While many investors focus on earnings, Validea CEO John Reese says that some of Wall Street’s best strategists prefer to use free cash flow when analyzing a company.
Bruce Berkowitz’s Fairholme fund got some bad news recently after a court ruling hit Fannie Mae and Freddie Mac hard. But over the long term, Berkowitz’s track record is impeccable, and in a recent interview with WealthTrack, he talked about the process that led him to go big into financial stocks amid the 2008-2009 financial crisis.
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.”