Berkowitz's Fairholme Cuts Regions Financial Position in Half

Bruce Berkowitz's Fairholme Capital filed an amended 13G with the SEC regarding shares of Regions Financial (RF) and disclosed they now have a 4.8% ownership stake in RF with 60,568,917 shares.

The SEC filing was made due to activity on September 30th and marks a 51% reduction in Berkowitz's position. The last time we covered Berkowitz was at the Harbor Investment Conference where he said there was black box risk to owning banks but that after three years you can get an idea of who's going to do well.

Fairholme also owns stakes in other financials like AIG (AIG), Citigroup (C), Bank of America (BAC), Goldman Sachs (GS), and CIT Group (CIT). In our Hedge Fund Wisdom premium newsletter, we outlined the investment thesis on AIG as Berkowitz has pressed his bet there and it is by far his largest position at over 20% of his portfolio.

Per Google Finance, Regions Financial is "a financial holding company. The Company operates throughout the South, Midwest and Texas. Regions provides traditional commercial, retail and mortgage banking services, as well as other financial services in the fields of investment banking, asset management, trust, mutual funds, securities brokerage, insurance and other specialty financing."

Bruce Berkowitz & Bill Ackman: Summary of Their Harbor Investment Conference Talk

We're continuing our focus on the recent Harbor Investment Conference that took place late last week and wanted to point out a discussion between Fairholme Capital's Bruce Berkowitz and Pershing Square Capital Management's Bill Ackman. The two interviewed each other on their respective investments.

Below courtesy of our friends at Benzinga.com is a guest post summarizing the managers' talk at the Harbor Investment Conference:

"Berkowitz of Fairholme Capital, was interviewed by Bill Ackman, the conference's Co-Chair, and he discussed why he's been long Berkshire Hathaway (NYSE: BRK-A) and Leucadia National Corp. (NYSE: LUK) for a long time. He bought both of them around 1985, for similar reasons. He liked the company's management, and he specifically liked Berkshire because he said that Warren Buffett was a "smart guy" who ran other people's money. He paid about $2,700 per share for each A share he owns.

Ackman of Pershing Square Capital, asked what Berkowitz's biggest investment error was of his career. Berkowitz responded by saying that his biggest mistake was trusting management, and not verifying them. He said that in order to verify management, you have to try to prove them wrong, and kill their thesis.

He also discussed some of his better investments, like Imperial Metals, which Berkowitz said he has no idea why it's doing well, it just is. He discussed his position in Wells Fargo (NYSE: WFC) in the late 1980's and early 1990's, and said that he really likes the banks now. He believes we are rebuilding now, and a lot of banks are trading below book value, with low valuations, and said that the worse the bank was perceived, the better it will probably wind up being. He owns positions in Goldman Sachs (NYSE: GS), Regions Financial (NYSE: RF), AIG (NYSE: AIG), CIT Group (NYSE: CIT), Bank of America (NYSE: BAC), Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS) in the financial sector. Berkowitz said there is a black box risk to owning banks, but after three years, you can get an idea of who's going to do well. Berkowitz said he would own more of Goldman Sachs if he could, but as a mutual fund, he's forbidden by law.

Regarding AIG, he said that AIG is more respected in Asia than it is here, and he sees tremendous value in the company's remaining assets, which it has so many of. Berkowitz said that former AIG CEO Hank Greenberg was a serial acquirer of assets, and there is tremendous value still there. He said that the current AIG is trading below book value, and it's trading at a single digit P/E. A major reason why he likes AIG is the company won't have to pay taxes for quite some time, as the company lost over $100 billion in market cap."

To read about the rest of Ackman and Berkowitz's talk, we highly recommend heading to the full summary at Benzinga here.

John Paulson Says Buy Stocks, Sell Bonds

At the end of last week, the market ripped higher presumably from hedge fund manager David Tepper's comments when he said he likes equities here. Now add to the mix another well known manager in John Paulson. His hedge fund Paulson & Co of course made billions from his bet against subprime as detailed in the book, The Greatest Trade Ever. Given his success, everyone now latches onto his every word, hoping for advice.

