American International Group Inc (AIG), Bank of America Corp (BAC): Fund Manager of the Decade Reveals His Favorite Stocks

Ultimately, an investment in Bank of America Corp (NYSE: BAC) is just a waiting game for the bank’s loan book to firm up enough to lower the provisions for loan losses. Berkowitz believes that patient investors will be rewarded with a stock price in excess of $20.

Old-economy retailer

Sears is Berkowitz’s third-largest, and most surprising, holding. Fairholme revealed a stake in the Eddie Lampert-led retailer in 2012. Sears has struggled for years as brick-and-mortar retailers suffered at the hands of Amazon and Wal-Mart.

The crux of Berkowitz’s thesis for Sears seems to have to do with the company’s vast real estate portfolio, which is carried on the books at an artificially low price due to the lack of a recent appraisal. Sears owns over 250 million square feet in real estate that Berkowitz believes is worth more than the market capitalization of the stock.

However, investors should not be so quick to trust Berkowitz on Sears. For one, Berkowitz’s bread-and-butter is financial services, not retail. The argument that Sears’ real estate provides ample downside protection in the event that the retail business does not turn around seems far fetched.

Not only will it be impossible to offload 250 million square feet of real estate in a timely manner, it is also unlikely that the real estate will be worth what Berkowitz thinks it is if the retail side does not recover; retail real estate is only going to be worth a lot when retail sales are strong, which will likely not be the case when Sears fails.

Bottom line

Investors should always do their own work, even when a super-investor like Berkowitz invests in a stock. Berkowitz has been right so far on AIG and Bank of America, but his stake in Sears looks early at best and a money-loser at worst. Nevertheless, each position is interesting in its own right and worth a closer look.

The article Fund Manager of the Decade Reveals His Favorite Stocks originally appeared on Fool.com and is written by Ted Cooper.

Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends American International Group and Bank of America. The Motley Fool owns shares of American International Group and Bank of America and has the following options: long January 2014 $25 calls on American International Group.

Ted is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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