Believe it or not, though he runs a highly concentrated portfolio, fund manager Bruce Berkowitz (Trades, Portfolio) has other stocks besides his outsized Fannie Mae (FNMA) and Freddie Mac (FMCC) ownership he has claimed for his firm, the Fairholme Fund (Trades, Portfolio), and the leftover financial stocks from his previous financial crisis game plan.
Though Berkowitz has made a noted killing on financial stocks such as AIG (AIG), his proposed strategy to save Fannie Mae and Freddie Mac still hangs in the balance. Berkowitz in November entered the heated debate among lawmakers concerning whether to wind down the two mainstays of the national mortgage industry, and offered to buy their insurance businesses. White House officials rejected the proposal, but lawmakers may be warming to the idea Berkowitz supports of restructuring - rather than shuttering - the companies, which would spell benefits for shareholders.
According to a Financial Times report on the Financial Services Roundtable discussion on Jan. 8, Senators Bob Corker (R., Tenn.) and Mark Warner (D., Va.), who authored legislation aimed at winding down the two entities, indicated that both parties of Congress are open to considering a plan that would take private investors into account when reforming them. Two other senators are working on a bipartisan bill that is based on the Corker-Warner legislation.
Rafferty Capital equity research analyst Dick Bove wrote in a research note titled "Fannie Mae: Shifting Politics:" "It now appears that the politicians are rethinking their views concerning the longevity of Fannie Mae. At present, there are three thrusts that would end the existence of the organization. One is from the President; one is from the Corker- Warner Bill; and one is from the U.S Treasury through its infamous third amendment."
He added: "I continue to believe that the realities of housing in this country will force the politicians to reinstate Fannie Mae to its old position. This will be very positive for its current shareholders."
Berkowitz has already benefited from the renewed optimism on the stock, which has gained 1,025% over the past year, and is priced around $3.14 Tuesday.
The Other Stocks
St. Joe (JOE)
St. Joe is Berkowitz's only stock from the real estate services sector. The company is a major real estate development and private landowning company in Florida, with 567,000 acres in the northwest part of the state. It also develops resort and residential communities, manages timber operations and sells rural acreage.
For the past year, St. Joe was Berkowitz's fourth largest holding. His continual chiseling of the holding reduced it to his fifth largest as of the third quarter 2013. He owns 25,010,633 shares as of quarter-end, amounting to 5.8% of his portfolio.
Berkowitz established his St. Joe position before 2009. He has been selling the St. Joe position quarterly since the first quarter of 2011, when he held 26,727,836 shares. Most recently, he sold 7,300 shares in the third quarter of 2013, when the stock had an average quarterly price of $21 per share. Overall he has a loss on the company, as he paid $25 per share on average, and the price is 26% lower at $18.79 a share on Tuesday.
The last year for St. Joe's stock was about as negative as the past five years. It is down 20% over 12 months, and 25% for five years.
St. Joe's financial data varies quarter to quarter based on economic cycles and timing of business opportunities. In the first three quarters of 2013, revenue and net income were down for the first quarter, up for the second quarter, and down for the third quarter, compared to the corresponding periods of 2012. In the third quarter revenues were $12.8 billion and net income was $4.19 billion, compared to $55.91 million and $15.3 million for the third quarter 2012. For the first nine months of the year combined, the company had net income of $4.4 million, or $0.05 per share, down from $14.6 million, or $0.16 per share.
In October last year, St. Joe decided to focus on its core business of real estate development, selling 382,834 acres of timberland for $565 million in a deal set to close in the first quarter of 2014. The acreage represented substantially all of the company's forestry operations land, along with additional land not used in other segments of its business. After the sale, St. Joe will be the owner of approximately 184,000 remaining acres of land.
The company had announced that in an SEC filing in early 2013 that it was exploring opportunities to sell its timberland assets that were not part of its core real estate development activities.
The sale of the timber added substantial liquidity for the company, which was down to $22.8 million in cash as of Sept. 30, from $166 million at year-end 2012. St. Joe's debt stands at $37.8 million debt, up slightly from $36.1 million at year-end 2012. The sale will also add "numerous opportunities to create long-term value for our shareholders," according to the company.
St. Joe's 10-year earnings and revenue history:
Currently the company trades with a P/B near a one-year low at 3.05. It also has a P/S of 14.5.
