Bruce Berkowitz Adds an Old Icon

Following Bruce Berkowitz recently became a little more fun, thanks to his spat with David Einhorn over the value of real estate developer St. Joe (NYSE: JOE  ) . After Einhorn's now-infamous presentation at the Value Investing Conference knocking the company, Berkowitz offered to send Einhorn a "box of chocolates" for making its stock cheaper. Berkowitz also added more than 135,000 shares to his large position in the company. However, the bet hasn't paid off; since he purchased the additional shares on Oct. 13, the stock has declined an additional 19%.

While Berkowitz's feud and sideshow with Einhorn has been one of his worst bets to date, his overall track record is hard to ignore. He also manages his fund a bit differently than most mutual fund managers. Berkowitz holds a lot of cash, making large, concentrated bets when he has a strong belief in a company's prospects. This has helped his Fairholme Fund return an average of 9% over the last five years, while the S&P 500 returned an average of close to 2% during the same time period.

According to the Fairholme Fund's most recent SEC filings, Berkowitz did not make many changes to the largest positions in his portfolio during the third quarter. He added very few shares to each of his top three positions AIG (NYSE: AIG  ) , Sears (Nasdaq: SHLD  ) , and Citigroup (NYSE: C  ) . The largest additions Berkowitz made to the fund were in shares of Bank of America (NYSE: BAC  ) and Morgan Stanley (NYSE: MS  ) , increasing his positions by more than 30% and 123%, respectively.

Just one addition
Berkowitz started only one new position during the third quarter, but the pick is surprising nonetheless. Fairholme purchased more than 14 million shares of onetime American icon General Electric (NYSE: GE  ) . The industrial giant is among the top 10 American companies by market capitalization, but the financial crisis took away some of its shine.

Personally, it's hard for me to find a lot to like about GE right now. The company has been a big beneficiary of the economic stimulus package, and of a U.S. government in general that has piled on debt over the last decade. If threatened spending cuts actually become reality in the U.S., GE could lose substantial amounts of revenue. Meanwhile, the company still has huge amounts of debt and remains fairly highly leveraged.

On the other hand, Berkowitz clearly sees value that I may not. Perhaps it's the improvement in the company's once extremely troubled financial arm. GE Capital has seen its loan portfolio bounce back as losses shrink. Citigroup even put out a report last month stating its belief that the finance arm will create more than 50% earnings growth next year for the company.

It will be interesting to see how Berkowitz's out-of-favor picks St. Joe and General Electric perform over the coming months. He's beaten the market routinely by picking downtrodden stocks that almost no one wants to own. St. Joe and General Electric are certainly not sexy, but they might be by the time Berkowitz is ready to sell.

Do you agree with Berkowitz's top picks? Let us know in the comment box below.

Andrew Bond owns no shares in the companies listed. You can follow Andrew on Twitter @Bond0 or on his RSS feed. The Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (14)

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  • Report this Comment On November 20, 2010, at 6:27 AM, midnightmoney wrote:

    Andrew, I'm curious if you think GE will eventually rebound. I'm looking at a 20 to 30-year timeline and am seriously considering buying some myself, knowing the money will be made far down the line. Could you also please elaborate on how government spending cuts will affect ge's profits? Do you think that the company's push into India, Brazil and China will eventually return them to solid-investment status? Reviews of ge stock potential are decidedly more mixed than yours seems to be, so I'd like to know how much thought you've put into your dismissal. Fool pieces and recommendations carry a lot of weight for me, could you please say more?

  • Report this Comment On November 20, 2010, at 6:32 AM, midnightmoney wrote:

    If I had to put forth a candidate for a stock to buy on Buffett's "buy when others are fearful" criterion, I'd say ge fits the bill.

  • Report this Comment On November 20, 2010, at 1:34 PM, TMFBond007 wrote:

    Hi Midnightmoney,

    Right now I think there are much better ways to get exposure to the industrial space. Sure GE trades at discount to many of its peers if you are looking at P/E, but GE is saddled with $495 billion dollars of debt on its balance sheet. So, taking that staggering amount of debt into account GE trades at an EV/EBITDA that values it more than 3x greater than 3M and almost 3x as rich as Honeywell. These diversified industrials also have a similar dividend yield, and aren’t strapped with a loan portfolio that still has a ton of ugly stuff out there (CRE).

    I’m glad management has started to trim down some of its businesses and is narrowing the company’s focus, but other industrial companies are thriving right now, and that is how I would rather play the sector.

    You want exposure to India, Brazil, and China? How about Cummins? Take a look at its revenue growth in those countries. Power generation demand is huge and growing in the BRIC’s.

    As for 30 year time periods, personally I believe that is extremely lazy, and it would be irresponsible of me to tell readers they could just hold a stock for 30 years. I bet there were a lot of brokers telling their clients that Lehman, Bear, GM, etc were great ‘long-term’ investments to hold forever.

    Buy and hold works great…. Until it doesn’t. I buy companies that I want to hold for a long time, but if I don’t like the direction the company is going, why risk my capital. There are too many good companies out there to stick with one for a 20-30 year time period just because…

    I don’t know how the economy is going to look in 20-30 years, so it’s stilly to invest like I do. Apparently Netflix and Chipotle are on pace to rule the world, so maybe those are good 30 year investments.

    However, every Fool has different investment philosophies, and that’s what makes this community such an awesome place. I would love to hear your thoughts on GE, and why you are considering buying shares.

    Thanks for reading,

    Andrew

  • Report this Comment On November 21, 2010, at 4:13 PM, midnightmoney wrote:

    I'm afraid I've got nothing that would turn your head, Andrew. I'm very grateful for your input though.

  • Report this Comment On November 22, 2010, at 6:52 PM, MYCash472 wrote:

    I also just bought into GE (after watching it for some time). I believe it's exposure to it's finance arm have been more than built into it's price. I think if management reviews every single business it is in, and if it is not one of the top 3 players, exits that business ~ leaving them less to oversee & concentrate on, they will thrive again - and I will reap the rewards. I invest hoping to be able to hold my investments for decades, but I review them regularly to make sure they still meet my overall plan.

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