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Fund Manager Bruce Berkowitz's Investment Thesis On Pfizer

February 26, 2009 | About:

Investment Guru Bruce Berkowitz manages Faiholme fund. GuruFocus Data show as of December 31, 2008, his mutual fund has $7 billions invested 39 stocks and about 8% in cash. Top sectors include: Health Care (49.3%), Financials (17%), Industrials (16.5%) and Consumer Services(11.3%), Oil & Gas (6%).

The fund’s top 10 holdings as of December 31, 2008 are tabulated below. Together, the 10 companies take up 76.69% of the fund’s stock assets. Pharmaceutical company Pfizer (NYSE:PFE) alone is 22.24%. Like Warren Buffett and Prem Watsa, Bruce Berkowitz is another Investment Guru who likes to hold a concentrated stock portfolio for long term.

Bruce Berkowitz Top 10 Holdings

No.

Symbol Company

Percentage (%)

1

PFE Pfizer Inc

22.24

2

FRX Forest Laboratories Inc.

7.31

3

WLP WellPoint Inc.

7.1

4

SHLD Sears Holdings Corp.

6.98

5

UNH UnitedHealth Group Inc.

6.81

6

CNQ Canadian Natural Resources Ltd.

6

7

NOC Northrop Grumman Corp.

5.67

8

BA The Boeing Company

5.41

9

LUK Leucadia National Corp.

4.99

10

HUM Humana Inc.

4.28

Total

76.79



Fairholme Capital Management held the annual conference call on February 11, 2009. The following are notes on and quotes from the conference call transcript pertaining to his stock holding and trading activities. In this Part I summarize the questions and answers on one stock – Pfizer (NYSE:PFE).

Bruce Berkowitz started to buy into Pfizer in Q2, 2008, when share price was much higher; in Q3, 2008, he reached as much as 93 million shares. Bruce sold a tiny portion (3.76%) during Q4, 2008. As of December 31, he held 89.5 million shares of Pfizer, or 22% of the fund’s stock asset. With such a heavy holding, no wonder people are curious and asking questions.

Question 1: Was the Wyeth acquisition the type of investment you were hoping Pfizer would make with their cash on hand?

Bruce Berkowitz: “Honestly, I did not know what type of acquisition Pfizer would make, if any. What we do understand is Pfizer’s free cash flow, which we estimated at $2 and over and we did understand that Jeff Kindler would measure any acquisition in relation to – in relationship to the acquisition of his own repurchases – repurchasing his own shares back. We believe that the acquisition will be accretive to the company and they said a company’s basics going to be accretive in second year, but we’re not paying much attention to that. We continue to believe that the company has at least $2 per share of free cash flow and in many ways that the acquisition will make that goal more easily attainable and probably take the company to about two-and-a-half dollars plus of free cash flow in 2012.”

Question 2: What about Pfizer? Does Pfizer-Wyeth becoming such a big holding, has the Wyeth purchase changed this all?

Bruce Berkowitz: “You know Pfizer – well we went to buy Pfizer, triple-A quality, triple-A balance sheet, huge free cash flow generator, about $17 billion a year, largest distribution system probably in the world and for me it was very reminiscent of Philip Morris, Exxon Mobile were always bumping around the bottom before you know most people figured it out. And at today’s prices and today’s free cash flows, we’re talking about a company generating 14 to 17 percent free cash flow yields, depending upon your assessments of ongoing free cash flow between two and two-and-a-half dollars per share. To me, that justifies a large investment, especially when you take into account the sterling balance sheet."

Question 3: How do you feel about Pfizer cutting the dividend? Does this lower yield mean you will lower the size of the holding?

Bruce Berkowitz: “The answer is no. I mean I understand that the dividend had to be cut in order to pay for the acquisition. In fact this acquisition, the cash component and the debt component for the acquisition should be paid for in about 30 months and this is a statement from the company and statement pretty much backs up our estimate of you know conservative free cash flows in this most difficult environment."

Question 4: I was curious about an article that you had in an interview in Kiplinger Magazine. You – two areas of just clarification one regarding Pfizer and I'm wondering if regarding Pfizer and their drive to be number one provider of established brand products, if you're talking about Pfizer being number one in the generic versions of their own drugs like Lipitor or if you think they're competing head to head their brand name versus the generic because people would prefer brand.

Bruce Berkowitz: “In terms of Pfizer and branded products, I believe this – the new CEO of Pfizer understands the mistakes the past CEOs of Pfizer made and I think he's being quite diplomatic and you're never going to hear about it but you know Pfizer and all the other large biopharmaceuticals gave the generic business away.

And from their companies in India and Israel developed multi – and other places developed multi, multi billion dollar businesses. And I'm also fascinated by the fact that people you know – citizens in the United States look at generics, they spend less time thinking about the generic pill they're taking than they think about the piece of chocolate they're putting in their mouth.

I can see a Lipitor competing against the generic version at the correct price point. And I can see Pfizer also becoming the number one generic company in the world. Why not? They have the distribution system. They have the know-how. They have the cash. They have the ability and it's not such a bad business.

And to just give it away makes no sense to me and I think if you look close you'll see that Pfizer is already coming in the ranks and together with (inaudible) it doesn’t seem to me to be that big stretch for them to be a dominant in the branded products.

