Bruce Berkowitz has attracted much attention for his investing talents. This year the famed manager went contrarian to the extreme and put over 80% of his clients’ money in the financial sector, including AIG, a company held afloat mainly by the aid of the government. It seemed crazy to some, coming off of the worst financial crisis since the Great Depression and considering real economic stability is still far from a reality. What next moves he would make have thus been highly anticipated. It turns out, Berkowitz did not shrink from his convictions but simply added to his most debated positions in the second quarter.
The Fairholme Fund now contains more AIG (AIG, Financial), BRK.B (BRK.B, Financial), Goldman Sachs (GS, Financial), and added Cisco (CSCO, Financial).
AIG (AIG)
AIG was a “too big to fail” company during the financial crisis. In the summer of 2008, AIG executives realized they would not be able keep it going for another week with the $9 billion cash they had on hand due to mounting liabilities. AIG’s collapse would have had such a far-reaching effect on the financial system that the Treasury eventually gave them a bail out totaling $182 billion.
The Financial Inquiry Commission concluded that “AIG failed and was rescued by the government primarily because its enormous sales of credit default swaps were made without putting up initial collateral, setting aside capital reserves, or hedging its exposure — a profound failure in corporate governance, particularly its risk management practices.”
Since then, the government has gone from 92% ownership of the company to 77%. The more shares the government sells, however, the lower the return for investors. Berkowitz’s investment could thus at least be rewarded in the very, very long term.
Berkowitz continues to champion the stock, his largest holding. “AIG common stock is similarly cheap, due mostly to market pressures caused by the U.S. Treasury's desire to sell its 77% ownership,” He wrote in his second-quarter letter. “When a recovering icon trades at half of our understanding of intrinsic value for a reason that has nothing to do with its prospects, we swing big.”
In the first quarter 2011 AIG lost free cash flow of $5.3 billion, down from a gain of $3.1 year on year, and from $1.8 billion quarter on quarter. However, first-quarter results were affected by the Japan earthquake and tsunami and charges incurred to extinguishing debt to the Federal Reserve Bank of New York (FRBNY) two years early. AIG’s fourth-quarter results come out August 4.
Berkowitz bought 54,400,000 shares of AIG in the second quarter at an average price of $30.43, adding to his existing stake of 40,432,939 shares for a total of 94,832,939 as of June 30, 2011.
American International Group Inc. has a market cap of $52.63 billion; its shares were traded at around $27.75 with and P/E ratio of 0, P/B ratio of 0.6 and P/S ratio of 0.8.
AIG is down 10% after hours. You can now buy the stock for even less than Bruce Berkowitz, if you have the courage.
Berkshire Hathaway (BRK.B)
Berkshire Hathaway Inc. is a holding company owning subsidiaries engaged in a number of diverse business activities and owned by Warren Buffett.
Under Buffett’s leadership, Berkshire Hathaway’s stock price has risen 64% over the last 10 years, but fallen 7.6% year to date.
Berkshire stands out as the one uncontroversial holding in Berkowitz’s portfolio. He added more to his holdings at a time when Berkshire, one of the most robust companies in the world, lost some favor after a tough quarter. However, Berkshire’s financial performance stemmed primarily from circumstances beyond their control – historic natural disasters such as the Japan earthquake and tsunami, which cost the company $1.7 billion.
Although he hasn’t commented on his Berkshire holding in his recent letters, in February he told the audience at the Harbor Investment Conference that he liked the company’s management and called Warren Buffet “a smart guy.” Berkowitz added 2,543,800 shares in the second quarter at an average price of $78.92.
Berkshire’s operating earnings in the first quarter 2011 came out to $1.6 billion, lower than the $2.2 billion the same quarter 2010. Nonetheless, it generated cash flow of $2 billion, down slightly from $2.1 billion the same quarter 2010, and 2010 cash flow was almost $12 billion, its strongest in at least the last 10 years. Revenue was also the highest in at least 10 years.
