Bruce Berkowitz has achieved enormous success as an investor and is considered by many to be the best mutual fund manager today. Up until recently, Berkowitz invariably chose stable, high-quality companies – a strategy that paid off for him. His Fairholme Fund had average annual returns of 25.47% in 2010 versus the S&P 500’s 15.06% and 39% in 2010 versus the S&P’s 26.5%.Over the last five years, he managed returns of 9.97% versus the S&P’s 2.29%. His five-year cumulative return of 60.80% trounced the S&P’s 11.99%. However, in 2010 he departed from his forte and began adding stocks of distressed companies, which has hurt his portfolio – in the first quarter of 2011, his fund declined -2.30%.
2009
For most of his career, Berkowitz has avoided investment opportunities with above average risk. He rarely engaged in arbitrage, never went short on any stocks, and avoided bankrupt or distressed companies. “My ability to predict is still near zero and I’ve always acted based upon the free cash flow of companies relative to the price that they are in the marketplace,” he said in a 2008 conference call with investors. In 2009, his record-breaking year of 39% returns, Berkowitz’s top holdings matched those criteria: Pfizer (PFE, Financial), Sears Holdings (SHLD, Financial), and Forest Laboratories (FRX, Financial). Each of these stocks rose in the first quarter of 2011, although only one remained in the top-five holdings of his portfolio.
Pfizer, his top holding in 2009, has solid financials and consistent cash flow. From 2007-2010 its net income was approximately $8 billion each year. When he sold most of his stake in March 2010, he gave an interview to Morningstar saying he didn’t look at Pfizer as a loss, but “nothing to write home about either.” Of post-Pfizer investments he said, “We’re going to go with the best possible risk/reward ratio.”
Berkowitz sold out of Pfizer at $17.17 per share. In the first quarter of 2011, Pfizer stock rose almost 15% and is at $20.89 as of April 29, 2011.
His second largest stake in 2009, Sears Holdings, is now the fifth largest stake in his portfolio as of March 31, 2011. Sears has been profitable every year after 2004 when it lost $614 million dollars, although it had two negative quarters in 2010. Its earnings grew 4% in the last 12 months. In the first quarter of 2011, its stock price rose approximately 14%. The chairman of Sears, Eddie Lambert, is a GuruFocus guru as well.
Berkowitz sold out of his third largest holding, Forest Laboratories, in the first quarter of 2010. Forest Laboratories had earnings growth of 8.6% in the last 12 months, and has had steady net income for the last ten years. In the first quarter, its stock rose 3.75%.
Another notable aspect of his portfolio in 2009 was that he completely sold out of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), one of the most financially sound companies in the world, in the first quarter. Berkowitz told investors in a February 2009 conference call that he abandoned Berkshire because Warren Buffett stated it would not likely beat the S&P by more than 2% in the near future. By the next quarter, he was back to accumulating Berkshire shares and continued in subsequent quarters until he had an even greater stake than previously. In the fourth quarter of 2010 he bought 2,102,700 shares for a total of 6,843,300. Berkshire’s stock price increased from $56.54 at the time he sold out, to $81.17 in the fourth quarter of 2010. Having Berkshire in his current portfolio helped it – in the first quarter of 2011, the stock was up 4.39%.
2010-2011
The tagline of Berkowitz’s Fairholme Fund is “Ignore the crowds.” Berkowitz has bucked the crowds often, but usually within his classic arena of companies with strong financials. In 2010, he began shifting his focus from good companies at low prices to distressed companies at low prices – most notably, his stake on St. Joe’s (JOE, Financial), a small Florida real estate firm. Berkowitz’s association with St. Joe’s dates back to the fourth quarter of 2007, when he bought 3,604,200 shares at $31.47 per share. Since then he has increased his stake to 26,788,120 shares, while the stock price has declined to just over $26 per share.
St. Joe reflects a marked divergence from the type of companies that were in Berkowitz’s 2009 top holdings. In the past 12 months, St. Joe’s revenue has declined 30.5%, and it has not had positive net income since 2007.
