Bruce Berkowitz's Top Positions (Part I)

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Bruce Berkowitz is considered to be one of the best value investment managers in the world. For the first 10 years of the 21st Century, his Fairholme Fund has managed to deliver a 13.2% annual return. Morningstar has named him a “ Stock Manager of the Decade.” He doesn’t diversify a lot, in fact, he currently holds around 20 stocks in his portfolio, with a significant concentration on some top ideas. It would be interesting to look at his portfolio to determine whether or not we should follow Bruce Berkowitz into his top positions.

Concentrated Into an Insurance Giant

As of September 2012, his biggest position was American International Group (NYSE: AIG). He held more than 86.5 million shares in the company, accounting for more than 40% of his total portfolio. AIG is considered to be the largest global insurer, operating in more than 130 countries, with more than 88 million customers worldwide. Several years ago the US government bailed out AIG with the rescue package of $182 billion. To date, that funding has been fully repaid and the US government realized a $22.7 billion profit. AIG has committed to focus on its core business. It has raised $6.45 billion by selling AIA, the Asian life insurer. It also sold out its 90% stake in an airplane leasing business for $5.28 billion.

AIG Should be Worth at Least its Book Value

Bruce Berkowitz mentioned that AIG was moving away from low frequency and high severity insurance, which, according to him, was “picking up pennies in front of a steamroller.” He thought that a business like AIG could trade at a multiple of the book value. However, it was trading at around 0.5x its book value. In the interview with WealthTrack, he said:

“I think the book value is near $70 per share. It‘s going to continue to grow. We believe the price, which is now less than $35 per share, will eventually reach book value. Maybe that happens in the $70s or the $80s, I don't know. But it gets about there. We‘ll see. And companies such as AIG can trade at a multiple of book value. But I don‘t want to go there yet. Just getting to our estimate of book value will be a very nice return for shareholders.”

AIG’s peers in Europe include AXA (NASDAQOTH: AXAHY) in France and Allianz SE (NASDAQOTH: AZSEY) in Germany. AIG has the cheapest valuation among the three, with 0.5x P/B, whereas AXA is valued at 0.7x P/B and Allianz is the most expensive, with 0.9x P/B. Both AIG’s European peers are paying decent dividend yields. Allianz and AXA are paying 3.2% and 4.3%, respecitvely, in dividend yields.

Sears – The Liquidation Play

The second biggest position in the Bruce Berkowitz’s portfolio was Sears Holding Corporation (NASDAQ: SHLD). As of September 2012, Berkowitz owned nearly 16.94 million shares in the retail giant, accounting for 13.4% of his portfolio. Fairholme Fund was actually the second biggest shareholder in Sears, only after the retailer’s Chairman and CEO Eddie Lampert. Berkowitz considered Sears’ investment as a liquidation play, not a retail play. He mentioned that the inventory liquidation value of the company was similar to its current stock price. In addition, Sears also had significant value in its real estate. He thought if the real estate were fully valued on its balance sheet, the value of Sears would reach more than $160 per share. Currently, Sears is trading at only $46.24 per share, with a total market capitalization of $4.83 billion.

Foolish Takeaway

AIG and Sears are both quite undervalued at the current trading prices. It would take time for their stock prices to catch up with their intrinsic values. Those two companies have a high probability of benefiting long-term investors in the near future. In the next article, I will go into details of the two next big positions in Bruce Berkowitz’s portfolio.

hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. 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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