up to $10.6 billion from a net loss of $1.6 billion in 2009. Citicorp end of period loans grew 10% year over year, with 6% growth in consumer loans and 16% growth in corporate loans.
The Goldman Sachs Group Inc. (GS)
Goldman Sachs is a global investment banking and securities firm, providing a full range of investing, advisory and financing services worldwide to a substantial and diversified client base, which includes corporations, financial institutions, governments, and high net worth individuals. The Goldman Sachs Group Inc. has a market cap of $70.46 billion; its shares were traded at around $136.09 with a P/E ratio of 12.3 and P/S ratio of 1.8. The dividend yield of The Goldman Sachs Group Inc. stocks is 1%. The Goldman Sachs Group Inc. had an annual average earnings growth of 9.8% over the past 10 years.
Bruce Berkowitz bought Goldman Sachs stock in the first quarter 2011 at $164.50 per share, and it has since declined 17.3% to $137.23. He has owned shares since the second quarter of 2010, when he paid approximately $148.40 per share.
Goldman Sachs had net income of $8.4 billion in 2010, down from $13.4 billion in 2009, but strong compared to its previous years. Operating earnings, which some analysts say are a good indicator of whether a bank is improving, have fallen every year since 2007, amounting to $19.7 billion in 2010.
The New York Times reported that Goldman plans to cut 10% or $1 billion of noncompensation expenses over the next 12 months, which will include layoffs.
The firm’s non-compensation expenses for the first quarter 2011 also increased 23% since the quarter prior. The increase compared with the first quarter of 2010 reflected the impact of impairment charges of approximately $220 million related to assets classified as held for sale during the first quarter of 2011, primarily related to Litton Loan Servicing LP, the firm’s residential mortgage servicing subsidiary. The remainder of the increase compared with the first quarter of 2010 generally reflected increased levels of business activity, including higher operating expenses related to the firm’s consolidated entities held for investment purposes. The first quarter of 2011 also included net provisions for litigation and regulatory proceedings of $24 million.
You can find more Bargain Candidates of Bruce Berkowitz or any other guru that we track at GuruFocus in our newly released GuruFolio Report. Premium members can download these reports for free; non-members can buy them for $9.99 per report.