Fairholme’s Bruce Berkowitz gave a speech in the newly held Value Investing Congress and answered many questions from the attendants. Thanks to Ben Claremon (see his blog Inoculated Investor, we can have the full notes to Berkowitz’s speech:
Ben's complete notes for the Value Investing Congress can be access here.
By the way, Ben is a UCLA Business School student and he is looking for a summer intern opportunity. If you are in a position to help, click here for details.
Without much surprise, Berkowitz’s quarter-end portfolio is full of financials:
No. 1: Sears Holdings Corp. (SHLD, Financial), Weightings: 15.2% - 14,714,071 Shares
Sears Holdings Corporation, the parent of Kmart and Sears, Roebuck and Co. Sears Holdings Corp. has a market cap of $11.72 billion; its shares were traded at around $102.01 with a P/E ratio of 29.7 and P/S ratio of 0.3. Sears Holdings Corp. had an annual average earning growth of 13.6% over the past 5 years.
Berkowitz sold 240,000 shares of SHLD during the quarter. Berkowitz held this stock for a long time, you can find his holding history by clicking on the “History” button on the SHLD row of Berkowitz’s portfolio holding.
No. 2: Citigroup Inc. (C, Financial), Weightings: 8.78% - 227,460,600 Shares
Citigroup Inc., the global financial services company, has some two hundred million customer accounts and does business in more than hundred countries, providing consumers, corporations, governments, and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, and wealth management. Citigroup Inc. has a market cap of $106.22 billion; its shares were traded at around $3.73 with and P/S ratio of 1.2.
Berkowitz bought 13 million shares of Citigroup shares during the quarter. You can find his holding history by clicking on the “History” button on the row of Citigroup symbol “C” of Berkowitz’s portfolio holdings.
No. 3: The St. Joe Company (JOE, Financial), Weightings: 8.26% - 26,799,155 Shares
St. Joe Company is one of the Southeast's largest real estate operating companies. The St. Joe Company has a market cap of $2.68 billion; its shares were traded at around $28.95 with and P/S ratio of 19.3.
Berkowitz sold 33,000 shares of St. Joe Company shares during the quarter. You can find his holding history by clicking on the “History” button on the row of The St. Joe Company of Berkowitz’s portfolio holdings.
No. 4: Humana Inc. (HUM, Financial), Weightings: 7.04% - 15,798,900 Shares
Humana, Inc. is a health services company that facilitates the delivery of health care services through networks of providers to its medical members. Humana Inc. has a market cap of $7.86 billion; its shares were traded at around $46.2 with a P/E ratio of 7.6 and P/S ratio of 0.3. Humana Inc. had an annual average earning growth of 23.5% over the past 10 years. GuruFocus rated Humana Inc. the business predictability rank of 3.5-star.
Again, Berkowitz sold a small portion of his position in the stock. You can find his holding history by clicking on the “History” button on the row of Humana Inc. of Berkowitz’s portfolio holdings.
No. 5: AmeriCredit Corp. (ACF, Financial), Weightings: 6.94% - 30,673,922 Shares
AmeriCredit Corp. is a independent automobile finance company that provides financing solutions indirectly through auto dealers and directly to consumers in the United States and Canada. Americredit Corp. has a market cap of $2.94 billion; its shares were traded at around $21.97 with a P/E ratio of 18.1 and P/S ratio of 1.4.
Berkowitz sold about 5 million of shares of the stock. You can find his holding history by clicking on the “History” button on the row of AmeriCredit of Berkowitz’s portfolio holdings.
No. 6: Bank of America Corp. (BAC, Financial), Weightings: 6.69% - 39,309,900 Shares
Bank of America Corp. is one of the world's financial services companies. Bank Of America Corp. has a market cap of $138.12 billion; its shares were traded at around $15.95 with and P/S ratio of 0.9. The dividend yield of Bank Of America Corp. stocks is 0.2%.
Berkowitz bought a large position of 39.3 million in the stock. You can find his holding history by clicking on the “History” button on the row of Bank of America of Berkowitz’s portfolio holdings.
