Last week, the Fairholme Focused Income Fund (Trades, Portfolio) released its equity portfolio for the second quarter of 2022, which ended May 31.
The fund is part of Bruce Berkowitz (Trades, Portfolio)’s Miami-based Fairholme Capital Management. It invests in a handful of undervalued stocks to achieve its objectives of current income, cash distribution and capital preservation.
According to NPORT-P filings for the quarter, Berkowitz’s fund entered three new positions, sold out of five stocks and added to two holdings. The fund’s most notable trades included increased bets on Enterprise Products Partners LP (EPD, Financial) and Commercial Metals Co. (CMC, Financial) as well as the divestment of Energy Transfer LP (ET, Financial), Kinder Morgan Inc. (KMI, Financial) and LyondellBasell Industries NV (LYB, Financial).
Investors should be aware that, just like 13F filings, NPORT-P reports do not provide a complete picture of a guru’s holdings to the public. Filed by certain mutual funds after each quarter’s end, they collect a wide variety of information on the fund for the SEC’s reference, but in general, the only information made public is in regard to long equity positions. Unlike 13Fs, they do require some disclosure for long equity positions in foreign stocks. Despite their limitations, even these partial filings can provide valuable information.
Enterprise Products Partners
The fund upped the Enterprise Products Partners (EPD, Financial) stake by 63.42%, buying 507,500 shares. The transaction had an impact of 14.63% on the equity portfolio. The stock traded for an average price of $26.03 per share during the quarter.
Enterprise Product Partners is the Focused Income Fund’s largest holding, accounting for 37.70% of the equity portfolio. It holds 1.31 million shares total. GuruFocus estimates it has gained 11.45% on the investment so far.
The Houston-based midstream oil and gas company has a $59.05 billion market cap; its shares were trading around $27.03 on Friday with a price-earnings ratio of 13.02, a price-book ratio of 2.30 and a price-sales ratio of 1.33.
The GF Value Line suggests the stock is modestly undervalued currently based on historical ratios, past financial performance and future earnings projections.
GuruFocus rated Enterprise Products Partners' financial strength 4 out of 10. As a result of issuing new long-term debt over the past three years, it has insufficient interest coverage. The low Altman Z-Score of 1.67 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 exceeds the weighted average cost of capital.
The company's profitability fared better with an 8 out of 10 rating. In addition to an expanding operating margin, Enterprise Products Partners has strong returns on equity, assets and capital that top over half of its competitors. The moderate Piotroski F-Score of 6 out of 9 means conditions are typical for a stable company. It also has a predictability rank of one out of five stars. According to GuruFocus research, 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 0.15% of its outstanding shares. Beyond Berkowitz’s funds, David Tepper (Trades, Portfolio), Mark Hillman (Trades, Portfolio), Leon Cooperman (Trades, Portfolio), George Soros (Trades, Portfolio), Tweedy Browne (Trades, Portfolio), Murray Stahl (Trades, Portfolio) and several other gurus also own the stock.
Commercial Metals
The Focused Income Fund increased the Commercial Metals (CMC, Financial) position by 39.76%, buying 192,500 shares. The transaction impacted the equity portfolio by 8.04%. During the quarter, shares traded for an average price of $40.53 each.
With 676,600 shares and representing 28.26% of the equity portfolio, the stock is the fund’s second-largest holding. GuruFocus says it has gained an estimated 10.97% on the investment so far.
The steel and metal manufacturer headquartered in Irving, Texas has a market cap of $4.82 billion; its shares were trading around $39.53 on Friday with a price-earnings ratio of 4.55, a price-book ratio of 1.53 and a price-sales ratio of 0.58.
According to the GF Value Line, the stock is modestly overvalued currently.
Commercial Metals’ financial strength was rated 7 out of 10 by GuruFocus on the back of adequate interest coverage and a high Altman Z-Score of 4.20. The ROIC also overshadows the WACC, indicating value creation is occurring.
The company’s profitability scored an 8 out of 10 rating, driven by operating margin expansion, strong returns that are outperforming versus industry peers and a moderate Piotroski F-Score of 6. Commercial Metals also has a one-star predictability rank.
With a 1.71% stake, Berkowitz is the company’s largest guru shareholder, followed by the Fairholme Fund (Trades, Portfolio) and the Focused Income Fund. Commercial Metals is also being held by Chuck Royce (Trades, Portfolio), Hotchkis & Wiley, Steven Cohen (Trades, Portfolio), First Eagle and Ray Dalio (Trades, Portfolio).
Energy Transfer
Impacting the equity portfolio by -7.67%, Fairholme dumped its 575,500 remaining shares of Energy Transfer (ET, Financial). The stock traded for an average per-share price of $11.01 during the quarter.