Berkshire Hathaway B has a market cap of $181.43 billion; its shares were traded at around $73.37 with a P/E ratio of 14.4 and P/S ratio of 1.4. Berkshire Hathaway B had an annual average earnings growth of 18.2% over the past 10 years.
Goldman Sachs (GS)
Goldman Sachs is a global investment banking and securities firm, providing a full range of investing, advisory and financing services worldwide to a substantial and diversified client base, which includes corporations, financial institutions, governments, and high net worth individuals.
Berkowitz has mentioned that he would own more Goldman Sachs if he could, but he is prevented by government regulations that limit the amount of financial holdings a mutual fund can have. The stock price has gone down 21.5% year to date, and Berkowitz added a mere 117,700 shares at an average price of $143.82 to his existing holding of 6,263,400 shares, for a total of 6,263,400.
Goldman Sachs has lost money every year for the last 10 years except 2009. It lost the least amount, $7.3 billion, in 2010. The bank’s return on equity fell to 10.8% in 2010 from 18.9% in 2009. Its return on assets declined as well, to 0.8% from 10.8%.
Further, the firm is undertaking expense reduction initiatives that lowered their operating expenses 23% in the second quarter 2011 from the second quarter 2010. It also repurchased 10.8 million shares of its common stock in the second quarter.
The Goldman Sachs Group Inc. has a market cap of $68.38 billion; its shares were traded at around $132.08 with a P/E ratio of 13 and P/S ratio of 1.8. The dividend yield of The Goldman Sachs Group Inc. stocks is 1%. The Goldman Sachs Group Inc. had an annual average earnings growth of 9.8% over the past 10 years.
Cisco (CSCO)
Cisco was once a tech giant, but in the last year its stock price has dropped with each new earnings release. Its 52-week range is $14.78 - $24.87. At the same time, Cisco earned $2.7 billion in the quarter ended April 30, up both year over year and quarter over quarter, as well as $9.2 billion free cash flow for 2010, raised from $8.9 billion for 2009. They also improved sales 5% year over year and initiated a quarterly cash dividend of 6 cents a share.
Yet other problems are encroaching on Cisco’s future profitability: increased competition (especially from HP), dated product portfolio, lack of new innovation, oversized operations and the increasingly prevalent perception that old tech companies are losing prominence.
Cisco has gone to great lengths to prove it won’t lose ground. For example, CEO John Chambers delivered a keynote at the annual Cisco Live! conference in which he made clear that management was acutely aware of the problems and showcased their “Action Plan” to solve them.
The action plan aims to save $1 billion next year by cutting 6,500 jobs to streamline operations, selling a Juarez, Mexico manufacturing plant with 5,000 workers, and sharpening its focus on a network-centric growth strategy, among other things.
Berkowitz bought 34,199,700 Cisco shares at an average price of $16.48 in the second quarter 2011.
Many Gurus have bought hoards of this cheaply priced Internet era icon recently. Here’s what a few of them have said:
“Cisco is financially strong and we think statistically cheap. It has a dominant market position and has been growing within a category that we believe still has a lot of room for future growth. Perceived competitive threats and concerns about possible slower rates of growth have put pressure on Cisco's stock price, which has allowed us an entry point in the stock that we believe is at roughly a one third discount from a conservative estimate of the company's intrinsic value.” – Tweedy, Browne, first-quarter letter
“ Cisco (CSCO) is currently experiencing competitive pressures in its switching business as it transitions to a new technology and engages in aggressive discounting to drive adoption of its new products (new products, by the way, that now use Intel chips). This has caused earnings to weaken and growth to grind to a halt, which is why the stock is cheap. It is further distracted by an array of consumer businesses acquired over the years that are not yielding much in the way of profits. It is a classic fallen angel in a mature industry that overreached and got sloppy. We believe that Cisco has been hurt by a combination of poor execution and a disruptive product transition; but it has a powerful franchise, the product transition will pass, and it is making the right moves to clean up its business. Not only is Cisco trading at 10x EPS, but at 10x modestly depressed EPS. It doesn’t have to get a lot right to make the stock work.” – Arnold Van Den Berg, interview with GuruFocus
The Fairholme Fund now contains more AIG (AIG, Financial), BRK.B (BRK.B, Financial), Goldman Sachs (GS, Financial), and added Cisco (CSCO, Financial).
