Bruce Berkowitz (Trades, Portfolio), staunch contrarian investor at the Fairholme Fund (Trades, Portfolio), engaged in unusually aggressive selling in the first quarter and unloaded some of his key long-term holdings.
Berkowitz has emphasized price in his investing history, buying the most scorched U.S. financials during the financial crisis and chunks of woebegone Sears Holdings (SHLD, Financial) as its price crashed to the teens.
âWhile holding our investments, we may appear wrong for extended periods, and in some instances, it can take years for a position to become an overnight success,â Berkowitz said in his annual letter.
Like many value investors, he sells once the price rises to his estimate of intrinsic value, no matter how long it takes. When his holdings continue to stumble, as in 2015, Berkowitz also said he will âassess whether our analysis is flawed.â
Last year Berkowitzâs returns showed his fund had veered out of step with the market. The Fairholme Fund (Trades, Portfolio) (FAIRX, Financial) lost 11.5 percent versus the 1.4 percent gain of the S&P 500. With a trend of periodic swings, the fund has returned an annualized 10.2 percent return since inception versus 89.8 percent for the index.
Most of Berkowitzâs sells during the quarter were long-term holdings. Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), the business empire owned by Warren Buffett (Trades, Portfolio), had appeared in his portfolio since before 2011. After reducing his shares of the company quarterly as the price traced up, Berkowitz sold his remaining shares at an average price of $132. The last time he bought shares, in 2013, the price averaged $99.
Berkowitz axed his Berkshire A-shares too, a holding that predated 2011. His last average buy price of $108,506 per share compares to his final sell price of $199,251 on average for the first quarter.
Berkowitz also closed his one of his biggest positions, the insurance giant American International Group Inc. (AIG, Financial) that almost collapsed in 2008 but was pronounced âtoo big to failâ by the U.S. government, which gave it a bailout. Fairholme owned as much as 103,164,517 shares of AIG in 2011 and had been selling shares for several years.
âWe bought AIG at substantial discount to tangible book value (âTBVâ),â Berkowitz said in his annual conference call. âWe had a simple thesis that AIG still had a franchise value, and that AIG was worth at least TBV. We then started selling in 2014 as our thesis played out and AIG approached our estimate of TBV. That was always our game plan.â
In total Berkowitz made about $2 billion on his AIG investment, he said in his annual letter. AIG warrants, obtained as part of its 2011 recapitalization, remain the fundâs largest position at 14.2 percent of assets. Priced around $56.97 Friday, AIG shares still trade at a discount to book value, with a price-book ratio of 0.72.
Berkowitz closed positions in two oil and gas companies, MRC Global Inc. (MRC, Financial) and Canadian Natural Resources Ltd. (CNQ, Financial), both started in the third quarter. He bought MRC Global along with its competitor, DNOW (NOW, Financial), and pushed their management for a merger between the two companies. Though neither were particularly cash generative, Berkowitz paid low multiples of their balance sheet assets.
âToday, we have a situation where the selling price of these commodities is lower than the price to produce them,â Berkowitz said in his February conference call. âThis canât last â something has to give. Demand will go up, and price must rise to entice producers to supply more. When? We donât know.â
Last, Berkowitz sold out his stake in International Business Machines Corp. (IBM, Financial), one of Buffettâs top holdings. Berkowitz started the position in the third quarter when the companyâs share price averaged $154. In the first quarter, the average price for IBM shares fell to $133.
Berkowitz maintained top positions in The St. Joe Co. (JOE, Financial), Sears Holdings Corp. (SHLD, Financial) and AIG warrants (AIG.WS). Below are more details about his sells in the quarter.
MRC Global Inc. (MRC, Financial)
Berkowitz sold his remaining 5,634,300 shares during the quarter when the price averaged $11. His total estimated loss was 12 percent.
MRC Global Inc. has a market cap of $1.33 billion; its shares were traded around $13.47 with and P/S ratio of 0.35.
Berkowitz sold a remaining 47,900 shares of IBM, which had an average quarterly share price of $133. He had a total estimated loss of 9 percent.
IBM Corp. has a market cap of $141.35 billion; its shares were traded around $147.25 with a P/E ratio of 11.16 and P/S ratio of 1.72. The trailing 12-month dividend yield of IBM Corp. stocks is 3.61 percent. The forward dividend yield of International Business Machines Corp stocks is 3.86 percent. IBM Corp. had an annual average earnings growth of 10 percent over the past 10 years. GuruFocus rated IBM Corp. the business predictability rank of 4.5-star.
Canadian Natural Resources Ltd. (CNQ, Financial)
Berkowitz sold 1,107,100 shares for Canadian Natural Resources, which had an average quarterly share price of $22. He had an estimated total gain of 1 percent.
Canadian Natural Resources Ltd. has a market cap of $31.65 billion; its shares were traded around $28.89 with and P/S ratio of 3.36. The trailing 12-month dividend yield of Canadian Natural Resources Ltd stocks is 2.41 percent. The forward dividend yield of Canadian Natural Resources Ltd. stocks is 2.51 percent. Canadian Natural Resources Ltd. had an annual average earnings growth of 7.5 percent over the past 10 years. GuruFocus rated Canadian Natural Resources Ltd. the business predictability rank of 4.5-star.
Berkshire Hathaway Inc. (BRK.B, Financial)
Berkowitz sold his remaining 135,242 shares of Berkshire Hathaway B-shares, which had an average quarterly price of $132.
Berkshire Hathaway Inc. has a market cap of $349.52 billion; its shares were traded around $141.83 with a P/E ratio of 14.28 and P/S ratio of 1.63. Berkshire Hathaway Inc. had an annual average earnings growth of 10.3 percent over the past 10 years. GuruFocus rated Berkshire Hathaway Inc. the business predictability rank of 3-star.
Berkshire Hathaway (BRK.A, Financial)
Berkowitz sold his remaining 3 shares of Berkshire Hathaway A-shares, which had an average quarterly price of $199,251.
Berkshire Hathaway Inc. has a market cap of $349.66 billion; its shares were traded around $212,833.00 with a P/E ratio of 14.27 and P/S ratio of 1.63. Berkshire Hathaway Inc. had an annual average earnings growth of 10.3 percent over the past 10 years. GuruFocus rated Berkshire Hathaway Inc. the business predictability rank of 3-star.
American International Group Inc. (AIG, Financial)
Berkowitz sold his remaining 271,560 shares of AIG Inc., which had an average quarterly price of $54.
AIG Inc. has a market cap of $63.75 billion; its shares were traded around $56.97 with and P/S ratio of 1.33. The trailing 12-month dividend yield of AIG Inc. stocks is 1.77 percent. The forward dividend yield of AIG Inc. stocks is 2.27 percent.
See Bruce Berkowitz (Trades, Portfolio)âs portfolio here. Start a free 7-day trial of Premium Membership to GuruFocus.