Conclusion
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and Bruce Berkowitz for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.
Speaker # 4: Bruce Berkowitz of Fairholme Capital “Back to the Future”
Bruce recently learned something very important: everyone needs a Munger. Munger has all the symbolic logic and thinks in terms of contingencies. Denial and death and envy are important concepts. Munger is living proof that you can get older and can get smarter. The knowledge is cumulative. You can get better as you get older. Munger’s career shows how important it is to have cash.
Back to the Future:
It’s about counting the cash and following the cash. It’s about the past and understanding history: déjà vu all over again. We have seen the same financial conglomerates come back after the model had failed in the past. Financial services and banks right now are about pigs in the python. The pig is bad debt and the python is the institution. It’s all about leverage, liquidity and the kindness of strangers. It’s about average lives and torture in the financial services industries. It’s about the government at its best. Bruce was really impressed with how they have handled financial services industry.
Today is different than the 1990s when it comes to financial services. Fairholme is in a lot of cash and short term bonds (30%) and he thinks this is a good time to be in some cash. They are the largest owners of Regions Financial, CIT, and AIG (other than the US government). They have gigantic stake in Goldman Sachs and are involved with real estate companies General Growth and St Joe.
Question: How did he become Morningstar manager of the decade?
You have got to get lucky. The trick in life is not to make the same mistake twice. He has avoided mistakes that he would have made a decade earlier. He started in the financial services industry and this time he waited to jump back into that sector. He has a big firm with great people who focus more on not losing rather than making a lot of money. They don’t get caught up in denial. He believes that you have to put yourself in the shoes of your shareholders and owners by putting your money on the line with your investors.
Question: Any comments on Fortescue and general iron ore trends?
Fortescue was a fabulous investment for Leucadia. He has liked Fortescue at a certain price. From here on out it is going to be too easy for governments for trying to get a big piece of the pie (royalty tax in Australia as an example) and resource companies can be very easy targets
Question: What’s his current stance on Wellpoint and health insurers?
First off, he is getting older and will need them more. People want to live to 100 but they don’t want t pay for health insurance. Health insurers are the bad boys and girls on the street even though they represent a small portion of the health care industry. There is lots of friction in the health insurance industry. He used to like them because they were defensive. But the real question is who is going to do it other than them? Not the government. Wellpoint has a great franchise but they also like Humana. They like the Medicare Advantage and Medicaid businesses because they got killed as everyone stared to hate these businesses.
Question: They recently started a focused credit fund. Why is it attractive? How are valuations?
He has a rule: they only do for themselves what they do for clients. He never gets too emotionally involved in the investment process. They had a lot of money in T-bills and when he saw value higher in the company capital structure, he saw attractive returns for a fund focused on income.
Question (by Marcelo Lima): You have a small staff at Fairholme and move around between sectors. How do you do diligence in so many names and sectors with such a small staff? [i][/i]
Everyone worries about too having many assets under management. One of the big problems arises when you become a manager of people rather than managers of investments. This is the first step towards financial death. You have to keep your firm small. You can’t hire all the best experts because when you switch sectors then you can’t fire them. So, they use consultants instead of analysts. This not usual in the mutual fund world. The US treasury and Fed pays the best bank analysts in the world at those institutions.
They have access to professionals and consultants that have on the ground knowledge. They hire lots of people from the outside and ask them to tell Fairholme where they are screwing up. This makes for a much more efficient organization and an easier life.
Question: Why did he stop liking Pfizer?
Recurring, non recurring expenses were the reason for exiting the position for the most part. He likes the people and the stock was cheap enough, relative to past valuations. But, these expenses started to bother him. They started to be real expenses. Accordingly, their cash earnings metric seemed arbitrary, even though the entire industry behaves like that. They have legal expenses in this business and he thought they had to count them as recurring. When they went into health care they thought it was a good defense. But, he said that the only good hedge is in a Japanese garden because when things go bad all correlations go to one.
Question: Tell us more about St. Joe since you own almost 30%.
