Andrew Hawkins, Guest Editor
It is always interesting to find an investor who seems to go against Wall Street and still produce significant returns. Bruce Berkowitz, the manager of Fairholme Fund, has continued to produce superior returns with the funds mantra “ignore the crowd.” His unique and confident style has worked in the past, but we look at the future of this famed investor. We are going to break down 6 of his newest buy picks and decide whether he was ignoring the crowd or ignoring the warning signs.
AIG – AIG was left to pick up the pieces after the credit crisis. With a lot of help from Washington, AIG has managed to sew up most of the wounds and begin to look to the future. Despite the turbulent few years, AIG is still a leader in insurance. It provides numerous insurance products around the world. It was the insurance powerhouse before 2008, and is looking to stand atop the industry once again. With a new management team and leaner operations, AIG plans to engage in a secondary stock offering. Fairholme Fund currently has about 10.7% of its total assets in AIG. This means that Mr. Berkowitz is not messing around and is putting his money where his mouth is. He truly is putting his chips down on a company that has seen troubled times and is hoping that AIG turns things around.
RF – Regions Financial Corporation is another financial company that was left scarred and tattered after the credit crisis. Regions provides commercial and retail banking services to multiple states throughout the United States. It was founded and has seen growth through mergers and acquisitions. Bruce obviously has his money on Regions bouncing back because he owns about 9.2% of outstanding shares. Regions does look good based on a few typical metrics. It has a price/book of 0.7 and a debt/equity of 0.9. He is far and above the fund with the largest stake in Regions Financial. He believes in it but does the rest of Wall St? I think Region's relatively improved commercial loan portfolio makes it a buy.
BAC – Bank of America is a banking juggernaut. It offers a wide range of services and products both commercial and retail. It also has a significant global presence. It was obviously hurt by the credit crisis, but has seemed to recover slightly better than RF. It managed to acquire Merrill Lynch, an investment banking leader, throughout the mess of a year that was 2008. It had a less than stellar quarter and controversy surrounds some divisions (mostly the mortgage division). Bruce has about 8.5% of the Fairholme Fund’s total assets into Bank of America. This is currently the fund's third largest holding and Mr. Berkowitz has faith that this banking king will produce superior returns.
GS – Goldman Sachs is considered the premier investment bank on Wall Street. It has been all over the media because of scandals. Bruce hopefully knows what he is doing seeing as he currently has about 7.3% of the fund’s total assets allocated to Goldman. He recently upped his stake in the company by almost 14%. This is a move that a few hedge funds have made as well, but most are waiting to see exactly what happens with the pending investigations against Goldman Sachs.
CSCO – One of Bruce’s most recent, high profile purchases has been Cisco Systems Inc. Cisco is a technology hardware and equipment company that focuses on network solutions for businesses. Cisco has been on the decline recently and Bruce has actually taken a loss on this position since entering, but is holding on for the long term. He has about 4.25% of total assets allocated to Cisco. Despite a sound financial base, quarterly earnings have been weak and investors have not been kind to the stock price. Cisco closed at $16.64 on May 17. With competitors like Hewitt-Packard (HPQ) trying to chip away at Cisco’s profits, Cisco certainly has some trials ahead. Bruce has taken a hit thus far on Cisco and may take a few more before he sees any returns.
TEF – Bruce sold most of Fairholme Fund’s stake in Verizon (VZ) and AT&T (T) and secured a position in Telefonica S.A. Telefonica is a Spanish based telecommunications company. It has a significant global presence mostly in Latin America and the rest of Europe. The company thrives in the wireless/mobile phone sector. According to the first quarter results conference call, it is positioned to maintain profits and continue to grow because of its global presence. The diversification this brings drives growth, with much of it coming from Latin America. It currently has a 7.4 price/earnings and has very little debt. Fundamentally, this seems like a good buy and Bruce may be following a crowd but this pick should produce positive returns.