We’ve already mentioned AIG and it was still by far Fairholme’s largest position at the end of June according to the 13F: at 88 million shares, the mutual fund had nearly three times as much money invested in the insurer as in its second largest position. Hedge funds have started to see AIG as a value stock and are beginning to get in (see why hedge fund managers like AIG). The federal government has recently announced plans to sell many of its shares, but the broader market still appears to be discounting the company on the basis of its failure during the financial crisis: it trades at 11 times forward earnings estimates and a P/B of 0.6.
Sears Holdings Corporation (NASDAQ:SHLD) was another of Berkowitz’s top picks. The fund had a position of about $1 billion, giving it a large stake in the currently $6.2 billion market cap retailer. Sears is struggling with a capital S: it is expected to be unprofitable for this fiscal year (which ends in January 2013) and next year as well, and its revenue declined last quarter compared to a year ago. In addition, it is highly exposed to the broader market with a beta of 2.6. It is therefore unsurprising that a number of short sellers are taking the opposite side of this trade, and given these financials we would probably be on their side against Berkowitz and billionaire Eddie Lampert.
Fairholme’s third largest holding, like AIG, is a bailed-out financial institution which is cheap compared to its earnings and book value: Bank of America Corp (NYSE:BAC). The bank has popped 50% so far in 2012 but still pays a low dividend yield for a financial stock. Fairholme reported owning about 100 million shares at the end of June, about the same as a year ago. Bank of America trades at 10 times earnings on both a trailing and forward basis, as the sell-side expects low growth, and at only 0.4 times the book value of its equity. We think Bank of America and other cheap banks (such as Citigroup and JPMorgan Chase) are good buys at current prices.
Commercial bank and former Tyco International business unit CIT Group Inc. (NYSE:CIT) was the fourth largest position on Fairholme’s 13F, with the fund owning about 14 million shares. CIT trades at the book value of its equity. The company is expected to be unprofitable this year- analysts expect $2.76 in losses per share- but its fortunes are expected to reverse next year with EPS of $3.58. At that performance, the stock currently trades at 11 times forward earnings. We aren’t sure about the company’s prospects to turn around to such a great degree, and we’d prefer AIG or Bank of America for now.
MBIA Inc. (NYSE:MBI), a $2.2 billion market cap insurance and financial advisory company, rounds out our list of Fairholme’s top five positions. As with Sears, the size of the fund’s position- 45 million shares- combined with the relatively low market cap makes Fairholme a major shareholder. MBIA’s earnings per share are highly volatile and unpredictable: the sell-side has estimated EPS between 15 and 30 cents for the last four quarters, while the company has never been in that range (from a loss of $3.23 to a gain of $2.98). The P/B is 0.9, fairly close to 1. MBIA could be undervalued but should be researched closely before taking a position.
