This column was originally published on RealMoney on March 1 at 3:20 p.m. EST. It's being republished as a bonus for readers.

I like learning from the stock picks and styles of others. I spent five years studying every aspect of Warren Buffett's approach, and the result was my second book, Trade Like Warren Buffett . I looked at every stage of his career from the 1950s on (hedge fund days, early Berkshire, later Berkshire, his personal portfolio, etc.), and had conclusions very different from the usual value-based books about him. I hope the process made me a better investor, and time will tell.

Along these lines, I like looking at the 13F-HR. These are filings from institutions/funds with greater than $100 million in stock holdings, which are required by the SEC every quarter.

I plan to pick an investor once every so often and do an article based on his 13F-HR filings to get a sense of their approach and a look at their picks.

The first of these efforts will be on J.L. Berkowitz & Co., which filed its latest 13F-HR on Jan. 18. You can read the exploits of the young Jeff Berkowitz in Jim Cramer's Confessions of a Street Addict . If you read only one chapter in the book, read Jim's description of his experiences in September 1998. If you read two chapters, then also read his description of his first week in the hedge fund business. (Jim's hedge fund, Cramer Berkowitz, evolved into Berkowitz & Co.)

I'm not going to go over all the positions (there are more than 100 of them), and I'm going to focus on his largest tech positions, although he has a fair number of positions that are in more industrial areas. On the whole, it seems Berkowitz & Co. goes for tech stocks with the following characteristics.

Great balance sheets: These companies tend to have lots of cash and no debt and decent price over cash multiples when compared with the market in general. For instance, McAfee ( MFE), the security-software company, has a $3.2 billion market cap and $1.26 billion in cash with no debt. There's software company Stellent ( STEL), with a $318 million market cap and almost $60 million in net cash.

There are pros and cons to a great balance sheet: The "pro" is obvious. If a company has $1 billion in cash, makes money every quarter and has no debt, then it's going to be difficult for it to go bankrupt. That seems like an extreme worry, but who would've thought in early 2001 that Enron, Adelphia, and WorldCom would be bankrupt less than 18 months later? As Buffett says, "If you know a stock is going to be around 20 years from now, then it's probably a good buy right now."

The "con" is less obvious. Great balance sheets do not leave much room for improvement. That's why you go into heavy debt when you buy a house. If your "cash flows" (i.e., your income) are steady and continue to rise, and your "coverage" (your monthly income divided by mortgage payment), remains doable, then ultimately your net worth ("market cap" in the stock sense) goes up a lot more than if you used no leverage and paid for your house with 100% cash.

It's the same thing with stocks. You want that boost in market cap that a leveraged asset can provide if the debt is handled appropriately. But that potential for upside returns implies more risk, hence the "pro" from above. Nevertheless, Berkowitz's portfolio appears more slanted toward companies with the aforementioned great balance sheets.

A great example of where this has helped him is in his holding of stocks such as iVillage ( IVIL). These were stocks that only recently have started posting profitable quarters, but were able to hang on through "the dark years" only because of good net cash positions ($55 million for IVIL).

Low Multiple Over Cash Flows: Although Berkowitz owns calls on stocks such as Google ( GOOG) and Apple ( AAPL), most of his picks fall into the value or deep-value category.

Two points on Google and Apple, though. First, by owning them through calls, he's capping his downside somewhat just in case volatility kicks back into the market and these stocks are no longer the fashion of the day. Second, ultimately there's no separation between growth and value. A bet on Google is simply a bet that future cash flows, when everyone sees what they are, will imply that today's prices for Google are in deep-value territory.

Now let's take a look at some of the larger positions in the portfolio.

Collector's Universe ( CLCT) is an authentication service for online auctions (and non-online) of collectibles like coins and autographs. The company has a $129 million market cap, $55 million in net cash, and $8.5 million in cash flows over the past 12 months. This stock, which I have in Internet Review, is down a bit on last weekend's Barron's article. But it's worth noting that today, Shamrock Activist Fund filed a 13D stating it's been averaging down every bit of the way -- in the $16s, $15s, and yesterday in the $14s.

Blue Coat Systems ( BCSI) is a provider of security appliances for networks that carries a $267 million market cap, $70 million in net cash, and EBITDA of $15 million. Also, Blue Coat has had 43% year-over-year revenue growth and a return on equity of 18%.

The security software company McAfee ( MFE) has a $3.2 billion market cap, $1.2 billion in cash with no debt, and EBITDA of $287 million, giving it a multiple of enterprise value over cash flows of less than 9.

Microsoft ( MSFT) consistently finds itself in the value bucket these days, with its $275 billion market cap, $34 billion in cash, no debt, and cash flows of $15 billion and growing while still keeping a return on equity at 28%.

EMC ( EMC) offers a $33 billion market cap, $4 billion in net cash and $2.2 billion in cash flows.

In general, Berkowitz & Co. seems more than willing to load up on beaten-down stocks that have great balance sheets that might not be best of breed. However...

In some cases, the fund seems to take a top-down approach, starting with a stance on the growth prospects of a sector and then trying to find the fastest-growing companies in that sector and placing its bets on several of the stocks. For instance, consider its stakes in the online-homebuying sector.

Ziprealty ( ZIPR) has an $185 million market cap, $89 million in net cash and $8.7 million in cash flows over the past 12 months. (Note that even in the top-down approach, the firm still picks the stocks that have the bottom-up characteristics described above.) ( SOLD) offers a $343 million market cap, $88 million in net cash and $24 million in cash flows. ( HOMS) carries a $923 million market cap, $58 million in net cash and $20 million in cash flows from operations. (This is the smallest of the three positions.)

I plan to do more of these types of articles, and please send me an email and tell me your thoughts on this one.

P.S. from Editor-in-Chief, Dave Morrow:
It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our free trial offer to's RealMoney premium Web site, where you'll get in-depth commentary and money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice -- try it now.
At the time of publication, Altucher and/or his fund was long CLCT, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

Interested in more writings from James Altucher? Check out his newsletter, Internet Review. For more information, click here. has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from

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