Here's What Bruce Berkowitz at Fairholme Is Buying

Every quarter, fund managers have to disclose what they've bought and sold. Their latest moves can shine a bright light on smart stock picks.

Today, let's look at investing giant Bruce Berkowitz. He's the founder of Fairholme Capital Management, which oversees three mutual funds of interest: the flagship Fairholme Fund (FAIRX) seeks long-term growth of capital, the Fairholme Focused Income Fund (FOCIX) seeks current income, and the Fairholme Allocation Fund (FAAFX) seeks long-term total return. The funds are all rather focused, each owning less than two dozen holdings, instead of the hundreds that many funds own.

The Fairholme fund has many admirers, and Berkowitz was named Morningstar's fund manager of the decade. But the fund has faltered recently, having made some seemingly risky big bets. Also of concern to some, Berkowitz's right-hand man, Charles Fernandez, recently left the firm.

Interesting developments
So what does Fairholme's latest quarterly 13F filing tell us? Well, for starters, Berkowitz's portfolio features about 19 entries, and totals $6.1 billion in value, as of the end of 2011. The top three holdings are AIG, representing a whopping 35% of the portfolio, CIT Group, with 11%, and Bank of America (NYSE: BAC  ) , at 10%.

Most of the portfolio is in the financial sector, with St. Joe (NYSE: JOE  ) being a significant exception, and a controversial one. It's a major landowner in Florida, heavily shorted, and with its practices being looked at by the Securities and Exchange Commission. Fairholme recently owned more than 25% of the company.

Here are a few other interesting details:

New to the portfolio are warrants in JPMorgan Chase (NYSE: JPM  ) . Like many banks, it has struggled some in our sputtering economic environment, but the eventual recovery will help it. As investors wait, it does offer a more attractive dividend than many peers. My colleague Dan Caplinger points out a danger, though: If credit cards become a thing of the past, as they might, then big card issuers such as JPMorgan Chase might take a big hit.

Stocks in which Berkowitz boosted his stake include Wells Fargo and Bank of America, with both increases coming through warrants. Why is Mr. Berkowitz bestowing such favor on bank stocks? One reason might be that many investors are seeing the light at the end of the uncertainty tunnel. How much banks might ultimately have to pay for their involvement in the recent credit crisis is starting to dissipate as some deals are made -- such as one struck by five big banks, worth as much as $26 billion.

Of course, not all banks have equally rosy futures. The Fairholme portfolio shrank its stake in Citigroup and Regions Financial (NYSE: RF  ) , for example. Regions Financial, like many peers, has been improving its credit quality, but it still sports falling revenue, and hasn't paid off its TARP bailout yet.

One stock that Berkowitz sold out of was European telecommunication giant Telefonica (NYSE: TEF  ) . Troubles in Europe have been depressing the stock, though its bulls like its growth prospects in Latin America. Its dividend yield near 10% has also been a draw for many.

We should never blindly copy any investor's moves, no matter how talented the investor. But it can be useful to keep an eye on what smart folks are doing. 13-F forms can be great places to find intriguing candidates for our portfolios.

Looking for promising investments? Check out our free special report -- "The Stocks Only the Smartest Investors Are Buying" -- and learn which stocks are appealing to Warren Buffett and other great investors.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter @SelenaMaranjian, owns shares of JPMorgan Chase and Fairholme Fund, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Telefonica, Wells Fargo, Bank of America, JPMorgan Chase, and Citigroup, and has created a covered strangle position on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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