A value-investing guru, Berkowitz is greedy when others are fearful.
The investor runs
, a mutual fund company with only two funds: the flagship
Fairholme Focused Income Fund
, which debuted this year.
Bruce Berkowitz of Fairholme Capital
Fairholme Fund has delivered a 255% return since its 2000 inception, compared with a 15% loss for the
. Berkowitz has delivered outstanding results, in up and down years for the market, by holding a concentrated equity portfolio and a cash coffer, with about 20% of assets in short-maturity corporate debt and cash equivalents. Value-conscious Berkowitz concedes that timing is difficult, so he always has cash on hand to scoop up securities under duress.
Ignore the crowd
At the end of the latest quarter, Berkowitz held 23 securities in his equity portfolio. Many of his value picks are laggards, such as
Here are 10 cheap, unloved stocks that Berkowitz owns. They've performed miserably over a three-year span and analysts mostly pan them. Still, they may have tremendous potential. The stocks are ordered by book-value multiple, from cheap to cheapest.
St. Joe Co.
is a real-estate development company in Florida, with 580,000 acres in the northwest region of the state. It manages timberland operations in rural areas and works with residential, commercial and resort planners. Its second-quarter loss narrowed 81% to $8.6 million, or 9 cents a share, as revenue fell 44% to $22 million. The operating margin remained in negative territory. St. Joe's stock has fallen 12% a year since 2007 as revenue dropped 38% a year. It trades at a book value multiple of 2.6, an 8% premium to its peer average.
offers a target of $32, implying 27% of upside. Fairholme owns 29% of outstanding shares.
rents construction and industrial equipment at 465 locations in the U.S. and Canada. Its second-quarter loss nearly doubled to $22 million, or 21 cents a share, as revenue declined 7.8% to $301 million. The operating margin tightened from 7.4% to 4.4%. RSC shares sell for a forward earnings multiple of 35, a 116% premium to the industry average. A sales multiple of 0.6 and cash flow multiple of 2.3 reflect discounts of 68% and 78% to industry averages. The stock has fallen 26% a year since 2007. Of analysts following RSC, five rate its stock "buy", five rate it "hold" and one ranks it "sell." A median price target of $11 suggests a return of 53%.
Hertz Global Holdings
is a car- and equipment-rental company with over 8,000 locations in 145 countries. Hertz swung to a second-quarter profit of $25 million, or 6 cents a share, as revenue grew 7%. The operating margin rose from 10% to 11%. Hertz's stock trades at a sales multiple of 0.6 and a cash flow multiple of 2.1, 75% and 81% discounts to peer averages. It has fallen 21% a year since 2007. Of researchers following Hertz, seven, or 78%, advise purchasing its shares, one recommends holding and one suggests selling. A median target of $17.50 suggests a return of 60% in the next 12 months.
forecasts a rise of 83% to $20.
leases intermodal containers and chassis. It has a market value of $743 million and offers a lofty dividend yield of 5.8%. TAL's second-quarter profit plummeted 87% to $4.7 million, or 15 cents a share, as revenue declined 3% to $87 million. The operating margin widened from 35% to 37%. TAL's stock sells for a forward earnings multiple of 11, a book value multiple of 1.8 and a cash flow multiple of 5.6, 34%, 43% and 46% discounts to industry averages. Of analysts covering TAL, two rate its stock "buy", three rate it "hold" and one ranks it "sell." A median target of $29.50 implies 22% upside.
Robert W. Baird
expects a gain of 36% to $33.
Daily Journal Corp.
publishes newspapers and Web sites with a professional focus. Daily Journal is a micro-cap company, with a market value of just $97 million. Its fiscal third-quarter profit dropped 20% to $1.8 million, or $1.34 a share, as revenue decreased 13% to $9.5 million. The operating margin contracted from 33% to 29%. Daily Journal's stock trades at a trailing earnings multiple of 12, a book value multiple of 1.6 and a cash flow multiple of 9.8, 45%, 55% and 39% discounts to media industry averages. There are no sell-side firms covering Daily Journal. Three insiders control 64% of the float. Fairholme's position is comparatively small at 0.8%.
is a diversified holding company with telecommunications, manufacturing, oil and gas drilling, and property-management divisions. It swung to a second-quarter profit of $235 million, or $1.01 a share, from a profit of $411 million, or $1.67, a year earlier. Revenue soared 51%. The operating margin turned positive. Leucadia's stock sells for a book value multiple of 1.4 and a sales multiple of 4.1, 64% and 171% premiums to industry averages. Just one brokerage,
, follows Leucadia, rating it "sell." The stock has fallen 21% a year since 2007. Fairholme owns 8.1% of the float, but lessened its stake in the latest quarter.
offers health and supplemental benefit plans in the U.S. Second-quarter profit increased 21% to $340 million, or $2 a share, as revenue expanded 9.5%. The operating margin rose from 5.9% to 8.2%. Humana's stock trades at a trailing earnings multiple of 7.4, a forward earnings multiple of 8.9, a book value multiple of 1.3, a sales multiple of 0.3 and a cash flow multiple of 3.7, 53%, 34%, 50%, 61% and 60% discounts to health care peer averages. Of analysts following Humana, nine rate its stock "buy", 11 rate it "hold" and one ranks it "sell." A median target of $56 implies 12% upside.
forecasts an advance of 20% to $60.
Winthrop Realty Trust
is a real estate investment trust, focusing on commercial properties. It offers a distribution yield of 5.2%. Winthrop swung to a second-quarter profit of $4.5 million, or 25 cents a share, from a loss of $71 million, or $4.50, a year earlier. The operating margin declined to 49%. Winthrop's stock sells for a trailing earnings multiple of 13, a forward earnings multiple of 21, a book value multiple of 1.2 and a sales multiple of 5.2, 80%, 78%, 50% and 13% discounts to REIT industry averages. Just two analysts cover Winthrop, both rating it "hold." A median target of $13 suggests a return of 3%. Fairholme owns nearly 15% of the REIT.
provides insurance for fixed-income securities. Second-quarter profit increased 45% to $1.3 billion, or $6.32 a share, as revenue more than doubled to $1.8 billion. MBIA holds $18 billion of debt, converting to a debt-to-equity ratio of 6.9. Its stock trades at a book value multiple of 0.8, a 94% discount to its peer average. The company has suffered losses in six of the past 10 quarters. Of analysts following MBIA, one advises purchasing its shares and two recommend holding. None rate the stock "sell." A median price target of $12.25 implies 12% upside. Fairholme controls 11% of outstanding shares.
provides commercial-, retail- and mortgage-banking services in the South and Midwest. Regions Financial's second-quarter net loss expanded 47% to $277 million, but its per share loss remained steady at 28 cents. Revenue fell 16% to $1.9 billion. The company has suffered five consecutive quarterly losses. Regions shares sell for a book value multiple of 0.5, a sales multiple of 1.1 and a cash flow multiple of 2.8, 61%, 38% and 68% discounts to financial industry averages. Of analysts following Regions, two, or 9%, rate its stock "buy", 17 rate it "hold" and three rank it "sell." A median price target of $8.30 suggests a return of 20%.
-- Written by Jake Lynch in Boston.
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