Bruce Berkowitz focuses his investments in a relatively small number of companies. He thinks that the more diversified the portfolio, the more likely the performance will be average. He likes to beat the average by choosing companies with great managers, and deeply undervalued stocks. Berkowitz’s investment strategy stems from Benjamin Graham. He believes eventually the whimsical market will reflect the actual value of the company.
Bruce Berkowitz is the founder and the Managing Member of the Fairholme Fund. Prior to forming Fairholme Capital Management, Mr. Berkowitz was a Managing Director of Smith Barney, Inc. from December of 1993 to October of 1997. Since inception in 1999 through the end of 2007, his Fairholme Fund has returned 17.40% annually on average. Bruce Berkowitz’s fund beat the street nine out of ten of the years from 2000 to 2009. His fund made an average excess gain of 13.86% compared with the S&P500. In 1999, if we invested $10,000 in Fairholme, and $10,000 in S&P500, our portfolio value would have tripled to $33,600 in Fairholme, and declined to $8,953 in S&P500 (Shareholder Letter 2009). Bruce Berkowitz holds interest in 30 companies with a total value of $9.97 billion with the largest investments in financials (45%).
Top Five Holdings of Bruce Berkowitz:
No. 1: Sears Holdings Corp. (SHLD), Weightings: 12.51% - 14,951,639 Shares
No. 2: Berkshire Hathaway Inc. (BRK-B), Weightings: 7.96% - 241,507 Shares
No. 3: The St. Joe Company (JOE), Weightings: 7.77% - 26,833,468 Shares
No. 4: Citigroup Inc. (C), Weightings: 7.13% - 214,698,274 Shares
No. 5: Hertz Global Holdings Inc. (HTZ), Weightings: 7.07% - 59,138,966 Shares
According to his interview with Consuelo Mack, Bruce is a bottom-up value investor that puts his focus on domestic US-based companies. Bruce Berkowitz said Fairholme looks for companies with “fortress-like” balance sheets and ample free cash-flow. This rule does not exclude his company. Berkowitz said, “Cash is like a financial valium, that you can keep your cool during very difficult times. And of course cash is extremely valuable when no one else has it. When that situation occurs, the phone starts to ring and there are interesting propositions. We've been able to do securitized-bonds at 18% yield to maturity, again, 25 plus percent bonds. We've been able to buy large positions in companies whose management we respect, that where the prices were being decimated for no good reason at all. It's wonderful to have that flexibility, but [for us to] have the heft of that balance sheet is the safety of having that cash” (page 5). He said to keep yourself protected in these economic times is to not treat investing like Russian-Roulette—even if there is 1% chance at death out of a hundred—to put it simply, “Death is Death”.
He likes to play it safe. He gave an example: “Today you have the health insurers, where the fear is so great they’re going to be put out of business by the government, so their prices, their stock market prices have fallen off the proverbial cliff. So when you look at the prices today of a Humana or a Well Point compared to the amount of free cash that they generate, it’s a very high free cash flow yield. And it’s not because they’re making egregious profits, which they’re not. They make about a 4% profit margin which isn’t that much and is very sensible and competitive, but it’s because of the fear of their failure based upon what the current administration is going to do, allowed Fairholme to buy at
a very cheap price in relationship to those existing cash flows, which have done quite well. And then, of course, we try to kill the business, and we ask ourselves, well, if the current health insurers aren’t going to do it, who is going to do it for the country? The answer is there isn’t anyone else to do it for the country. Government is very good at printing checks, sending them out to people, but there’s no hidden department with hundreds of thousands of people ready to help with health care” (page 4).
Berkowitz makes the analogy of his devotion to long-term investments to be a lot like marriage. “It’s like the longer we can hold an investment, the better we feel that all the time and effort we put into studying a company- it’s kind of when we sell a position, I feel as if it’s divorce.”