And I very much, I mentioned an analogy and Pfizer is analogous to Phillip Morris, Exxon Mobile in terms of you know thinking about a merchant banking aspect, thinking about just – you know dominant distribution channels and especially when you can mix in the generic products. So and there are whole lot of other elements too that we like about Pfizer. It's not just about the generics and the distribution system. So I hope that helps answer the question. But I'm going hold score of accounts, we like Pfizer and I know the companies hate it right now and I know the CEO is just like – I think he's doing good job and it takes a bit of time to turn around such a large company. And he's doing it.

And there is an awful lot of activity that’s going on beneath the surface that’s very difficult to see. But from our investigative work, we see it and we're excited about what they're going to do. We'll see. Over a decade ago, investors could not get enough Pfizer at 40, 50 times their earnings and today it’s the most dreaded stock at seven, eight times the earning. So our attack line is that we ignore the crowd. We're ignoring the crowd on this one because we see the cash and time will tell if we're right."


Rating: 3.0/5 (24 votes)

Comments

traderashish
Traderashish - 9 years ago    Report SPAM
http://online.wsj.com/article/SB123560916922977285.html?mod=yahoo_hs&ru=yahoo

Is that why most gurus sold of UNH. and Humana is selling off.

Bruce is contrarian so we will know only in few years if he was right or wrong.

But his portfolio and investors are going to be in pain for some time.

( disclosure I am invested in FAIRX)
jacsaces
Jacsaces - 9 years ago    Report SPAM
i belive pfe, in the long term is a great investment at this point in time.

the price is right the time is rightto move on this one

jacs
kfh227
Kfh227 - 9 years ago    Report SPAM
Time for me to refresh my DCF worksheet. I can't remember what I last thoguht about PFE but I hold it and will continue to hold it.
intelvestor
Intelvestor - 9 years ago    Report SPAM
I think having more than 20% of your portfolio in one company is too risky no matter how confident you are about its future prospects.

This reminds me of the once celebrated value investor Bill Nygren of Oakmark and his Washington Mutual Holding. He had a huge bet on WaMu that at one point he had it at as much as 20% of the portfolio and saw the stock price tumble to zero (actually he got out just before WaMu went bankrupt).
cm1750
Cm1750 - 9 years ago    Report SPAM
Intelvestor,

I would agree that 20% is too much for a mediocre investor, and IMHO Nygren fits in that category.

However, if the downside is essentially zero (95% certainty) then a 20% position is justified. WEB did this when 40% of his portfolio was in AXP decades ago.

I am a big believer in the Kelly Formula which says high conviction = high concentration. This is exactly what private equity firms utilize - they do tons of work and then have 10-12 positions in their funds. Some public market investors have used this approach with great success over time - Greenberg (Chieftain), Relational, SPO, ValueAct etc.

Most mutual fund managers know relatively little about their stocks so 20% positions are not recommended. As WEB correctly points out - diversification is a protection against incompetence, which is a fair characterization for most portfolio managers.

Statistically, the more positions you own, the more likely it is to mimic the index - having 10-12 positions is the best way for a good manager to beat the market.
Amit Chokshi
Amit Chokshi - 9 years ago    Report SPAM
cm I agree but the big caveat is we, pros and retail investors alike, tend to overestimate our ability to analyze a company. We all know statistics and realize people like WEB, Joel Greenblatt, and maybe a few others are in that 10 sigma/std deviations from the mean but we all like to think we're in that same exclusive group.

I did well with a concentrated portfolio in the last bull market but as I started shorting more in 2004 I needed more liquidity on the long side which is why I went from 8-10 holdings to 20 or so and it also helped because i was more comfortable holding less cash because i had more liquidity with those 20 holdings and could make portfolio adjustments faster.

Kelly formula I think has its flaws because I'd say blackjack and cards have more pure math where good players follow the math. With the kelly formula you have emotional/psychology impacting the markets and you also have the fact that your projections could be dead wrong and the kelly formula results come back totally wrong.

Big bets are good for the new fund manager in raising AUM, like a Mark Sellers or Pabrai, because the compensation structure makes sense where they make money off placing your assets under risk. If they flame out early on, no big deal, but if they have that 1 bet that takes off, they bring in more and more money and further leverage that into big gains. then even if they flop and bomb to the tune of 60+% losses, they return the capital but keep what they made from earlier years.

MCF worked for sellers and he bought all the way up, when it kicked out, he shut down because running a fund during a bad period sucks and he has plenty of money to stick around. Pabrai has written books and is known for heads i win, tails i dont lose much and in his case, because he's using OPM, it's true. PNCL is at $1 now, he bought that at $16-18. Any chance that or his other holdings so anything?

This is the toughest industry to distinguish the pretenders from the real deal because a great fund manager could be down 30% but a clown could be up 10% and most people can't analyze the underlying holdings properly enough. It's like, Pabrai bought CRYP? wow, must be a 8 bagger when you lose your shirt instead on it. These guys are "heros" because of a number of factors and their analysis of businesses may be a less critical factor to their success than people here think.
traderashish
Traderashish - 9 years ago    Report SPAM
PFE is one of few stocks which have been ignored so far by this rally other being JNJ.

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