Paulson did divulge some of his latest views at a lecture for New York's University Club. Simply put, he said to buy stocks and sell bonds. His favorite stocks are blue-chips with dividends such as: Johnson and Johnson (JNJ) and Coca Cola (KO). Playing on his 'recovery' theme, he also continues to like Bank of America (BAC), Suntrust Banks (STI), and Regions Financial (RF). To see what he's been buying and selling, check out Paulson's portfolio in our newsletter: Hedge Fund Wisdom.

Equities

He says to simply replace low yielding bonds with higher yielding stocks. A 10 year Treasury yields around 2.6% and so stocks with earnings yields of 7-8% are much better options. While Paulson did not mention these names, a quick scan pulls up companies with even higher earnings yields such as Medtronic (MDT) at 9.43%, ConocoPhillips at 10.52%, and Microsoft at 8.53%.

Gold

We've examined John Paulson's gold fund in-depth in the past, and so it should come as no surprise that the hedge fund manager thinks the precious metal is headed higher. He says that gold (currently around $1,200) could hit $2,400 on monetary expansion alone and even $4,000 with significant inflation. His hedge funds offer a fund share class denominated in gold and Paulson himself has 80% of his assets in this class. Additionally, given his inflationist bent, Paulson thinks the US Dollar will fall and that yields on Treasuries will rise. He has been buying 5 and 7 year calls on the 30-year bond yield. We've seen numerous hedge funds put on this type of trade before.

Housing

Lastly, Paulson thinks this is the best time to buy a home in fifty years, exclaiming that, "If you don't own a home, buy one. If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home." Great, isn't that just the type of mentality that created the housing bubble in the first place? We realize he is using hyperbole to illustrate his point, but still. Given his prominence in the investing world these days, some people might actually take him literally. For more notes on Paulson's talk, head to Zero Hedge and to Forbes.

In terms of recent position movement from hedge fund Paulson & Co, we detailed their activist position in NovaGold Resources (NG) and sale of Centamin Egypt position.

Bruce Berkowitz's Fairholme Buys Bank of America, Sells Pfizer: 13F Filing Q1 2010

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund filings.)

Next up in our series is Bruce Berkowitz's Fairholme Capital Management. While not a hedge fund, we track Berkowitz because despite managing over $10 billion, he runs quite a concentrated portfolio. Not to mention, he was named fund manager of the decade by Morningstar. In activity that was reported after this most recent 13F filing, we see that Berkowitz has actually boosted his AIG holdings. Additionally, he recently revealed a brand new stake in Goldman Sachs (GS) at the Value Investing Congress (see detailed notes from the event here). Also, you'll remember that Fairholme has a large debt position in General Growth Properties (GGP) as they've been an integral part of the winning bid (along with Bill Ackman's Pershing Square and Brookfield) that will help to restructure the company. Lastly, note that Berkowitz typically discloses his positions for his Fairholme Fund (mutual fund: FAIRX) on an individual basis, but we are examining the holdings of his entire firm, Fairholme Capital Management. With that in mind, let's take a look at the rest of Fairholme's portfolio.

The positions listed below were their long equity, note, and options holdings as of March 31st, 2010 as filed with the SEC. All holdings are common stock unless otherwise denoted:


Brand New Positions
Bank of America (BAC)
American International Group (AIG)


Increased Positions
Berkshire Hathaway (BRK.B): Increased position by 1,458% ~ mainly due to Berkshire's 50/1 stock split
Regions Financial (RF): Increased by 74.8%
Comcast (CMCSK): Increased by 46.1%
Citigroup (C): Increased by 5.94%


Reduced Positions
Daily Journal (DJCO): Reduced position by 26.6%
Spirit AeroSystems (SPR): Reduced by 15.9%
CIT Group (CIT): Reduced by 14.5%
Americredit (ACF): Reduced by 13.2%


Positions They Sold Out of Completely
Pfizer (PFE)
WellPoint (WLP)
Burlington Northern Santa Fe (BNI) ~ bought out by Warren Buffett's Berkshire Hathaway
United Rentals (URI)
White Mountains Insurance (WTM)
Penn West Energy (PWE)
Forest Laboratories (FRX)
Coca Cola (KO)
Bristol Myers Squibb (BMY)
Marshall & Ilsley


