Thursday, February 24, 2011

Fairholme's Berkowitz on B of A, Goldman Sachs, and Sears

Bruce Berkowitz (named Fund Manager of the Decade last year by Morningstar) of Fairholme Fund (FAIRX) was recently interviewed by GuruFocus.

He speaks favorably about Bank of America (BAC) and points out, while banks will still be absorbing bad loans for a while, that loans by banks since late 2008 have generally been of high quality.

In the interview, he also speaks favorably about another one his larger financial holdings Goldman Sachs (GS).

He also mentioned that Sears (SHLD), a company heavily dependent on the housing sector, will end up being a good investment in the long run once housing has an upturn saying:

...Sears has become a real win-win, in that if Eddie Lampert does what most people expect he can do – improve the retailing of Sears – the stock will fly high and recognize that. If he can't, the stock price will continue to be volatile, very depressed at times, less depressed at other times, and eventually he'll have one share and we'll have one share, and there will only be two shares.

I like that last line. Buybacks benefit long-term owners significantly if consistently done when a stock sells at depressed levels (i.e. well below intrinsic value) using free cash flow over time. Apparently, Berkowitz has confidence that Eddie Lampert will apply good judgment in this area. The math is pretty simple yet buying back a cheap stock is too often underutilized as a means to add long-term shareholder value.*

Naturally this starts with being comfortable valuing the asset. Well, at least when it comes to Sears, I personally have no idea what it's intrinsically worth.

Lampert has in fact bought back more than $ 5 billion of stock over the past five years lowering the share count from 164 million (Oct. 2005) to 110 million (Oct. 2010).

More than 80% of the Fairholme Fund is now exposed to financial stocks. As far as I know that is more than any other non-financial sector specific money manager.

During the crisis Fairholme wisely had no exposure to banks.


Small long BAC position

* Unfortunately, the evidence seems to show that a number of companies have a tendency to buy high. Far too many buybacks occur when a company's shares aren't terribly cheap.

GuruFocus Interview
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