Bruce Berkowitz is the founder and the Managing Member of the Fairholme Fund. Prior to forming Fairholme Capital Management, Mr. Berkowitz was a Managing Director of Smith Barney, Inc. from December of 1993 to October of 1997. Since inception in 1999 through the end of 2007, his Fairholme Fund has returned 17.40% annually on average. Bruce Berkowitz’s fund beat the street nine out of ten of the years from 2000 to 2009. His fund made an average excess gain of 13.86% compared with the S&P500. In 1999, if we invested $10,000 in Fairholme, and $10,000 in S&P500, our portfolio value would have tripled to $33,600 in Fairholme, and declined to $8,953 in S&P500 (Shareholder Letter 2009). Bruce Berkowitz holds interest in 30 companies with a total value of $9.97 billion with the largest investments in financials (45%).
His top five holdings include Sears, Berkshire Hathaway, The St. Joe Company, Citigroup, and Hertz Global Holdings.
According to his interview with Consuelo Mack, Bruce is a bottom-up value investor that puts his focus on domestic US-based companies. Bruce Berkowitz said Fairholme looks for companies with “fortress-like” balance sheets and ample free cash-flow. This rule does not exclude his company. Berkowitz said, “Cash is like a financial valium, that you can keep your cool during very difficult times. And of course cash is extremely valuable when no one else has it. When that situation occurs, the phone starts to ring and there are interesting propositions. We've been able to do securitized-bonds at 18% yield to maturity, again, 25 plus percent bonds. We've been able to buy large positions in companies whose management we respect, that where the prices were being decimated for no good reason at all. It's wonderful to have that flexibility, but [for us to] have the heft of that balance sheet is the safety of having that cash” (page 5). He said to keep yourself protected in these economic times is to not treat investing like Russian-Roulette—even if there is 1% chance at death out of a hundred—to put it simply, “Death is Death”.
He likes to play it safe. He gave an example: “Today you have the health insurers, where the fear is so great they’re going to be put out of business by the government, so their prices, their stock market prices have fallen off the proverbial cliff. So when you look at the prices today of a Humana or a Well Point compared to the amount of free cash that they generate, it’s a very high free cash flow yield. And it’s not because they’re making egregious profits, which they’re not. They make about a 4% profit margin which isn’t that much and is very sensible and competitive, but it’s because of the fear of their failure based upon what the current administration is going to do, allowed Fairholme to buy at
a very cheap price in relationship to those existing cash flows, which have done quite well. And then, of course, we try to kill the business, and we ask ourselves, well, if the current health insurers aren’t going to do it, who is going to do it for the country? The answer is there isn’t anyone else to do it for the country. Government is very good at printing checks, sending them out to people, but there’s no hidden department with hundreds of thousands of people ready to help with health care” (page 4).
Berkowitz makes the analogy of his devotion to long-term investments to be a lot like marriage. “It’s like the longer we can hold an investment, the better we feel that all the time and effort we put into studying a company- it’s kind of when we sell a position, I feel as if it’s divorce.”
Berkowitz admits he made a mistake selling some of his largest holdings in Berkshire Hathaway, mainly due to his cautious approach. He said, “[The] past two years, given prices and where he’s been able to buy and how much money he’s put to work and given how so many of his competitors have been weakened from this environment that this may prove to be [Warren Buffet’s] best period of all time”—a.k.a. the Golden Age of Warren Buffett.
He defended his position in Sears as a parallel for Buffett’s Berkshire Hathaway: “When Warren Buffett bought the Berkshire Hathaway textile spinning mills, they turned out to be quite a losing operation. He had a tremendous respect for the employees there. He spent years trying to make a go of it with equipment, and in the end he realized that he had to take the cash, the free cash that the operation was generating and reallocate it for higher and better uses. And that’s the way Sears is going to go” (page 6).
Gurufocus keeps track of his most current new buys in seven companies: Citigroup(C), Burlington Santa Fe (BNI), CIT Group (CIT), Comcast Special (CMCSK), Regions Financial (RF), Comcast (CMCSA), Marshall & Ilsley (MI).
Penn West Energy Trust Trust Units (PWE) PENN WEST ENERGY TRUST is a senior oil and natural gas energy trust based in Calgary, Alberta. Penn West Energy Trust Trust Units has a market cap of $9.05 billion; its shares were traded at around $21.43 with and P/S ratio of 3.6. The dividend yield of Penn West Energy Trust Trust Units stocks is 7.9%.
This quarter, the companied offered senior unsecured notes totaling $300 million. Pen West have promised its holders $0.15 per trust unit for their February cash distribution. 4Q production ratio of oil to natural gas was 3 to 2. The oil producer lost $12 million or $0.03 per share for 4Q of 2009 on unrealized risk management losses. Compared to 4Q of 2008, the company made an income of $7 million or $0.02 per share.
Bruce Berkowitz owns 15,129 shares as of 12/31/2009, which accounts for less than 0.01% of the $9.97 billion portfolio of Fairholme Capital Management.
TAL International Group Inc. (TAL) TAL International Group, Inc. is a lessor of intermodal containers and chassis. Tal International Group Inc. has a market cap of $586.4 million; its shares were traded at around $19.1 with a P/E ratio of 14.9 and P/S ratio of 1.7. The dividend yield of Tal International Group Inc. stocks is 5.2%.
