This article is part of a series that provides an ongoing analysis of the changes made to Fairholme's US stock portfolio on a quarterly basis. It is based on Fairholme's regulatory 13F Form filed on 08/14/2013. Please visit our Tracking Bruce Berkowitz's Fairholme Fund Holdings article for an idea on how his holdings have progressed over the years and our previous update highlighting the fund's moves during Q1 2013.
Bruce Berkowitz's US stock portfolio size decreased marginally this quarter from around $7.86B to $7.69B. The number of positions in the portfolio went down from 21 to 19 - Assured Guaranty (AGO), Canadian Natural Resources (CNQ), MBIA Inc. (MBI), and Orchard Supply Hardware (OSH) were eliminated and Lincoln National (LNC) and Hartford Financial (HIG) were newly added. MBI disposal was the only significant activity as the rest of them are very small positions. The portfolio continues to be very concentrated with the largest five positions accounting for about 85% of the US long portfolio compared to just over 81% as of last quarter. That percentage increases to over 91% when including the associated warrants.
Lincoln National & Hartford Financial Services: LNC & HIG are very small ~0.02% of the US long portfolio positions each started this quarter. As the stakes are minute, the activity does not indicate a clear bias.
MBIA Inc.: MBI was a 4.11% of the US long portfolio position that was reduced by over one-fourth last quarter at prices between $7.85 and $13.02. It was disposed of this quarter at prices between $9 and $15.70. The stock currently trades at $12.40. The original position was established in 2010 and the stake elimination indicates a clear bearish bias.
Canadian Natural Resources: CNQ is a very small 0.45% of the US long portfolio stake established last quarter and disposed of this quarter. The purchase last quarter happened at prices between $28.87 and $32.93 and the disposal at prices between $28 and $32.15. The stock currently trades at $30.53. The quick about-turn indicates a mild bearish bias.
Assured Guaranty: AGO was an insignificantly small 0.01% position as of last quarter. It was established in Q2 2011 but was quickly reduced the following quarter. The stake elimination this quarter does not indicate a clear bias.
Orchard Supply Hardware (OTCPK:OSHWQ): The very small 0.03% of the US long portfolio stake was eliminated this quarter at around $2.50. The original position was established in Q1 2012 as a result of the spin-off of Orchard Supply Hardware from Sears Holding (terms: one common share and a preferred share of Orchard Supply hardware for every 22.141777 of Sears held) - it started trading at around $15.75. Since then, minor adjustments were done every quarter but the percentage allocation remained extremely small. The stock currently trades at $0.25.
American International Group (AIG): AIG is Berkowitz's largest position at just over 50% of the US long portfolio. The allocation is significantly up from the 42.43% as of last quarter: AIG share price spiked over 15% during the quarter. The position size was increased marginally as well at prices between $37.69 and $46.21. The stock currently trades outside that range at $47.21. Berkowitz is extremely bullish on AIG. The stake was increased incrementally in each of the last three quarters against advancing prices.
Bank of America (BAC): BAC is Berkowitz's second largest position behind AIG at 16.88% of the US long portfolio. The stake was first purchased in 2010 and minor adjustments have since been made every quarter. This quarter, the position in the common shares was increased marginally and the warrants were kept steady - the activity was very similar to last quarter. BAC traded between $11.44 and $13.83 this quarter and between $11 and $12.78 last quarter. It currently trades above those ranges at $14.42. Berkowitz continues to be very bullish on BAC.
Sears Holdings Corp (SHLD): SHLD is Berkowitz's third largest position at 11.16% of the US long portfolio. The original stake was established in 2007 although the position size has fluctuated over the years. This quarter, it was increased by around 4.5% at prices between $40 and $52.50 and last quarter the activity was similar: 7.5% increase at prices between $42 and $60. The current stock price of $41.18 is far below Berkowitz's average purchase price. The pattern of trades indicates aggressive buying in the face of price weakness and as such signifies a strong bullish bias. For investors attempting to follow Berkowitz, SHLD is a very good option to consider.
SHLD spun-off Sears Hometown and Outlet Stores (SHOS) in a rights transaction in mid-October 2012. That stock has been on a roll as it has returned over 32% in the last ten months.
Genworth Financial (GNW): GNW is a 0.16% of the US long portfolio stake established last quarter at prices between $7.50 and $10.50. It was increased by ~20% this quarter at prices between $9.10 and $11.39. The stock currently trades above that range at $12.59. As the relative position size is very small, the stake increase does not represent a clear bias.
Chesapeake Energy (CHK): CHK was a 3.47% of the US long portfolio stake established last quarter at prices between $$16.60 and $22.52. It was reduced to an insignificantly small 0.21% position this quarter at prices between $18.47 and $22.58. The stock currently trades well above that range at $25. The quick about-turn represents a clear bearish bias.
St Joe Companies (JOE) & Leucadia National (LUK): JOE and LUK are large 6.85% and 6.36% of the US long portfolio stakes respectively that were reduced marginally this quarter. The bulk of the JOE stake was purchased in the 2008-2009 timeframe and there have only been minor adjustments since. LUK is a very long-term holding that was built-up over several years. Last quarter, the position was increased by around 5% as a result of the all-stock merger deal between LUK and Jefferies. Berkowitz is very bullish on JOE & LUK. For investors attempting to follow Berkowitz, these are good options to consider.
Berkshire Hathaway (BRK.A and BRK.B): Berkshire Hathaway is a long-term holding that was built aggressively in the 2009-2011 timeframe. At its peak in 2011, the position accounted for 10% of the US long portfolio. The following quarters saw an about-turn as the position was reduced by over 80% by Q2 2012. Last quarter, the stake was almost doubled to a 2% of the US long portfolio position at prices between $90 and $104 and this quarter the pattern reversed as 50% of the stake was sold at prices between $103 and $115. The stock currently trades at the top end of that range at $115.
AIG WTS 45 Strike: The position was decreased marginally while simultaneously increasing the common stock position. The activity does not signify a clear bias.
The rest of the positions were left untouched during the quarter:
Citigroup (C), Wells Fargo (WFC), Wells Fargo WTS 34.01 Strike, Bank of America WTS 13.30 Strike, JP Morgan WTS 42.42 Strike, Lincoln National WTS 10.636 Strike, and Hartford Financial Group WTS 9.563 Strike: The positions in the warrants are very small (less than 1%) to signify a clear bias. C was a very large stake established in 2010 that has since been reduced to an insignificant position. The very small 0.08% of the US long portfolio position in WFC was first established in 2011. Since then, the position has been periodically increased but it is still an insignificantly small stake to indicate a clear bias.
The spreadsheet below highlights changes to Fairholme's US stock holdings in Q2 2013: