Fairholme Capital Management is well regarded as one of the most popular and high profile asset managers. Its founder, Bruce Berkowitz, is considered by many to be one of the better large investors on the street, and also a contrarian.
Fairholme is well known for holding fewer, larger positions than most companies of its size, not unlike Warren Buffett. Fairholme’s flagship fund (FAIRX) is a substantial fund, at $18 billion, last reporting holdings of approximately 25% cash and 70% in about a dozen equities.
Based on Fairholme’s 13F for the first quarter of 2011, we know what transactions the fund made at the start of the year. This article will focus on Fairholme’s transactions with a market value above $200 million. This article seeks to observe how these transactions have worked out so far in 2011, individually and in comparison to the S&P 500 ETF (SPY).
Fairholme made two new large acquisitions in the first quarter of 2011. The largest was in Brookfield Asset Management Inc. (BAM), a large property, renewable power and infrastructure manager. Fairholme purchased 27.5 million shares of BAM, with a value of over $892 at the end of the quarter.
Fairholme also purchased over 35.8 million shares of Cisco Systems, Inc. (CSCO), with a value of over $614 million. Fairholme also significantly increased its position in Sears Holdings Corporation (SHLD), the retailer that runs Sears and Kmart. Fairholme acquired nearly $250 million more and now has over 16 million shares worth over $1.3 billion, or about a 15% stake in SHLD, indicating a strong level of comfort with the present valuation.
Fairholme also had notable decreases. First, the filing indicates a sale of some of its American International Group, Inc. (AIG), the well-known insurer. Fairholme still lists AIG as its largest holding, valued at over $1.5 billion at the end of the first quarter. Fairholme also has some AIG warrants. Fairholme also sold about $250 million worth of both of AT&T (T) and Verizon Communications (VZ), the two well-known American telecoms. Fairholme has sold nearly all of both.
Performance Comparisons of the Above-Mentioned Companies
Over the last six months, or since the start of 2011, these companies and the S&P 500 remained relatively flat, with the exception being AIG. Unlike the rest of these companies that have only deviated from their prices at the start of the year plus or minus about 5%, AIG is down 50% since the start of the year. Moreover, it is believed that Fairholme began selling its AIG shares after AIG’s initial drop by about 25% within January.
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Over the last three months, AIG was still the worst performing equity of the group, falling approximately 20%. SHLD also underperformed the group, falling approximately 10% during the quarter. The other names all remained relatively flat, not deviating more than about 5% from where they started the quarter.
Within the last month, again, all of these companies remained relatively range-bound. Though all are negative for the month, it is only during this recent short-term period that the S&P 500 has underperformed Fairholme’s discussed holdings.
What this information appears to show is that even though these investments have not produced large returns for Fairholme so far in 2011, they have begun to outperform the S&P 500 as the market has more broadly turned negative. This very situation is something that Fairholme’s value and high-focus strategy contemplates, by attempting to identify equities that appear to provide a margin of safety.
The one outlier equity, here, is AIG which severely underperformed the group. Most of AIG’s decline occurred in response to the government’s announcement as to its selling price, but even AIG outperformed the S&P 500 in June.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
