Fairholme Funds: "BAC at these prices is a unique buying opportunity"
Berkowitz's strategy is to concentrate its investments in few companies and look for companies that are well managed with deeply undervalued stocks. His philosophy is based on Benjamin Graham's. Also, Berkowitz may invest in mediocre companies. He usually tries to take advantage of discounts in the company’s intrinsic value, something that occurs when a company has gone through a serious event. He considers that this event will certainly be solved and the market price and intrinsic value's gap will narrow sometime.
"At Fairholme, we treat common stock as the most junior bond in a company's capital structure, where the true earnings, the free cash flow of a company, are akin to a coupon without a maturity date. We get really excited when we can find more senior and secure bonds that yield better than average equity-like returns. We then compare market prices to our estimates of free cash flows, to determine an expected return on investment. Price matters and buying right is half the battle. Getting a reasonable estimate of expected free cash flow is the other half," he said.
Basically, Berkowitz is betting his whole career and track record in his view that financials will recover and current prices of stocks like AIG, C and BAC are historical buying opportunities. I think that if financial stock prices get worse than 2011, Berkowitz will be forced to shut down or reduce his funds because the accumulated losses of 2011 and another bad 2012 will be huge to recover.
Essentially, his next years are in these stocks:
American International Group Inc. (AIG): AIG is an insurance and financial services firm operating across the world. It has many branches through which it renders its services: general insurance, life insurance and financial services.
Although the company severely suffered from the last financial crisis, it is starting to recover. For instance, despite the sale of most of its life insurance opportunities, the company has expanded in Japan and in other areas.
Most importantly for investors, government has started to sell its shares and ownership thereof will be returned to equity shareholders.
I think AIG is very risky, difficult to understand kind of business. While selling insurance is stable, this company is exposed to a lot of different markets and Buffett, who is an expert in this industry, has not bought the stock even when it traded below $1.
Sears Holdings Corporation (SHLD): SHLD is one of the largest broadlines retailers in the United States. After going through reorganization proceedings, in 2005 it merged with Kmart. The company is now parent to Sears, Sears Canada and Kmart stores.
In the last years, Sears has made significant cash flow that was later used to repurchase stock and repay debt. In addition, the company has significant assets in real estate. These assets can be leveraged by means of retail partnerships, distribution and services centers and internet sales.
In Canada, Sears is performing extremely well. Given Canada´s good economic situation, Sears will definitely continue growing and making large cash flows.
Finally, Sears is making efforts to expand its brands as they have value with or without distribution in Sears and Kmart. This expansion will create more opportunities.
SHLD is a mediocre business that can easily keep going down. I do not like to buy mediocre Companies, I want leaders and potential growth, so I think that conservative investors should pass on this stock.
Brookfield Asset Management Inc. Class A (BAM): Brookfield Asset Management owns and manages commercial property, power, and infrastructure assets. The company operates across the world although it is primarily concentrated in the United States, Canada, Brazil and Australia.
What is attractive about BAM is that it is always prepared to take risks to obtain return and is focused on long-term results rather than in short. Furthermore employees are encouraged to think and act like business owners.
Berkowitz likes BAM as Horizons Kinetics and Pabrai. BAM could be a very interesting play if US housing recovers (as I think will do). It is essential to make a deep valuation of this stock and see which value the market has to all the infrastructure portfolio. It seems that great value investors put an eye on this stock.
Bank of America Corporation (BAC): BAC is a financial institution that is present in the United States and many other countries around the world. Its lending operations include consumer, small business, and corporate space and the bank includes the asset management and investment banking division.
Although mortgages will be a problem, BAC´s business segments are recovering. Bank of America has faced several headwinds given poor allocation decisions. Fortunately, its size and better regulatory scrutiny have reduced said risk.
A very hard stock to analyze. Berkowitz is convinced that BAC is a steal at the current prices. I think the stock should find a valuation floor between 6 and 7usd before going up substantially. It is a stock I will follow in 2012.
Citigroup Inc (C): Citi is a global financial services company that operates in more than 160 countries. It includes a regional consumer banking segment through which it serves commercial and consumer clients and also an institutional clients group by means of which it provides investment banking, treasury and securities services.
Furthermore, Citi is completing its participation in brokerage, asset management and consumer lending businesses that are part of its Holdings segment.
Citi will be extremely benefited from the growth in Asia, Latin America and other emerging markets. In addition, with new management Citi has been recapitalized and refocused.
Different from BAC, Berkowitz did not keep accumulating shares when C went down. He was more sure in BAC than in C.