St. Joe’s value hinges on its ability to be profitable in the future. Currently, It has 576,000 acres of land in the Florida panhandle of disputed worth and no debt, but has stagnated since the housing crisis. In the first quarter of 2011, its stock fell approximately 3%.
In 2007 and 2008, when banks were faltering, Berkowitz had next to no financials in his portfolio. Around 2009, at their nadir, he began initiating positions in the financial sector because he believed banks were out of danger. “They’ve battled hard, and it’s a trite saying, but whatever doesn’t kill you makes you stronger is quite true. And for those financial institutions still standing, and the ones we’ve invested in, will get through this period and move on to a more normal earnings period,” he said in a 2010 interview on WealthTrack.
Citigroup (C, Financial), a beleaguered bank that has still not regained life after the credit crisis, is Berkowitz’s fourth largest holding; he owns 237,137,515 shares valued at $1.1 billion and began buying in the fourth quarter of 2009. In the first quarter of 2011, the bank’s stock fell from approximately $4.80 to $4.42. It had a revenue decline of 73.8% in the last 12 months.
Defending his stake in Citi, Berkowitz told Morningstar in February, 2010, “So it’s just now, in my opinion, a question of time, an ingestion period, where how many more quarters is it going to take before the new loans start to outweigh the old, existing loans?”
Similarly, Berkowitz has invested a large sum in distressed business American International Group (AIG, Financial). As of Dec. 31. 2011, it is his top largest holding. He owns 44,285,986 shares, or over 30% of the stock available to private investors, making him the largest shareholder after the federal government. The stock price has declined 19.51% in the last year, and 44.81% year to date.
Though a profitable company for years up to the credit crisis, AIG has not fully recovered from financial difficulties it suffered during 2008. In 2007, it earned $6.2 billion in net income, but the next year lost a staggering $99.3 billion. In 2009, it was still in the red $10.9 billion. The company returned to profitability in 2010, but with several negative quarters. In addition, AIG will have to repay a $182 billion bailout from the Federal Government that kept it from bankruptcy in 2008. The company has retired a portion of the debt, but still owes the federal government $47.6 billion as of Jan. 12, 2011.
In a recent interview with Fortune, Berkowitz expressed confidence that AIG would repay the Treasury expeditiously. However, the government will begin selling its AIG shares in May of this year, leaving AIG’s other shareholders in an uncertain position.
Time will tell whether Berkowitz’s foray into distressed companies will pay off, depending on whether these companies go up or down in the upcoming quarters.
2009
For most of his career, Berkowitz has avoided investment opportunities with above average risk. He rarely engaged in arbitrage, never went short on any stocks, and avoided bankrupt or distressed companies. “My ability to predict is still near zero and I’ve always acted based upon the free cash flow of companies relative to the price that they are in the marketplace,” he said in a 2008 conference call with investors. In 2009, his record-breaking year of 39% returns, Berkowitz’s top holdings matched those criteria: Pfizer (PFE, Financial), Sears Holdings (SHLD, Financial), and Forest Laboratories (FRX, Financial). Each of these stocks rose in the first quarter of 2011, although only one remained in the top-five holdings of his portfolio.
Pfizer, his top holding in 2009, has solid financials and consistent cash flow. From 2007-2010 its net income was approximately $8 billion each year. When he sold most of his stake in March 2010, he gave an interview to Morningstar saying he didn’t look at Pfizer as a loss, but “nothing to write home about either.” Of post-Pfizer investments he said, “We’re going to go with the best possible risk/reward ratio.”
Berkowitz sold out of Pfizer at $17.17 per share. In the first quarter of 2011, Pfizer stock rose almost 15% and is at $20.89 as of April 29, 2011.
His second largest stake in 2009, Sears Holdings, is now the fifth largest stake in his portfolio as of March 31, 2011. Sears has been profitable every year after 2004 when it lost $614 million dollars, although it had two negative quarters in 2010. Its earnings grew 4% in the last 12 months. In the first quarter of 2011, its stock price rose approximately 14%. The chairman of Sears, Eddie Lambert, is a GuruFocus guru as well.
