As of the quarter ending Sept. 30, Bruce Berkowitz , founder of Fairholme Capital Management, has reported three updates to his portfolio, which include an increase in his stake of Wells Fargo ( WFC ) and stake reductions in CIT Group ( CIT ) and Jefferies Group ( JEF ).
Berkowitz's investment philosophy targets undervalued stocks that have exceptional management, continuously generating free cash and a cheap price, especially compared to the stock's intrinsic value.
In his shareholder letter written in July referencing the six months ending in July for the Fairholme Fund s, Berkowitz writes:
"Great investment ideas start with disasters. Liquidity disappears. Assets are marked to mayhem. Intangibles are written off. Companies with fixable problems become unusually cheap and again profitable. Yet, they remain hated for past sins and sell for less than assets minus liabilities, reported as book value. They have little, if any, investment risk. This is when we focus on buying. This is also when we look dead wrong and have periods of underperformance. This is also how The Fairholme Fund has outperformed the S&P 500 Index in ten of the past twelve years."
Currently, the Fairholme Fund has 20 stocks in its portfolio, with a total value of almost $7 billion and a 0% quarter-over-quarter turnover rate. About 80.8% of the stocks belong to the financials sector, and the consumer services sector comes second at 13.4%. (See sector weighting)
Berkowitz's top holdings as of the end of the third quarter are:
1. American International Group Inc. ( AIG ) representing 40.6% of his portfolio, and 5.31% of shares outstanding.
2. Sears Holdings Corp. ( SHLD ) representing 13.4% of his portfolio and 15.91% of shares outstanding.
3. Bank of America Corp. (BAC) representing 12.9% of his portfolio and 0.95% of shares outstanding.
4. St. Joe Corp. (JOE) representing 7.1% of his portfolio and 0.95% of shares outstanding.
5. MBIA Inc. (MBI) representing 6.4% of his portfolio and 22.86% of shares outstanding.
Below are Berkowitz's latest reported trade activities for the third quarter.
Wells Fargo & Co. ( WFC )
Berkowitz's most recent investment move to his Wells Fargo stock: a staggering increase in shares by 542.99%.
The diversified financial services company has a market cap of $170.85 billion, and trades at $31.57 per share, about 20 below its intrinsic value (DCF) of $51.29.
Since acquiring the stock in the third quarter of 2011, Berkowitz maintained his shareholding of the company at 31,400 shares, before purchasing about 170,500 shares recently at an average price of $32.77, placing his current shareholding at 201,900 shares.
Wells Fargo has a Profitability and Growth rank of 8 out of 10 on GuruFocus. Despite its declining free cash flow in the past 12 months, Wells Fargo's revenue growth sports a positive trend line as it seeks stability, with a growth rate of 1.1% in the past 12 months, and 4.2% in the past five years.
Its two Good Signs indicate a dividend yield close to its two-year high and a P/E ratio close to a three-year low. Wells Fargo has a P/B Ratio of 1.2, close to its one-year high and a P/S ratio of 2 close to a three-year high
Additionally, Wells Fargo also has a pretty active insider trade activity - its most recent trade occurred on Oct. 26 by Executive Vice President Michael J. Heid, selling about 37,000 of his shares of the company.
View the rest of Wells Fargo's financial data on 10-Year Financials.
CIT Group Inc. ( CIT )
In the third quarter, Berkowitz decreased his shares in bank holding company CIT Group ( CIT ) by more than 2.9 million shares, placing his current shareholding at 11,153,729. The transaction accounted for a 20.65% reduction, and is the second largest reduction since Berkowitz acquired the stock in the first quarter of 2010.
CIT Group provides financing, lending and insurance services worldwide, and has a market cap of $7.44 billion. It is currently trading at $36.35, a P/E (ttm) ratio of 205, a P/B ratio of 0.9 and a P/S ratio of 1.5.
CIT Group's revenue has been in decline at a rate of 19.6 percent in the past 12 months, and its EBITDA growth is also seeing a negative slope at 19.8 percent rate. On the other hand, its operating margin, after taking a dip in 2009, has picked up in a hopefully steady increase in its following years.
View more of CIT Group's financial data on 10-Year Financials.
Jefferies Group Inc. ( JEF )
Berkowitz's reduction in global investment banking firm Jefferies Group Inc. ( JEF ) was 37.22% of his current holding, which brings his share count down to 1,728,050. He sold about a little over a million shares, at an average price of $13.51 per share.
Berkowitz first acquired Jefferies in the second quarter of 2008, starting with 1,978,565 shares, which he completely sold out by the following quarter. He practiced the same move for the next two consecutive quarters.
In the second quarter of 2011, he picked the stock back up, and began consistently trading in the five quarters that followed.
Jefferies has a current share price of $15.76, and a market cap of $2.9 billion. Its Financial Strength is 4 out of 10. Its Profitability and Growth is in the upper half at 7 out of 10. The contrasting rankings in both places Jefferies in low Business Predictability.
JEF data by GuruFocus.com
Its two Severe Warning Signs reveal revenue in decline for the last five years, and an increasing trend of issuing long-term debt.
Jefferies has a P/E ratio of 12.7, and both P/B and P/S ratios at 0.8.
View the rest of its financial data on 10-Year Financials.
See Bruce Berkowitz's Fairholme Fund portfolio here. Also check out the undervalued stocks, top growth companies and high yield stocks of Fairholme Fund.
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