Each quarter, hedge funds, such as Bruce Berkowitz’s Fairholme, file 13Fs with the SEC. The 13F forms disclose many of the positions held in the fund’s equity portfolio during the quarter. Fairholme is a very large managed fund, with over $19 billion assets under management, and has averaged an annual return of 12.9% over the past decade. We will now take a quick look at five stock positions that were either closed completely or reduced in the first quarter.
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Selloffs
During the quarter, Berkowitz sold out of his entire stake, of 3,223,229 shares, in leasing company CIT Group Inc. (NYSE:CIT), worth about $124.5 million as of December 31, 2012. The company reported disappointing margins as well as floundering asset growth during the first quarter of 2013, and there do seem to be companies offering better value in the leasing company sector, with ORIX Corporation (ADR) (NYSE:IX), for example, trading at 0.97 times book, while CIT Group Inc. (NYSE:CIT) trades just above parity.
Up over 15% year-to-date, Wall Street thinks CIT Group Inc. (NYSE:CIT) doesn’t have much more room to run, with average price targets predicting just another 3% in upside from current levels. It’s possible that Berkowitz noticed the peaking valuation—in addition to the shrinking profitability measures—as key reasons to why he sold off his stake in the commercial financing company.
Fairholme also reportedly closed its 1,432,000-share position in investment banking company Jefferies Group, Inc. (NYSE:JEF), although this is likely due to the merger in December 2012 with Leucadia National Corp. (NYSE:LUK), which saw Jeffries become an LLC early in 2013. As of March 31, the fund still held 18,770,478 shares worth nearly $515 million in Leucadia.
Cuts
The fund also decreased its stake in financial services company MBIA Inc. (NYSE:MBI) by approximately 26%, to hold 31,425,820 shares worth over $322 million as of the end of Q1. MBIA Inc. (NYSE:MBI) recently won a successful settlement against Bank of America Corp (NYSE:BAC), causing a 40% rise in its share price; Berkowitz’s sale during the quarter may have been an attempt to hedge against the uncertainty created by the case, although if so, this proved to be unnecessary.
Despite its massive appreciation of late, MBIA Inc. (NYSE:MBI) still sports the fourth-lowest PEG ratio in the entire financial sector (0.20), a book valuation below parity (0.83), and bargain bin multiples nearly everywhere else you look. Yes, earnings have been spotty, but much of the regulatory fears have been lifted, and Wall Street does expect MBIA Inc. (NYSE:MBI) to generate earnings growth of 10% a year over the next half-decade.
Fundamentally speaking, this play reminds us of an early 2012-era American International Group Inc (NYSE:AIG); shares have risen, but are still extremely cheap. Quite frankly, there’s nothing preventing more value hunters from buying in at these levels too.
Interestingly, another substantial decrease during the quarter was in Wells Fargo & Co (NYSE:WFC), with the fund reducing its existing stake by about a quarter to 151,400 shares worth about $5.6 million, as at March 31, 2013. This is an interesting move, given that Warren Buffett increased his holdings in the company during the quarter; the company has also reported positive quarterly earnings, and should continue to benefit from an ongoing housing boom, particularly in its home lending division.
Berkowitz did increase his stakes in Bank of America Corp (NYSE:BAC) and American International Group Inc (NYSE:AIG), so perhaps he currently perceives more value in these other financial companies.
During the quarter, Berkowitz also made a minor adjustment to his most controversial holding. He sold 83,700 shares of his approximate 25 million-share stake in the Florida-based commercial and industrial development company The St. Joe Company (NYSE:JOE), with this holding still worth about $532 million as of March 31.
Berkowitz has had a lengthy and troubled history with the investment, and has been intensely involved with boardroom politics of St. Joe via a position on the company’s board of directors. Although St. Joe reported a decline in earnings last quarter, some analysts, and perhaps Berkowitz himself, consider its balance sheet to be solid, and thus, a long-term value play.
Final thoughts
Berkowitz is a large and influential investor, with a bias towards value-oriented plays, so his buys and sells are always worth noting for those who use that investment style. In particular, the closing out of his fund’s entire position in CIT Group Inc. (NYSE:CIT) should give some investors in this company pause for thought, given that there are other attractive propositions in this sector. Additionally, Berkowitz’s cuts in MBIA Inc. (NYSE:MBI), Wells Fargo & Co (NYSE:WFC) and The St. Joe Company (NYSE:JOE) are intriguing, with the latter being the one we’d watch the closest moving forward. Continue preparing for 13F-filing season here.
Disclosure: none