He believes that they bought the stock for swamp land prices. There is a misperception out there. Smart people were short this but if you go there you see how great the land is there. A new Southwest hub is about to be opened there. The infrastructure is good. Tax dollars were at work and seemed to have been well spent. This land represents the last open place left in Florida, a state with no state taxes. For the 1st time you are going to be able to land within 10 miles of the Gulf Coast, even though the project is 15 years late. The 10,000 foot runway means that you can land anything there. The BP oil spill may have been killing the stock but the necessary cleanup is going to be like a full employment act for North Florida.
Question: Can you walk us through the AIG valuation?
The main analyst on this position is the Government Accountability Office (GAO). They have been studying AIG every 2 months and Fairholme is going by what the GAO reports. The GAO thinks AIG is going to make a profit on selling subsidiaries. The Chartis (P&C business) is intact. The Old Sun America is still in existence. Other assets are worth more than what is on the books. Financial products may be up as Maiden Lane 2 asset prices are up [with those assets being used as a barometer to value similar AIG assets].
Is there one insurance company that is doing in business in the US that is owned by a foreign government? This is a regulated business so he assumes that the government is the 80% owner but how are they going to perform? Can the company die? He doesn’t think so. At the price they bought it at, they are probably not going to get hurt. They are a major owner of the convertible preferred. They are up and down in the capital structure. AIG is a great insurance company. He likes being a partner with the government. In fact, he thinks the government has saved us. But the government doesn’t want to be in the insurance business. They want to make a few bucks and pay taxpayers back.
Question: St. Joe Management has been great. But how do you see actual cash flow being produced in our lifetimes?
Maybe we won’t but Fairholme won’t lose anything. They like the new management team. The strategy is do no harm. Where we are in the real estate cycle, there is nothing else he can do. There are a lot of interesting places to invest in real estate. They don’t think they will lose any money in this position. They bought it for a swamp land prices. But it could take a while for the story to play out though. So it might be his kids who benefit.
Question: General Growth (GGP, Financial)--can you talk about this investment?
Fairholme has the cash to help companies rebuild their balance sheets. He is hoping that they can help all the parties recover (up and down the capital structure). He started off thinking that the bonds were money good. Today, they would like to take their bonds, add $2.8 billion and turn it into equity. The $2.8 billion check is burning a hole in his pocket. If this deal goes through, everyone gets paid and moves forward. The bankruptcy judge is very smart. He thinks that this is a win-win- situation; rising from the ashes and allowing the company to move forward.
[b]Question: Simon’s increased bid? Would the Brookfield group (including Berkowitz), raise their bid?[/b]
He said no way. His shareholders would kill him. The company will come out of bankruptcy and they hope to be a long term shareholder.
Question: He says there are lots of good ideas out there, but he is in 30% cash. How does that work?
He always has cash. It is his biggest nightmare to have no cash. As long as you have cash and you know what you are doing, you are going to be alright in this world. He assumes that his shareholders could need cash. He needs to worry about need to liquidity, correlations between assets and commitments to companies, etc. Cash sometimes looks as though it is worthless but he believes it is very valuable. 90% of the time Fairholme is in 10-20% cash. It is a little higher (2x the normal level) than in the past. There is plenty to buy but their size only allows them to buy large. He can only put 4.9% of assets into a broker dealer. They are constrained and sometimes when things are different constraints can be a good thing [the implication was that it helps with investment discipline].
Question: Why did he buy Goldman Sachs (GS, Financial)?
He just doesn’t get the case-- the SEC’s case. Everybody knew everything and knew what was going to go where and when. It was a pretty common transaction. It will be a painful process. But they don’t seem to have done anything different than anyone else was doing. The main question is whether these synthetic CDOs have any merit to society. Thinks GS is a great firm with great people whose franchise is still intact. But this is a case of the few versus the many. Why should so many suffer because a mistake is made by a few? He thinks GS has a level of behavior and ethics that is quite good. He told us to go to the website and see what requirements and standards they have for interns. They tell people how to they should behave. You may think it is BS but he has never seen anything like it at another firm.
Ben's complete notes for the Value Investing Congress can be access here.
