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Bruce Berkowitz Increases Exposure to Berkshire Hathaway, Dumps Vista Outdoor

Bruce Berkowitz (Trades, Portfolio), leader of Fairholme Capital Management, revealed his portfolio for the second quarter last week.

The guru's Miami-based firm concentrates its investments in a relatively small number of companies, believing that a more diversified portfolio leads to a more average performance. Berkowitz applies Benjamin Graham's strategy when selecting stocks, seeking companies that have solid management, generate high free cash flows and are trading at a deep discount to intrinsic value.


In his semiannual letter to shareholders, Berkowitz noted that while the Covid-19 pandemic is "changing the demand and supply for goods and services," forcing society and businesses to adapt to "a new normal," he remains "optimistic about the future."

With these changing dynamics in mind, the investor disclosed he entered a position in Berkshire Hathaway's (NYSE:BRK.A)(BKR.B) Class A stock and added to his holding of Class B stock during the three months ended June 30. Other major trades included large reductions of the Occidental Petroleum Corp. (NYSE:OXY) and Simon Property Group Inc. (NYSE:SPG) positions and selling out of Vista Outdoor Inc. (NYSE:VSTO).

Berkshire Hathaway

In addition to expanding his holding of Berkshire's Class B stock by 33.01%, or 80,490 shares, Berkowitz invested in 1 share of its Class A stock. The Class A shares traded for an average price of $274,087 each during the quarter, while Class B shares traded for an average price of $182.86.

The guru now holds a total of 324,310 Class B shares, which represent 9.69% of the equity portfolio. GuruFocus estimates he has gained 11.15% on the investment since establishing it in the first quarter of 2019.

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The Omaha, Nebraska-based insurance conglomerate, which is run by renowned investor Warren Buffett (Trades, Portfolio), has a $501.99 billion market cap; its Class B shares were trading around $208.70 on Wednesday with a price-earnings ratio of 22.94, a price-book ratio of 1.28 and a price-sales ratio of 1.95. Class A shares were trading around $313,087 each.

The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 2 out of 10 also supports this assessment since the share price and price-sales ratio are near multiyear highs.

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In his letter, Berkowitz noted that market participants fear the ongoing Covid-19 pandemic may bankrupt insurers, but said most insurance policies exclude pandemics and that premiums are rising faster than risks. As such, "Berkshire continues to invest no-cost insurance float in guaranteed cost-plus utilities and other critical enterprises."

GuruFocus rated Berkshire's financial strength 5 out of 10. Although the company has issued approximately $5.2 billion in new long-term debt over the past three years, it is still at a manageable level due to having adequate interest coverage. Since the return on invested capital is lower than the weighted cost of capital, however, it may have trouble turning a profit. Its assets are also building up at a faster rate than revenue is growing, indicating it may be becoming less efficient.

The company's profitability scored a 6 out of 10 rating on the back of a net margin and return on assets that outperform over half of its competitors. Berkshire is also supported by a moderate Piotroski F-Score of 4, which suggests operations are stable, and a predictability rank of three out of five stars, which is on watch as a result of a slowdown in revenue per share growth over the past 12 months. According to GuruFocus, companies with this rank typically return an average of 8.2% annually over a 10-year period.

Of the gurus invested in the Class B stock, Bill Gates (Trades, Portfolio)' foundation trust has the largest stake with 1.67% of outstanding shares. Other top guru shareholders include Diamond Hill Capital (Trades, Portfolio), Glenn Greenberg (Trades, Portfolio), Tom Russo (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Chris Davis (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss, Ruane Cunniff (Trades, Portfolio) and Wallace Weitz (Trades, Portfolio).

Occidental Petroleum

With an impact of -0.23% on the equity portfolio, the guru curbed his position in Occidental Petroleum by 23.6%, selling 101,380 shares. The stock traded for an average price of $15.66 per share during the quarter.

Berkowitz now holds 328,110 shares total, accounting for 1% of the equity portfolio. GuruFocus data shows he has lost an estimated 57.26% on the investment since establishing it in the first quarter.

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The oil and gas producer, which is headquartered in Houston, has a market cap of $12.94 billion; its shares were trading around $13.90 on Wednesday with a price-book ratio of 0.94 and a price-sales ratio of 0.58.

According to the median price-sales chart, the stock is undervalued. The GuruFocus valuation rank of 9 out of 10 aligns with this assessment.

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Occidental's financial strength was rated 3 out of 10 by GuruFocus on the back of weak interest coverage. The Altman Z-Score of 0.08 also warns the company could be in danger of going bankrupt since its assets are building up at a faster rate than revenue is growing. The WACC also significantly outweighs the ROIC, indicating the company may struggle to turn a profit.