Berkowitz sold out of his third largest holding, Forest Laboratories, in the first quarter of 2010. Forest Laboratories had earnings growth of 8.6% in the last 12 months, and has had steady net income for the last ten years. In the first quarter, its stock rose 3.75%.
Another notable aspect of his portfolio in 2009 was that he completely sold out of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), one of the most financially sound companies in the world, in the first quarter. Berkowitz told investors in a February 2009 conference call that he abandoned Berkshire because Warren Buffett stated it would not likely beat the S&P by more than 2% in the near future. By the next quarter, he was back to accumulating Berkshire shares and continued in subsequent quarters until he had an even greater stake than previously. In the fourth quarter of 2010 he bought 2,102,700 shares for a total of 6,843,300. Berkshire’s stock price increased from $56.54 at the time he sold out, to $81.17 in the fourth quarter of 2010. Having Berkshire in his current portfolio helped it – in the first quarter of 2011, the stock was up 4.39%.
2010-2011
The tagline of Berkowitz’s Fairholme Fund is “Ignore the crowds.” Berkowitz has bucked the crowds often, but usually within his classic arena of companies with strong financials. In 2010, he began shifting his focus from good companies at low prices to distressed companies at low prices – most notably, his stake on St. Joe’s (JOE, Financial), a small Florida real estate firm. Berkowitz’s association with St. Joe’s dates back to the fourth quarter of 2007, when he bought 3,604,200 shares at $31.47 per share. Since then he has increased his stake to 26,788,120 shares, while the stock price has declined to just over $26 per share.
St. Joe reflects a marked divergence from the type of companies that were in Berkowitz’s 2009 top holdings. In the past 12 months, St. Joe’s revenue has declined 30.5%, and it has not had positive net income since 2007.
St. Joe’s value hinges on its ability to be profitable in the future. Currently, It has 576,000 acres of land in the Florida panhandle of disputed worth and no debt, but has stagnated since the housing crisis. In the first quarter of 2011, its stock fell approximately 3%.
In 2007 and 2008, when banks were faltering, Berkowitz had next to no financials in his portfolio. Around 2009, at their nadir, he began initiating positions in the financial sector because he believed banks were out of danger. “They’ve battled hard, and it’s a trite saying, but whatever doesn’t kill you makes you stronger is quite true. And for those financial institutions still standing, and the ones we’ve invested in, will get through this period and move on to a more normal earnings period,” he said in a 2010 interview on WealthTrack.
Citigroup (C, Financial), a beleaguered bank that has still not regained life after the credit crisis, is Berkowitz’s fourth largest holding; he owns 237,137,515 shares valued at $1.1 billion and began buying in the fourth quarter of 2009. In the first quarter of 2011, the bank’s stock fell from approximately $4.80 to $4.42. It had a revenue decline of 73.8% in the last 12 months.
Defending his stake in Citi, Berkowitz told Morningstar in February, 2010, “So it’s just now, in my opinion, a question of time, an ingestion period, where how many more quarters is it going to take before the new loans start to outweigh the old, existing loans?”
Similarly, Berkowitz has invested a large sum in distressed business American International Group (AIG, Financial). As of Dec. 31. 2011, it is his top largest holding. He owns 44,285,986 shares, or over 30% of the stock available to private investors, making him the largest shareholder after the federal government. The stock price has declined 19.51% in the last year, and 44.81% year to date.
Though a profitable company for years up to the credit crisis, AIG has not fully recovered from financial difficulties it suffered during 2008. In 2007, it earned $6.2 billion in net income, but the next year lost a staggering $99.3 billion. In 2009, it was still in the red $10.9 billion. The company returned to profitability in 2010, but with several negative quarters. In addition, AIG will have to repay a $182 billion bailout from the Federal Government that kept it from bankruptcy in 2008. The company has retired a portion of the debt, but still owes the federal government $47.6 billion as of Jan. 12, 2011.
In a recent interview with Fortune, Berkowitz expressed confidence that AIG would repay the Treasury expeditiously. However, the government will begin selling its AIG shares in May of this year, leaving AIG’s other shareholders in an uncertain position.
Time will tell whether Berkowitz’s foray into distressed companies will pay off, depending on whether these companies go up or down in the upcoming quarters.
