Top fund manager Bruce Berkowitz says he believes financials like AIG and Bank of America remain the best value opportunities in the market right now, even though they jumped sharply in 2012. Berkowitz tells Bloomberg that he would buy more of BOA if he could, but mutual fund regulations prevent him from doing so. He thinks that as government-sponsored enterprises, like those that involve mortgages, run out, banks and insurers could have a “huge market” of loans to take on, enhancing profits. In a separate video, Berkowitz says he thinks shares of financials like AIG and BOA will quadruple over the next five to seven years, comparing their rebound to the rebound from the commercial real estate crisis in the 1990s.
In a recent Fortune article, top fund manager Bruce Berkowitz discusses his fund’s struggles in 2011 and its bounce-back in 2012, as well as some of his favorite stocks in the market right now.
“I think it’s fair,” Berkowitz said of criticism he received when his fund, which had been extremely successful over the long term, was hit hard in 2011. “What’s not fair is to believe that a manager or a businessperson is in such control of companies that they can control any one-year period or two-year period. I’ve not seen it done. There’s a reason Warren Buffett judges Berkshire Hathaway’s book value against the S&P 500. He doesn’t use Berkshire’s stock price.”
Berkowitz said he remains very high on beaten-down value plays like Sears, Bank of America, and AIG. Sears, he says, is worth far more than investors think because of the value of its inventory, and its real estate. And he talks about the impact Superstorm Sandy could have on AIG’s business.
Top fund manager Bruce Berkowitz remains high on beaten-down financial stocks, saying that many have improving business trends and balance sheets and extremely cheap shares. Berkowitz tells WealthTrack’s Consuelo Mack that he started buying “systemically important companies” at huge bargains after the government recapitalized them, and after busines trends were recovering. Many were priced below liquidation value back then, he says — and they still are. But, he says, investors let fears keep them from believing the facts, and they have shunned financials. Berkowitz talks about the importance of ignoring the crowd, and why he’s comfortable running a concentrated portfolio.
After struggling in 2011, Morningstar Fund Manager of the Decade Bruce Berkowitz is rebounding strong in 2012, with his Fairholme fund in the top 1% of funds in its category year-to-date, according to Morningstar.com. And at a recent Columbia Investment Management Association conference, Berkowitz laid out his checklist for analyzing a company and its stock, and Market Folly offered a summary:
1. Can you kill it? Is there adult supervision at the company?
2. Is the company essential? Does it depend upon the kindness of strangers?
3. What can the company make? Profitability for owners.
4. Management – honest in past and present?
5. Catalysts – Buybacks? Misunderstood? Is enterprise having a big problem that is fixable? Everyone’s been burned by the stock so afraid to buy it.
Berkowitz also offered the top lessons he wished he learned long ago. Among them:
- You always have to have cash, especially when no one else has it.
- You only see reality under extreme stress
- Volatility is not risk!
- Always assume you will have bad luck.
- If you have to use more than 6th grade math, you’re in trouble.
Market Folly also notes that Berkowitz says he is now 100% in financials. He says AIG, Bank of America, and CIT Group are misunderstood, and he likes holding companies like Berkshire Hathaway and Sears Holdings. He has plenty of interest in the U.S., but no interest in European investments.
Bruce Berkowitz, who was one of Morningstar’s Fund Managers of the Decade in the 2000s but saw his flagship portfolio hit very hard in 2011, is sticking to his guns.
“Improving book value levels and ratios show companies recovering from tough times, prepared for uncertainty, and capable of profits without excess leverage,” Berkowitz writes in Fairholme Capital’s year-end manager’s report (click here for a PDF copy). “The Fund’s performance last year makes little sense in light of such positive trends and we can only hypothesize from public comments that investors did not fathom our financials’ assets. There appears little understanding of how loan and insurance contracts age and run-off, bad begets good over time, and how U.S. Generally Accepted Accounting Principles (GAAP) create undue quarterly volatility in book values.”
“Current events always reverberate much louder than the financial histories of past cycles; positive results and actions are now needed to swing market sentiment and prices toward more balanced views and values,” Berkowitz adds. “AIG’s $1B common stock buy-back, Buffett’s transaction with Bank of America, CIT’s rapid debt refinancing, and MBIA CEO Jay Brown’s repeated stock purchases all point to improving fundamentals — the process has started.” He offers his take on why big Fairholme holdings like AIG, Sears, and Bank of America are still good stocks.
