Bruce Berkowitz takes long view on losers
The manager of Fairholme Fund sees his investment thesis playing out over the next 5 to 7 years.
Berkowitz's largest financial positions -- AIG, Bank of America and MBIA -- together comprise approximately 65% of his portfolio. He began purchasing his largest holding, AIG (AIG), in the first quarter of 2010, when the price dropped to $24 per share on average. That year, AIG's book value per share was $94.94. He more than doubled the stake in 2011, at an average price of $31 per share. The book value in 2011 was $53.46.
Bank of America (BAC), his second largest holding, was mainly purchased in 2010 at prices ranging from $12 to $16. The book value that year was $23.31.
MBIA (MBI), his sixth largest position, was mostly added at prices ranging from $8 to $11 per share in 2010, when it had a book value of $13.99.
Berkowitz said that even if these prices approached tangible book value he would be unlikely to sell. "Why sell at tangible book?" he went on. "You buy something at half its liquidation value. Problems are fixed. A more normal environment develops. The equity values rebound. Price eventually surpasses equity values and you have an above average performance return for a number of years."
The market prices of each of his top three financial holdings have made significant gains, contributing to his returns last year, but still are some distance from tangible book value. AIG is trading for $37.63 on Monday afternoon, still under its fourth-quarter tangible book value per share of $66.45, after gaining 33% over the past 12 months. Bank of America has a market price of $12.37, still trailing its fourth quarter book value of $14.33, after gaining 25.5% over the past 12 months. MBIA trades for $10.77, trailing its fourth quarter book value of $16.35, after gaining 13.5% over the past 12 months.
Berkowitz believes these companies can achieve 10% return on equity again, as they have in the past. The last time AIG's return on equity reached double digits was in 2006, when it was 13.8%. Its annual return on equity in 2012 was 3.5%.
In its 2012 10K, AIG listed enhancing return on equity as a key goal in its core business strategy. "Build on simplified legal entity structure to enhance financial strength and durability, capital efficiency and ease of doing business," it said. "Improve operational efficiencies, expense control and service through investments in technology and more productive use of existing resources and lower-cost operations centers."
(AIG data by GuruFocus.com)
Bank of America returned 10.2% on equity in 2007, and broached double digits the preceding four years. Since then, it has struggled to reach historical levels, returning 1.8% on equity in 2012. In the fourth quarter, however, it reported a 10.48% return on average allocated equity in its consumer and business banking segment, up from 9.47% the previous quarter.
(BAC data by GuruFocus.com)
MBIA exceeded 10% from 2003 to 2006, then again in 2009, and again in 2012, with a 38.9% return on equity.
(MBI data by GuruFocus.com)
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