Chesapeake Energy Corp. (CHK)
Chesapeake Energy bears the distinction of being the only company from the oil and gas sector within Berkowitz's portfolio. He started the position in the first quarter of 2013, buying 13,373,700 shares with the average quarterly price of $20.
It is safe to say Berkowitz no longer finds Chesapeake as attractive as his other investing opportunities, as he has been backing out of the position over recent quarters. In the second quarter he eliminated 12,569,900 shares, also at an average price of $20. In the third, he reduced a further 9,400 shares, at an average price of $25. His current position is sized at 794,400 shares, or 0.24% of his portfolio.
Chesapeake's share price rose 52% over the past 12 months, and slid almost 6% since the start of the year. It is around $25.63 a share on Tuesday, near a two-year high point.
Chesapeake Energy is the second-largest natural gas producer and 11th largest oil and natural gas liquids producer in the U.S. After a rocky year in 2012 due to a drop in natural gas prices and leadership uncertainty, the company is beginning to see better days.
Chesapeake set out in 2013 to shift from primarily natural gas production to more oil production, and to focus on developing its existing assets, rather than expending resources searching for new plays. As a result, oil production increased by single digits in each of the first three quarters of the year compared to the previous year, and plans to continue to generate organic growth in 2014. Rising natural gas prices and increased operational efficiency also boosted its top and bottom lines.
For the first nine months of 2013, Chesapeake reported total revenues of $12.97 billion, compared to $8.78 billion for the same period last year. Net income also soared to $840 million, from a net loss of $1.07 billion the prior year. The company has cash of $987 million, and total liabilities of $23.9 billion.
This is Chesapeake's 10-year revenue and earnings history:
Chesapeake has a P/E of 19.5, P/B of 1.3 and P/S of 1.01.
Sears Holdings (SHLD)
Sears represents Berkowitz's only holding from the retail sector. Though the company continues to report shaky financial results, he seems to become more interested in the stock the cheaper it gets. Already his third-largest holding, he continued his buying streak in the third quarter by adding 365,200 shares for a total holding size of 20,758,173 shares, giving him 19.5% interest in the company.
Sears share declined 20% over the past five years, and dropped 25% year to date. At Sears' price on Thursday near a two-year low of $37.26 per share, Berkowitz has a paper loss of around 37% on his average buy price of $56.47 a share.
Under the leadership of CEO and hedge fund manager Edward Lampert (Trades, Portfolio), Sears continues to transition its business model. It stated in its Jan. 9 earnings report:
"During the quarter, we continued to proactively transform our business to a member-centric integrated retailer leveraging our Shop Your WayTM ("SYW") program and platform. As previously stated, we are transitioning from a business that has historically focused on running a store network into a business that provides and delivers value by serving its members in the manner most convenient for them: whether in store, in home or through digital devices."
For the fourth quarter ending Feb. 1, 2014, Sears expects a net loss between $250 million and $360 million, or between $2.35 and $3.39 per diluted share, including the impact of pension expense, store closures and severance and gains from the sale of assets. This compares to a net loss of $489 million, or $4.62 per diluted share, in the fourth quarter of 2012.
At Jan. 4, 2014, Sears had approximately $1.0 billion in cash and access to $2.3 billion of credit, and plans to receive $300 million in proceeds from its Sears Canada real estate transactions on Jan. 10, 2014.
The company is currently exploring a sale of its Lands' End and Sears Auto Center businesses, particularly spinning off Lands' End through a pro rata distribution to shareholders. It also continues to close unprofitable stores.
Lampert, in a blog post dated Jan. 9, 2014, and titled "What Our Reported Financial Results Don't Clearly Show," argues that team members' transition efforts are beginning to pay off, despite evidence not yet trickling into its 10-Q:
"We see signs that it is working," he wrote. "We've had consistent annual digital growth and significantly-increased engagement from Shop Your Way members. We continue to leverage our strengths as the distinction between physical and online retailing blurs. The fact that these results are obscured by our overall performance doesn't make them any less real or any less central to the needed transformation of our company."
Sears' 10-year revenue and earnings history:
Sears has a P/B of 2.1 and P/S of 0.1, near a two-year low.
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This article first appeared on GuruFocus.