Berkowitz Paring Financials: Berkshire Cut, Goldman Eliminated

Bruce Berkowitz’s Fairholme Capital pared back some bets on financial stocks including eliminating a holding in Goldman Sachs and slashing stakes in Citigroup and Berkshire Hathaway.
Berkowitz maintained hardly moved his stakes in American International Group and Bank of America, two stocks he has defended over the past year as being oversold. But his bets on other bank stocks were trimmed, according to the filing.
A stake of 21,300 shares in Goldman, which would have been worth over $2 million at Tuesday’s close, no longer appears.
His stake in Berkshire Hathaway A shares was pared by 2,449 shares, a sale that would amount to some $300 million. About another $141 million in Berkshire Hathaway class B shares were sold.
And about $48 million of Citigroup, at Tuesday prices was eliminated as well.
Fairholme was also trimming financial stocks last quarter.
Two new stocks did appear in Fairholme’s filing: auto insurer Mercury General and home-improvement retailer Orchard Supply Hardware Stores.  The stake in Mercury General would be worth about $3.2 million as of Tuesday’s close while the Orchard Supply stake is worth about $14.3 million.

Investing: Fairholme Fund bounces back

Both Berkowitz and his fund suffered through a miserable 2011, as many of the concentrated fund's biggest holdings cratered. Fairholme finished 2011 with a 32-percent decline, lagging Standard & Poor's 500-stock index by a staggering 35 percentage points. Many of Fairholme's shareholders decided that the Miami heat had gotten the best of Berkowitz and pulled billions from his fund.

But the same stocks that performed so poorly last year have rebounded dramatically this year, and Fairholme has benefited. In the first four months, the fund gained 31.4 percent, beating the S&P 500 by 20 points.

So is it time to buy shares of Fairholme again? With just over $8 billion in assets as of last February, the fund is now half the size it was in late 2010. But we still have doubts about the wisdom of buying shares now. Beyond the matter of size, Fairholme has had a string of staff departures. Co-manager Charles Fernandez abruptly resigned last October for personal reasons, and that parting followed the 2008 exits of co-managers Keith Trauner and Larry Pitkowsky, who went on to launch the GoodHaven Fund.

Berkowitz has hired two new executives: Dan Schmerin, a former Treasury Department official, and Fred Fraenkel, former chairman of investment policy at money manager Beacon Trust. Both have experience with financial outfits -- a bonus, given that 72 percent of Fairholme's assets were invested in financial companies at last report.

Which brings us to the fund's still-outsize stake in financials. A bet like that isn't out of character for Fairholme -- in 2000, nearly 70 percent of the fund was invested in that sector. Plus, Berkowitz said in a recent video interview that financial-services companies are "what I know best" and that the sector is on the verge of a turnaround.

Before Fairholme's 2011 misadventure, it had performed brilliantly. From 2000, its first full calendar year, through 2010, Fairholme beat the S&P 500 ten years out of 11. The fund's long-term record remains superb; over the past ten years, it gained 9.1 percent annualized, topping the S&P 500 by an average of 4.8 points per year.

We were once among Berkowitz's biggest fans. But after his nerve-racking flop in 2011, our confidence in him is shaken. He may go on to post strong results in the years to come, but is that worth the risk of suffering another disaster? For most investors, we think the answer is no.

Bruce Berkowitz Sells More St. Joe

Bruce Berkowitz , founder of the Fairholme Fund ( FAIRX ), reduced his holding of St. Joe Co. ( JOE ), one of the largest landholders in Florida, by 2.44 percent, according to GuruFocus Real Time Picks . Berkowitz had also reduced his St. Joe position for the last four consecutive quarters.

The shares sold were held in an account that was managed by the Fairholme Fund at the direction of the client. A total of three sales were made on May 7, 8 and 9, at prices of $18.06, $17.60 and $17.18, respectively.

Days before the transaction, on May 3, St. Joe announced its first quarter results. The company reported a net loss of $0.9 million, compared to net income of $14.1 million for the first quarter of 2011. Revenue declined to $30.5 million, compared to $73.4 million the previous year, as the company had a one-time timber deed transaction in the first quarter of 2011 that boosted revenues by $54.5 million.

Berkowitz spoke about his St. Joe investment with Bloomberg on February 13. "St. Joe is really about real estate. In recessions real estate is worth very little. When it's in demand, it's worth a lot more," he said.

A deeper-than-expected downturn in Florida real estate has plagued the company, which has approximately 573,000 acres of land primarily in Northwest, with approximately 70 percent within 15 miles of the coast of the Gulf of Mexico. Incorporated in 1936, St. Joe acquired most of the land decades ago at very low cost. It has sought to increase the value of its assets by enhancing it for better uses.

In 2011, St. Joe reassessed the carrying value of its real estate which led to non-cash impairment charges of $377.3 million and a full-year net loss of $330.3 million, compared to a net loss of $35.9 million for 2010. In January 2012, the company adopted a new real estate investment strategy to reduce capital outlays and employ new risk-adjusted investment return criteria for evaluating its properties and future investments in the properties. Consequently it will spend less on infrastructure, amenities and master-planned community development, as well as reposition some of its assets to sell in order to preserve capital, improve cash flow and reduce risk for the remainder of the real estate downturn.

Berkowitz tried in 2011 to replace all of the members of St. Joe's board with nominees from the Fairholme Fund , which the company opposed, saying it was trying to take control of the company without paying shareholders. A month later, in February, St. Joe added four of Fairholme's candidates to its board, including Bruce Berkowitz.

Berkowitz initiated his position in St. Joe in the fourth quarter of 2007 when the share price was approximately $31. He has lost approximately 38 percent on the investment so far, based on the average price he paid for all of his shares.

