) has already come back from a 32.42% loss in 2011 to a 35.81%
gain 2012, he believes his investment thesis for the stocks
largely responsible for the deficit will not play out in full for
about five years. In a February interview with Bloomberg,
Berkowitz gave an idea of his vision for the future of the stocks
in his fund. "Over the next five to seven years, as they recover,
equity values will increase and market prices more so," he said.
Most of the companies, he said, he bought at half of liquidation
Berkowitz's largest financial positions (AIG, Bank of America and
MBIA) together comprise approximately 65% of his portfolio. His
largest holding, AIG (
), he began purchasing in the first quarter of 2010, when the
price dropped to $24 per share on average. That year, AIG's book
value per share was $94.94. He then more than doubled the stake
in 2011, at an average price of $31 per share. The book value in
2011 was $53.46.
Bank of America, his second largest holding, was mainly purchased
in 2010 at average prices ranging from $12 to $16. The book value
that year was $23.31.
), his sixth largest position, was mostly added in 2010 at prices
ranging from $8 to $11 per share on average, when it had a book
value of $13.99.
Berkowitz said that even if these prices approached tangible book
value he would be unlikely to sell. "Why sell at tangible book?
You buy something at half its liquidation value. Problems are
fixed. A more normal environment develops. The equity values
rebound. Price eventually surpasses equity values and you have an
above average performance return for a number of years," he said.
The market price of each of his top three financial holdings have
made significant gains, contributing to his returns last year,
but still have a distance to meet their tangible book value. AIG
is trading for $37.63 on Monday afternoon, still under its fourth
quarter tangible book value per share of $66.45, after gaining
33% over the past 12 months. Bank of America has a market price
of $12.37, still trailing its fourth quarter book value of $14.33
after gaining 25.5% over the past 12 months. Finally, MBIA trades
for $10.77, trailing its fourth quarter book value of $16.35,
after gaining 13.5% over the past 12 months.
He also mentioned that he believes these companies can achieve
10% return on equity again, as they have in the past. In AIG's
case, the last time its return on equity reached double digits
was in 2006, when it was 13.8%, and the three preceding years.
Its most recent annual return on equity was 3.5% in 2012.
AIG listed enhancing return on equity as a key goal in its core
business strategy in its 2012 10-K, specifically, "Build on
simplified legal entity structure to enhance financial strength
and durability, capital efficiency and ease of doing business.
Improve operational efficiencies, expense control and service
through investments in technology and more productive use of
existing resources and lower-cost operations centers."
data by GuruFocus.com
Bank of America returned 10.2% on equity last in 2007, and
broached double digits the preceding four years. Since then, it
has struggled to reach historical levels, returning 1.8% on
equity in 2012. In the fourth quarter, however, it reported a
10.48% return on average allocated equity in its consumer and
business banking segment, an increase from 9.47% the previous
BAC data by GuruFocus.com
MBIA exceeded 10% from 2003 to 2006, then again in 2009, and
again in 2012, with a 38.9% return on equity.
MBI data by GuruFocus.com
Berkowitz also expects his theses to play out similar to Wells
) and other financial institutions in the 1990s in the wake of a
commercial real estate collapse. Warren Buffett, a major Wells
Fargo shareholder, commented on the event, analogous to the 2008
financial crisis, in his Berkshire Hathaway (
) shareholder letter from the time, as a buying opportunity:
"Our purchases of Wells Fargo in 1990 were helped by a
chaotic market in bank stocks. The disarray was appropriate:
Month by month the foolish loan decisions of once well-regarded
banks were put on public display. As one huge loss after another
was unveiled - often on the heels of managerial assurances that
all was well - investors understandably concluded that no bank's
numbers were to be trusted. Aided by their flight from bank
stocks, we purchased our 10% interest in Wells Fargo for $290
million, less than five times after-tax earnings, and less than
three times pre-tax earnings."
Wells' stock price fell from $84.75 to $42.75 from peak to trough
in 1990, while the company had a book value of $57.44. Five years
later, the market price had increased 209%.
Though Berkowitz's calculations are far more complex, history and
the metrics he mentioned in February indicate that his
highest-conviction financial stocks have significant upside
remaining at this point one to two years into his
five-to-seven-year time horizon.
"I still consider the holdings within our portfolio to be cheaper
than anything else I can find and understand," he said in
February. "I can't kill them. Overall, I'm very optimistic about
See Bruce Berkowitz's Fairholme portfolio here. Also check out
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