Berkowitz says that, just as he asks investors not to be swayed by short-term performance in great years, so too does he ask that they not be swayed by short-term performance in bad years. “One circling of the Sun is too short a time to differentiate between good and lucky,” he says. “Thus, we remain optimistic given our performance since inception and a belief that while history does not exactly repeat, it does rhyme. Unemployment is coming down and elections are near. Our favorite economist, Warren Buffett, is bullish on America. Year-end reports show continuing, positive trends. Our companies are strong and cheap. Shareholders have kept their courage and conviction under stress. Fairholme has kept its word to focus on value-based, long-term investments. We will stay the course.”
Bruce Berkowitz, who in 2010 was named one of Morningstar’s Fund Managers of the Decade but has been hit hard in the past year, says he continues to be high on unloved financial stocks that have been dragging his portfolio down. Berkowitz tells WealthTrack’s Consuelo Mack that all of the negativity about financials has driven many of their stock prices down to incredibly attractive levels. “The negatives are all uncertainty about the future. And what I try and do is focus on the facts of today,” he says. “So, when you look at the income statements, they’re making huge cash flows, a lot of it being paid for the foolishness of 2007 and 2008, which eventually will burn off and those huge cash flows will show. If you look at the balance sheets of the company, they have — banks, for example, they have the strongest balance sheets that they’ve had probably in a history of their histories. If you look at reserving, it’s stronger than at any time. If you look at the trends, the trends are turning favorable. If you understand the nature of loans and the average life of five to seven years, and your troubles in 2007, 2008, you’ve already had a good– you’ve had a three, four year look at how the loans progressed. You know how they’re going to turn out.”
Bruce Berkowitz, one of Morningstar’s Fund Managers of the Decade for the 2000s, is sticking by his conviction that AIG and other financial stocks are undervalued and will make big gains.
“Our inclination remains to run from the popular and embrace the hated where prices tend to reflect such mistrust,” Berkowitz wrote in a report to investors, according to Bloomberg. “Often, we are ahead of the crowd, too early, and appear wrong for a time.”
In addition to AIG, Berkowitz says he still thinks banks like Bank of America and Citigroup will prove wary investors wrong. “Financials with enormous cash flows and diminishing restructuring expenses for the illogical extremes of 2006/2007” are at a tipping point, he says. “Their pre-provision, pretax earnings power is compelling.”
In a wide-ranging three-part interview with Morningstar’s Don Phillips, top value investor Bruce Berkowitz discusses several aspects of his investment approach, including the willingness to go against the crowd and the decision to run a focused portfolio smaller than those of many other mutual funds. “At the end of the day, investing is about one person has to take the responsibility of pulling the trigger, and group-think always dummies down to the lowest common denominator, and so, you ignore the crowd,” Berkowitz says. “It’s still painful, but it’s worked.” As for portfolio size, he adds, “Given the nature of companies and the complexity of companies today, I really don’t know how you can get your hands around dozens and dozens of companies. So, we tend to focus, so we can spend thousands and thousands of hours on individual companies. But as you find more companies, I really don’t understand the concept of picking your 50th best company, when you can buy more of your first- or second-best company. Once you get past about 30 companies, you’re pretty much nearing an index anyway. So what’s the point?” Berkowitz also talks about some of his major holdings, his take on investing in China, and the macroeconomic climate.
Bruce Berkowitz remains high on financial stocks, and says his conviction about his financial holdings has only grown stronger. “I’ve been able to see their earnings for the past few quarters, the trends are getting better, the balance sheets are building, tangible book value is growing,” Berkowitz tells Bloomberg from the Morningstar Investment Conference. “The problems from 2007, 2008, still have a ways to burn through, but we’re more than, I would say more than halfway through the problem now.”
While it’s now more than two-and-a-half years since the collapse of Lehman Brothers and the worst of the financial crisis, several top investors are still avoiding bank stocks.
“We find it hard to believe the banks have cured all their bad asset problems, and they aren’t transparent enough for us to understand the risks,” Clyde McGregor, whose Oakmark Equity and Income Fund has beaten 99% of peers over the past decade, tells Bloomberg. “Can you still make money in banks? Maybe. But we can build a portfolio that doesn’t demand owning them.” McGregor says a big part of the problem is derivatives, whose complexity and dependence on a multitude of hard-to-predict factors make them difficult to value.
Donald Yacktman, who has also compiled an excellent long-term fund-management track record, is also leery of banks, and held only one bank stock at the end of the first quarter, according to Bloomberg. “With a bank you create assets with a stroke of a pen,” Yacktman said. “You’ve got a black box.”