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Sydnee Gatewood
Sydnee Gatewood
Articles (2485) 

Bruce Berkowitz’s Fairholme Fund Dumps Vista Outdoor in Favor of Berkshire Hathaway

Fund releases its 1st-quarter portfolio

In its portfolio for the first quarter of 2020, which was released earlier this week, the Fairholme Fund (Trades, Portfolio) disclosed it established one new position and exited another.

The fund is part of Bruce Berkowitz (Trades, Portfolio)’s Miami-based Fairholme Capital Management. As he believes that more diversified portfolios lead to more average returns, the guru invests in a handful of undervalued stocks whose underlying companies have good management teams and steady cash flow generation.

Based on these criteria, the fund entered a position in Berkshire Hathaway Inc.’s (NYSE:BRK.A)(NYSE:BRK.B) Class B stock and divested of its position in Vista Outdoor Inc. (NYSE:VSTO).

Berkshire Hathaway

After previously selling out in the fourth quarter of 2019, Fairholme picked up a new 192,100-share holding of Berkshire’s Class B stock, giving it 5.88% space in the equity portfolio. The stock traded for an average price of $225.13 per share during the quarter.

Warren Buffett (Trades, Portfolio)’s Omaha, Nebraska-based insurance conglomerate, which will stream its annual shareholder meeting this weekend, has a $451.41 billion market cap; its shares were trading around $185.46 on Friday with a price-earnings ratio of 5.59, a price-book ratio of 1.06 and a price-sales ratio of 1.39.

The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued. The GuruFocus valuation rank of 5 out of 10, however, leans more toward overvaluation even though its share price, price-earnings ratio and price-sales ratio are near multiyear lows.

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GuruFocus rated Berkshire Hathaway’s financial strength 5 out of 10. As a result of issuing approximately $677 million in new long-term debt over the past three years, the company has a low cash-debt ratio of 0.62. Its assets are also building up at a faster rate than its revenue is growing, which suggests it may be becoming less efficient.

The company’s financial strength fared a bit better, scoring a 7 out of 10 rating on the back of strong margins and returns that outperform a majority of competitors. It also has a business predictability rank of three out of five stars as Berkshire has recorded consistent earnings and revenue growth. GuruFocus says companies with this rank typically return an average of 8.2% per annum over a 10-year period.

Of the gurus invested in the stock, Bill Gates (Trades, Portfolio)’ foundation trust has the largest stake with 2.05% of outstanding shares. Bill Ackman (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Tom Russo (Trades, Portfolio), Chris Davis (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Glenn Greenberg (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss, Ruane Cunniff (Trades, Portfolio) and Wallace Weitz (Trades, Portfolio), among many other investors, also have positions in the stock.

Vista Outdoor

Having reduced its stake in Vista Outdoors over the past several quarters, the fund sold its 152,790 remaining shares. The trade had an impact of -0.20% on the equity portfolio. During the quarter, shares traded for an average price of $7.93 each.

GuruFocus estimates Fairholme has lost 11.72% on the investment since the second quarter of 2018.

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The manufacturer of outdoor sports and recreation products, which is headquartered in Anoka, Minnesota, has a market cap of $585.71 million; its shares were trading around $9.73 on Friday with a price-book ratio of 0.94 and a price-sales ratio of 0.32.

According to the chart, the stock is trading above both its median price-book and price-sales ratios, which are near one-year highs.

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Vista’s financial strength was rated 4 out of 10 by GuruFocus. In addition to weak interest coverage, the low Altman Z-Score of 1.15 warns the company could be at risk of going bankrupt since its Sloan ratio is indicative of poor earnings quality. In addition, it is becoming less efficient since the weighted average cost of capital outperforms the return on invested capital.

The company’s profitability scored a 6 out of 10 rating despite having declining margins, negative returns that underperform a majority of industry peers and recording a decrease in revenue per share over the past 12 months. Vista is also supported by a moderate Piotroski F-Score of 5, which suggests operations are stable.

With a 2.28% stake, Jim Simons (Trades, Portfolio)’ Renaissance Technologies is the company’s largest guru shareholder. Other top guru investors are Paul Tudor Jones (Trades, Portfolio), Berkowitz and Joel Greenblatt (Trades, Portfolio).

Portfolio composition and performance

Over 60% of Fairholme’s $674 million equity portfolio, which is composed of five stocks, is dedicated to the real estate sector, followed by smaller holdings in the financial services and basic materials spaces.

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The fund also has positions in The St. Joe Co. (NYSE:JOE), preferred shares of both Fannie Mae (FNMAS.PFD) and the Federal Home Loan Mortgage Corp. (FMCKJ.PFD), which is also known as Freddie Mac, and Imperial Metals Corp. (TSX:III).

In his annual letter to shareholders, Berkowitz said the fund returned 32.06% in 2019, outperforming the S&P 500’s return of 31.49%.

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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