Value Investor Bruce Berkowitz's 5 Newest Stock Picks

 |  Includes: AIG, BAC, BRK.B, C, DTEGY, GS, HSBC, JPM, VOD, VZ
by: Investment Underground

By Larry Gellar

We recently discussed George Soros’ and David Tepper’s latest buys, and now we’d like to do the same for Bruce Berkowitz. Our list includes two banks, a telecom, an insurance company, and a conglomerate. Let’s take a look at what’s happening with these stocks:

Bank of America Corporation (NYSE:BAC) – Investors around the country are speculating what will happen with Bank of America next, as BAC has become by far the most traded stock on the market these days. In fact, the cost of insuring against a default on Bank of America’s bonds recently hit an all-time high. Regardless, bank maven Dick Bove has explained a number of reasons why investors shouldn’t be particularly worried. He notes the company’s profitability as well as the fact that decreases in BAC’s stock price won’t affect its balance sheet. Unless everyone decides to withdraw deposits at the same time (which is the opposite of what’s been happening lately), Bank of America will be fine. Bove also noted the company’s large holdings of cash – in fact, it currently has $638.54 billion. Despite all this, there are a number of other analysts who believe B of A should raise capital, including a group at J.P. Morgan. BAC is also notable for the fact that its market cap of $63.85 billion is a mere fraction of its book value of $222 billion. An interesting list of things that could be subtracted from BAC’s book value in the future though can be found here. Also, note that Bank of America’s operating margin has only been 1.91% for the past 12 months.

Citigroup, Inc. (NYSE:C) is trading about where it was after last Thursday’s drop, and the company has been recently affected by S&P’s refusal to rate a package of securities being offered by it and Goldman Sachs (NYSE:GS). This was due to a change in procedure on the part of Standard & Poor’s, and Moody’s has now been tapped to rate the securities. Other issues affecting the stock lately are discussed here. Notably, the company reported strong earnings, beating both analyst expectations as well as numbers from last quarter and last year. Citigroup is also strong in the emerging markets, and the hiring of Marcia Rothschild should help the company’s business in Latin America. On the other hand, the company has had some regulatory issues, and costs have been rising. Compared with competitors like Bank of America (BAC), HSBC (HBC), and J. P. Morgan Chase (NYSE:JPM), Citigroup’s price/earnings to growth ratio is pretty low at 0.55. Other measures like operating margin, price to earnings ratio, and price to sales ratio are also on the low side. As for cash flows, $2.5 billion came in during 2010, and $206 million has left the company in 2011 so far. Note that with a beta of 2.64 this stock has at times swung wildly.

Vodafone Group plc (NASDAQ:VOD) – VOD shot up early in Monday’s trading, and at least one dictator is a fan of the stock as Muammar Gaddafi's investments have been revealed by Global Witness. In fact, many investors like VOD right now for its 7.3% dividend yield. News for industry as a whole has lately centered on Verizon (NYSE:VZ) employees returning to work despite intense contract negotiations. Verizon has also been noteworthy for its rapidly expanding 4G LTE operations. Vodafone has of course been more affected by events in Europe, but we think these reactions tend to be overblown. In fact, Vodafone’s debt to equity ratio is rather low compared to other big telecoms. Cash per share is also quite healthy. Vodafone’s biggest competitor may be Deutsche Telekom (OTCQX:DTEGY), and each company wins in certain measures. (Note that other competitors like Orange S.A. and Telefónica Europe are privately owned). Vodafone’s price to earnings ratio and operating margin are better, while DTEGY.PK has a better gross margin and price to sales ratio. As for cash flows, Vodafone brought in 1.842 billion pounds for the 12 months ending March 31st. In fact, many investors have been quite happy that Vodafone’s primary currency is the pound due to problems in the euro zone.

Like Citigroup mentioned above, American International Group, Inc. (NYSE:AIG) is about even since last Thursday. The company has had a number of insider buys recently, and trailing-twelve-month net margin is improving. In fact, news like increasing insurance rates could help this company in the future. That article cites natural disasters as one factor that’s allowed companies like AIG to raise prices. Speaking of natural disasters, many investors were recently speculating that Hurricane Irene could affect AIG, but it now appears that that storm will miss the Southeast altogether. AIG has also been in the news for its repayment of bailout money it owes the government. Although the majority of the debt has been paid back, a significant amount still remains and AIG will probably continue to sell assets in order to make future payments. AIG’s International Leasing Finance Corp., which leases airplanes, may be next on the chopping block. Compared with Allianz SE (OTCQX:AZSEY) and AXA (OTCQX:AXAHY) offers strong margins – gross margin and operating margin are 19.75% and 13.19% respectively. On the other hand, AIG’s price to earnings ratio and price to sales ratio are a bit higher than these other companies at 7.55 and 0.51 respectively. As for cash flows, $1.032 billion came in during the half of 2011.

Berkshire Hathaway Inc. (BRK-B) – As one would expect, this conglomerate has moved with the market, which lately has meant volatility. Berkshire investments in BYD, a Chinese manufacturer of cars and batteries, have soured, as earnings were significantly lower than expected. In fact, Warren Buffett may just buy the company outright. Aside from the poor earnings, declining sales and launch delays may hurt BYD in the future. Regardless, some investors still love Berkshire Hathaway. That article explains that recent insider purchases for this stock make it a buy as well as the fact that Berkshire Hathaway is a relatively low-risk investment. Also, the company is trading at only a little higher than book value. Warren Buffett has also been in the news lately for his editorial saying that taxes on the extremely wealthy are too low right now, and some have speculated that this may be a move by Buffett to gain political goodwill. Either way, Berkshire Hathaway is quite healthy right now going by the cash flows. $7.669 billion came in during 2010, and $9.664 billion have come in for the first half of 2011. Admittedly though, that positive number for 2010 can largely be attributed to borrowing. The number for 2011 includes some of the payments made toward that debt, however. In fact, Berkshire Hathaway is also notable for its healthy amount of capital expenditure.

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