Fairholme gained approximately 58.45% on the investment over its lifetime. It was the fund’s fifth-largest holding in the previous quarter.
The Dallas-based midstream energy company has a $35.47 billion market cap; its shares were trading around $11.39 on Friday with a price-earnings ratio of 10.86, a price-book ratio of 1.11 and a price-sales ratio of 0.45.
Based on the GF Value Line, the stock appears to be modestly overvalued currently.
GuruFocus rated Energy Transfer’s financial strength 4 out of 10. In addition to weak interest coverage, the low Altman Z-Score of 1.18 warns the company could be at risk of bankruptcy in the near term. The WACC also eclipses the ROIC, so it is struggling to create value.
The company’s profitability fared better, scoring a 7 out of 10 rating due to operating margin expansion, strong returns that top over half of its competitors and a moderate Piotroski F-Score of 6. Since revenue per share has declined in recent years, Energy Transfer’s one-star predictability rank is on watch.
David Abrams (Trades, Portfolio) has the largest stake in Energy Transfer with 0.72% of its outstanding shares. Tepper, Leon Cooperman (Trades, Portfolio) and Francisco Garcia Parames (Trades, Portfolio) also have significant positions in the stock.
Kinder Morgan
With an impact of -7.14% on the equity portfolio, the fund sold its 312,000-share position in Kinder Morgan (KMI, Financial). During the quarter, the stock traded for an average price of $18.83 per share.
GuruFocus data shows the fund gained an estimated 32.77% on the investment, which was previously its sixth-largest holding.
The energy infrastructure company, which is headquartered in Houston, has a market cap of $40.29 billion; its shares were trading around $17.97 on Friday with a price-earnings ratio of 16.79, a price-book ratio of 1.32 and a price-sales ratio of 2.30.
The GF Value Line suggests the stock is modestly undervalued currently.
Kinder Morgan’s financial strength was rated 4 out of 10 by GuruFocus. In addition to insufficient interest coverage, the low Altman Z-Score of 0.85 also warns the company could be at risk of bankruptcy. The WACC also surpasses the ROIC, meaning it is struggling to create value.
The company’s profitability fared better with a 6 out of 10 rating as a result of an expanding operating margin and returns that outperform over half of its industry peers. Kinder Morgan also has a high Piotroski F-Score of 7, indicating business conditions are healthy, and a one-star predictability rank that is on watch.
Of the gurus invested in Kinder Morgan, Abrams has the largest stake with 0.55% of its outstanding shares. First Pacific Advisors (Trades, Portfolio), Steven Romick (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies and Jeremy Grantham (Trades, Portfolio) also have notable holdings.
LyondellBasell
The Focused Income Fund exited its LyondellBasell (LYB, Financial) investment, selling all 50,500 shares. Shares traded for an average price of $105.72 each during the quarter.
The fund gained around 11.77% on the investment, which used to be its seventh-largest holding.
The Netherlands-based company, which produces petrochemicals, has a $28.82 billion market cap; its shares were trading around $88.69 on Friday with a price-earnings ratio of 5.01, a price-book ratio of 2.29 and a price-sales ratio of 0.59.
According to the GF Value Line, the stock is significantly undervalued currently.
GuruFocus rated LyondellBasell’s financial strength 6 out of 10. Although the company has issued new long-term debt over the past several years, it is manageable due to adequate interest coverage. The Altman Z-Score of 3.23 also indicates the company is in good standing. Value is being created since the ROIC outshines the WACC.
The company’s profitability fared even better, scoring a 9 out of 10 rating. While margins are declining, returns top a majority of competitors. LyondellBasell is also supported by a high Piotroski F-Score of 9 and a one-star predictability rank.
With 0.84% of its outstanding shares, Dodge & Cox is the company’s largest guru shareholder. Other gurus invested in LyondellBasell are Simons’ firm, Grantham, Dalio, Jeff Auxier (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Cohen, John Hussman (Trades, Portfolio) and Scott Black (Trades, Portfolio).
Portfolio composition and performance
During the quarter, the fund also established positions in Citigroup Inc. (C, Financial) and D.R. Horton Inc. (DHI, Financial). It also swapped preferred shares of Federal Home Loan Mortgage Corp. (FMCCH.PFD) (FMCKI.PFD), or Freddie Mac, for 260,924 common shares (FMCC).
The energy sector has the largest representation in the Focused Income Fund’s $95 million equity portfolio, which is composed of 10 stocks, at 37.70%.
In his annual letter to shareholders, Berkowitz said the fund returned 6.74% in 2021, underperforming the S&P 500’s return of 28.71% by a wide margin.
