Tracking Bruce Berkowitz's Fairholme Portfolio - Q4 2012 Update

by: John Vincent

This article is part of a series that provides an ongoing analysis of the changes made to Fairholme's U.S. stock portfolio on a quarterly basis. It is based on Fairholme's regulatory 13F Form filed on 02/14/2013. 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 Q3 2012.

Bruce Berkowitz's U.S. stock portfolio size decreased marginally this quarter from around $7B to $6.95B. For the year 2012, the portfolio value has increased about 15% from about $6.1B as of Q4 2011. The number of positions in the portfolio went down from 21 to 20 - a minute position in General Motors (NYSE:GM) WTS established last quarter was eliminated and no new positions were added this quarter. The largest five positions account for almost 85% of the overall U.S. long portfolio value. Overall, the portfolio has become even more concentrated as that percentage as of last quarter was just over 80%.

New stakes:


Stake Disposals:

General Motors WTS 18.33 Strike: This was a minute 0.03% of the portfolio stake established last quarter and eliminated this quarter. As such, the stake establishment and subsequent disposal does not signify a clear bias.

Stake Increases:

American International Group (NYSE:AIG): AIG is Berkowitz's largest position at 43.63% of the U.S. long portfolio. As such, he is extremely bullish on AIG. The stake was increased marginally this quarter after having been reduced marginally last quarter. Such minor stake adjustments quarter-to-quarter does not signify a clear bias.

Sears Holdings Corp (NASDAQ:SHLD): SHLD is Berkowitz's third largest position at 16.78% of the U.S. long portfolio. The original stake was established in 2007 although the position size has fluctuated over the years. This quarter, it was increased marginally after having increased marginally last quarter as well. The activity in the last two quarters happened at prices between $39.50 and $66.76. The stock currently trades at $48.46. The current stock price is far below Berkowitz's average purchase price. The pattern of trades indicates aggressive buying in the face of price weakness and as such signifies a strong bullish bias. For investors attempting to follow Berkowitz, SHLD is a very good option to consider.

SHLD spun-off Sears Hometown and Outlet Stores (NASDAQ:SHOS) in a rights transaction in mid-October 2012. That stock has been on a roll as it has returned over 40% in the last four months.

Bank of America (NYSE:BAC) WTS 13.30 Strike: The position was increased marginally this quarter in the face of strong price appreciation. The activity indicates a bullish bias.

Stake Decreases:

Bank of America : BAC is Berkowitz's second largest position behind AIG. The position was purchased in 2010 and has since been kept steady although minor adjustments have been made every quarter. This quarter, the stakes in the common shares were decreased marginally and the warrants were increased marginally. BAC traded between $8.83 and $11.61 during the quarter. It currently trades at around $12. Berkowitz continues to be very bullish on BAC.

Berkshire Hathaway (NYSE:BRK.A) and (NYSE:BRK.B): Berkshire Hathaway is a long-term holding that was built aggressively in the 2009-2011 timeframe. The stake has since been reduced by over 80% as of Q2 2012. This quarter, the stake was decreased marginally at prices between $84.58 and $90.62 through the disposal of the BRK.B shares. The stock currently trades at $99.21 and accounts for around 1% of the portfolio. At the peak in Q2 2011, the position was at about 10% of the portfolio. The minor stake decrease this quarter does not signify a clear bias.

Leucadia National (NYSE:LUK): LUK is a very long-term holding that was built-up over several years to a 6.14% stake. This quarter, the position was decreased marginally after marginally increasing the stake last quarter. The activity in the last two quarters happened at prices between $20.48 and $24.26. The stock currently trades outside that range at $27.57. Berkowitz is very bullish on LUK. For investor attempting to follow Berkowitz, LUK is a good option although a better entry-point should be considered.

CIT Group (NYSE:CIT): CIT Group is a 1.79% of the U.S. long portfolio position that was reduced by over 70% this quarter at prices between $36.12 and $40.81. It was a large 7% of the portfolio first purchased in 2009. During Q2 2012, the position was reduced by around 25% at prices between $32.57 and $41.60. Last quarter, the stake had been further reduced by another ~25% at prices between $34.20 and $41.38. The stock currently trades at $42.45. The large stake reduction over several quarters signifies a clear bearish bias.

Jefferies Group (JEF): JEF is a very small 0.38% position first purchased in Q2 2011. The stake was doubled in Q2 2012 at prices between $13.64 and $19.49. Last quarter, there was an about turn as the stake was reduced by almost 40% at prices between $11.77 and $16.03. The stake was further reduced this quarter by around 17% at prices between $13.59 and $18.85. The stock currently trades at $21.57. Leucadia and Jefferies agreed to merge in an all-stock deal (0.81 shares of LUK for a share of JEF) in mid-November 2012.

Citigroup (NYSE:C): C is a minute 0.03% position that was significantly reduced this quarter at prices between $32.75 and $40.17. The stock currently trades at $44.32. The position was first established in Q4 2009 when the price-per-share varied between $33.10 and $46.30. It was reduced by over 90% in Q4 2011 when the price-per-share varied between $23.11 and $34.16. Since then, there has been a consistent pattern of further trimming. It indicates a clear bearish bias.

JP Morgan WTS 42.42 Strike, AIG WTS 45 Strike, MBIA Inc. (NYSE:MBI), Orchard Supply Hardware (OSH), and St Joe Companies (NYSE:JOE): These positions were only marginally reduced this quarter and so do not signify a clear bias.

The rest of the positions were left untouched during the quarter:

Lincoln National (NYSE:LNC) WTS 10.715 Strike, Assured Guaranty (NYSE:AGO), Wells Fargo (NYSE:WFC), Wells Fargo WTS 34.01 Strike, and Hartford Financial Group WTS 9.649 Strike: These are very small stakes that were left untouched this quarter. LNC WTS are a 0.05% of the U.S. long portfolio stake that was established last quarter and left untouched this quarter. The warrants currently trade at around $21.17, well ahead of his low-teens cost-basis. They have an expiry date of July 10, 2019. Wells Fargo Warrant (expiry 10/28/2018, strike price $34.01) is a ~0.2% position while the other two positions are even smaller. The positions do not signify any clear bias.

The spreadsheet below highlights changes to Fairholme's U.S. stock holdings in Q4 2012:

(Click to enlarge)

Disclosure: I am long SHLD, AIG, BAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.