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This series of articles is an ongoing analysis of the changes made to Fairholme's US stock portfolio on a quarterly basis. Bruce Berkowitz's US stock portfolio size vaulted ~27% this quarter compared to a drop of ~25% in Q4 2011. The major positions in his portfolio performed splendidly the last two quarters. The last quarter saw the portfolio size diminish by 25% due to redemptions - a problem that has clearly abated this time around. Extensive redemptions following the underperformance of the fund since the credit crisis were a drag on Fairholme. The substantial bets placed on financials such as American International Group (AIG) and Bank of America (BAC) produced two back-to-back quarters of outperformance.

New stakes:

Mercury General Corp (MCY): MCY, a minute position, was established this quarter when the price-per-share varied between $42.88 and $45.62. The stock currently trades at $45.02. The stake is too trivial to indicate a bullish bias.

Orchard Supply Hardware Stores (OSH): OSH, a small 0.2% position, was established this quarter when the price-per-share varied between $15.02 and $27.51. The stock currently trades at around $20. This stake is also too light to indicate a clear bias.

Stake Disposals:

Goldman Sachs (GS): GS, initiated as a large 6.5% position in 2010 Q4 and trimmed since then, was disposed this quarter. Most of the position was sold in Q3 2011. The stake elimination indicates a mild bearish bias.

Stake Increases:

American International Group Warrants: AIG WTS (expiry - 01/19/2021, strike price - $45), a 2.2% position, was increased marginally during the quarter when the warrants traded between $6 and $9. It is currently trading at $11.57 compared to the current stock price of ~$31 for a leverage of 2.7 times. Berkowitz is using these warrants as a leveraged long-bet on AIG shares. The stake is significant and implies a very strong bullish bias for he already has a humongous 35% position in AIG common stock. The warrant will expire worthless and the entire capital will be lost should the stock price stay below $45 at expiry. Before considering this position note:

  • There is no strike price readjustment for annual dividends of $0.67 or below, and
  • There is no compensation based on time value, should a catalyst (acquisition) reduce the life of the warrant.

Bank of America Class A Warrants: BAC WTS (expiry - 01/16/2019, strike price - $13.30), a 0.6% position, was increased by 15% during the quarter when the warrants traded between $2 and $5.5. It is currently trading at $3.49 compared to the current stock price of $7.22 for a leverage of 2.07-times. Berkowitz is using these warrants as a leveraged long-bet on BAC shares. The stake is significant and implies a strong bullish bias for he already has a sizable ~13% position in BAC common stock. The warrant will expire worthless and the entire capital will be lost should the stock price is below $13.30 at expiry. Before considering this position note:

  • There is no strike price readjustment for annual dividends of $0.04 or below, and
  • There is no compensation based on time value, should a catalyst (acquisition) reduce the life of the warrant.

Jefferies Group (JEF): JEF, a 0.6% stake which has been in the portfolio since Q2 2011, was doubled this quarter when the price-per-share varied between $13.64 and $19.49. The stock currently trades at the low-end of that range at $13.77. For investors attempting to follow Berkowitz, JEF is a good option to consider. JEF happens to be a favorite holding of Leucadia National's Ian Cumming as well.

Sears Holdings Corp (SHLD): SHLD, a huge 14% stake that has been a presence in the portfolio since 2007, was increased marginally this quarter when the price-per-share varied between $29.14 and $83.43. The stock currently trades at $51.46. The large position size and the stake increase signify a mild bullish bias. SHLD is a very volatile stock whose long-term prospects are caught up in a huge speculation as to what options Eddie Lampert might consider to turn the company around.

Wells Fargo Warrants: WFC WTS (expiry 10/28/2018, strike price $34.01), a ~0.17% position, was increased by over 55% this quarter when the warrants traded between $8.7 and $10.8. It currently trades at $9.82. The stake is too small to signify a clear bias.

Stake Decreases:

Citigroup Inc (C): C, a large ~10% position as of Q3 2011 which was reduced to below 1% in Q4 2011, was subjected to significant reduction this quarter. The pattern indicates a clear bearish bias.

American International Group , Bank of America , Berkshire Hathaway (BRK.A and BRK.B), CIT Group (CIT), Leucadia National Corp (LUK), MBIA Inc (MBI), and St Joe Companies (JOE): These large positions were reduced marginally during the quarter. With AIG and BAC, although the long positions were trimmed, Berkowitz added more warrants thereby adding to his leveraged long bets on them. The same pattern applied last quarter as well, indicating a strong bullish bias. The large stakes in the other companies indicate a bullish bias.

The JP Morgan Warrants (JPM WTS, expiry - 10/28/2018, strike price - $42.42) saw no movement this quarter. The remaining three minute positions -Assured Guaranty Ltd (AGO), Regions Financial (RF), and Wells Fargo (WFC) - also maintained their status quo during the quarter.

The spreadsheet below highlights changes to Fairholme's US stock holdings in Q1 2012:

Click to enlarge

Please visit our Tracking Bruce Berkowitz's Fairholme Fund Holdings article for an idea on how his holdings have progressed over the years and our previous update highlighting the fund's moves during Q4 2011.

Source: Tracking Bruce Berkowitz's Fairholme Portfolio: Q1 2012 Update