Berkowitz admits he made a mistake selling some of his largest holdings in Berkshire Hathaway, mainly due to his cautious approach. He said, “[The] past two years, given prices and where he’s been able to buy and how much money he’s put to work and given how so many of his competitors have been weakened from this environment that this may prove to be [Warren Buffet’s] best period of all time”—a.k.a. the Golden Age of Warren Buffett.
He defended his position in Sears as a parallel for Buffett’s Berkshire Hathaway: “When Warren Buffett bought the Berkshire Hathaway textile spinning mills, they turned out to be quite a losing operation. He had a tremendous respect for the employees there. He spent years trying to make a go of it with equipment, and in the end he realized that he had to take the cash, the free cash that the operation was generating and reallocate it for higher and better uses. And that’s the way Sears is going to go” (page 6).
Gurufocus keeps track of his most current new buys in seven companies: Citigroup(C), Burlington Santa Fe (BNI), CIT Group (CIT), Comcast Special (CMCSK), Regions Financial (RF), Comcast (CMCSA), Marshall & Ilsley (MI).
Forest Laboratories Inc. (FRX, Financial)
Forest Laboratories, Inc. and its subsidiaries develop, manufacture and sell both branded and generic forms of ethical drug products which require a physician's prescription, as well as non-prescription pharmaceutical products sold over-the-counter. Forest Laboratories Inc. has a market cap of $9.45 billion; its shares were traded at around $31.26 with a P/E ratio of 9.06 and P/S ratio of 2.41. Forest Laboratories Inc. had an annual average earning growth of 30.7% over the past 10 years. GuruFocus rated Forest Laboratories Inc. the business predictability rank of 2-star.February, FDA denied Forest Lab’s new drug Bystolic, a blood-pressure and heart-failure stabilizer. The company’s 3Q profits increased to $210 million, or $0.69 per share compared to $188 million or $0.62 per share a year ago.
Bruce Berkowitz owns 13,732,500 shares as of 12/31/2009, which accounts for 4.42% of the $9.97 billion portfolio of Fairholme Capital Management. His holdings in Pfizer and Forest total 6.8% of his domestic equity fund (page 10)
Berkshire Hathaway Inc. (BRK-A)
Berkshire Hathaway Inc. is a holding company owning subsidiaries engaged in a number of diverse business activities. Berkshire Hathaway Inc. has a market cap of $130.22 billion; its shares were traded at around $123200 with a P/E ratio of 23.75 and P/S ratio of 1157.6. Berkshire Hathaway Inc. had an annual average earning growth of 27.1% over the past 10 years. GuruFocus rated Berkshire Hathaway Inc. the business predictability rank of 3-star.Last year, Berkshire Hathaway’s performance based on book-value of 19.8% was lower than the S&P500’s 26.5%. The market did better by 6.7% according to Buffet’s 2009 Annual Letter. Words of Buffet: “Our gain in net worth during 2009 was $21.8 billion, which increased the per-share book value of both our Class A and Class B stock by 19.8%. Over the last 45 years (that is, since present management took over) book value has grown from $19 to $84,487, a rate of 20.3% compounded annually. Berkshire’s recent acquisition of Burlington Northern Santa Fe (BNSF) has added at least 65,000 shareholders to the 500,000 or so already on our books….When the financial system went into cardiac arrest in September 2008, Berkshire was a supplier of liquidity and capital to the system, not a supplicant. At the very peak of the crisis, we poured $15.5 billion into a business world that could otherwise look only to the federal government for help. Of that, $9 billion went to bolster capital at three highly-regarded and previously-secure American businesses that needed – without delay – our tangible vote of confidence. The remaining $6.5 billion satisfied our commitment to help fund the purchase of Wrigley, a deal that was completed without pause while, elsewhere, panic reigned. We pay a steep price to maintain our premier financial strength. The $20 billion-plus of cash equivalent assets that we customarily hold is earning a pittance at present. But we sleep well” (page 1, page 5).
