Since launching in 1999, the Fairholme fund beat the S&P 500 index by 14% annually in its first 10 year through 2009. The fund’s manager, Bruce Berkowitz, was named “manager of the decade” by Morningstar. However, this has been a hard year for Berkowitz, with his flagship fund down -32.49% through September 30, 2011. In contrast, the Goodhaven fund, launched earlier this year by ex-Fairholme portfolio managers Larry Pitkowsky and Keith Trauner, has return -4.7% from inception through September 30th.
Although it would be premature to draw any conclusions based on performance over such a short period of time, the duo seem to be doing a good job of applying the investment style and lessons they learned at Fairholme to their own fund. Like Fairholme, Goodhaven looks for bargains among companies that are under stress. The fund is also highly concentrated, with the managers targeting roughly 15 to 20 holdings in the fund. Pitkowsky and Trauner each have over 20 years of experience in securities research and portfolio management. They have both invested over $1 million of their own money in the fund.
Using the SEC Form N-Q, we can take a look at Goodhaven Fund’s five top holdings as of August 31, 2011:
Spectrum Brands Holdings (NYSE:SPB): Spectrum, a global branded consumer products company, is Goodhaven’s largest holding at 9.7%. Keeping in line with the fund’s emphasis on depressed and hard-to-understand stocks, Spectrum only emerged from Chapter 11 bankruptcy a few years ago. Spectrum owns several well known brands, such as the George Foreman grill, Remington electric shavers and Rayovac batteries. Pitkowsky and Trauner believe the company’s new senior management will be able to generate enough free cash flow to rapidly pay down post-bankruptcy debt and turnaround the company.
Microsoft (NASDAQ:MSFT): This information technology giant is Goodhaven’s second-largest holding at 7.7%. Many investors and analysts have declared Microsoft “dead money” based on the stock’s performance over the past decade. However, the company has almost $13B in cash and equivalents on its balance sheet, and generated over $63B in free cash flow in the last four quarters. Microsoft has a P/E of 9.33 and a dividend yield of 3.11%.
Hewlett-Packard (NYSE:HPQ): The portfolio managers at Goodhaven Fund describe themselves as “the kind of people who want to run toward a fire, instead of away from it”. Hewlett-Packard, the funds third-largest holding, certainly exemplifies this ethos. Although the company has been under a lot of scrutiny with the change in CEO, Pitkowsky and Trauner believe the underlying businesses are still solid. The stock is trading at almost half of its 52-week high price. It has a P/E of 8.6 and a dividend yield of 1.71%. It makes up 6.9% of Goodhaven’s portfolio.
Google (NASDAQ:GOOG): Goodhaven has 5% of its portfolio in Google. Its most recent earnings blew away analysts’ expectations, with the company reporting $7.51B in revenue and earnings of $9.72/share. That is an increase of 37% and 27% respectively, from the previous year. The stock plunged throughout the first half of the 2011, but has since rebounded and is currently up over 5% YTD. It has a $202.64 billion market cap and a P/E of 21.
Berkshire Hathaway (NYSE:BRK.B): Rounding out Goodhaven’s top five holdings at 4.7% is Berkshire Hathaway, a stock commonly found in most value investors’ portfolios. Warren Buffett and Berkshire’s board authorized a share repurchase program a few months ago, allowing the company to buy either A or B shares at a maximum price of 10% over book value. Furthermore, Buffett has hired two investment managers, Todd Combs and Ted Weschler, in order to address the issue of succession planning. Berkshire is currently trading at 1.18x book value compared to the typical multiple of 1.5-1.7x in past years, suggesting there is no “Buffett premium” priced into the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Additional disclosure: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.