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Holly LaFon
Holly LaFon
Articles (10139)  | Author's Website |

Stocks Trading Cheaper Than When Bruce Berkowitz Bought Them: BAC, BAC.WS.A, AIG.WS, STD, TEF

November 28, 2011 | About:
Bruce Berkowitz is a renowned investor whose Fairholme Fund has had an average annual return of 14.3% since inception in 2000. With a portfolio weighted 86% financials, his $9.5 billion fund is down 35% year to date, according to Morningstar data. He has said in several interviews that while he did not doubt his bet on financials, he may have bought a little early.

Bruce Berkowitz stocks you can now buy cheaper than he did are: Bank of America Corp. (NYSE:BAC),Bank of America Warrants (NYSE:BAC.WS.A), AIG Warrants (NYSE:AIG.WS), Banco Santander S.A. Ads (STD), Telefonica S.A. Ads (NYSE:TEF).

Bank of America (NYSE:BAC)

Bruce Berkowitz paid an average of $14.37 per share for Bank of America. For his last purchase in the third quarter of 2011, he paid a quarterly average of $8.28 for $5,364,340 shares. The current price for Bank of America shares is $5.17 – a 63% discount.

Bank of America is Berkowitz’s third-largest holding of a portfolio composed of 86.3% financials, and one of his most scrutinized. Net income for the first half of the year declined 43% year over year on 12% lower revenue. Revenue fell largely due to recent legislative changes for overdraft frees. The amount of cash on its balance sheet also declined from $151 billion at June 30, 2010, to $119.5 billion on June 30, 2011. The bank still holds the largest retail deposit market share in the U.S.

In its November 15 presentation, the bank announced that one of its problems is that expenses are too high for a low-growth environment. To raise capital lost from new legislation forbidding merchant fees for debit card usage, Bank of America attempted to implement a $5 fee on customers for using debit cards. Customer outrage caused the plan to backfire, and on November 1, it announced it canceled the plan. The bank then sold 10.4 billion common shares of China Construction Bank Corporation (CCB) for an after-tax gain of $1.8 billion.

“Today, we believe to be at a similar tipping point for financials with enormous cash flows and diminishing restructuring expenses for the illogical extremes of 2006/2007,” Berkowitz said in his mid-year 2011 investor letter. “Their pre-provision, pre-tax earnings power is compellin A not unreasonable 1% return on Citi's assets or 10% return on equity would yield $6 per share. A 1% ROA or 10% ROE for BofA (BAC) would yield over $2 per share.”

This is similar to what Berkowitz said in the recent presentation he issued on Bank of America as the stock price continued to sag, “Fairholme Stays the Course.”

For the third quarter, Bank of America had a 10.8% ROE and 1.7% ROA.

Bank of America Warrants (NYSE:BAC.WS.A) and AIG Warrants (NYSE:AIG.WS)

Berkowitz bought 6,158 Bank of America Warrants at an average cost of $3.98 per share. Since then, the price decreased 36.5% to $2.47. Warrants are a way to profit from Bank of America with less of the risk. Francis Chou, renowned investor who owns 6.4 million BofA warrants, commented on them in his second-quarter investor letter: “We also think [JPM, WFC, BAC] common shares, and in some cases their TARP warrants, are attractive investments. The TARP warrants give the holder the right to buy the bank's stocks at a specific price. Most of these warrants are long dated, with most expiring in 2018 or 2019. This time frame of eight-plus years allows the banks to grow their intrinsic value to a high enough level to meet the strike price of the warrant. In addition, we believe the strike price is adjusted downward for any quarterly dividend paid that exceeds a set price.”

Berkowitz also bought 23,967 AIG Warrants at about $8 per share. The current price is about $5 per share.

Banco Santander S.A. Ads (STD)

Berkowitz paid an average of $9.26 per share for his Banco Santander holding; the price is now $6.80 per share. For his first purchase he bought 4,741,200 shares at an average price of about $12 per share. Over the next two quarters, he sold out that holding. In the third quarter of 2011, he bought 510,000 shares at about $9 per share.

Bank of Santander, originated in Spain, is the largest bank in the euro zone by market cap the fourth largest bank in the world by profits. It used to be 24.9% owned by Bank of America since 2002. Santander bought back the 24.9% stake in a transaction completed in the third quarter of 2010 USD2.5 billion. The bank’s earnings per share have declined each year since 2009, and fell 14.8% year over year to .6 euros for the nine months ended Sept. 30, 2011. Total assets, net customer loans and customer deposits increased 1.2%, 2.6%, and 3.1% year over year, though customer funds under management declined 0.8% year over year.

The bank’s non-performing loans ration in Spain inched up to 5.1% in the third quarter, compared to 4.8% in the second quarter. Total non-performing loans for the first nine months of 2011 increased 13.7% year over year.

In November, Spain’s unemployment rate stood at 22.6%, the highest in the EU, and Organization for Economic Cooperation and Development cut its forecast for Spain’s economic growth to 0.3% for 2012, from its former estimate of 1.6% set in May.

Telefonica S.A. Ads (NYSE:TEF)

Telefonica is also a small new buy of Bruce Berkowitz and his only telecom holding. He paid about $21 per share for the 220,000 shares he bought in the third quarter of 2011. The price has dropped to $17 since then.

For the nine months ended Sept. 30, 2011, the company saw strong customer growth, solid top-line expansion of 5.4%, profitability amid increased commercial activity (36% OIBDA margin), and increased free cash flow 11.6%. It also had double-digit growth in its mobile contracts and MBB accesses, and high single-digit growth in its mobile and FBB businesses. The company has 227.3 million wireless customers, increased 8% over the past year.

The third quarter marked its first quarterly loss in nine years, as it pays expenses to eliminate workers and customers in Spain switch to lower-priced competitors. The company’s net loss was 429 million euros, compared to a profit of 5.1 billion euros the previous year.

Telefonica will team with Research In Motion (RIMM) for a Near Field Communications-based mobile payments trial for BlackBerry smartphones, dubbed the Telefonica Wallet. The trial will allow 350 employees at its headquarters in Distrito Telefonica, Spain, to make convenient, simple payments over their NFC-enabled BlackBerries against a reader, in collaboration with local banks and retailers.

"We are getting ever closer to the point where our customers will be able to take the contents of their wallets and put them on their mobiles," said Matthew Key, Chairman & CEO Telefonica Digital.

For a full look at Berkowitz’s portfolio holdings, go here.

About the author:

Holly LaFon
I'm a financial journalist with a Master of Science in journalism from Medill at Northwestern University.

Visit Holly LaFon's Website

Rating: 3.8/5 (19 votes)


Tonyg34 - 7 years ago    Report SPAM
More interesting article title would have been; Are there any stocks in the Fairholme portfolio that you can't buy cheaper than Bruce did?
Superguru - 7 years ago    Report SPAM
Tonyg34 - LOL. You do not need article for that. Tweet would be enough. Bruce is a value investor not a market timer. He appears to only one though who went all into financials when he did.
Fareastwarriors - 7 years ago    Report SPAM

BAC hit 52 week low today. Things clearly not improving at Fairholme.
AlbertaSunwapta - 7 years ago    Report SPAM
Why do you say they aren't improving? Don't you dream of your favorite stock hitting new lows?
Fareastwarriors - 7 years ago    Report SPAM

I do. The problem is the Fund bought many of those securities at much higher prices but the Fund doesn't have more cash to add to the holdings. I'm still a big believer in the Fairholme fund and is adding to my position moderately.

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