Bruce Berkowitz’s last five years can be summed up as initial losses on massive early bets on troubled financials and subsequent incredible gains on the same financials, but now he is finally making a slight change in direction. His second quarter portfolio, released today, shows that while he held on to most of his firm’s largest holdings, he bought three new ones for the Fairholme Fund: Fannie Mae (FNMA), Federal Home Loan Mortgage Corp. (FMCC) and Chesapeake Energy Corp. (CHK).
Fannie Mae (FNMA)
Berkowitz purchased 7,042,000 shares of Fannie Mae in the second quarter. The stock had an average price over the quarter of $1.38, but the price fluctuated significantly:
Fannie Mae is a government-sponsored enterprise that was chartered by Congress in 1938 to support liquidity, stability and affordability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold. Fannie Mae has a market cap of $1.8 billion; its shares were traded at around $1.55 with a P/E ratio of 11.30 and P/S ratio of 0.40.
Berkowitz commented on his Fannie Mae and Freddie Mac Investments in his second quarter letter:
The Fund's latest investments in the recovery of homeownership are in the preferred stocks of Fannie Mae and Freddie Mac. Your current mortgage may be backed by Fannie or Freddie – about 60% of new mortgages are. Millions of families depend on them to lower the costs and increase the availability of homeownership. In times of stress, Fannie and Freddie stand to ensure the continued functioning of our housing market. Their twelve thousand employees do yeoman's work helping to preserve a cornerstone of the American dream.
The Fund was able to purchase the preferred stocks of Fannie and Freddie near one-fifth of liquidation values – a significant bargain thanks to market predictions of U.S. Government agencies expropriating their assets. we see them differently. Fannie and Freddie are successful, publicly traded, shareholder-owned companies just like AIG and Bank of America. Shifting political winds can change their futures, but not alter their pasts.
The Fund has filed complaints in the court of Federal claims and the U.S. District court in washington. In our suits, we seek nothing more than the enforcement of existing contractual rights, which require the payment of dividends to Fannie and Freddie preferred shareholders. our arguments are based on fundamental principles. In America, property ownership is a sacrosanct freedom, guaranteed by our Constitution. In America, we follow the rule of law, not the rule of the crowd. In America, profitable companies honor contracts.
Below is Fannie Mae’s revenue and earnings history:
Federal Home Loan Mortgage Corp (FMCC)
Berkowitz bought 7,218,200 shares of Federal Home Loan Mortgage Corp in the second quarter, representing 0.23% of the Fairholme Fund portfolio. The stock’s average price for the quarter was $1.30 per share.
Freddie Mac was chartered by Congress in 1970 with a public mission to stabilize the nation's residential mortgage markets and expand opportunities for home ownership and affordable rental housing. Federal Home Loan Mortgage Corp has a market cap of $942.6 million; its shares were traded at around $1.45 with a P/E ratio of 72.10 and P/S ratio of 0.30.
The company’s revenue and earnings history:
Chesapeake Energy Corp (CHK)
For Berkowitz’s largest new position he bought 3,194,200 shares of Chesapeake Energy for $20 per share on average, representing 1.1% of the portfolio. The stock has since gained 23% and trades for $24.95 Friday.
Chesapeake Energy Corp was incorporated on 1989. Chesapeake is a natural gas and oil exploration and production Company engaged in the exploration, development and acquisition of properties for the production of natural gas and crude oil from underground reservoirs and it provides marketing and midstream services. Chesapeake Energy Corp has a market cap of $15.5 billion; its shares were traded at around $24.91 with a P/E ratio of 27.10 and P/S ratio of 1.20. The dividend yield of Chesapeake Energy Corp stocks is 1.40%.
Cheapeake’s revenue and earnings history:
Fellow investor John Rogers of Ariel Investments who also owns Chesapeake shares commented on the company in his first quarter 2013 investor letter:
Specifically, Chesapeake Energy Corp. (CHK), a holding in some of our other portfolios, priced a joint venture at prices roughly 35% lower than recent transaction values for similar land. The deal implied low prices for deals across the space, hitting Contango's stock. Many believe the company's sale is imminent, and while it is reasonable to assume it could be, we do not believe management would sell its unencumbered assets on the cheap when they can afford to wait. As patient investors, that is what we would do, and we count their team as fellow travelers.