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Holly LaFon
Holly LaFon
Articles (7317) 

Bruce Berkowitz Sells Final Financial Crisis Bet Bank of America

Exit also narrows portfolio to several contrarian stocks

Completing his exit from Bank of America (NYSE:BAC) in the fourth quarter also erased the final holdover from Bruce Berkowitz’s famed bets on distressed financials brought to their knees in the 2008 market crisis.

The Fairholme Fund (Trades, Portfolio)s investor sold his remaining 1,713,203 shares of Bank of America in the fourth quarter for around $32 million or $19 per share. It was their highest quarterly average price since the value-oriented investor started his position in early 2010. The bank, which had 5,700 branches and 57 million customers, was trading around $18 per share.

Back then, Bank of America stock was on its way up after a staggering plunge from above $50 to around $3 per share as the financial crisis unfolded from 2007 through the spring of 2009. In a presentation, Berkowitz praised it for its “strong fundamentals” and said its bad loans were masking its strong franchises.

He also bought other stocks affected from the fallout around the same time, like CIT Group (NYSE:CIT), Citigroup (NYSE:C), and AIG (NYSE:AIG), and has since sold them all. Along with several other billionaires, he maintains an interest in the bailed-out mortgage lender Fannie Mae (FNMA), which he bought later, in 2013.

Berkowitz sold most of the Bank of America stake in the third quarter of 2016, axing 11,259,800 shares, of 86.79% of his holding. GuruFocus calculates he ended with an approximate total gain of 18% since first-quarter 2011.

Comments on Bank of America did not appear in Berkowitz’s annual letter, but he gave hints that his thesis may have matured, saying that its return on tangible assets had hit his 10% goal.

But he also had positive comments, saying that its declining net interest margins were being more than countered by improving operating efficiencies. In the past five years, Bank of America’s net interest margins have declined at a rate of 1.94% annually, and net interest income has declined at a rate of 4.26%.

Regulators gave their approval for a 50% dividend increase to 75 cents per share in 2016 and coupled with $5 million in share buybacks the bank would improve its capital allocation, he said.

Selling the bank also narrows down Berkowitz’s stock portfolio and places him in more contrarian territory. Aside from Fannie Mae holdings, he has 9% in the ailing retailer Sears (NASDAQ:SHLD) as big-box retailers faltered this earnings season, along with positions in retailers Lands’ End Inc. (NASDAQ:LE), Sears Canada (NASDAQ:SRSC) and Sears Hometown and Outlet Stores (NASDAQ:SHOS). Roughly 24% is allocated to its top positions, Florida real estate company The St. Joe Co. (NYSE:JOE).

In his 2016 Fairholme Capital Management letter, Berkowitz also disclosed bond holdings in two oil companies, Chesapeake Energy (NYSE:CHK) and Atwood Oceanics.

See the Fairholme Fund (Trades, Portfolio) portfolio here.


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GuruFocus has detected 4 Warning Signs with Bank of America Corporation $BAC.
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