Tracking Bruce Berkowitz's Fairholme Portfolio - Q2 2014 Update

by: John Vincent


Bruce Berkowitz’s US stock portfolio increased marginally this quarter from around $9.90B to $9.94B.

Fairholme's largest three positions continue to be American International Group, Bank of America, and Sears Holdings. They together account for 67.26% of the portfolio.

The combined position size in Fannie & Freddie (and preferreds) remained almost steady this quarter at 15.88% of the entire portfolio.

This article is part of a series that provides an ongoing analysis of the changes made to Fairholme's US stock portfolio on a quarterly basis. It is based on Fairholme's regulatory 13F Form filed on 08/14/2014. 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 Q1 2014.

Berkowitz's US stock portfolio increased marginally this quarter from around $9.90B to $9.94B. The portfolio continues to be very concentrated with most of it invested in just eight businesses. The largest three positions are American International Group, Bank of America, and Sears Holdings and together they account for 63.46% of the US long portfolio - the percentage increases to 70.86% when including the associated warrants.

New stakes:

Lands' End (NASDAQ:LE): LE is a small 1.14% of the US long portfolio position established this quarter as a result of its spin-off from Sears Holding that became effective in April. The terms called for Sears' shareholders to receive Lands' End shares in the ratio 0.300795:1. Berkowitz received around 7.41M shares and he sold more than half in the quarter at prices between $25.86 and $34.87. The stock currently trades at $34.93. The stake reduction indicates a mild bearish bias.

Stake Disposals:


Stake Increases:

Bank of America (NYSE:BAC) & WTS 13.30 Strike: BAC is Berkowitz's second largest position behind AIG at 16.06% of the US long portfolio. The stake was first purchased in 2010 and minor adjustments have since been made every quarter. This quarter, the common was decreased marginally while the warrants (Jan 2019 13.30 Strike, Yahoo Ticker - BAC-WTA, Current Quote - $6.70) were increased by 16% - the net effect was a small overall stake increase. BAC traded between $14.51 and $17.34 during quarter. It currently trades at $15.22. Berkowitz continues to be very bullish on BAC.

Sears Holdings Corp (NASDAQ:SHLD): SHLD is Berkowitz's third largest position at 9.92% of the US long portfolio. The original stake was established in 2007 although the position size has fluctuated over the years. Last two years saw consistent buying and the share count has increased from around 16.8M shares to 24.7M shares. Q4 2013 saw a ~2.7% stake increase at prices between $44 and $66 and last quarter saw another 15% stake increase at prices between $34 and $49. This quarter saw a marginal increase. The current stock price ($35.16) is far below Berkowitz's average purchase price. The pattern of buying signifies a strong bullish bias. For investors attempting to follow Berkowitz, SHLD is a very good option to consider: he controls 23% of the business.

NOTE: The implied performance of his recent SHLD purchases by the prices quoted above is negatively skewed because of the effect of the Lands' End spinoff in April: Lands' End was spun-off from SHLD whereby SHLD holders received LE shares at the ratio 0.300795:1. Sears acquired this online/catalog retail clothing business for around $1.9B in 2002 and the current market valuation is at $1.12B.

Stake Decreases:

American International Group (NYSE:AIG) & AIG WTS 45 Strike: AIG is Berkowitz's largest position at 38.33% of the US long portfolio (44.88% including warrants). The position size in the common was reduced by 6% in Q4 2013 at prices between $47.30 and $52.30. Last quarter saw another ~5% stake reduction at prices between $46.88 and $52.22. This quarter, the warrants (Jan 2021 45 Strike, Yahoo Ticker - AIG-WT, Current Quote - $25.55) were marginally reduced while the common was reduced by ~8% at prices between $49.40 and $55.72. The stock currently trades at $53.99. Berkowitz is bullish on AIG, although the last few quarters have seen stake reductions.

St Joe Companies (NYSE:JOE) & Leucadia National (NYSE:LUK): JOE and LUK are large 6.35% and 4.14% of the US long portfolio stakes respectively. Both positions were reduced marginally this quarter. The bulk of the JOE stake was purchased in the 2008-2009 timeframe and there have only been minor adjustments since. LUK is a very long-term holding that was built-up over several years. In Q1 2013, the position was increased by around 5% as a result of the all-stock merger deal between LUK and Jefferies. Berkowitz is very bullish on JOE & LUK. JOE trades at $22.18 and LUK at $24.98 currently. For investors attempting to follow Berkowitz, these are good options to consider.

Kept Steady:

Federal Home Loan Mortgage Association & PFD (OTCQB:FMCC) (OTC:FMCKJ) and Federal National Mortgage Association & PFD (OTCQB:FNMA) : These positions were first disclosed in a June 2, 3013 press release when it was announced that they hold $2.4B par value of the preferred stocks of these two entities. The press release went on to push the restructuring of Fannie and Freddie. The preferred shares traded at around $6 (~25 cents on the dollar: $25 par value) at the time of the announcement and they currently trade at around $11.27 (~45c on the dollar). This quarter, the position sizes were adjusted, although overall there is not much of a change: FNMA was added while FNMAS was reduced - also FMCC was increased.

Investors have filed around 20 lawsuits against the US government over Fannie/Freddie and the Federal Housing Finance Agency's actions as conservator. Hedge Funds involved include Perry Capital, Fairholme Capital, and Pershing Square Capital Management. While most of the lawsuits are focused on the treatment of the preferred holders, Pershing Square's is different in that it is challenging the treatment of the common holders.

Other very small positions (less than 0.5% of the US long portfolio each) in the portfolio include Altria Group (NYSE:MO), AT&T Inc. (NYSE:T), Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), Citigroup Inc. (NYSE:C), Diamond Offshore (NYSE:DO), Genworth Financial (NYSE:GNW), Hartford Financial Services (NYSE:HIG) & WTS 9.563 Strike, JP Morgan Chase WTS 42.42 Strike, Lincoln National (NYSE:LNC) & WTS 10.636 Strike, Mercury General (NYSE:MCY), Oaktree Capital Group (NYSE:OAK), Reynolds American (NYSE:RAI), Transocean Ltd. (NYSE:RIG), Vodafone Group plc (NASDAQ:VOD), and Wells Fargo (NYSE:WFC) & WTS 34.01 Strike.

The spreadsheet below highlights changes to Fairholme's US stock holdings in Q2 2014:

Disclosure: The author is long SHLD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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