By Andrew Hawkins
The other day I wrote an article on the newest buys by famed investor Bruce Berkowitz, manager of the Fairholme Fund. Today I am going to flip that and take a look into some of the positions he couldn’t hold on to anymore. All investors have positions that fall into the red, but it is what they do when they see red that separates the winners and the losers.
Winners have a plan. They stick to their strategy and don’t sell out at the bottom. Winners also know when to get out of a hopeless position. They stay vigilant and are constantly reevaluating their strategies when new information is available. Losers fear the red glow from the computer screen and run for the hills. They will also stick to a plan that is no longer applicable to the current market. Bruce has a history of being a winner, but no one is perfect and it is important to remind ourselves that these high profile investors are human and take losses too. Let’s see what Mr. Berkowitz has been selling and how:
General Growth Properties Inc. (GGP): General Growth Properties Inc. has been a short-lived member of the Fairholme Fund’s portfolio. Bruce purchased shares in this real estate investment trust (REIT) in the last quarter of 2010. He bought about 113 million shares at an average price of $15.96. REITs get special tax considerations and because of this, they usually offer substantial dividends. Currently, GGP has a 0.40 forward annual dividend rate and a 2.5% forward annual dividend yield. Bruce must have found several things appealing about GGP because he took a big position one quarter and got rid of it the next. He got out of all 113 million shares in the first quarter of 2011. According to the quarterly average price, he bought them at $15.96 and sold at $15.11. With capital loss of about $.85/share, the dividend of $.40/share would not cover his loses. According to Gurufocus.com, this had a -11.14% impact to his portfolio, the ratio of the dollar value of the transaction to the total value of the portfolio. Fairholme was involved in the restructuring of GGP that led to the creation of a spinoff, The Howard Hughes Corporation (HHC).
General Electric (GE): This global corporate giant is no stranger to any investor. GE has business units all over the world and is involved in a myriad of different industries. It has been around since 1892 and has shaped the world into what it is today. Mr. Berkowitz sold all his approximately 16 million shares for an average price of $19.99 in the first quarter of 2011. He purchased the bulk (about 14.5 million) of them in the third quarter of 2010 at about $15.56. He had another round of buying in the fourth quarter where he purchased about another 1.5 million shares at approximately $16.75. GE has a nice payout ratio of 41% and a dividend yield of 3%, making this a nice position to hold on to. But Bruce bailed out of GE about $1.66 away from the 52-week high of $21.65. Today, GE is trading around $19.96, around the $19.99 mark Berkowitz approximately sold at.
BP plc (BP): This London-based oil giant has seen its fair share of controversy in the recent news. The massive oil spill from one of its oil rigs in the Gulf of Mexico has destroyed the company’s image. As BP’s image fell to the gutter in 2010, so too did its stock price. On June 25, 2010 BP closed at $27.02. This is a dramatic drop from April 15, 2010, which closed at $60.57. Bruce bought in during 2010 in the second quarter at an average price of $45.25. He purchased almost 9.5 million shares, most likely assuming that fundamentally, BP has not changed too dramatically and, once people let the sting of the oil spill pass, the stock will bounce back. Unfortunately, the spill lasted longer than expected and Bruce ended up selling all 9.5 million shares at an average price of $37.24 during the third quarter of 2010. BP is currently trading around $43.21, which is almost back up to the price that Berkowitz bought at. Bruce would have had to wait almost 3 quarters to see his position make him money. On the up side, he could have waited and sold at the bottom instead he dove off the ship halfway down the whirlpool.
Hertz Global Holdings (HTZ): Hertz Global Holdings is huge in the car rental space. It is hard to pass through an airport without seeing a Hertz advertisement or its booth. The company has also been kind to Bruce’s portfolio. Before the credit crisis in 2007, Hertz traded as high as $26.72. Once the economy began to tumble it fell to a low of $1.55 on November 17, 2008. Bruce saw Hertz as a cheap buy and bought in during Q3 of 2008. He bought 12.3 million shares at an average of $8.44. The next quarter he upped his position by 21 million shares at an average price of $4.41. The price of the stock still slumped and in his “ignore the crowd” way, he bought even more. In Q1 2009, he purchased 8.5 million more shares at $4.33. The price began to bounce back slightly and at $6.85 he did another large purchase of 16 million shares.
At around the $10 mark, Bruce did a tiny sell and another small buy. At the beginning of 2010, Mr. Berkowitz almost had 60 million shares of Hertz Global Holdings. He sold all 60 million in the next 3 quarters in 2010. In Q1, he sold about 3 million at an average price of $10.52. In Q2, he sold 27 million at $11.48 and finally in Q3, he sold the approximately 29 million shares remaining at $10.18. Bruce truly hit the mark on this stock pick, but currently HTZ is trading at about $16.18. I am sure Bruce is not sweating this point because he profited huge from his dealings with Hertz.
AmeriCredit Corporation (ACF): Another big winner for Bruce was AmeriCredit Corporation. Founded in 1992, AmeriCredit was a leading automobile finance company. The company dealt with dealerships and consumers directly. ACF no longer exists independently. It was bought out by General Motors (GM) in July 2010 for $3.5 billion cash. It currently operates as General Motors Financial.
This acquisition made Bruce a very happy man. He first bought almost 13 million shares of ACF in Q1 of 2008 at an average price of $12.29. The price continued to drop and Bruce continued to buy. He ended 2008 with 32 million shares. He purchased 11 million of these at a little under $7. He held on to these shares for almost a whole year before making any more decisions. In Q4 of 2009, Mr. Berkowitz purchased another 3 million shares with an average price tag of $18.19, almost $6 more than his original entering price. Next came the fun part, he sold over 10 million shares in the $22 range and managed to sell 6,700 at $23.24 before the sale to GM. According the terms of agreements of the sale, shareholders received $24.50 for each outstanding share owned. ACF was a large payday for Bruce, who at one point was buying these shares under $7.
“You win some and you lose some” the saying goes. It is always valuable to take a moment to realize that with the big paydays, come the huge loses. Bruce knows this better than most. He has had some large paydays but has taken a few losses along the way.