Has Bruce Berkowitz been exposed to kryptonite? His money-management firm, Fairholme Capital, is on a losing streak few could have anticipated. After all, this is a fund that handily outperformed the S&P 500 in 10 out of 11 years through 2010. That streak ended with a loud bang in 2011, as his fund lost a stunning 32%, even as the S&P 500 rose 2%.
Berkowitz was surely glad to turn the page on 2011, but 2012 has been horrific as well, especially over the past three months. Take a look at these seven stocks, all of which are owned by Berkowitz, and how they have performed in the past three months.
For savvy investors, such a lousy performance brings opportunity. We get the chance to dig deeply into these washed-out stocks, seeking out the stocks that now offer even more compelling value.
A bad sector bet
Much of the recent underperformance can be attributed to Berkowitz's aggressive positioning with financial services stocks. He anticipated a big sector rally in 2011 and 2012, but the never-ending crisis in Greece has led to deep pain for banks of all stripes. You already know I'm a big fan of Citigroup (NYSE: C), and I think Berkowitz will be vindicated with this pick during the next few years, as we move away from the European economic crisis. And in a moment, I'll note another out-of-favor financial stock in this group that should be on your radar.
Too much faith in Lampert?
Berkowitz is a big fan of financial engineering, even when it exists for companies in nonfinancial sectors. That's why he built up a $1 billion position in Sears Holdings in 2010 and early 2011. He knew Sears Holdings (Nasdaq: SHLD) was a lousy retail operator, but also knew Chairman Eddie Lampert could pull a lot of levers to squeeze cash flow out of Sears and Kmart stores.
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Trouble is, you can only under-invest in retail stores for so long before customers start shopping elsewhere, which is why many others steered clear of this stock. Berkowitz failed to spot trouble ahead, and has seen his investment lose more than a third of its value in the past three months (which is a big deal when the position starts above $1 billion). In fact, Berkowitz bought another 705,000 shares in the first quarter of 2012, anticipating an eventual rebound.
That recent buying may be unwise, according to analysts at Goldman Sachs. They see this stock falling from a recent $53 to just $34. They figure shares, trading at more than 11 times trailing EBITDA, are still too richly valued and deserve to trade at around nine times forward EBITDA, or right at book value. And by their math, Lampert's efforts to squeeze cash flow out of this business may be coming to an end. Goldman sees Sears Holdings generating more than $5 a share in free cash flow in fiscal (January) 2013, but see that figure dropping to around $1.50 in fiscal 2014 and just $0.32 in fiscal 2015.