Top 15 Holdings (by percentage of assets reported on 13F filing)

1. Sears Holdings (SHLD): 14.91%
2. Citigroup (C): 8.61%
3. St. Joe (JOE): 8.1%
4. Humana (HUM): 6.9%
5. Americredit (ACF): 6.81%
6. Bank of America (BAC): 6.56%
7. Regions Financial (RF): 5.57%
8. Hertz Global (HTZ): 5.24%
9. Spirit AeroSystems (SPR): 5.04%
10. American International Group (AIG): 4.8%
11. Leucadia (LUK): 4.71%
12. CIT Group (CIT): 4.46%
13. Berkshire Hathaway (BRK.A): 4.21%
14. Comcast (CMCSK): 3.56%
15. Berkshire Hathaway (BRK.B): 2.86%


Overall, it appears as though Berkowitz is sticking with his 'recovery' play on financials. He added new stakes in Bank of America and AIG (the latter of which we already knew about) and increased holdings in Regions Financial. Additionally, as we mentioned at the very beginning of this article, Berkowitz has just started a new stake in Goldman Sachs and he has been since adding to his AIG position as well.

In the past we detailed how Berkowitz liked health plays but it appears he is now less fond of some of them. After previously holding a massive stake in Pfizer (PFE), he has now completely sold out. This is the exact opposite of what we've seen David Einhorn do, as he's been building a Pfizer stake. Sticking with the Berkowitz/Einhorn dichotomy, we see that Berkowitz was selling some shares of CIT Group while Einhorn was buying. That said, they both own sizable positions.

We also highlight Berkowitz's sale of WellPoint (WLP) as Warren Buffett's Berkshire Hathaway also completely sold out of this position. While these two notable investors have sold out, we've seen various other hedge funds still owning this name. And speaking of Warren Buffett, you'll note that Fairholme Fund drastically increased their position in the B shares of Berkshire Hathaway (BRK.B).

Lastly, we want to bring to your attention that Fairholme also recently filed an amended 13D on shares of TAL International (TAL) due to activity on May 17th. Per the filing, Fairholme now shows a 6.2% ownership stake in the company with 1,890,453 shares. This is a decrease in their position as they've been selling shares throughout the month of May. Those interested in the specifics of the sales can view the SEC filing here. So, keep in mind that the data posted up in the 13F analysis article above is already stale.

Assets reported on Fairholme Fund's 13F filing were $10.7 billion this quarter. Data from the SEC is aggregated and sorted automatically by Alphaclone, our source for hedge fund tracking, replicating, and performance backtesting (Market Folly readers can receive a special free 30 day trial). Remember that these filings are not representative of the hedge fund's entire base of AUM.

This post is part of our daily hedge fund portfolio tracking series. We've already detailed activity from numerous managers so click the links below to be taken to the respective portfolio updates: Seth Klarman's Baupost Group, Warren Buffett's Berkshire Hathaway, Stephen Mandel's Lone Pine Capital, and Bill Ackman's Pershing Square, David Einhorn's Greenlight Capital, Eddie Lampert's RBS Partners, David Tepper's Appaloosa Management, Mohnish Pabrai's Investment Fund, John Griffin's Blue Ridge Capital, and Lee Ainslie's Maverick Capital. Be sure to check back daily for new hedge fund updates.

Whitney Tilson's T2 Partners Reveals Some Short Positions

The latest investor letter out of Whitney Tilson's hedge fund T2 Partners gives us a nice in-depth look at their portfolio. In particular, we're interested to learn of some of their short positions because let's face it, this kind of information is often scarce in hedge fund land. In their letter, we see that T2 Partners has been short Herbalife, InterOil, Regions Financial, VistaPrint, PMI, Radian, MBIA, and Palm. They also note that as the market has headed higher practically all year, they've begun to trim their longs and expand their short book. So, those of you looking for some possible short candidates might examine those listed above to do some due diligence on. And, for more thoughts from Tilson and company, we've posted up their October letter and their thoughts from the Value Investing Congress as well.

