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Tracking Bruce Berkowitz's Fairholme Portfolio - Q4 2017 Update

Feb. 18, 2018 8:23 AM•FAIRX

Summary

Bruce Berkowitz’s 13F stock portfolio value decreased this quarter from $907M to $726M.

Sears and Seritage positions saw reductions this quarter.

The portfolio is very concentrated with St. Joe Companies, Sears Holdings, and its spinoff Seritage Growth Properties forming almost the entire portfolio.

This article is part of a series that provides an ongoing analysis of the changes made to Fairholme’s 13F stock portfolio on a quarterly basis. It is based on Fairholme’s (FAIRX) (FOCIX) (FAAFX) regulatory 13F Form filed on 02/15/2018. Please visit our Tracking Bruce Berkowitz's Fairholme Fund Holdings article for an idea on how his holdings have progressed over the years and our previous update for the fund’s moves during Q3 2017.

Berkowitz’s 13F stock portfolio value decreased ~20% from $907M to $726M this quarter. The portfolio continues to be very concentrated with the entire holdings invested in St. Joe Company, Seritage Growth Properties, Sears Holdings, and Leucadia National.

Berkowitz’s flagship Fairholme Fund (FAIRX) has generated significant alpha since its December 1999 inception: through 2017, the fund returned 460.74% compared to 158.91% for S&P 500 index. FAIRX has, however, underperformed over the most recent 10-year period. For 2017, FAIRX was down 5.96% compared to up 21.83% for the S&P 500 index. Large equity holdings that are not in the 13F report include Fannie Mae (OTCQB:FNMA) preferred (FNMAS), Freddie Mac (OTCQB:FMCC) preferred (FMCKJ), and Imperial Metals (OTCPK:IPMLF). They also have small positions in International Wire Group (OTCPK:ITWG), Bristow Group (BRS), and Monitronics International. Stocks and preferreds together account for ~73% of the AUM and the rest are in cash & equivalents (~27%). Fannie/Freddie Preferreds are at ~26% of AUM.

Stake Disposals:

None.

Stake Increases:

St. Joe Company (JOE): JOE is the largest stake at ~70% of the 13F portfolio. The bulk of the position was purchased in the 2008-2009 time frame and there have only been minor adjustments since. Last three quarters have seen a combined ~14% increase at prices between $16.35 and $19.55. Currently, it trades at $18.80. Berkowitz’s ownership stake is at ~42% of the business.

Note: Fairholme’s thesis is centered on the idea that JOE has little debt, low fixed expenses, low-cost land, and $300M in cash reserve. That combination should allow long-term value creation.

Stake Decreases:

Sears Holdings Corp. (SHLD): Sears is Berkowitz’s third-largest 13F position at ~12% of the portfolio. The original stake was established in 2007, although the position size has fluctuated over the years. The current stock price ($2.61) is far below Fairholme’s cost-basis of ~$61. There was a ~13% trimming this quarter.

Note 1: In their Q4 report, Faiholme acknowledged their failure to foresee operating losses that significantly diminished the value of the assets - even though they got the asset values largely correct, their thesis was proved wrong. As a percentage of Fairholme’s overall AUM, the SHLD position is now a much diminished stake (~7%) and so will have much less portfolio impact going forward.

Note 2: Regulatory filings since the quarter ended show them owning ~21.3M shares (~19.8% of the business). This is compared to ~24M shares in the 13F.

Note 3: Bruce Berkowitz stepped down from the board of directors of Sears effective 10/31/2017.

Seritage Growth Properties (SRG): SRG is a top-three ~18% position. Seritage was spun-off from Sears Holdings through a Rights Offering in July 2015 and Fairholme participated in the transaction. Trading started at $37 per share and it currently trades at $42.02. H1 2017 saw a ~12% increase while this quarter saw a similar trimming.

Note: Their thesis is based on the fact that when Sears closes Seritage stores and they are then re-rented, the market rate is 3x of what they are getting from Sears.

Sears WTS 28.41 Strike: The very small 0.28% position in Sears WTS saw a ~12% trimming this quarter.

Kept Steady:

Leucadia National (LUK): LUK is a very long-term holding that was built-up over several years. The position had seen large reductions since Q2 2013. Recent activity follow: Q4 2015 saw a ~55% reduction at prices between $16 and $21 and the remaining stake was almost eliminated the following quarter at prices between $14.50 and $17.50. It currently trades at $24.97.

The spreadsheet below highlights changes to Fairholme’s US stock holdings in Q4 2017:

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long Fannie & Freddie Pfds.

https://seekingalpha.com/article/4147980-tracking-bruce-berkowitzs-fairholme-portfolio-q4-2017-update