Bruce Berkowitz has been visible lately defending his positions in financials. He’s had a tough year so far, with many of his big bets not performing as expected. Short-term performance should be nearly completely disregarded, though, in my opinion. Don’t look at his six month track record. Look at the past decade when he was named Morningstar’s domestic stock manager of the decade. He’s been early in the financials, but not wrong on them. If anything, this is an opportunity to buy some of his positions at cheaper valuations than he did.
Berkowitz is the founder of the Fairholme Funds. His holdings here cover his three portfolios as well as managed accounts. Unlike other famous portfolio managers, Berkowitz doesn’t run a hedge fund. Like Bill Ackman and Chase Coleman, both of whom I’ve highlighted recently, Berkowitz prefers a focused portfolio. His top seven holdings make up about 60% of his portfolio, although he holds stakes in 28 stocks. Six out of his seven largest holdings are in financials, if you consider Berkshire Hathaway a financial as I do. Most of the smaller positions seem to be just for tracking positions. His ten smallest positions only make up 1% of the portfolio in total. Earlier this year Berkowitz said he had $5 billion in cash out of his approximately $20 billion under management.
Below are Bruce Berkowitz’s 7 largest positions:
American International Group (AIG): Berkowitz first starting buying into AIG in Q1 2010. The position now makes up nearly 11% of his portfolio and is his largest position. This position has been the primary driver for his underperformance in 2011. However, he remains bullish on the stock, especially as it trades below book value. The impossibility here is to identify what exactly their book value should be. He recently noted that if he had the available cash, he would help buy the stake held by the U.S. government. In addition to shares, Berkowitz also owns about 24 million warrants.
Sears Holdings (SHLD): Sears is the only non-financial holding in the top seven. Berkowitz owns Sears because he’s an Eddie Lampert fan. While he’s held shares since Lampert took over, he started ramping up ownership in late 2007. The stock makes up slightly more than 9% of his portfolio right now. Despite all of the buybacks, shares still trade now for lower than they did in the third quarter in 2008.
Bank of America (BAC): Berkowitz started buying into Bank of America in Q1 2010. This is a position that has not performed for him, but that he has vigorously defended. He’s looking at a normalized environment and sees huge upside in the name. Like AIG, book value may be difficult to accurately gauge, but Bank of America is at 0.5 times book as well as below tangible book. Tangible book strips out intangibles like goodwill. Yes, there is a tremendous amount of uncertainty in the financials and in this stock in particular. But from my vantage point it appears the market is valuing a worst case scenario for Bank of America in every aspect. The bank makes up about 8.5% of Berkowitz’s portfolio.
Berkshire Hathaway (BRK.B): If you add together his holdings in the A and B shares, Berkshire makes up about 8% of his portfolio. Some commentators have recently noted that Berkshire shares are trading at valuation levels not seen for decades if measured by price to book. Are share buybacks a possibility? Perhaps so, but Buffett also is interested in another large purchase not unlike Lubrizol and Burlington Northern. It appears that there are some candidates out there.
Citigroup (C): The idea behind the Citi position is similar to the Bank of America position. Citgroup makes up about 8% of Berkowitz’s portfolio. He bought into the stock in late 2009. You can read this 2010 interview which describes how Berkowitz got comfortable with the stock. He believes it’s too big for the government to let it fail, and he compares Citi to his extremely profitable investment in Wells Fargo in the late ‘80’s and early ‘90’s. It’s clear that Berkowitz believes it’s only a matter of time until the bad loans start falling off the books, and the stock then jumps exponentially.
Morgan Stanley (MS): Berkowitz has a position in Morgan Stanley slightly larger than 7%. He first bought into the stock in Q2 2010 and more than doubled his position in Q3 of that year. Morgan Stanley has a similar story on the thesis as the other names. Like Bank of America, the price to book here is also extremely low, just 0.6. In normal times the general rule of thumb is that you buy a bank at less than 1.5 times book and sell when it’s above 2. Obviously these times are not normal, but if you’re of the opinion that history may not repeat itself, though it does rhyme, then you have to believe that these financials should at least be trading at levels that would have historically been considered cheap. Just to get to 1.5 times book is a 150% gain in the stock price even with no book value growth.
Goldman Sachs (GS): This pre-eminent brand makes up about 7.4% of Bruce Berkowitz’s portfolio. He bought into Goldman in Q2 2010. Goldman has come out of the crisis clearly designated as the chief boogeyman in the eyes of politicians. Whether they benefited from being net short during the crisis or whether they were not, in fact, net short during the crisis, Goldman was not the reason for the collapse. Berkowitz is betting that Goldman will weather the regulatory and political onslaught and come out okay, as they always have. At today’s valuations, a worst-case scenario is already priced into shares.