Bruce Berkowitz launched Fairholme in 1999. It earned him the title of “Stock Manager of the Decade” from Morningstar and is now a $19 Billion mutual fund. Berkowitz’s Fairholme Fund managed to return 1.02% per month since September 2000. This compounds to an average annual return of 12.9% for the past 10 years. In 2010, Fairholme Fund returned 25.5%, beating the SPY by more than 10 percentage points. In fact, Bruce Berkowitz managed to beat the market every year except in 2003.
The best performing stocks in the market are usually the highest growing stocks or the stocks with the highest expected growth rates. This doesn’t mean that one should be invested in growth stocks and stay away from the value stocks at all times. Historically value stocks managed to beat the growth stocks hand over fist. The reason is simple. Value stocks are beaten down stocks with very low or negative growth expectations. Not surprisingly it is easier for these stocks to beat the expectations on the average. On the other hand, everybody is extremely bullish about growth stocks and expect them to have higher growth rates in the future. Their stock prices also reflect this fact. Not surprisingly, it is more difficult for these stocks to beat these challenging expectations.
Here are Bruce Berkowitz’s stock picks with the highest upside potential:
MBIA Inc., together with its subsidiaries, provides financial guarantee insurance and related reinsurance, advisory, and portfolio services, as well as investment management services to public finance and structured finance markets. It lost 41.13% since the beginning of this year. It has a market cap of $1.48 billion and a forward P/E ratio of 5.91, and is expected to shrink over the next five years. Berkowitz had $407 million invested in MBI shares. Israel Englander largely increased his holding of MBI by 67-fold during the second quarter and held a position of nearly $7 million at the end of June.
Eli Lilly develops, manufactures, and sells pharmaceutical products worldwide. It returned 13.01% since the beginning of this year. It has a market cap of $42.3 billion and a forward P/E ratio of 10.26, and is expected to shrink over the next five years. Berkowitz had $7.8 million invested in LLY shares. Jim Simons’ Renaissance Technologies held a $388 million position at the end of June.
Bank of America Corporation, a financial holding company, provides banking and nonbanking financial services and products to individuals, small- and middle-market businesses, large corporations, and governments in the United States and internationally. It lost 57.39% since the beginning of this year. It has a market cap of $61.11 billion and a forward P/E ratio of 5.38, and is expected to shrink over the next five years. Berkowitz had $1.1 billion invested in BAC shares. John Paulson held a $662 million position at the end of June.
RSC Holdings Inc., together with its subsidiaries, engages in the rental of construction and industrial equipment primarily in the United States and Canada. It lost 11.19% since the beginning of this year. It has a market cap of $939.25 million and a forward P/E ratio of 14.6, and is expected to grow at a rate of 0.22% over the next five years. Berkowitz had $1.1 million invested in RRR shares. Steven Cohen and Jim Simons also held positions in RRR.
Winthrop Realty Trust, a real estate investment trust (REIT), engages in the ownership and management of real property and real estate-related assets. It lost 33.41% since the beginning of this year. It has a market cap of $275.86 million and a forward P/E ratio of 5.47, and is expected to grow at a rate of 0.37% over the next five years. Berkowitz had $16 million invested in FUR shares. D.E Shaw doubled his position in FUR and Ken Griffin initiated a brand new position in FUR during the second quarter.
Regions Financial Corporation operates as the holding company for the Regions Bank that provides a range of commercial, retail, and mortgage banking services in the United States. It lost 50.78% since the beginning of this year. It has a market cap of $4.36 billion and a forward P/E ratio of 6.53, and is expected to grow at a rate of 1.74% over the next five years. Berkowitz had $768 million invested in RF shares. John Paulson held a $120 million position in RF at the end of June. Ken Griffin tripled his position in RF during the second quarter.
CIT Group Inc. operates as the holding company for CIT bank that provides commercial financing, leasing products, and other services to small and middle market businesses. It lost 30.14% since the beginning of this year. It has a market cap of $6.5 billion and a forward P/E ratio of 20.76, and is expected to grow at a rate of 2.43% over the next five years. Berkowitz had $859 million invested in CIT shares.
The Goldman Sachs Group, Inc., together with its subsidiaries, provides investment banking, securities, and investment management services to corporations, financial institutions, governments, and high-net-worth individuals worldwide. It lost 43.57% since the beginning of this year. It has a market cap of $49.01 billion and a forward P/E ratio of 6.85, and is expected to grow at a rate of 4.72% over the next five years. Berkowitz had $799 million invested in GS shares. Jim Simons initiated a brand new $29 million position in GS shares during the second quarter.
