After outsized holdings in troubled stocks like Sears (SHLD, Financial) and Fannie Mae (FNMA, Financial) hurt performance over the past year and a half, Fairholme Fund (Trades, Portfolio)s manager Bruce Berkowitz (Trades, Portfolio) replenished his portfolio with five fresh positions and sold one stock in the second quarter.
“Consistent with our value-oriented criteria, we initiated new investments in cash-generative businesses at discounted prices,” Berkowitz wrote in a letter dated July 30.
Berkowitz bought Vista Outdoors Inc. (VSTO, Financial), AT&T (T, Financial) and Spectrum Brands Holdings Inc. (SPB, Financial), according to his second-quarter portfolio disclosure dated May 31. His portfolio manager’s report for the six months ended June 30 announced an additional position, Citigroup (C, Financial). He also exited Sears spinoff Seritage Growth Properties (SRG, Financial).
Berkowitz’s Fairholme Fund (Trades, Portfolio) dipped 8.49% for the first six months of the year, compared to a 2.65% rise in the S&P 500. In a shareholder letter, Berkowitz ascribed the drop in performance to his stake in embattled mortgage entities Fannie Mae and Freddie Mac, “even though the enterprises businesses are stronger than ever,” Berkowitz said.
The Federal Home Loan Mortgage Corp. (Freddie Mac) accounted for 8.4% of the portfolio and Federal National Mortgage Association (Fannie Mae) for 8.4% at second quarter-end. The two were his third and fourth largest positions behind The St. Joe Co. (JOE) at 28.2% and cash and cash equivalents at 25.3%.
Shares of Fannie Mae tumbled 42% year to date, while Freddie Mac declined 37%.
Despite the falters, Berkowitz remains above the index since inception, with a 9.24% annualized return versus 5.43% for the S&P 500.
New buys
Vista Outdoor Inc.
Berkowitz purchased 4,222,600 shares of Vista Outdoor Inc., a maker of sports and outdoor recreation products. The company’s share price averaged $16 in the second quarter. The holding represented 8.54% of Berkowitz’s reported equity portfolio.
Vista Outdoor Inc. has a market cap of $913.530 million; its shares were traded around $15.90 with and P/S ratio of 0.38.
Berkowitz commented in his shareholder letter:
“Vista Outdoors, originally owned by Honeywell until the early 1990s, is a dominant producer of ammunition that is purchased by military, police, and governments around the world, in addition to U.S. consumers. Vista’s product portfolio spans 50+ brands. We believe that Vista’s bottom-cycle profitability has largely been clouded by the temporary oversupply of the U.S. consumer ammunitions market. We expect a return to equilibrium this year and that the company will further recover to past profit levels by selling non-core brands and reducing debt outstanding.”
Berkowitz purchased 875,100 shares of AT&T, giving it 3.38% portfolio space. The telecommunications company had a second-quarter average share price of $34.
AT&T Inc. has a market cap of $231.26 billion; its shares were traded around $31.85 with a P/E ratio of 6.22 and P/S ratio of 1.24. The trailing 12-month dividend yield of AT&T Inc. stocks is 6.25%. The forward dividend yield of AT&T Inc. stocks is 6.27%. AT&T Inc. had an annual average earnings growth of 1.60% over the past 10 years.
Berkowitz commented:
“AT&T offers substantial free cash flow providing ample coverage for a large dividend. This is an attractive proposition for a firm endowed with historical advantages and diversified wireless, wired, and media business lines.”
Spectrum Brands Holdings Inc.
Berkowitz purchased 206,200 shares of Spectrum Brands Holdings stock in the second quarter, giving it 1.96% portfolio space. Its share price averaged $88 for the quarter.
Spectrum Brands Holdings Inc. has a market cap of $4.75 billion; its shares were traded around $88.69 with a P/E ratio of 3.51 and P/S ratio of 0.79. The forward dividend yield of Spectrum Brands Holdings Inc. stocks is 1.93%.
Berkowitz commented:
“Spectrum Brands Holdings is a global consumer products company with leading brands, including Armor All, Kwikset, and Nature’s Miracle to name a few. The company just completed an all-stock merger with its controlling shareholder, HRG. We expect that the combined company will generate much higher levels of cash, sell non-core assets, and apply proceeds to reduce debt and repurchase common shares.”
Citigroup Inc.
Berkowitz did not release information on the number of shares of Citigroup he purchased.
Citigroup Inc has a market cap of $180.79 billion; its shares were traded around $71.84 with and P/S ratio of 2.57. The trailing 12-month dividend yield of Citigroup Inc stocks is 1.80%. The forward dividend yield of Citigroup Inc. stocks is 2.50%.
Berkowitz commented:
“Citigroup was purchased at approximately ten times earnings and a discount to book value, a modest valuation for an essential, global financial institution. Recently approved by the Federal Reserve, Citigroup’s capital allocation plan calls for substantially all earnings to be used for share repurchases, which should drive per share earnings growth.”
Berkowitz previously owned Citigroup when he purchased a slew of banks including Bank of America (BAC) and CIT Group (CIT) in the aftermath of the financial crisis in 2010.
See Bruce Berkowitz (Trades, Portfolio)’s Fairholme Fund (Trades, Portfolio) portfolio here.