Here's the November commentary from Whitney Tilson's hedge fund T2 Partners courtesy of the great folks over at MyInvestingNotebook:

"December 2, 2009

Dear Partner,

Our fund declined 1.4% gross and 1.2% net in November vs. 6.0% for the S&P 500, 6.9% for the Dow and 4.9% for the Nasdaq. Year to date, our fund is up 31.0% gross and 24.8% net vs. 24.1% for the S&P 500, 21.5% for the Dow and 37.0% for the Nasdaq. If the year ended with these numbers, it would be our best year ever and nearly all of our investors would earn 30.0% net, reflecting the benefit of the high-water mark.

We made money during the month on the long side, led by General Growth Properties (up 59.8%), American Express (20.1%), Huntsman (19.7%), Pfizer (6.7%) and Microsoft (6.1%), offset by Borders Group (-27.8%), dELiA*s (-22.2%), Helix Energy (-14.3%), and Iridium stock (-8.0%) and warrants (-4.9%).

Not surprisingly in such a strong month for the markets, our short book dampened our returns, thanks mainly to Herbalife (up 24.6%), InterOil (22.6%), Regions Financial (21.1%) and VistaPrint (11.7%). Partially offsetting these positions were PMI (-24.0%), Radian (-22.8%), MBIA (-14.8%) and Palm (-6.0%).

Overview
In his 2004 letter to Berkshire Hathaway shareholders, Warren Buffett wrote that investors “should try to be fearful when others are greedy and greedy when others are fearful.” We believe in this maxim and have had ample opportunity to implement it over the past year: we started getting greedy a year ago after Lehman’s collapse and the resulting market panic, buying ever-cheaper stocks all the way down to the market’s final capitulation in early March. Since th then, during one of the biggest, fastest rallies in history (the S&P 500 rose 64.6% from March 9 through the end of November), we have steadily become less greedy and more fearful by doing three things: trimming our longs, adding to our shorts, and repositioning our long portfolio toward more defensive, big-cap stocks such as Berkshire Hathaway, Microsoft and Pfizer.

Today, our net long position is down to approximately 20%, the lowest it has ever been, reflecting both our top-down macro concerns (outlined in our August and September letters) as well as our core bottoms-up analysis, which is uncovering many great shorts and a paucity of attractive longs. That said, we like our long positions a great deal and are still net long, so we’re certainly not perma-bears and aren’t predicting Armageddon.

Speaking of our long positions, we wanted to share brief thoughts on a few of them.

General Growth Properties
The stock soared during the month for two reasons: first, rival mall giant Simon Properties Group announced that it had hired both Lazard and Wachtell, Lipton to “help it formulate a strategy for possibly bidding for all or part” of General Growth (see article in Appendix A). Then two days later, General Growth announced that (quoting from the article attached in Appendix B):
...it had reached a deal with lenders and servicers to restructure $8.9 billion of mortgages on 77 malls in hopes of removing them from bankruptcy by year end.” The pact is the first step for General Growth in extracting from bankruptcy court the 166 malls it put under Chapter 11 bankruptcy protection in April. The company still must strike similar pacts with lenders on another $6 billion of secured debt as well as $6.5 billion of unsecured debt.

"This moves up the entire timetable for getting out of bankruptcy," said Kevin Starke, an analyst with CRT Group LLC, which monitors distressed securities. "These guys could be out [in entirety] in the April-June timeframe."

General Growth appears to have won on some key points in the restructuring, of which details were outlined in a bankruptcy court hearing in New York.

December is off to a good start for General Growth, as it announced this morning (see Appendix C) that 92 of its properties, representing $9.7 billion of restructured debt (up from $8.9 billion less than two weeks ago), will exit bankruptcy by the end of the year, a remarkably quick timetable. This announcement also puts pressure on the remaining debtholders to accept similar terms.

When we first purchased the stock earlier this year at under $1/share, we thought there was upside potential of $20-$30, but we kept it a small position, reflecting the high risk that the equity could be worthless. Today, the best-case scenario appears to be playing out and the risk of a catastrophic outcome for the equity is far lower, but the stock price doesn’t reflect all of the positive developments in our opinion, so this is now among our largest positions

dELiA*s
dELiA*s recently reported a mildly disappointing third quarter and gave conservative guidance for the critical fourth quarter, which triggered a sell-off of the stock. Since the company doesn’t communicate with Wall Street as frequently as most retailers and doesn’t report monthly comps, the stock is often volatile around its earnings releases.