The long-term investor still seemed satisfied with the St. Joe investment regardless of macroeconomic conditions when he reiterated some of the main points of his thesis on Bloomberg in February.

"I'm very proud of what's going on at St. Joe in that the bleeding has stopped," he said. "The company is now structured for whatever the future may be in real estate and will be ready to take advantage of the tail winds that will eventually come. So, it's a lot of land in the last sparse spot in Florida. St. Joe is nothing more than the history of real estate development in the United States."

David Einhorn has fared better so far with St. Joe. He shorted the company in 2010, based on a thesis he explained in a 160-slide presentation at the Value Investor Congress that year.

Bruce Berkowitz Buys Mercury General, Sears, Jefferies and Wells Fargo Warrants

Facing redemption pressure, it has been a while since Bruce Berkowitz bought his last new position. But in the quarter ended on March 31, he initiated a new position in insurance company Mercury General ( MCY ). He also added to his positions in Sears ( SHLD ), Jeffries ( JEF ) and Wells Fargo Warrants. He reduced Berkshire Hathaway ( BRK.A )( BRK.B ), Citigroup ( C ) and Goodman Sachs ( GS ).

Of course Bruce Berkowitz still has more than 80% of his portfolio in financials. His largest holding is AIG ( AIG ), which is 36% of all his stocks. Will AIG make or break Bruce Berkowitz ? We will wait to see.

Bruce Berkowitz initiated holdings in Mercury General Corp. His purchase prices were between $42.88 and $45.63, with an estimated average price of $41.32. The impact to his portfolio due to this purchase was 0.04%. His holdings were 70,900 shares as of March 31, 2012. Mercury General Corp. is engaged primarily in writing all risk classifications of automobile insurance in a number of states, principally California. He owned this stock before in Fairholme Focused Income Fund, but sold later. The stock now has a dividend yield of 5.4%.

Mercury released its first quarter results recently. Its net premiums written is almost flat from the same period last year, but its combined ratio declined to 97.6% from 98.2% in 2011, an important increase of 60 basis points.

Due to the improvement in the combined ratio, Mercury had net income of $73.4 million in the first quarter, compared to $58.2 million for the same period a year ago. The company declared a quarterly dividend of $0.61 per share.

Bruce Berkowitz continues to add to Sears, as the stock price declined. He now owns 156 million shares of Sears. He also added to Jefferies ( JEF ), which he has a lot of confidence in due to the investment of Leucadia ( LUK ).

He reduced his positions in St. Joe. ( JOE ), and sold out Goldman Sachs ( GS ).

Here's What Bruce Berkowitz at Fairholme Is Buying

Every quarter, many money managers have to disclose what they've bought and sold. Their latest moves can shine a bright light on smart stock picks.
Today let's look at investing giant Bruce Berkowitz. He's the founder of Fairholme Capital Management, which oversees three mutual funds of interest: the flagship Fairholme Fund (FAIRX) seeks long-term growth of capital, the Fairholme Focused Income Fund (FOCIX) seeks current income, and the Fairholme Allocation Fund (FAAFX) seeks long-term total return. The funds are all rather focused, each owning less than two dozen holdings, instead of the hundreds that many funds own.
The Fairholme fund has many admirers, and Berkowitz was named Morningstar's fund manager of the decade. But the fund has faltered a bit recently, having made some seemingly risky big bets. Berkowitz has some controversial holdings, such as Florida real estate company St. Joe (NYS: JOE) . The stock got a lift a few months ago on some executive turnover and speculation about a buyout, but it's still down for the year.

Berkowitz's portfolio featured about 20 entries and totaled $7.5 billion in value as of March 31. The top three holdings were AIG, representing a whopping 38% of the portfolio, Sears Holdings, with 15%, and Bank of America (NYS: BAC) , at 13%.
Interesting developmentsSo what does Fairholme's latest quarterly 13-F filing tell us? Here are a few interesting details:
New holdings include auto insurer Mercury General (NYS: MCY) , which has a long dividend-paying history and a recent yield of 5.4%. In its latest quarter, net income jumped 26% over year-ago levels, mostly on investment gains, as premiums and operating income were basically flat.
Among holdings in which Fairholme increased its stake was global financial firm Jefferies Group (NYS: JEF) . The company has seen its shares drop nearly 40% over the past year, but in its favor, its CEO recently took a pay cut and several executives gave back bonuses -- not every Wall Street firm has behaved that way. It was also prescient enough to have shorted some Spanish investments in the recent past.
Fairholme reduced its stake in several companies, including Warren Buffett's Berkshire Hathaway (NYS: BRK.B) . It can be hard sometimes to find people who aren't bullish on Buffett, but in concentrated portfolios, a manager might sell a promising holding simply to buy into something seemingly more promising. My colleague Alex Planes offered some downsides to Berkshire earlier this year -- such as a somewhat lackluster performance in recent years. Others will point out that it's the long run that matters for many of us Foolish investors, and Berkshire does offer a lot to like. Fairholme also unloaded all of its stock in Goldman Sachs.
One interesting move Berkowitz made was to sell shares of Bank of America but boost his holdings of B of A warrants. Bank of America has been digesting some $200 billion of toxic assets it received when it bought Countrywide Financial, and it has been gradually turning itself around, selling off non-core assets and improving its overall health, despite continuing mortgage-related losses. My colleague Anand Chokkavelu thinks the stock may well double from recent levels in the not-too-distant future, and that might push warrant prices up even further.
We should never blindly copy any investor's moves, no matter how talented the investor. But it can be useful to keep an eye on what smart folks are doing, and 13-F forms can be great places to find intriguing candidates for our portfolios.
While Fairholme is unloading some financial stocks, our analysts have found some compelling banking stocks. Click into our special free report, "The Stocks Only the Smartest Investors Are Buying," to meet a handful of impressive stocks.