Bruce Berkowitz: Sears for Tears?

You can make a lot of money following the moves of great investors. They have teams of analysts, endless resources, long experience, and great track records. Luckily, if they manage over $100 million, they must report their holdings every three months! Thus, we can see the ebbs and flows of their stock portfolio (they are not required to file non-equity holdings) throughout the year -- buys, sells, and holds. Why ignore a potential gold mine of stock ideas?

Today's review
Today we'll focus on Bruce Berkowitz. Berkowitz runs Fairholme Capital Management, based in Miami, with an estimated AUM of $8.2 billion (yowza, where's mine?) at the end of the third quarter. His firm runs the Fairholme Fund, a mutual fund, as well as separately managed accounts.

Berkowitz is a rare bird in the mutual fund world, prone to heavy concentration and often long-term holding periods. It's been a double-edged sword: Berkowitz was named "Domestic-Stock Fund Manager of the Decade" by Morningstar last year, but a rough 2011 has caused him to suffer massive outflows.

Berkowitz's unusual approach has led him into a substantial concentration in financial stocks, beginning in 2010 with the purchase of Citigroup (NYS: C) and continuing into 2011 with purchases of Bank of America (NYS: BAC) , AIG (NYS: AIG) , Jefferies Group (NYS: JEF) , MBIA (NYS: MBI) , and CIT Group (NYS: CIT) , among others. In the case of AIG, Fairholme is the largest shareholder outside of the U.S. government, which owns 77% of the company's common shares.

With that in mind, let's take a look at what Bruce Berkowitz was up to last quarter.

Top 10 Holdings

As of June 30, 2011

Shares Held (in millions)

Value* (in millions)

AIG 103.1 $3,025
Berkshire Hathaway 15.5 $1,197
Sears Holdings 16.4 $1,170
Citigroup 26.4 $1,099
Bank of America 99.6 $1,092
Brookfield Asset Management 27.3 $905
CIT 19.4 $859
Goldman Sachs 6.0 $799
Regions Financial 123.9 $768
Leucadia National 18.7 $638

Source: 13F-HR Filings for Fairholme Capital Management. *Based on stock price at filing date.

As of Sept. 30, 2011

Shares Held (in millions)

Value* (in millions)

AIG 101.5 $2,228
Berkshire Hathaway 13.5 $958
Sears Holdings 16.3 $936
Bank of America 105.0 $643
Citigroup 24.9 $639
Brookfield Asset Management 22.2 $613
CIT 19.4 $588
Leucadia National 18.5 $420
St. Joe's 26.5 $385
MBIA 48.5 $352

Source: 13F-HR Filings for Fairholme Capital Management. *Based on stock price at filing date.

Taking a closer look: Sears Holdings
One of Berkowitz's longtime holdings is Sears Holdings (NAS: SHLD) , the holding company majority owned and chaired by Eddie Lampert of ESL Partners. Sears owns the Kmart retail chain, the eponymous Sears chain, and 94% of Sears Canada. Fairholme's enormous shareholding -- it holds about 15% of Sears' shares outstanding -- makes it the second-largest shareholder behind Lampert's ESL.

It's been a bumpy ride for Sears shareholders since Lampert merged the Kmart and Sears chains in a bold move to create efficiencies between two also-ran retailers. In the years since, Lampert has been heavily criticized for cutting capital expenditures to the bone and investing most of Sears' excess cash in share repurchases, a formula he has worked successfully at the AutoZone and AutoNation chains but that hasn't yet yielded the same for Sears. Sales have declined every year since 2007, and the stock is down more than two-thirds from its high of $190 that year.

There are worrisome clouds on the horizon. In the most recent quarter, Sears showed that not only have sales continued to decline, but free cash flows have disappeared. To offset the negative cash flow, Sears has had to borrow more money, amassing over $4.5 billion in debt against only $624 million cash. Some of that borrowing comes directly from Lampert: ESL holds $220 million of Sears' commercial paper, $100 million of which is attributable to Lampert.

Steer clear of Sears
Keep in mind that size is the enemy of returns. Successful investing brings the money manager more assets, and before you know it, the billions limit the universe of investable stocks. "Super-investor" almost always comes with "super assets." So if you've got Berkowitz's $8 billion-plus under management, buying the kind of $100 million market-cap stock that I and the Motley Fool Special Ops team prefer doesn't move the needle on your returns.

But while smaller stocks are more likely to be mispriced, any size company can offer value and catalysts. Unfortunately, investors need to be wary of Sears Holdings, given its long struggle for relevance and its recent financial struggles. Even the great investors can occasionally be wrong. So be Foolish, not foolish, and watch out for Sears!

Fool on!

At the time this article was published Tom Jacobs is the advisor for Motley Fool Special Ops, a special situations and opportunistic/deep value service 80% invested in small- and micro-caps and the rest in vintage Life magazines. You can follow him on Twitter @TomJacobsInvest, read his articles, and email him.The Motley Fool owns shares of Berkshire Hathaway, Citigroup, and Bank of America. Motley Fool newsletter services have recommended buying shares of Goldman Sachs, Berkshire Hathaway, and Brookfield Asset Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

Bonds for Beginners

Learn about fixed income investments.

View Course »

Introduction to Economic Indicators

Measure the performance of the economy.

View Course »

Add a Comment

*0 / 3000 Character Maximum