The company's profitability fared better, scoring a 6 out of 10 rating. While the operating margin is outperforming around half of its industry peers, returns are negative and underperforming. Occidental also has a low Piotroski F-Score of 3, which implies business conditions are in poor shape, and a one-star predictability rank that is on watch as a result of a slowdown in revenue per share growth over the past 12 months. GuruFocus says companies with this rank return, on average, 1.1% annually.

With a 13.3% stake, Dodge & Cox is Occidental's largest guru shareholder. Carl Icahn (Trades, Portfolio), the T Rowe Price Equity Income Fund (Trades, Portfolio), Pioneer, Ken Fisher (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss, Paul Tudor Jones (Trades, Portfolio), BP Capital Fund Advisors (Trades, Portfolio) and Richard Snow (Trades, Portfolio) also own the stock.

Simon Property Group

Berkowitz trimmed his Simon Property Group holding by 40.82%, selling 20,000 shares. The transaction had an impact of -0.22% on the equity portfolio. During the quarter, the stock traded for an average per-share price of $62.57.

He now holds 29,000 shares total, which represent 0.33% of the equity portfolio. According to GuruFocus data, Berkowitz has lost 47.05% on the investment so far.

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The Indianapolis-based commercial real estate company has a $19.72 billion market cap; its shares were trading around $64.48 on Wednesday with a price-earnings ratio of 11.41, a price-book ratio of 9.99 and a price-sales ratio of 3.73.

Based on the Peter Lynch chart, the stock appears to be undervalued. The GuruFocus valuation rank of 10 out of 10 supports this assessment.

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GuruFocus rated Simon Property Group's financial strength 3 out of 10. Due to the company issuing approximately $3.9 billion in new long-term debt over the past three years, it has weak interest coverage. The Altman Z-Score of 0.62 also warns the company is in distress and could be in danger of going bankrupt.

The company's profitability fared better with an 8 out of 10 rating. In addition to operating margin expansion, Simon Property Group is benefitting from strong returns that outperform a majority of competitors as well as a moderate Piotroski F-Score of 5. The four-star predictability rank is on watch as a result of revenue per share declining over the past year. GuruFocus data shows companies with this rank typically return an average of 9.8% annually.

Pioneer has the largest stake in Simon Property Group with 0.41% of its outstanding shares. The Smead Value Fund (Trades, Portfolio), Chris Davis (Trades, Portfolio), Mark Hillman (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Gabelli also have positions in the stock.

Vista Outdoor

The guru divested of his 105,510 remaining shares of Vista Outdoor, impacting the equity portfolio by -0.18%. During the quarter, the stock traded for an average price of $9.96 each.

GuruFocus estimates he lost 19.92% on the investment, which was established in the first quarter of 2018.

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The manufacturer of outdoor sports and recreation products, which is headquartered in Anoka, Minnesota, has a market cap of $1.28 billion; its shares were trading around $22.23 on Wednesday with a price-book ratio of 2.67 and a price-sales ratio of 0.72.

The price chart shows the stock is trading above both the median price-book ratio and the median price-sales value.

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Vista Outdoor's financial strength is rated 4 out of 10 by GuruFocus. In addition to poor interest coverage, the company has a low Altman Z-Score of 1.42, signaling distress, and a Sloan ratio that is indicative of poor earnings quality.

The company's profitability did not fare much better, scoring a 5 out of 10 rating on the back of declining margins and returns that underperform a majority of industry peers as well as declining revenue per share. Vista Outdoor also has a moderate Piotroski F-Score of 6.

Of the gurus invested in Vista Outdoor, Jim Simons (Trades, Portfolio)' Renaissance Technologies has the largest stake with 1.8% of outstanding shares. Grantham and Cohen also hold the stock.

Additional trades and portfolio performance

During the quarter, Berkowitz also trimmed The St. Joe Co. (NYSE:JOE) position by 0.09% and The Kraft Heinz Co. (NASDAQ:KHC) holding by 0.83%. The investment in Western Midstream Partners LP (NYSE:WES) was left untouched.

The guru's $598 million equity portfolio, which consists of seven stocks, is most heavily invested in the real estate sector with a weight of 86.42%.

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In his semiannual letter to shareholders, Berkowitz noted the Fairholme Fund (Trades, Portfolio) posted an 8.42% decrease for the first half of the year. In comparison, the S&P 500 fell 3.08%.

Disclosure: No positions.

Read more here:

  • David Rolfe's Top 5 2nd-Quarter Trades

  • Bill Ackman Bows Out of Berkshire, Blackstone and Park Hotels & Resorts

  • Warren Buffett Goes for Gold, Sells Major Bank Holdings



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This article first appeared on GuruFocus.


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