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By Larry Gellar

In 1997, Bruce Berkowitz founded Fairholme Capital Management. Since then, he has been named the Domestic Stock Fund Manager of the Decade by Morningstar. Let’s take a look at his fund’s top 5 holdings.

American International Group Inc. (NYSE:AIG): Once upon a time, shares of AIG traded for over $1500 per share. One government bailout and a 1:20 stock split later, the company now trades in the high 20s. General economic headlines that are affecting this company are the U.S. debt ceiling and debt problems in the eurozone. One important headline specific to this company has been that Taiwan has finally approved a buyer for AIG’s Taiwan unit. (Note that the previous buyer the company had lined up did not get approval from Taiwan.) Considering AIG’s search for a suitable buyer had been going on for 20 months, this is certainly a relief for shareholders. AIG is only trading at 9.3 times earnings, so the company may be due for an upswing. This article also discusses a couple of more obscure reasons to consider AIG. Most notably, put/call ratio recently increased from 0.57 to 0.61 and net insider purchases over the last six months represent 3.06% of the company’s share float. Another article from the same contributor discusses more statistics that make AIG a good buy. The company’s TTM EBITDA/common equity ratio, which is essentially a measure of profitability, is currently 0.68 compared to a five-year average of 0.36. Additionally, TTM interest coverage, which measures the company’s ability to pay interest expenses, is currently 4.18 compared to 2.37 for the year prior. Despite these favorable statistics, the company has been on a downward trend as of late, so the time to buy may be now. CEO Robert Benmosche seems to agree as he feels that AIG’s stock offering in May was a failure on the part of investment banks. His comments in this article certainly imply that the stock should be trading at higher levels.

Sears Holdings Corp. (NASDAQ:SHLD): Despite popular brands like Sears, Kmart, and Lands’ End, SHLD has seen its fair share of ups and downs in 2011. The company now trades in the mid-70s, right where it was at the beginning of the year. Recent problems with the company have centered on a tremendously disappointing Q1 earnings report. The next earnings report comes on August 15th, and this will probably decide the fate of the company’s stock price in the short term. One article that does a great job of explaining Sears’ problems can be found here. Specifically, the company’s income has fallen by an amazing 84 percent since Sears and Kmart merged. Same-store sales are one factor causing this decline, and Sears’ domestic stores may be the ones that deserve the most blame.

Online sales may be a place where Sears can add some revenue, but it is doubtful that this can turn around the company’s fortune completely. Shareholders in particular blame chairman Eddie Lampert for the company’s failures, citing his questionable attempts to cut the company’s costs. Negative earnings make measures such as P/E and PEG nearly meaningless, but one way to understand the company’s current valuation is through price-to-sales. Compare a price-to-sales ratio of 0.19 for Sears to 0.52 for Target (NYSE:TGT) and 0.44 for Wal-Mart (NYSE:WMT). The question for Sears is essentially whether the company can start turning consistent profits in its reduced role in the retail industry. Additionally, a recent inventory price report may bode poorly for retail stocks overall. Specifically, prices for soft goods are down 0.8% and overall prices are down 0.6%. In an economy that appears slow to recover, stocks like Sears do not seem to be the place for smart money.

Bank of America Corp. (NYSE:BAC): Bank of America made big headlines on Friday when shares began selling for under $10. The company’s problems seem endless, many of them stemming from when the company bought Countrywide Financial in 2008. Specifically, Bank of America recently settled with a group of investors for $8.5 billion, yet even this has come under fire. New York’s attorney general is investigating the settlement and others will be challenging it in court. A great overall discussion of Bank of America’s current problems can be found here. Due to this bad news, Bank of America’ valuation metrics are certainly enticing to say the least.

Price-to-sales ratio is currently 1.23 compared to 1.79 and 2.02 for competitors JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC), respectively. It seems that the best way to understand an investment in Bank of America is to consider Wall Street’s overall mentality. In many ways, the worst of Bank of America’s problems are over, which means it is unlikely that there is enough bearish fuel to hold the stock below $10 for the long-term. In other words, although there is no reason to believe that the stock will skyrocket anytime soon, investors do not have a strong enough bearish sentiment to keep the stock down. There is some general news that will affect Bank of America in the next month or so. One item is the U.S. debt ceiling, and some analysts have speculated that a U.S. default could actually help banking stocks due to an increase in bond trading. On the other hand, the wide-ranging economic implications of such a default would probably end up hurting stocks of all types, including the financials.

Citigroup Inc. (NYSE:C): Although Citigroup beat earnings estimates last week, the stock has actually fallen a bit since the announcement. Part of this should definitely be attributed to the world’s fiscal problems, but some analysts are also pointing out concerns with the content of Citigroup’s report. Citigroup’s revenues increased, but costs did as well, and it seems unlikely that these rising costs will be going away anytime soon. Despite this, many investors see Citigroup as one of the more stable banks in today’s climate. Another problem plaguing these financials is that a few European banks recently failed a stress test of sorts. This type of news has many believing that the banking industry as a whole is not a wise investment. As far as the debt ceiling goes, one great way to understand the probability of a default is to check the price of credit-default swaps. These prices can be found here, and as one can see, the price to insure U.S. debt is still a fraction what it is for countries such as Greece, Portugal, and Ireland.

It seems likely that U.S. markets are overreacting to the debt ceiling problem, and a rebound is probable once the issue is resolved in Congress. Historically, Citigroup has been sensitive to the market, though, with its beta of 2.62, so there may still be some volatility ahead. On the other hand, Citi has historically found resistance at prices of $36 to $37, so there should be limit to the stock’s potential downside. Although sovereign debt is clearly the big news these days, smaller headlines may also affect this company’s future performance. For example, the company began using its new derivative clearing platform today as part of compliance with the Dodd-Frank Act. As recovery from the financial crisis continues, look for Citigroup to be a leader in the new ways in which transactions must be conducted. There is also an important possibility that Citigroup will be handling the Indian government’s sale of Bharat Heavy Electricals, which would certainly be a boost to the company’s business as an investment bank.

Morgan Stanley (NYSE:MS): In an industry where it is sometimes difficult to differentiate between companies, it is not hard to understand why Morgan Stanley has also been hurt by recent sovereign fiscal problems. Being smaller than the Big Four banks though, Morgan Stanley may be able to outmaneuver some of the world’s political trends. The big earnings report will be released on July 21st, but good news has already seeped out. As reported by Bloomberg, the company’s fixed-income business is improving, with a recent survey showing that Morgan Stanley has been able to increase its number of clients.

Additionally, the company is expanding in the areas of interest rate trading and foreign exchange. Furthermore, CEO James Gorman has remarked that the company is in the top three for commodities as well as credit sales and trading. On a day when Goldman Sachs (NYSE:GS) revised their earnings expectations lower, Morgan Stanley suddenly looks a little more appetizing. Morgan Stanley’s P/E ratio is also well-suited for a value play at only 10.12. Morgan Stanley recently announced that it will be greatly reducing its hiring, and without any further information, this may seem like a rather negative sign for the company. Morgan Stanley already operates at over 20,000 more employees than rival Goldman Sachs though, so this is actually probably the right move. If Wall Street misinterprets this news, investors may be able to cash in once the reduced costs are made clearer. There are also a couple of interesting trends to note in regard to Morgan Stanley’s upcoming earnings report. The big financials that reported last week (Capital One (NYSE:COF), Citigroup, and JPMorgan Chase) all beat estimates, and Morgan Stanley has beaten estimates in its previous two quarters. Shareholders are certainly hoping these trends continue on Thursday.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.