AIG is Berkowitz’s largest holding, at 41.1% of his portfolio. He owns a total of 87,987,894 after unloading some shares over the previous three quarters. He made his largest purchase in the second quarter of 2011 with 58,966,502 shares at an average price of $30.50, near the bottom.
AIG significantly weighed down Berkowitz’s returns in 2011, plunging 62.3% that year. But to date in 2012, AIG is up 50% to trade for nearly $35 a share.
American International Group is the multinational insurer that would have collapsed – and potentially sparked the collapse of the entire U.S. financial system – during the financial crisis of 2008 due to what Federal Reserve Chairman Ben Bernanke called “irresponsible bets” if not for a $182 billion bailout from the Federal Reserve and Treasury Department.
In the second quarter, AIG reported its third consecutive quarter of earnings, with revenue down both sequentially and year-over-year. That quarter the company successfully paid off its Maiden Lane III loan from the Federal Reserve Bank of New York. It also bought back $2 billion of its shares from the U.S. Treasury, which held a stock offering of 189 million AIG shares in May, gaining proceeds of $5.7 billion.
Berkowitz commented on AIG in his second quarter letter:
“Our best idea remains AIG (AIG) common (35% of the Fund) with a reported book value of $57 per share. There are few occasions when systemically important franchises sell for half of book value and are profitable. This is one of those times. AIG warrants held by the Fund (another 3% of the Fund) provide the right to 21+ million shares at $45, or maybe more shares at lower strike prices for the next 34 quarters if dividends above $0.675 per trailing 12-month period are paid.”
Sears Holdings Corporation (SHLD)
Berkowitz owns 16,829,880 shares of Sears Holdings, after adding 16,400 shares at an average price of $55 in the second quarter. It is 14.6% of his portfolio and 15.81% of the company.
Sears has also had a better year so far. Since the beginning of the 2012, Sears’ stock price has gone up 64%. In 2011, the story was quite different. Sears’ shares plummeted about 57%.
Sears is a retailer with 3,900 stores in the U.S. and Canada that noted hedge fund manager Eddie Lampert has been trying to turn around. In four of the last five quarters, the company has reported losses as the company continues to implement new changes. “Our poor financial results in 2011, culminating in a very poor fourth quarter, underscore the need to accelerate the transformation of Sears Holdings,” Lampert said in the company’s 2011 letter. In August 2012, the S&P 500 delisted the company due to the “small public float,” though the stock has been one of its top performers.
In August, Berkowitz posted a Case Study on Sears in which he argued that the recent market price was not equal to the company’s intrinsic value. Key assets for Sears include: real estate, operations, top brands, leadership, liquidity and catalysts. He explains each in detail here.
Berkowitz also commented on the company in his second quarter letter:
“Sears Holdings (SHLD) (11% of the Fund) is one of the largest corporate real estate organizations in the world, with a portfolio of retail locations that is second to none. Generally Accepted Accounting Principles ("GAAP") mandate valuing their real estate at the lower of cost or market. GAAP would force the Dutch settlers to value Manhattan today at the 1626 purchase price of $23.70. The company's reported book value of $43 understates real values.”
Bank of America (BAC)
Berkowitz owns 101,700,355 shares of Bank of America, his third largest holding. The stock has also progressed this year, going up 43% year to date. It will have to increase further for Berkowitz to realize gains, however, as he purchased most of his shares in the mid-to-high teens and shares trade for about $8 on Wednesday.
Berkowitz commented on the holding in his second quarter letter: “Bank of America (BAC) is the Fund's next largest financial holding (9% of the Fund) affected by the great housing price collapse. The company's reported book value is over $20 per share. We believe that America's bank is returning to its retail roots (think of Wells Fargo) with a $1 trillion deposit franchise and that bank profits will skyrocket as legacy real estate loans burn-off.”
Most of the other stocks rounding out Berkowitz’s top 10 have gained in 2012, with a few down slightly. Even St. Joe (JOE) is up over 30%.
Overall, the Fairholme Fund (FAIRX) is up 30.8% year to date. By comparison, the S&P is up 13.38%.
See Bruce Berkowitz’s portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Bruce Berkowitz.