Bruce Berkowitz owns 3,925 shares as of 12/31/2009, an increase of 77.28% from the previous quarter. This position accounts for 3.9% of the $9.97 billion portfolio of Fairholme Capital Management.
Humana Inc. (HUM, Financial)
Humana, Inc. is a health services company that facilitates the delivery of health care services through networks of providers to its medical members. Humana Inc. has a market cap of $8.17 billion; its shares were traded at around $47.97 with a P/E ratio of 7.8 and P/S ratio of 0.26. Humana Inc. had an annual average earning growth of 18.7% over the past 10 years. GuruFocus rated Humana Inc. the business predictability rank of 3-star.4Q SEC-filing reported that Humana spent over $1.3 million on lobbying the government. The company’s CEO Michael McCallister’s 2009 salary increased 26% to $6.5 million compared to a year earlier. Humana plans to cut 2,500 jobs or 5% of its workforce this year. On lower operating expenses, the company said 4Q earnings rose 44% to $250.7 million or $1.48 per share from $174.1 million or $1.03 per share, in the same quarter of 2008. Revenue climbed 2% from $7.49 billion to $7.63 billion.
Bruce Berkowitz owns 15,879,600 shares as of 12/31/2009, which accounts for 6.99% of the $9.97 billion portfolio of Fairholme Capital Management.
AmeriCredit Corp. (ACF, Financial)
AmeriCredit Corp. is a independent automobile finance company that provides financing solutions indirectly through auto dealers and directly to consumers in the United States and Canada. Americredit Corp. has a market cap of $3.16 billion; its shares were traded at around $23.64 with a P/E ratio of 28.48 and P/S ratio of 1.52. Americredit Corp. had an annual average earning growth of 13.2% over the past 10 years.The consumer finance company plans to extend and expand its credit borrowing capacity to $1.3 billion from $1.0 billion with agreements made with eight other lending companies. AmeriCredit reported 4Q earnings of $46 million or $0.33 a share compared to a loss of $35 million or $0.29 a share. Revenue of the period rose to $363 million.
Bruce Berkowitz owns 35,349,099 shares as of 12/31/2009, which accounts for 6.75% of the $9.97 billion portfolio of Fairholme Capital Management.
Pfizer Inc (PFE, Financial)
Pfizer Inc is a research-based, global pharmaceutical company that discovers and develops innovative, value-added products that improve the quality of life of people around the world and help them enjoy longer, healthier, and more productive lives. Pfizer Inc has a market cap of $137.8 billion; its shares were traded at around $17.08 with a P/E ratio of 8.46 and P/S ratio of 2.76. The dividend yield of Pfizer Inc stocks is 4.22%. Pfizer Inc had an annual average earning growth of 11% over the past 10 years.Succeeding David Brennan, CEO Jeffrey Kindler is the new chairman of the Pharmaceutical Research and Manufacturers of America. At $5million, Teva Pharmaceutical Industries (TEVA) outbid Pfizer in acquiring German generic drug-maker Ratiopharm. Pfizer drops their suit against Eli Lilly for Viagara patent rights. Canadian gene-therapy drug researcher Tekmira said they will enter into a joint venture with Pfizer to develop therapy-drug delivery molecules. Pfizer ended its Sutent lung cancer drug study-trials on disappointing results.
Bruce Berkowitz owns 93,600 shares as of 12/31/2009, a decrease of 99.87% of from the previous quarter. This position accounts for 0.02% of the $9.97 billion portfolio of Fairholme Capital Management. In his interview, Berkowitz defended his position on Pfizer. He said, “Investing is all about what you pay and what you get. And for the prices
we pay, we think the amount of cash that owners will eventually get will show a nice return in a company with solid balance-sheets, new management,” but most of all “it was really a cheap price relative to the cash flows”(page 5).
Sources:
2009 Shareholder Letter
Interview with Consuelo (Nov 2009), also see Transcript.
