Late last week, the Fairholme Fund (Trades, Portfolio) released its portfolio for the third quarter, which ended Aug. 31.
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.
Having not been invested in more than 10 holdings since the third quarter of 2018, the fund went on a buying spree. It established eight new positions during the quarter, boosted the Imperial Metals Corp. (TSX:III, Financial) stake by 10% and trimmed its holdings of Fannie Mae (FNMAS.PFD, Financial) and Federal Home Loan Mortgage Corp. (FMCKJ.PFD, Financial) preferred shares. Among the additions to the portfolio were Enterprise Product Partners LP (EPD, Financial), Commercial Metals Co. (CMC, Financial), Intel Corp. (INTC, Financial), Energy Transfer LP (ET, Financial) and Kinder Morgan Inc. (KMI, Financial).
Enterprise Product Partners
The fund invested in 1.11 million shares of Enterprise Products Partners (EPD, Financial), allocating 2.27% of the equity portfolio to the stake. The stock traded for an average price of $23.53 per share during the quarter.
Enterprise Product Partners is now Fairholme’s second-largest holding.
The Houston-based midstream oil and gas company has a $49.78 billion market cap; its shares were trading around $22.78 on Monday with a price-earnings ratio of 13.08, a price-book ratio of 2.01 and a price-sales ratio of 1.53.
The GF Value Line suggests the stock is modestly undervalued currently based on its historical ratios, past performance and future earnings projections.
Enterprise Products Partners' financial strength was rated 4 out of 10 by GuruFocus. As a result of issuing approximately $2.9 billion in new long-term debt over the past three years, it has weak interest coverage. The low Altman Z-Score of 1.53 also warns the company could be at risk of bankruptcy if it does not improve its liquidity. The company is creating value as it grows, however, since the return on invested capital eclipses the weighted average cost of capital.
The company's profitability fared better, scoring a 7 out of 10 rating on the back of an expanding operating margin, strong returns on equity assets and capital that outperform over half of its competitors and a moderate Piotroski F-Score of 6 out of 9, which indicates business conditions are stable. As a result of revenue per share declining over the past three years, the predictability rank of one out of five stars is on watch. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.
Of the gurus invested in Enterprise Product Partners, First Eagle Investment (Trades, Portfolio) has the largest stake with 0.13% of its outstanding shares. David Tepper (Trades, Portfolio), Leon Cooperman (Trades, Portfolio), Pioneer Investments, Mark Hillman (Trades, Portfolio), the Fairholme Focused Income Fund (Trades, Portfolio), George Soros (Trades, Portfolio), Tweedy Browne (Trades, Portfolio) and Murray Stahl (Trades, Portfolio) also own the stock.
Commercial Metals
Fairholme picked up 441,700 shares of Commercial Metals (CMC, Financial), dedicating 1.32% of the equity portfolio to the holding. Shares traded for an average price of $32.05 each during the quarter.
The stock is now the fund’s fourth-largest position.
The steel and metal manufacturer, which is headquartered in Irving, Texas, has a market cap of $3.87 billion; its shares were trading around $32.19 on Monday with a price-earnings ratio of 9.46, a price-book ratio of 1.69 and a price-sales ratio of 0.57.
According to the GF Value Line, the stock is significantly overvalued currently.
GuruFocus rated Commercial Metals’ financial strength 6 out of 10 on the back of adequate interest coverage and a high Altman Z-Score of 3.97. The ROIC also overshadows the WACC, indicating value creation is occurring.
The company’s profitability scored a 7 out of 10 rating, driven by operating margin expansion, strong returns that top a majority of industry peers and a moderate Piotroski F-Score of 5. Commercial Metals also has a one-star predictability rank.
With 0.63% of its outstanding shares, Chuck Royce (Trades, Portfolio) is the company’s largest guru shareholder. Other gurus invested in Commercial Metals are Richard Snow (Trades, Portfolio), Berkowitz, the Focused Income Fund, Hotchkis & Wiley, Ray Dalio (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and First Eagle.
Intel
The fund entered a 125,500-share position in Intel (INTC, Financial), giving it 0.62% space in the equity portfolio. During the quarter, the stock traded for an average per-share price of $55.21.
The stock is Fairholme’s seventh-largest holding.
