We took a look at investing guru Bruce Berkowitz's buys from the latest reporting period ending first quarter 2011. It's clear Berkowitz continues to see value in the pharmaceutical space, and he continues to find value in the banking sector as well. Here are nine of his newest buys, plus some commentary on each. Interestingly, at the time of writing, you can buy a few of the names below at a lower price than Bruce paid. As always, use the list below as a starting point for your own due diligence:
Cisco (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 Berkowitz 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 $14.97 on May 17. With competitors like Hewlett Packard (HPQ) and Juniper (JNPR) 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.
However, as developed countries increasingly rely on data services such as mobile phones, cloud storage, and online retail, the market for IT hardware and services will be highly lucrative. Cisco is concentrating its efforts on being the market leader in networking infrastructure to better meet this huge surge in demand, and it has the piles of cash to make such a strategy successful. With a very low forward P/E of 8.74 and a PE/G ratio of just 0.96, Cisco is a beaten down stock with great dividend potential ahead.
The dividend will almost certainly be raised each year or more frequently going forward. We think Cisco's management, while fallible, recognizes that money is better spent returning cash to shareholders rather than pursuing growth at any cost. We commend this probable change in trajectory.
American International Group (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 looks poised to emerge from zombie status. Fairholme Fund currently has about 10.76% 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. (It should be noted, that while Berkowitz did add shares of AIG during the reporting period ending 12/31, he only added shares of AIG warrants during the most recent period.)
Sears Holdings (SHLD): Sears Holdings is a retail holding company that controls both Kmart’s and Sears’ department stores. The company has very low pre-tax profit margins (.43%) compared to its competitors such as Wal-Mart (WMT) and Target Stores (TGT), which have operating margins of 3.87% and 4.34%, respectively. This, combined with stiff competition in the retail industry leads us to believe that Sears Holdings will fall in the next quarter. The stock currently trades at $74.04 per share, and we are lukewarm at that price. We think interested investors should employ a put-selling strategy to acquire shares if they want them. Berkowitz owns 16 million shares of Sears and has maintained a position for at least the past five years.
Citigroup (C) Citigroup suffered drops in share value of over 20% since its high in late January. Citigroup is hovering at a level slightly below its book value currently. Currently selling at $38.30, Citigroup should probably be valued somewhere in the mid-$40 range. With a P/E of 12.35, and earnings per share of 3.06 Citigroup definitely has room to grow in value. In terms of management effectiveness, Citigroup is below industry averages when it comes to net profit margin and return on assets.
By itself, Citigroup is a worthwhile stock to consider based on its projected book value. It has been recovering since announcing a 10-to-1 reverse stock split in March, a move that likely opened Citigroup up to more institutional buyers.
GlaxoSmithKline (GSK) paid $2.04 in dividends in 2010, which would be a current yield of 5%. The latest dividend payment was made on April 7 in the amount of $0.6153. Cross your fingers, we could see dividend growth this year. The 52 week trading range is $31.80 - $44.10, and GlaxoSmithKline trades currently near $40.50.
The company is focused on diversifying global growth and introducing new products. We believe there is substantial value in the pharmaceutical sector for investors willing to wait out "lumpy" returns. We still think Novartis (NVS) is a better buy due to its earnings growth prospects over the next few years.
Bristol-Myers Squibb Company (BMY): Between 2012 and 2013, Bristol-Myers will lose patent protection on blockbusters Plavix and Avapro, which will result in a loss of over 40% of sales. Bristol-Myers will also lose protection in 2015 on blockbuster antipsychotic drug Abilify, which will further erode Bristol-Myers’ operating margins and revenue streams. Despite the grim news, we believe Bristol-Myers has enough strength in its pipeline to weather the coming storm. Bristol-Myers has established profitable partnerships in the past with other drug makers to create blockbusters such as Plavix and Avapro. That partnership strategy, which reduces risks and development costs, should help with future products such as Onglyza and Apixaban, which are currently being developed in conjunction with AstraZeneca (AZN) and Pfizer (PFE) respectively.
Increased cash reserves from the sell-off of the company’s medical-imaging group, wound-care division, and nutritional business also give it some room to make an acquisition if necessary (and also make it an attractive acquisition target). In the short-term, expect sales volatility with minor growth due to patent loss. In the long-term, expect Bristol-Myers to bounce back once potential blockbusters start rolling off its pipeline. Bristol-Myers trades at $27 with an EPS of 1.79. We estimate fair value at $29 per share.
Eli Lilly and Company (LLY): Eli Lilly is a worldwide pharmaceutical provider. It manufactures and markets drugs focused on the fields of neuroscience, endocrinology, oncology, cardiology, and also animal health. The products Eli Lilly makes treat a variety of conditions and illnesses within these fields.
Eli Lilly stated earlier in the year that first quarter 2011 dividend would be $0.49, which is a dividend yield of 5.1%. It is currently trading around $37.33. It has a price to earnings of 8.48, compared to the industry average of 19.7. Eli Lilly has a strong operating margin of 26.4% and earnings per share growth (3 year average) of 19.1. It also has a return on equity of 25.6%. We think Eli Lilly will continue to line your portfolio with strong dividends for quite a while. Be careful about how long you hold this position though. Like BMY, there is a lot of skepticism about Eli Lilly due to some patents expiring in the coming years.
Goldman Sachs (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. We think Goldman will continue to fight to stay relevant in this economy and succeed. Despite attacks on Goldman Sachs' profits from the Frank-Dodd bill and the newly formed consumer protection agency headed by Elizabeth Warren, Goldman Sachs should be able to keep profit margins reasonably steady going forward.
We finally arrive at Berkshire Hathaway (BRK.A) (BRK.B), Warren Buffett's baby, which owns over 70 firms and has stakes in more than a dozen others. If there is one Graham disciple who stands above all others, it is Buffett, with his focus on providing value to investors. Berkshire’s book value per share has increased an average of 20% per year over the last 40-plus years. However, we do see slowing in that growth rate due to Berkshire's large size.
Shares appear cheap, in our opinion. Berkshire shares are cheap in their own right and should trade around the $145,000 mark ($96 per B share), based on Berkshire's historic book value median of 1.6x. Most analysts continue to model Berkshire primarily as an insurance company, which is colorable given that we value Berkshire's insurance businesses at around $85,000 per A share.
What used to be a "Buffett premium" is now a Buffett discount. On the facts, Buffett and co-chairman Charlie Munger are getting old, and the two have been awfully tight-lipped about succession plans.
Buffett's pick of Todd Coombs, a relative no-name from the Greenwich hedge fund crowd that Buffett and Munger often despise due to their high fees, still leaves us puzzled. Todd Coombs does not appear to be special. His returns are by no-means extraordinary. He does not display any clear abilities in options markets, which is frankly where Berkshire needs to head to make outsized returns. Regardless, Coombs' picks in the financial sector are underwhelming.
Gaffes and puzzles aside, Berkshire is still a stellar collection of assets that have tremendous earnings power. They are worth more together. We think Berkshire shares are undervalued; and at some point investors will forgive Buffett (or more likely realize he is the same human he was over the last several decades).