If there was a time to buy some of the worst-hit stocks of the financial crisis, it was early last year. Yet even after many of those shares have seen phenomenal rises, one of the most highly renowned money managers of the past decade still believes that there's good value in what many have derided as "junk stocks."
A fair ho(l)me for your money
Bruce Berkowitz is no stranger to the limelight. After putting together a strong track record of 13% annual returns at his Fairholme Fund since 2000, Berkowitz was named the best domestic equity fund manager of the decade by Morningstar.
But even with stellar performance to look back on, Berkowitz still turns heads with some of his picks. Recently, he disclosed that he had bought a substantial position in AIG (NYSE: AIG ) . That was confirmed earlier this month in a 13G filing with the SEC, which showed Fairholme Capital Management with an 11% stake in the company as of March 31.
Nor is AIG the only hard-hit stock Berkowitz has picked up recently. Last fall, he bought more than 100 million shares of Citigroup (NYSE: C ) , citing in a recent interview with Barron's the fact that "the company is hated by investors" as a rationale for his purchase. More recently, Berkowitz added Bank of America (NYSE: BAC ) to his portfolio, stating that he saw good potential for returns without any appreciable downside risk.
In addition, Berkowitz has been combing the distressed-asset market for opportunities to profit. For instance, he has been a major player in the bankruptcy of General Growth Properties (NYSE: GGP ) , taking an active role in joining with co-investors Brookfield Asset Management (NYSE: BAM ) and Pershing Square Capital Management. The group has offered to make a total investment of $6.5 billion in exchange for a 65% stake in GGP plus warrants to buy additional shares. In doing so, Berkowitz has been at odds with Simon Property Group (NYSE: SPG ) , which has made a counteroffer to make a multibillion-dollar investment in GGP shares and debt.
Also, he bought more than $200 million in bonds of CIT Group (NYSE: CIT ) late last year, and now reports current ownership of almost $400 million in CIT stock after the company emerged from bankruptcy last December. The newly issued stock has performed well, as CIT pursues new financing and sales of some of its assets.
Room to run?
Simply stated, Berkowitz believes that companies like these are the pillars of the financial system. Rather than betting against the "too big to fail" companies, he sees them as opportunities, largely because they are "interwoven into the fabric of the United States" -- and not just because of the government's financial interest in many of them.
In particular, Berkowitz sees AIG's "partnership with the government" as having led to the insurance giant's reducing its risk level and strengthening its financial condition. With the bank stocks, he believes that as banks make new loans under tighter credit standards, they'll naturally improve the quality of their loan portfolios.
Going against the trend
Berkowitz is a great example of how top investors don't succeed by following the crowd. Value isn't entirely an objective criterion, but allowing yourself to be overly influenced by popular opinion is likely to cause you to reject out of hand some investment opportunities you should have jumped on.
When you hear about an investment that many are calling a sure thing, the first thing you should do is figure out what risks and problems those investors are missing. As has happened with tech stocks and residential real estate, the crowd often gets caught up in the euphoria of the moment without considering the actual downside.
Similarly, when people are universally deriding a particular investment, it may be worth a closer look. Sure, stocks that look like dogs often will turn out to be dogs. But sometimes you'll discover true treasures in the junk pile. Fairholme investors certainly hope that Bruce Berkowitz's trash-can-diving will show them the money.
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