AIG (AIG)
AIG was a “too big to fail” company during the financial crisis. In the summer of 2008, AIG executives realized they would not be able keep it going for another week with the $9 billion cash they had on hand due to mounting liabilities. AIG’s collapse would have had such a far-reaching effect on the financial system that the Treasury eventually gave them a bail out totaling $182 billion.
The Financial Inquiry Commission concluded that “AIG failed and was rescued by the government primarily because its enormous sales of credit default swaps were made without putting up initial collateral, setting aside capital reserves, or hedging its exposure — a profound failure in corporate governance, particularly its risk management practices.”
Since then, the government has gone from 92% ownership of the company to 77%. The more shares the government sells, however, the lower the return for investors. Berkowitz’s investment could thus at least be rewarded in the very, very long term.
Berkowitz continues to champion the stock, his largest holding. “AIG common stock is similarly cheap, due mostly to market pressures caused by the U.S. Treasury's desire to sell its 77% ownership,” He wrote in his second-quarter letter. “When a recovering icon trades at half of our understanding of intrinsic value for a reason that has nothing to do with its prospects, we swing big.”
In the first quarter 2011 AIG lost free cash flow of $5.3 billion, down from a gain of $3.1 year on year, and from $1.8 billion quarter on quarter. However, first-quarter results were affected by the Japan earthquake and tsunami and charges incurred to extinguishing debt to the Federal Reserve Bank of New York (FRBNY) two years early. AIG’s fourth-quarter results come out August 4.
Berkowitz bought 54,400,000 shares of AIG in the second quarter at an average price of $30.43, adding to his existing stake of 40,432,939 shares for a total of 94,832,939 as of June 30, 2011.
American International Group Inc. has a market cap of $52.63 billion; its shares were traded at around $27.75 with and P/E ratio of 0, P/B ratio of 0.6 and P/S ratio of 0.8.
AIG is down 10% after hours. You can now buy the stock for even less than Bruce Berkowitz, if you have the courage.
Berkshire Hathaway (BRK.B)
Berkshire Hathaway Inc. is a holding company owning subsidiaries engaged in a number of diverse business activities and owned by Warren Buffett.
Under Buffett’s leadership, Berkshire Hathaway’s stock price has risen 64% over the last 10 years, but fallen 7.6% year to date.
Berkshire stands out as the one uncontroversial holding in Berkowitz’s portfolio. He added more to his holdings at a time when Berkshire, one of the most robust companies in the world, lost some favor after a tough quarter. However, Berkshire’s financial performance stemmed primarily from circumstances beyond their control – historic natural disasters such as the Japan earthquake and tsunami, which cost the company $1.7 billion.
Although he hasn’t commented on his Berkshire holding in his recent letters, in February he told the audience at the Harbor Investment Conference that he liked the company’s management and called Warren Buffet “a smart guy.” Berkowitz added 2,543,800 shares in the second quarter at an average price of $78.92.
Berkshire’s operating earnings in the first quarter 2011 came out to $1.6 billion, lower than the $2.2 billion the same quarter 2010. Nonetheless, it generated cash flow of $2 billion, down slightly from $2.1 billion the same quarter 2010, and 2010 cash flow was almost $12 billion, its strongest in at least the last 10 years. Revenue was also the highest in at least 10 years.
Berkshire Hathaway B has a market cap of $181.43 billion; its shares were traded at around $73.37 with a P/E ratio of 14.4 and P/S ratio of 1.4. Berkshire Hathaway B had an annual average earnings growth of 18.2% over the past 10 years.
