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Bruce Berkowitz's 3rd-Quarter Update

Fairholme Capital Management recently disclosed its portfolio updates for the third quarter of 2019. During the quarter, the firm established a new position in The Kraft Heinz Co. (NASDAQ:KHC) and reduced its holdings of The St. Joe Co. (NYSE:JOE), Vista Outdoor Co. (NYSE:VSTO) and Berkshire Hathaway (NYSE:BRK.B).

Bruce Berkowitz (Trades, Portfolio) founded Fairholme Capital Management in 1999. From 2000 to 2010, Fairholme's funds achieved strong returns that outpaced the S&P 500, and Berkowitz was named Domestic Stock Fund Manager of the Decade by Morningstar in 2010. However, the period since 2010 has been marked by long periods underperformance, leading to Berkowitz beginning to liquidate Fairholme Capital's hedge fund in October 2017.


Berkowitz's contrarian investing strategy holds that cash flow is king, and his firm invests in companies with reliable cash flows that are trading at discount prices to those cash flows. Using relatively high cash holdings to limit volatility is part of what helped him outperform his peers.

One company that stuck to these criteria back in 2005 was Sears Holding Corp. (SHLDQ), though that turned out to be a failed investment in the end. Sears contributed significantly to the decline in Fairholme's profitability as its share price dropped from $131 in early 2007 to 34 cents by the time it filed for Chapter 11 bankruptcy in October 2018.

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As of the end of the third quarter, Fairholme Capital Management's equity portfolio is valued at $475 million. At 94.99% of the equity portfolio, St. Joe is the firm's largest holding and has by far the largest influence on its profitability. The new position in Kraft Heinz accounts for 3.81% of the portfolio, while Berkshire's Class B shares account for 0.72% and Vista Outdoor for 0.48%.

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Kraft Heinz

Fairholme Capital Management established a new position of 647,300 shares in Kraft Heinz, impacting the equity portfolio by 3.81%. Shares traded at an average price of $28.76 during the quarter.

Kraft Heinz is an iconic American food company whose brands include Kraft, Heinz, Oscar Mayer, Jell-O and Kool-Aid. As the second-worst performer on the S&P 500, the struggling food company has faced a surge of analyst downgrades from Wall Street and Goldman Sachs, plunging the price of its shares below intrinsic value according to the Peter Lynch chart.

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Kraft Heinz has achieved stagnant revenues over the past several years, due largely to its failure to keep up with new trends such as organic food and plant-based protein. Retail giants such as Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT) have also been taking increasingly large shares of the grocery business as their at-home delivery services become more popular, making it easier for customers to discover and buy small-brand and local products instead of relying on big names.

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As of Dec. 12, Kraft Heinz has a market cap of $38.92 billion, a forward price-earnings ratio of 11.92, a cash-debt ratio of 0.08 and a three-year revenue decline rate of 2.6%. It has a GuruFocus financial strength score of 4 out of 10 and a profitability score of 6 out of 10.

Kraft Heinz has a dividend yield of 5.01% and a three-year dividend growth rate of 13.07. On Dec. 13, the company will pay a dividend of 40 cents per common share to shareholders of record as of Nov. 15. The dividend marks a decline from the 62.5 cents that the company paid from mid-2017 to 2018.

Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway owns nearly 27% of Kraft Heinz. In 2013, Berkshire and 3G Capital bought Heinz and merged it with Kraft in 2015, and although the lower stock price puts the investment in the red, Buffett has yet to sell shares of the company.

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St. Joe

Fairholme Capital Management sold 167,155 shares of its St. Joes common stock, reducing the holding by 0.63% and impacting the portfolio by -0.62%. During the quarter, shares traded at an average price of $17.76.

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St. Joe is a real estate operation in Northwest Florida. It is well-positioned to take advantage of population growth in the area that Forbes calls "The Hamptons of the South," aiming to reach a yearly run rate of 1,000 home and home lot sales, 1,300 apartment rentals, 900 hotel rooms and 1.5 million square feet of commercial space by 2021.

As of Dec. 12, St. Joe has a market cap of $1.22 billion, a price-earnings ratio of 67.87, a cash-debt ratio of 0.63 and a three-year revenue growth rate of 14.1%. GuruFocus has assigned it a financial strength score of 5 out of 10 and a profitability score of 4 out of 10. According to the Peter Lynch Chart, the company is currently trading at a fair price.

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Berkowitz serves as chairman of the board of directors for St. Joe, and Fairholme's common stock holding in the real estate company accounts for 8.6% of its total net assets.

Despite reductions in its operations as the major growth booms in Northwest Florida slowed down in anticipation of the 2008 recession, St. Joe has managed to continue providing value for shareholders; the average share price in the third quarter was higher than the average price in the five years following the company's stock listing, when revenues were approximately five times higher.

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If Northwest Florida sees another housing boom, St. Joe is in an ideal position to take advantage of the situation to increase the profitability of its land holdings.

Disclosure: Author holds no positions in any of the stocks mentioned.

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This article first appeared on GuruFocus.