Bruce Berkowitz's Top Positions (Part II)

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In the previous article, I wrote about the two biggest positions in Bruce Berkowitz, the “Stock Manager of the Decade.” AIG, the insurance giant, accounted for more than 40% of his portfolio. Sears Holdings, the retail giant, represented 13.4% of his portfolio as of September 2012. In this article, I will continue with two other businesses that also accounted for a big portion of his concentrated portfolio. One is a banking giant and the other is in the real estate business.

Five Reasons to be Bullish About Bank of America

The third biggest position in Bruce Berkowitz’s portfolio was Bank of America (NYSE: BAC). As of September 2012, he owned more than 102.2 million shares in the bank, accounting for 12.9% of his portfolio.  Berkowitz mentioned that he liked Bank of America for several reasons. First, the price was cheap. When Berkowitz first revealed his Bank of America’s position, it was trading at less than one-third of the book value.  Second, its core business was generating 1% return on assets and 10% return on equity. That translated into 20% implied annual return on investment when the stock was bought at less than half book value. Third, Bank of America had a strong balance sheet. Berkowitz said that the bank’s earnings power had been disguised by the large loan loss provision. In the normal time in the near future, the provision would be released to the bottom line. The fourth reason was that Bank of America had the largest retail deposit market share in the US, and it served one in every two US households. Last but not least, the bank was essential to global economic security. It seemed that Bank of America fit the definition of “too big to fail” perfectly. The successful investor Warren Buffett has also endorsed the bank, saying that, “Bank of America is a strong, well-led company… I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them.

Much Cheaper Valuation Than Wells Fargo

At the current price of $11.14 per share, the total market capitalization is a little more than $120 billion. The market is still valuing Bank of America at a 40% discount to its book value. Wells Fargo (NYSE: WFC), Warren Buffett’s favorite bank, is trading at $34.93 per share. The market values the bank at a much higher valuation, with 1.3x its book value. However, Wells Fargo had a much higher net interest margin and return on asset than Bank of America. Wells Fargo's net interest margin and ROA were 3.56% and 1.267%, respectively, whereas Bank of America’s net interest margin and ROA were 2.21% and 0.18%, respectively.

Conflicting Opinions on This Real Estate Company

St. Joe Corporation (NYSE: JOE) was the fourth largest position in Bruce Berkowitz’s portfolio as of September 2012. He owned more than 25.35 million shares in the company, accounting for 7.1% of his portfolio. St. Joe is considered to be one of the largest landholders in Florida, with around 573,000 acres of land. St. Joe has four main business segments: residential real estate, commercial real estate, rural land sales, and forestry. St. Joe acquired most of this land decades ago. Thus, it had a very low initial cost. The majority of its revenue came from forestry, which accounted for nearly 60% of its total revenue in 2011. The second biggest revenue contributor was residential real estate, which represented 34.7% of the total 2011 revenue. Bruce Berkowitz’s investment in St. Joe was purely the real estate play. He said: “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.However, hedge fund manager David Einhorn did not agree with Bruce Berkowitz. He said that St. Joe’s business model was flawed. It continues to carry its mostly vacant commercial real estate at inflated values. He expected that St. Joe would take more write-downs on its beachfront real estate.

Foolish Bottom Line

Indeed, Bank of America is still cheap at the current price with 40% discount to its book value. I personally think it could deliver a decent return for its shareholders over a long period of time. St. Joe is more of a real estate play. Without proper understanding of the real estate business and the Florida region, I don’t think investors should follow Bruce Berkowitz into this real estate company. 

hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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