Netting out the projected year-end cash balance of $1.50 per share, the core retail business is today essentially being valued at zero. We believe that dELiA*s business is worth at least $3 per share (plus an additional $1.50/share in cash), and would expect this value to be recognized over the next year as the company turns the corner to profitability. In the meantime, we are comfortable that the cash balance makes a further stock price decline unlikely. In addition, based on recent transactions, we have little doubt that the company could be easily sold for at least double its current share price of $1.68, but we actually hope the company remains independent because we believe there’s far more upside if management executes on its growth plan.

While dELiA*s has not yet been a profitable investment, it represents today exactly what we like in a stock: a low probability of permanent loss of capital and a good chance of making multiples of our money.

Borders Group
Speaking of sub-$100 million market cap retailers, we have recently been buying Borders Group, a stock we’ve had a very up and down experience with over the years. Initially it was a disaster, falling well below $1 earlier this year, at which point we bought quite a bit more and were quickly rewarded, as it rose dramatically in less than five months to $4.34. We sold most of our position, but are now getting another bite at this apple as the stock has tumbled anew (it closed yesterday at $1.29).

This is a tough business and the odds appear stacked against Borders in light of threats from Barnes & Noble, Amazon.com, and discounters like Wal-Mart. That said, we like the current management and believe that Borders can succeed.

At today’s price, Borders has a market cap of a mere $77 million, a tiny fraction of annual revenues, which exceed $3 billion. We view this stock as a mispriced option: the company could go bankrupt and wipe out our investment, but if it merely survives – which is likely, we believe – the stock should rise many-fold.

Iridium
Iridium reported a strong quarter recently, but this wasn’t enough to offset the poor trading conditions that the SPAC structure created nor mitigate concerns about the risks associated with funding the new generation of satellites, Iridium Next. Based on conversations with management and the primary sponsor, Greenhill, we are confident that the company will be able to access the capital necessary for Iridium Next via existing cash on the balance sheet, operating cash flow, shared payload fees, vendor financing, and external debt and/or equity.

We continue to believe that this is an excellent company and that the stock is extremely undervalued. Comparable businesses are trading at 10x EV/EBITDA, while Iridium, which is growing significantly faster than and taking share from its competitors, trades at under 5x EBITDA. Finally, we are encouraged by the recent large insider purchases by both the CEO and Chairman of the company.

Berkshire Hathaway
In last month’s letter, we wrote that “Berkshire Hathaway reports earnings on Friday and we are confident that it will be a blowout quarter.” Sure enough, Berkshire reported strong operating earnings and an unprecedented 10.1% increase in book value during the quarter.
The other big news during the month was the acquisition of Burlington Northern Santa Fe, which is by far Buffett’s biggest investment ever. At $100/share, equal to 19x trailing earnings, he paid a full price for the 77.4% of the company that Berkshire didn’t already own, so this was a good deal for BNI shareholders – but it’s a good deal for Berkshire shareholders as well.
Paying a full price for this business makes no sense for most buyers, but we think the acquisition makes sense for Berkshire – and only for Berkshire – because of the company’s low cost of capital, in the form of float ($62 billion worth as of the end of Q3) from Berkshire’s vast insurance operations.

The correct way to think about this acquisition, in our opinion, is that Buffett bought a business with utility-like characteristics. Burlington Northern generates consistently decent (but not spectacular) mid-teens returns on equity and will likely grow a bit more than the overall economy, basically forever. There will be no new competitors and this business won’t go offshore. If anything, as energy prices rise over time, railroads will become more competitively advantaged vs. trucking.

Our view of Berkshire’s intrinsic value is unchanged: we continue to believe it’s worth approximately $135,000/share, a 34% premium to the current price of $100,600."


So, interesting thoughts from hedge fund T2 as they clearly have upped their cautionary stance to the markets. The fact that their net long position is at the lowest it has *ever* been stuck out to us. While many fund managers have been skeptical of the monster rally continuing, Tilson has definitely joined the ranks as they believe fundamental problems still remain unsolved. To see more thoughts from hedge fund T2 Partners, you can read their October letter to investors and their remarks from the Value Investing Congress.