By the way, Ben is a UCLA Business School student and he is looking for a summer intern opportunity. If you are in a position to help, click here for details.
Without much surprise, Berkowitz’s quarter-end portfolio is full of financials:
| Industry | 2009-12-31 | 2010-03-31 |
|---|---|---|
| Financials | 44.9% | 57.8% |
| Consumer Services | 23.9% | 25.8% |
| Health Care | 18.8% | 9.3% |
| Consumer Goods | 0% | % |
| Industrials | 11.9% | 6.6% |
No. 1: Sears Holdings Corp. (SHLD, Financial), Weightings: 15.2% - 14,714,071 Shares
Sears Holdings Corporation, the parent of Kmart and Sears, Roebuck and Co. Sears Holdings Corp. has a market cap of $11.72 billion; its shares were traded at around $102.01 with a P/E ratio of 29.7 and P/S ratio of 0.3. Sears Holdings Corp. had an annual average earning growth of 13.6% over the past 5 years.
Berkowitz sold 240,000 shares of SHLD during the quarter. Berkowitz held this stock for a long time, you can find his holding history by clicking on the “History” button on the SHLD row of Berkowitz’s portfolio holding.
No. 2: Citigroup Inc. (C, Financial), Weightings: 8.78% - 227,460,600 Shares
Citigroup Inc., the global financial services company, has some two hundred million customer accounts and does business in more than hundred countries, providing consumers, corporations, governments, and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, and wealth management. Citigroup Inc. has a market cap of $106.22 billion; its shares were traded at around $3.73 with and P/S ratio of 1.2.
Berkowitz bought 13 million shares of Citigroup shares during the quarter. You can find his holding history by clicking on the “History” button on the row of Citigroup symbol “C” of Berkowitz’s portfolio holdings.
No. 3: The St. Joe Company (JOE, Financial), Weightings: 8.26% - 26,799,155 Shares
St. Joe Company is one of the Southeast's largest real estate operating companies. The St. Joe Company has a market cap of $2.68 billion; its shares were traded at around $28.95 with and P/S ratio of 19.3.
Berkowitz sold 33,000 shares of St. Joe Company shares during the quarter. You can find his holding history by clicking on the “History” button on the row of The St. Joe Company of Berkowitz’s portfolio holdings.
No. 4: Humana Inc. (HUM, Financial), Weightings: 7.04% - 15,798,900 Shares
Humana, Inc. is a health services company that facilitates the delivery of health care services through networks of providers to its medical members. Humana Inc. has a market cap of $7.86 billion; its shares were traded at around $46.2 with a P/E ratio of 7.6 and P/S ratio of 0.3. Humana Inc. had an annual average earning growth of 23.5% over the past 10 years. GuruFocus rated Humana Inc. the business predictability rank of 3.5-star.
Again, Berkowitz sold a small portion of his position in the stock. You can find his holding history by clicking on the “History” button on the row of Humana Inc. of Berkowitz’s portfolio holdings.
No. 5: AmeriCredit Corp. (ACF, Financial), Weightings: 6.94% - 30,673,922 Shares
AmeriCredit Corp. is a independent automobile finance company that provides financing solutions indirectly through auto dealers and directly to consumers in the United States and Canada. Americredit Corp. has a market cap of $2.94 billion; its shares were traded at around $21.97 with a P/E ratio of 18.1 and P/S ratio of 1.4.
Berkowitz sold about 5 million of shares of the stock. You can find his holding history by clicking on the “History” button on the row of AmeriCredit of Berkowitz’s portfolio holdings.
No. 6: Bank of America Corp. (BAC, Financial), Weightings: 6.69% - 39,309,900 Shares
Bank of America Corp. is one of the world's financial services companies. Bank Of America Corp. has a market cap of $138.12 billion; its shares were traded at around $15.95 with and P/S ratio of 0.9. The dividend yield of Bank Of America Corp. stocks is 0.2%.
Berkowitz bought a large position of 39.3 million in the stock. You can find his holding history by clicking on the “History” button on the row of Bank of America of Berkowitz’s portfolio holdings.
Conclusion
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and Bruce Berkowitz for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.
