Tracking Bruce Berkowitz's Fairholme Portfolio - Q4 2013 Update

by: John Vincent

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 02/14/2014. 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 Q3 2013.

Bruce Berkowitz's US stock portfolio size increased ~15% this quarter from around $8.44B to $9.71B. The bulk of the increase is due to Berkowitz choosing to report his holdings in Federal Home Loan Mortgage Association and Federal National Mortgage Association (common and preferred) even though they are not 13F securities. The number of positions in the report increased from 19 to 23 as a result. The portfolio remained relatively steady with only minor adjustments made to a few positions this quarter - it continues to be very concentrated with the largest three positions accounting for about 69% of the US long portfolio - that percentage increases to ~74% when including the associated warrants.

New stakes:

Federal Home Loan Mortgage Association & PFD (OTCQB:FMCC) (FMCKJ) and Federal National Mortgage Association & PFD (OTCQB:FNMA): These positions were first disclosed in a June 2, 3013 press release when it was announced that they hold $2.4B par value of the preferred stocks of these two entities. The press release went on to push the restructuring of Fannie and Freddie. It is interesting that Berkowitz chose to disclose his actual position through the 13F filing although it is not a regulatory requirement. The preferred shares traded at around $6 (~25 cents on the dollar: $25 par value) at the time of the announcement and they currently trade at around $10 (~40c on the dollar).

Stake Disposals:


Stake Increases:

Sears Holdings Corp (NASDAQ:SHLD): SHLD is Berkowitz's third largest position at 10.77% of the US long portfolio. The original stake was established in 2007 although the position size has fluctuated over the years. Last two years saw consistent buying and the share count has increased from around 16M shares to over 21M shares. This quarter saw a ~2.7% stake increase at prices between $44 and $66. The current stock price ($41.44) is far below Berkowitz's average purchase price. The pattern of buying signifies a strong bullish bias. For investors attempting to follow Berkowitz, SHLD is a very good option to consider: he controls 22% of the business.

SHLD spun-off Sears Hometown and Outlet Stores (NASDAQ:SHOS) in a rights transaction in mid-October 2012. That stock has been on a roller-coaster since then - very strong performance in the first few quarters followed by an extended drop.

Bank of America (NYSE:BAC): BAC is Berkowitz's second largest position behind AIG at ~16% of the US long portfolio. The stake was first purchased in 2010 and minor adjustments have since been made every quarter. In Q2 2013, the position in the common shares was increased marginally and the warrants were kept steady. The common was marginally reduced last quarter but this quarter saw reversal: a marginal increase. BAC traded between $11.44 and $15.88 during the last three quarters. It currently trades above that range at $16.70. Berkowitz continues to be very bullish on BAC.

Chesapeake Energy (NYSE:CHK): CHK was a 3.47% of the US long portfolio stake established in Q1 2013 at prices between $16.60 and $22.52. It was reduced to an insignificantly small 0.21% position in Q2 2013 at prices between $18.47 and $22.58 and further reduced last quarter. This quarter saw an about-turn as the stake was increased by ~17% at prices between $25 and $29. The stock currently trades at $25.14. The position is still insignificantly small at just 0.26% of the US long portfolio. As such, the activity does not indicate a clear bias.

Stake Decreases:

American International Group (NYSE:AIG): AIG is Berkowitz's largest position at around 41.91% of the US long portfolio. The position size was reduced by 6% this quarter at prices between $47.30 and $52.30. Last quarter also saw a marginal stake reduction at prices between $44.22 and $50.57. The stock currently trades at $49. Berkowitz is extremely bullish on AIG. The stake was increased incrementally in each of the previous three quarters against advancing prices.

AIG WTS 45 Strike: The position was decreased marginally this quarter. The activity does not signify a change in bias.

St Joe Companies (NYSE:JOE) & Leucadia National (NYSE:LUK): JOE and LUK are large 4.91% and 5.24% of the US long portfolio stakes respectively that were reduced marginally this quarter. They were reduced marginally last two quarters as well. 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. In Q1 2013, 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 (NYSE:BRK.A) (NYSE: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. In Q1 2013, the stake was almost doubled to a 2% of the US long portfolio position at prices between $90 and $104 and in Q2 2013 the pattern reversed as 50% of the stake was sold at prices between $103 and $115. Last two quarters saw marginal stake reductions. The stock currently trades at around $115.

The rest of the positions were left untouched during the quarter:

Genworth Financial (NYSE:GNW), Citigroup (NYSE:C), Lincoln National (NYSE:LNC), Hartford Financial Services (NYSE:HIG), and Wells Fargo (NYSE:WFC): The positions are very small (less than 0.5%) to signify a clear bias.

Wells Fargo WTS 34.01 Strike, Bank of America WTS 13.30 Strike, and 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 to signify a clear bias. Combined, they account for ~1.30% of the US long portfolio.

The spreadsheet below highlights changes to Fairholme's US stock holdings in Q4 2013:

Disclosure: I am long SHLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.