Bruce Berkowitz's Fairholme Fund Swaps Berkshire Hathaway For Bank Of America

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In its portfolio for the final quarter of 2020, which was released earlier this week, the Fairholme Fund (TradesPortfolio) disclosed it established one new position and sold out of another.

The fund is part of Bruce Berkowitz (TradesPortfolio)’s Miami-based Fairholme Capital Management. As he believes that more diversified portfolios lead to more average returns, the guru invests in a handful of undervalued stocks whose underlying companies have good management teams and steady cash flow generation.

Based on these criteria, the fund entered a position in Bank of America Corp. (NYSE:BAC) and exited its holding of Berkshire Hathaway Inc. Class B (NYSE:BRK.B) shares during the quarter ended Nov. 30.

Bank of America

Having previously sold out of Bank of America (NYSE:BAC) in the first quarter of 2016, the fund entered a new 1.35 million-share stake, giving it 3.91% space in the equity portfolio. The stock traded for an average price of $25.33 per share during the quarter.

GuruFocus estimates Fairholme has gained 13.87% on the investment so far.

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The Charlotte, North Carolina-based bank has a $288.94 billion market cap; its shares were trading around $33.35 on Wednesday with a price-earnings ratio of 17.86, a price-book ratio of 1.19 and a price-sales ratio of 3.44.

The Peter Lynch chart shows the stock is trading slightly above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 4 out of 10 also supports this assessment since the share price and price-sales ratio are both approaching multiyear highs.

GuruFocus rated Bank of America’s financial strength 3 out of 10. While the cash-to-debt ratio of 1.37 is high in comparison to the company’s history, it is underperforming in comparison to over half of its industry.

The company’s profitability scored a 4 out of 10 rating on the back of margins and returns that underperform over half of its competitors. Bank of America also has a moderate Pitroski F-Score of 5, which indicates operating conditions are stable, and a predictability rank of one out of five stars. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.

Of the gurus invested in Bank of America, Warren Buffett (TradesPortfolio) has the largest stake with 11.68% of outstanding shares. Dodge & Cox, PRIMECAP Management (TradesPortfolio), Pioneer Investments (TradesPortfolio), Hotchkis & Wiley, Diamond Hill Capital (TradesPortfolio), Bill Nygren (TradesPortfolio), Li Lu (TradesPortfolio) and Richard Pzena (TradesPortfolio), among others, also have large positions in the stock.

Berkshire Hathaway

After reducing its holding of Berkshire Hathaway (NYSE:BRK.B) in the third quarter, Fairholme sold its remaining 245,100 shares of Class B stock, impacting the equity portfolio by -7.12%. Shares traded for an average price of $216.48 each during the quarter.

GuruFocus estimates the fund gained 4.91% on the investment since establishing it in the first quarter of the year.

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Warren Buffett (TradesPortfolio)’s insurance conglomerate, which is headquartered in Omaha, Nebraska, has a market cap of $566.06 billion; its shares were trading around $240.70 on Wednesday with a price-earnings ratio of 16.14, a price-book ratio of 1.4 and a price-sales ratio of 2.09.

According to the Peter Lynch chart, the stock is slightly overvalued. The GuruFocus valuation rank of 3 out of 10 supports this assessment since its share price and price-sales ratio are both close to multiyear highs.

GuruFocus rated Berkshire Hathaway’s financial strength 5 out of 10. Although the company has issued approximately $6.7 billion in new long-term debt over the past three years, it is at a manageable level due to having adequate interest coverage. Its assets are also building up at a faster rate than its revenue is growing, which suggests it may be becoming less efficient.

The company’s financial strength fared a bit better, scoring a 7 out of 10 rating on the back of strong margins and returns that outperform a majority of industry peers, as well as a high Piotroski F-Score of 7, which indicates business conditions are healthy. It also has a three-star predictability rank as Berkshire has recorded consistent earnings and revenue growth. GuruFocus says companies with this rank typically return an average of 8.2% per annum over a 10-year period.

With a 2.01% stake, Bill Gates (TradesPortfolio) is the company’s largest guru shareholder. Other top guru investors include Diamond Hill, Tom Russo (TradesPortfolio), Pioneer, Chris Davis (TradesPortfolio), Tom Gayner (TradesPortfolio), Glenn Greenberg (TradesPortfolio), Barrow, Hanley, Mewhinney & Strauss and Ruane Cunniff (TradesPortfolio).

Portfolio composition and performance

The real estate sector has the largest representation in Fairholme’s $973 million equity portfolio, which is composed of five stocks, at 75.33%. The financial services and basic materials space have much smaller allocations.

The fund also has positions in The St. Joe Co. (NYSE:JOE), preferred shares of both Fannie Mae (FNMAS.PFD) and the Ferederal Home Loan Mortgage Corp. (FMCKJ.PFD), which is also known as Freddie Mac, and Imperial Metals Corp. (TSX:III).

In his annual letter to shareholders, Berkowitz said the fund returned 46.9% in 2020, outperforming the S&P 500’s return of 18.4%.

Disclosure: No positions.

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