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Fairholme’s Bruce Berkowitz Announces New Holding Sears Canada and Increase to Leucadia

Holly LaFon

Holly LaFon

248 followers
Famed mutual fund manager Bruce Berkowitz seems satisfied with his Fairholme Fund (FAIRX)’s positioning – he made few adjustments in the fourth quarter. He made headlines in 2009 and 2010 for weighting his portfolio heavily in troubled financials, whose recovery delayed, leaving him with a year of unprecedented bad performance. In 2011, he lost 32.42%, compared to a modest gain for the S&P index.

“Staying the course” in 2012, however, earned him a 35.81% return ahead of 16% for the S&P, for the year, and well ahead for the long term – with a 11.38% average annual return since inception in 1999, versus the S&P’s 1.69%.

The fund contains 13 stocks, one more than the third quarter, with the addition of Sears Canada Inc. (SEARF)(TSX:SCC). He also added slightly to Leucadia National Corporation (LUK), and decreased his positioning in American International Group Inc. (AIG) and CIT Group (CIT).

In his fourth quarter letter, Berkowitz said he expects after the volatility for his fund to touch new highs soon. He cites positive factors in the macro environment, such as the U.S. being in its fourth year of recovery, housing prices increasing, unemployment declining and interest rates remaining at record lows.

He also believes his holdings are “cheap relative to underlying equity values – as cheap as in the beginning of 2012,” and is “bullish on America.”

New Holding: Sears Canada Inc. (PINK:SEARF)(TSX:SCC)

Berkowitz in the fourth quarter bought 6,087,327 shares of Sears Canada Inc., valued at $68.33 million, in the fourth quarter. This amounts to 1% of his portfolio, and his makes it his ninth largest holding.

Headquartered in Toronto, Sears Canada was formed in 1952, and currently owns 118 department stores, 48 free-standing Sears Home stores, 11 outlet stores, 4 floor covering centers and 4 appliance and mattress stores, along with several other types of specialty stores, services and subsidiaries.

U.S. retailer Sears (SHLD) owns a 51% stake in Sears Canada. Edward Lampert, chairman and CEO of Sears Holdings Corporation and founder of hedge fund ESL Management, owns a 27% stake in Sears Canada.

Berkowitz likely received his Sears Canada shares as part of a partial spinoff of one of his other stocks, Sears Holdings. In November, Sears Holdings distributed 44.5% of its common shares of Sears Canada to Sears Holdings common stock holders. This drained the percentage of the company it owned from 96% to 44.5%.

Sears Holdings shareholders received 0.4283 Sears Canada common shares for every share they owned of Sears Holdings, effective on Nov. 13.

According to GuruFocus global coverage, Sears Canada’s revenue per share has experienced a 5% decline rate over the past five years. EBITDA fell at a rate of 36.8%, free cash flow at a rate of 64.7% and book value at 0.5%, over the same period.

Currently, it has a 10.1 P/E, 0.87 P/B and 0.2237 P/S.

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TSX:SCC data by GuruFocus.com

Add: Leucadia National Corporation (LUK)

Berkowitz increased his position in Leucadia National Corp. by 0.35%, or 42,700 shares with an average cost of $23. After the purchase, he owns a total of 12,229,050 shares of the company, or 5% of shares outstanding.

Leucadia in November came within a dollar of its 52-week low share price.

It is a holding company with subsidiaries that span the range from beef processing to oil and gas drilling. Additionally, in the third quarter of 2012 it acquired all of Jefferies Inc. (JEF) after owning an interest for years, and eliminated its holding of Mueller Industries Inc. (MLI).

Leucadia’s revenue has been growing since 2007. In 2011, it reached $1.57 billion. Most years of the past decade the company was profitable, with the exception of a $2.5 billion loss in 2008. Cash flow is less predictable, with only three years of positive generation since 2002.

Approximately $1.48 billion in cash resides on Leucadia’s balance sheet. And, wary of leverage, it carries $1.25 billion in long-term liabilities and debt.

Helming Leucadia is GuruFocus Guru Ian Cumming, who wrote in his 2011 annual letter that, though cautious, his team is “enthusiastic about the future of our broad array of operating businesses and investments and have our eyes open for additional acquisitions.”

Cumming also noted the lack of correlation between its book value and share price growth: Though both have recovered from their Great Recession troughs, the share price has a ways to go to return to pre-recession levels, he said.

Currently, the P/E of Leucadia is 11.7, P/B is 1 and P/S is 0.89.

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LUK data by GuruFocus.com

See Bruce Berkowitz’s other fourth quarter moves and holding history in his portfolio here. Also check out the undervalued stocks, top growth companies and high yield stocks of Bruce Berkowitz.


Rating: 4.6/5 (10 votes)

Comments

The Science of Hitting
The Science of Hitting premium member - 1 year ago
I'm with him 100% on LUK - takes some faith in management (with a track record worth having some faith in), but they're clearly positioning the portfolio for the future with some recent changes. Adding JEF is just the beginning in my opinion...

AlbertaSunwapta
AlbertaSunwapta - 1 year ago
Canada's hottest real estate markets, Toronto and Vancouver are slowing (from amazing heights) so Sears spin off might have something to do with market timing and an appraisal of Canada's short term growth prospects.

A 0.35% holding change in LUK rounds down to 0%. Hardly worth mention wouldn't you say?

Disclosure: Long Canada and LUK (no Sears, yet.)
CarstenPrause
CarstenPrause - 1 year ago


Fairx's inception date was 1999 and not 2009. I also recommend Fairholme's cast studies on several of itits top holdings.
CarstenPrause
CarstenPrause - 1 year ago
Fairx's inception date was 1999 and not 2009. I also recommend the case studies on their website.

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