The company provides international container leasing services with $1.9 billion in assets. 4Q dividend was reported to be $0.25 per share. Company financial reports show revenue decline to $72.6 million compared to $$83.6 million. 4Q TAL International earned $16.0 million or $0.52 per share, versus net loss of $15.3 million or $0.47 per share.
Bruce Berkowitz owns 2,402,742 shares as of 12/31/2009, which accounts for 0.3% of the $9.97 billion portfolio of Fairholme Capital Management. George Soros owns 24,100 shares as of 12/31/2009, which accounts for less than 0.01% of the $6.95 billion portfolio of Soros Fund Management LLC. Bruce Berkowitz is a 10% owner of TAL International. The quarter ending in February, Berkowitz sold 306,866 shares of TAL between $13.44 and $14.36.
WINTHROP REALTY TRUST (FUR) Winthrop Realty Trust is a Boston-based real estate investment trust. Winthrop Realty Trust has a market cap of $258.5 million; its shares were traded at around $12.69 with a P/E ratio of 7.7 and P/S ratio of 5.3. The dividend yield of Winthrop Realty Trust stocks is 5.2%.
The REIT reported a lower net loss of $6.0 million or $0.34 per share loss for the 4Q of 2009, compared with a loss of $52.7 million or $3.34 per share in the same period of 2008. The company reports 95% to 100% capacity for its property leases in Florida, Massachusetts, and Vermont. In January, Winthrop acquired interests in four loans for $15.6 million on a total balance of $34.8 million.
Bruce Berkowitz owns 4,297,670 shares as of 12/31/2009, an increase of 276.89% from the previous quarter. This position accounts for 0.47% of the $9.97 billion portfolio of Fairholme Capital Management.
BristolMyers Squibb Company (BMY) Bristol-Myers Squibb Company is a global leader in the research and development of innovative lifesaving and life-enhancing treatments for heart disease; high blood pressure; stroke; diabetes; cancer; HIV/AIDS and other infectious diseases; depression, schizophrenia and other mental disorders; pain; and other conditions. Bristolmyers Squibb Company has a market cap of $44.69 billion; its shares were traded at around $26.07 with a P/E ratio of 12.8 and P/S ratio of 2.4. The dividend yield of Bristolmyers Squibb Company stocks is 4.9%.
The company said their combo-drug for diabetes Onglyza is under review with the FDA. This drug is a dual venture between Bristol and AstraZeneca. FDA is also adding warning labels to one of Bristol’s highly marketed drug, Plavix. The warning labels remind users that not all patients will respond to the blood thinning drug. Bristol-Myers and Allergan agreed to head into a joint venture to develop pain medication. Bristol expects drug to make $413 million in profits.
Bruce Berkowitz owns 14,100 shares as of 12/31/2009, which accounts for less than 0.01% of the $9.97 billion portfolio of Fairholme Capital Management.
The CocaCola Company (KO) The Coca-Cola Company is the world's largest beverage company and is the producer and marketer of soft drinks. The Cocacola Company has a market cap of $124.36 billion; its shares were traded at around $53.95 with a P/E ratio of 17.6 and P/S ratio of 4. The dividend yield of The Cocacola Company stocks is 3.3%. The Cocacola Company had an annual average earning growth of 5.3% over the past 10 years. GuruFocus rated The Cocacola Company the business predictability rank of 2.5-star.
Coca-Cola plans to open new $300 million plant in Malaysia. SEC-filing reports show Coke spent $4.8 million in lobbying for the 4Q. April 22, Phoebe A. Wood will join Coke’s board of directors. CEO Muhtar Kent’s salary for 2009 was $18.8 million—16% lower than 2008’s $22.4 million. CocaCola Company plans to buy its bottling partner Coca-Cola Enterprises Inc.’s North American business. The deal will complete within the next four years.
Bruce Berkowitz owns 12,900 shares as of 12/31/2009, which accounts for 0.01% of the $9.97 billion portfolio of Fairholme Capital Management.
Pfizer Inc (PFE) Pfizer Inc is a research-based, global pharmaceutical company that discovers and develops innovative, value-added products that improve the quality of life of people around the world and help them enjoy longer, healthier, and more productive lives. Pfizer Inc has a market cap of $137.8 billion; its shares were traded at around $17.08 with a P/E ratio of 8.46 and P/S ratio of 2.76. The dividend yield of Pfizer Inc stocks is 4.22%. Pfizer Inc had an annual average earning growth of 11% over the past 10 years.
Succeeding David Brennan, CEO Jeffrey Kindler is the new chairman of the Pharmaceutical Research and Manufacturers of America. At $5million, Teva Pharmaceutical Industries (TEVA) outbid Pfizer in acquiring German generic drug-maker Ratiopharm. Pfizer drops their suit against Eli Lilly for Viagara patent rights. Canadian gene-therapy drug researcher Tekmira said they will enter into a joint venture with Pfizer to develop therapy-drug delivery molecules. Pfizer ended its Sutent lung cancer drug study-trials on disappointing results.
Bruce Berkowitz owns 93,600 shares as of 12/31/2009, a decrease of 99.87% of from the previous quarter. This position accounts for 0.02% of the $9.97 billion portfolio of Fairholme Capital Management. In his interview, Berkowitz defended his position on Pfizer. He said, “Investing is all about what you pay and what you get. And for the prices
we pay, we think the amount of cash that owners will eventually get will show a nice return in a company with solid balance-sheets, new management,” but most of all “it was really a cheap price relative to the cash flows”(page 5).