Goldman Sachs (GS)
Goldman Sachs is a global investment banking and securities firm, providing a full range of investing, advisory and financing services worldwide to a substantial and diversified client base, which includes corporations, financial institutions, governments, and high net worth individuals.
Berkowitz has mentioned that he would own more Goldman Sachs if he could, but he is prevented by government regulations that limit the amount of financial holdings a mutual fund can have. The stock price has gone down 21.5% year to date, and Berkowitz added a mere 117,700 shares at an average price of $143.82 to his existing holding of 6,263,400 shares, for a total of 6,263,400.
Goldman Sachs has lost money every year for the last 10 years except 2009. It lost the least amount, $7.3 billion, in 2010. The bank’s return on equity fell to 10.8% in 2010 from 18.9% in 2009. Its return on assets declined as well, to 0.8% from 10.8%.
Further, the firm is undertaking expense reduction initiatives that lowered their operating expenses 23% in the second quarter 2011 from the second quarter 2010. It also repurchased 10.8 million shares of its common stock in the second quarter.
The Goldman Sachs Group Inc. has a market cap of $68.38 billion; its shares were traded at around $132.08 with a P/E ratio of 13 and P/S ratio of 1.8. The dividend yield of The Goldman Sachs Group Inc. stocks is 1%. The Goldman Sachs Group Inc. had an annual average earnings growth of 9.8% over the past 10 years.
Cisco (CSCO)
Cisco was once a tech giant, but in the last year its stock price has dropped with each new earnings release. Its 52-week range is $14.78 - $24.87. At the same time, Cisco earned $2.7 billion in the quarter ended April 30, up both year over year and quarter over quarter, as well as $9.2 billion free cash flow for 2010, raised from $8.9 billion for 2009. They also improved sales 5% year over year and initiated a quarterly cash dividend of 6 cents a share.
Yet other problems are encroaching on Cisco’s future profitability: increased competition (especially from HP), dated product portfolio, lack of new innovation, oversized operations and the increasingly prevalent perception that old tech companies are losing prominence.
Cisco has gone to great lengths to prove it won’t lose ground. For example, CEO John Chambers delivered a keynote at the annual Cisco Live! conference in which he made clear that management was acutely aware of the problems and showcased their “Action Plan” to solve them.
The action plan aims to save $1 billion next year by cutting 6,500 jobs to streamline operations, selling a Juarez, Mexico manufacturing plant with 5,000 workers, and sharpening its focus on a network-centric growth strategy, among other things.
Berkowitz bought 34,199,700 Cisco shares at an average price of $16.48 in the second quarter 2011.
Many Gurus have bought hoards of this cheaply priced Internet era icon recently. Here’s what a few of them have said:
“Cisco is financially strong and we think statistically cheap. It has a dominant market position and has been growing within a category that we believe still has a lot of room for future growth. Perceived competitive threats and concerns about possible slower rates of growth have put pressure on Cisco's stock price, which has allowed us an entry point in the stock that we believe is at roughly a one third discount from a conservative estimate of the company's intrinsic value.” – Tweedy, Browne, first-quarter letter
“ Cisco (CSCO) is currently experiencing competitive pressures in its switching business as it transitions to a new technology and engages in aggressive discounting to drive adoption of its new products (new products, by the way, that now use Intel chips). This has caused earnings to weaken and growth to grind to a halt, which is why the stock is cheap. It is further distracted by an array of consumer businesses acquired over the years that are not yielding much in the way of profits. It is a classic fallen angel in a mature industry that overreached and got sloppy. We believe that Cisco has been hurt by a combination of poor execution and a disruptive product transition; but it has a powerful franchise, the product transition will pass, and it is making the right moves to clean up its business. Not only is Cisco trading at 10x EPS, but at 10x modestly depressed EPS. It doesn’t have to get a lot right to make the stock work.” – Arnold Van Den Berg, interview with GuruFocus
