What's Up at Fairholme?

Bruce Berkowitz and the others at Fairholme Capital Management do things their way.

That should be no surprise with the slogan "Ignore the Crowd." And by doing just that, the fund has outperformed the S&P 500 -- 18.3% to 2% since its inception Dec. 29, 1999. (Returns as of June 30, 2007.)

In an age of diversification, these guys run a concentrated portfolio. After all, in a quote from a U.S. News & World Report article on Warren Buffett, Berkowitz posed the question, "Why in the world would you want to invest in your 30th-best idea, as opposed to your best idea?" Good point, Bruce.

The firm recently submitted its 13-F statement to the SEC, disclosing its holdings as of June 30, 2007. To see how they're doing their own thang, let's check out what happened in the portfolio last quarter. Below are some of the notable changes.

A little more, please
Like many of us, the guys at Fairholme are Buffett disciples. I'll let them tell you why they added to their positions in Berkshire Hathaway.

Berkshire Hathaway remains our largest single investment, and for good reason. The company is liquid, generates tons of cash, and continues to sell at a discount to our estimate of fair value.

Translation: We can't wait for Buffett to continue to work his magic with all that cash, especially during turbulent times like these.

Remember, Fairholme would rather invest more in its best ideas. And that's why the firm also added more shares of Canadian Natural Resources to the mix. It produces oil and natural gas and, according to its website, should be producing 110,000 barrels of synthetic crude oil per day from its oil sands project in Alberta.

A little less, please
Troubled insurance broker Marsh & McLennan continues to push forward with its turnaround. But it looks like Fairholme is tired of waiting and almost liquidated its position. Looking at the chart, that call appears to be pretty prescient. Marsh Mac peaked around June and has been declining ever since.

The fund also reduced its position in Calumet Specialty Products, though this was a much smaller part of the portfolio. Calumet is a refiner that generates various hydrocarbon products ranging from Petrolatum, used in cosmetics, to solvents, which should not be applied to your face.

It's interesting to note that Calumet is a Motley Fool Income Investor recommendation. There are many reasons an investor can sell a stock, and I can't really find any news on why Fairholme would want to sell. But it's clear that Income Investor's James Early finds the company's prospects and its 5.5% dividend yield attractive.

Come on in!
Congratulations, Fairholme! It's an oil and natural gas acquisition, exploration, and development company. Let's name it XTO Energy, since that's the name it came with.

Back to the firm's most recent shareholder letter, "energy remains our number one exposure." Putting 3% of its portfolio in XTO to go along with the 22% position in Canadian Natural Resources confirms Fairholme's bullish stance on energy.

Get outta here!
Talk about a great trade! The price of wireless communications solution provider USA Mobility dropped its connection recently, to the tune of 38.5% from its high in July. Fairholme unloaded its stake sometime before June 30, so it clearly got out when the gettin' was good. Maybe the guys looked at its one-star stock rating in Motley Fool CAPS and realized it was time to go.

One Fool's view
As an investor who also tries to wait for that perfect pitch and load up on his best ideas, I am always anxious to see what the gentlemen at Fairholme are up to. This quarter didn't disappoint. And with 44% of its portfolio in its two best ideas, I'd say the firm is walking the walk and not just talking the talk.

Berkshire Hathaway (A and B shares) is a Motley Fool Inside Value recommendation. Inside Value looks for the best companies at the best prices. To see how lead analyst Philip Durell is outperforming the market by using them, sign up today for your free 30-day trial.

Berkshire Hathaway (A and B shares) is also a Stock Advisor selection.

Retail editor and Inside Value team member David Meier owned shares of Berkshire for two weeks before realizing he owned them for the wrong reasons. He does not own shares of any of the companies mentioned. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.