The Santa Clara, California-based company, which manufactures semiconductor chips, has a $200.89 billion market cap; its shares were trading around $49.35 on Monday with a price-earnings ratio of 9.58, a price-book ratio of 2.22 and a price-sales ratio of 2.58.
Based on the GF Value Line, the stock appears to be modestly undervalued currently.
Intel’s financial strength was rated 6 out of 10 by GuruFocus as it is being supported by a comfortable level of interest coverage as well as a high Altman Z-Score of 3.24. The ROIC also exceeds the WACC, so value is being created.
The company’s profitability fared better, scoring an 8 out of 10 rating as a result of operating margin expansion, strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 6. Despite recording consistent earnings and revenue growth over the past several years, Intel’s 3.5-star predictability rank is on watch. GuruFocus says companies with this rank return an average of 9.3% annually.
PRIMECAP Management (Trades, Portfolio) is Intel’s largest guru shareholder with a 0.86% stake. Ken Fisher (Trades, Portfolio), Seth Klarman (Trades, Portfolio), Daniel Loeb (Trades, Portfolio), Chris Davis (Trades, Portfolio), Pioneer Investments, Al Gore (Trades, Portfolio), the Parnassus Endeavor Fund (Trades, Portfolio) and Michael Price (Trades, Portfolio) also have significant stakes in Intel.
Energy Transfer
Fairholme purchased 280,000 shares of Energy Transfer (ET, Financial), expanding the equity portfolio by 0.24%. The stock traded for an average price of $10.10 per share during the quarter.
The company is now the fund’s eighth-largest position.
The midstream energy company, which is headquartered in Dallas, has a market cap of $26.66 billion; its shares were trading around $9.86 on Monday with a price-earnings ratio of 7.53, a price-book ratio of 0.97 and a price-sales ratio of 0.5.
The GF Value Line suggests the stock is modestly overvalued currently.
GuruFocus rated Energy Transfer’s financial strength 3 out of 10. In addition to weak interest coverage, the low Altman Z-Score of 1.05 warns the company could be at risk of bankruptcy in the near term. The ROIC surpasses the WACC, however, so value is being created.
The company’s profitability scored a 6 out of 10 rating on the back of operating margin expansion, strong returns that top a majority of industry peers and a high Piotroski F-Score of 7, indicating business conditions are healthy. Although revenue per share has declined in recent years, Energy Transfer still has a one-star predictability rank.
Of the gurus invested in Energy Transfer, David Abrams (Trades, Portfolio) has the largest stake with 0.82% of its outstanding shares. Tepper, Leon Cooperman (Trades, Portfolio), Pioneer Investments, Francisco Garcia Parames (Trades, Portfolio) and Berkowitz also have significant positions in the stock.
Kinder Morgan
The fund bought 150,000 shares of Kinder Morgan (KMI, Financial), taking up 0.22% of the equity portfolio. During the quarter, shares traded for an average price of $17.74 each.
It is now Fairholme’s ninth-largest holding.
The Houston-based energy infrastructure company has a $38.66 billion market cap; its shares were trading around $17.06 on Monday with a price-earnings ratio of 22.14, a price-book ratio of 1.27 and a price-sales ratio of 2.52.
According to the GF Value Line, the stock appears to be modestly undervalued.
Kinder Morgan’s financial strength was rated 3 out of 10 by GuruFocus on the back of poor interest coverage. The low Altman Z-Score of 0.72 also warns the company could be in danger of bankruptcy.
The company’s profitability fared better, scoring a 6 out of 10 rating as a result of strong margins and returns that outperform over half of its competitors. Kinder Morgan also has a moderate Piotroski F-Score of 6. Despite recording a decline in revenue per share over the past several years, it still has a one-star predictability rank.
With a 0.55% stake, Abrams is Kinder Morgan’s largest guru shareholder. Other top guru investors include Pioneer Investments, First Pacific Advisors (Trades, Portfolio), Steven Romick (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio).
Portfolio composition and performance
During the quarter, the fund also entered positions in Enbridge Inc. (ENB, Financial), Western Midstream Partners LP (WES, Financial) and Williams Companies Inc. (WMB, Financial).
The real estate sector has the largest representation in Fairholme’s $1.09 billion equity portfolio, which is composed of 12 stocks, at 91.43%.
In his annual letter to shareholders, Berkowitz said the fund returned 46.9% in 2020, outperforming the S&P 500’s return of 18.4%.
