The Fairholme Fund (Trades, Portfolio)’s founder and portfolio manager Bruce Berkowitz (Trades, Portfolio) has revealed the fund has drastically boosted its holding of Berkshire Hathaway Inc. (BRK.B, Financial) in the second quarter.
After is foundation in 1999 by Berkowitz, the fund saw massive gains over the S&P 500 for the first 10 years of its existence. The fund operates on a quarterly basis and is separate from the other accounts and funds managed by Berkowitz. Berkowitz concentrates his investments in a small number of companies and looks for good management and solid cash flow.
Portfolio overview
The portfolio contains five stocks, with Berkshire Hathaway being the newest addition to the portfolio in the first quarter of this year. The portfolio is currently valued at $674 million and has seen turnover of 6%.
The top holdings in the portfolio are The St. Joe Co. (JOE, Financial), Federal Home Loan Mortgage Corp. (FMCKJ.PFD, Financial), Fannie Mae (FNMAS.PFD, Financial), Berkshire Hathaway Inc. and Imperial Metals Corp. (TSX:III, Financial).
By weight, the portfolio is most invested in the real estate (66.66%), financial services (31.94%) and basic materials (1.41%) sectors.
Berkshire Hathaway
The fund saw the addition of 56,000 shares for an increase of 29.15% to the holding. The addition came on the heels of its addition to the portfolio in the first quarter after being sold in 2019. The shares were purchased around an average price of $183.68 and represented an impact of 1.62% on the equity portfolio overall. GuruFocus estimates the total gain at 4.68% over the lifetime of the holding.
On Aug. 4, Berkshire Hathaway was trading at $199.89 with a market cap of $485.63 billion. The Peter Lynch chart shows the stock traded close to intrinsic value from 2010 to 2018 before seeing some large spikes.
GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 6 out of 10 and a valuation rank of 2 out of 10. Two severe warning signs are issued for new long-term debt and assets growing faster than revenue growth. While debt has grown in the last several years, the company has grown cash levels and saw a spike in net income in 2019.
Berkowitz had the following to say about Berkshire Hathaway in the Fairholme Fund’s 2020 semiannual shareholder letter:
"Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) is trading near book value, which Warren Buffett (Trades, Portfolio) believes greatly underestimates fair market values. Berkshire is the 800-pound gorilla in insurance. Market participants perceive Covid-19 claims may bankrupt insurers. There will be significant costs and hits to portfolio companies. But, most insurance policies exclude pandemics and premiums are rising faster than risks. Meanwhile, Berkshire continues to invest no-cost insurance “float” in guaranteed cost-plus utilities and other critical enterprises. This makes sense when the Federal Reserve pays 0.25% and European Central Bank charges 0.50% to hold bank cash."
Alongside other affiliates, Berkowitz maintains ownership of 23.8% of the Fairholme Fund and remains “optimistic about the future.”
Disclaimer: Author owns no stocks mentioned.
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