Fairholme Fund Buys Berkshire, Adds To 2 Positions

Summary

• The fund entered a position in Bershire Hathaway.
• It also boosted its holdings of Enterprise Products Partners and Commercial MetalsCMC
  .
• The Freddie Mac investment was reduced.

Last week, the Fairholme Fund (Trades, Portfolio) released its portfolio for the third quarter, which ended Aug.31.

The fund is part of Bruce Berkowitz (Trades, Portfolio)’s Miami-based Fairholme Capital Management. As he believes that more diversified portfolios lead to more average returns, the guru invests in a concentrated number of undervalued stocks whose underlying companies have good management teams and steady cash flow generation.

During the quarter, the NPORT-P filing shows the fund entered a new position in Berkshire Hathaway Inc. (BRK.B, Financial) class B stock, increased its holdings of Enterprise Products Partners LPEPD
(EPD, Financial) and Commercial Metals Co. (CMC, Financial) and reduced its position in Federal Home Loan Mortgage Corp. (FMCC, Financial).

Investors should be aware that, just like 13F reports, NPORT-P reports do not provide a complete picture of a guru’s holdings to the public. Filed by certain mutual funds after each quarter’s end, they collect a wide variety of information on the fund for the SEC’s reference, but in general, the only information made public is in regard to long equity positions. Unlike 13Fs, they do require some disclosure for long equity positions in foreign stocks. Despite their limitations, even these limited filings can provide valuable information.

Berkshire Hathaway

The fund invested in 28,200 shares of Berkshire Hathaway’s (BRK.B, Financial) class B stock, allocating 0.83% of the equity portfolio to the holding. The stock traded for an average price of $288.33 per share during the quarter.

It previously sold out of the stock in the fourth quarter of 2020.

The Omaha, Nebraska-based insurance conglomerate, which is run by Warren Buffett (Trades, Portfolio), has a $656.68 billion market cap; its class B shares were trading around $297.31 on Monday with a price-earnings ratio of 61.47, a price-book ratio of 1.43 and a price-sales ratio of 2.51.

The GF Value Line suggests the stock is modestly overvalued currently based on its historical ratios, past financial performance and analysts’ future earnings projections.

The GF Score of 85 out of 100 also indicates the company has good outperformance potential based on high ratings for profitability, growth and momentum, middling marks for financial strength and a low GF Value rank.

GuruFocus rated Berkshire’s financial strength 5 out of 10. As a result of the company issuing new long-term debt in recent years, it has insufficient interest coverage. Further, the return on invested capital is overshadowed by the weighted average cost of capital, meaning the company is struggling to create value as it grows.

The company’s profitability fared better with a 7 out of 10 rating even though its net margin and returns on equity, assets and capital are underperforming versus competitors. Berkshire also has a moderate Piotroski F-Score of 5 out of 9, meaning conditions are typical for a stable company. Due to a recent decline in revenue per share, the predictability rank of 3.5 out of five stars is on watch. According to GuruFocus research, companies with this rank return an average of 9.3% annually over a 10-year period.

Of the gurus invested in the class B stock, Bill Gates (Trades, Portfolio)’ foundation trust has the largest stake with 1.58% of its outstanding shares. Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Tom Russo (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio) and Chris Davis (Trades, Portfolio) also have significant holdings.

Enterprise Products Partners

Fairholme boosted the Enterprise Products Partners (EPD, Financial) stake by 2.19%, or 45,000 shares, which impacted the equity portfolio by 0.12%. Shares traded for an average price of $25.96 each during the quarter.

The fund now holds 2.1 million shares total, which account for 5.77% of the equity portfolio and its second-largest holding. GuruFocus estimates it has gained 6.49% on the investment so far.

The midstream oil and gas company headquartered in Houston has a market cap of $54.52 billion; its shares were trading around $25.07 on Monday with a price-earnings ratio of 11.29, a price-book ratio of 2.11 and a price-sales ratio of 1.08.

According to the GF Value Line, the stock, while undervalued, is a possible value trap. As a result, potential investors should do thorough research before making a decision.

Further, the GF Score of 84 indicates it has good outperformance potential. It received high ranks for profitability, growth and GF Value and middling marks for financial strength and momentum.

Enterprise Products Partners’ financial strength was rated 4 out of 10 by GuruFocus, driven by inadequate interest coverage and a low Altman Z-Score of 1.74 that warns the company could be at risk of bankruptcy if it does not improve its liquidity. The company is creating value, however, since the ROIC eclipses the WACC.

The company’s profitability fared better, scoring an 8 out of 10 rating. In addition to an expanding operating margin, Enterprise Products Partners has strong returns that top over half of its industry peers. It also has a high Piotroski F-Score of 7, meaning conditions are healthy, and a one-star predictability rank. GuruFocus found companies with this rank return, on average, 1.1% annually.

With a 0.16% stake, Berkowitz is the company’s largest guru shareholder. First Eagle Investment (Trades, Portfolio), the Fairholme Fund (Trades, Portfolio) and the Fairholme Focused Income Fund (Trades, Portfolio) also have large positions in Enterprise Products Partners.

Commercial Metals

The fund upped the Commercial Metals (CMC, Financial) position by 0.95%, buying 10,000 shares. The transaction had an impact of 0.04% on the equity portfolio. The stock traded for an average per-share price of $38.37 during the quarter.

With 1.06 million shares and representing 4.48% of the equity portfolio, the stock is Fairholme’s third-largest position. GuruFocus says it has gained an estimated 37.84% on the investment so far.

The Irving, Texas-based steel and metal manufacturer has a $5.29 billion market cap; its shares were trading around $45.04 on Monday with a price-earnings ratio of 4.52, a price-book ratio of 1.61 and a price-sales ratio of 0.61.

Based on the GF Value Line, the stock appears to be modestly overvalued currently.

The company has good outperformance potential on the back of a GF Score of 88. It raked in high ratings for profitability, growth and financial strength, middling marks for momentum and a low grade for GF Value.

GuruFocus rated Commercial Metals’ financial strength 7 out of 10 on the back of adequate interest coverage and a high Altman Z-Score of 4.47. The ROIC also exceeds the WACC, so value creation is occurring.

The company’s profitability scored a 9 out of 10 rating, driven by operating margin expansion, strong returns that top a majority of competitors and a high Piotroski F-Score of 7. Commercial Metals also has a one-star predictability rank.

Berkowitz is Commercial Metals’ largest guru shareholder with a 1.90% stake. In addition to both Fairholme Fund (Trades, Portfolio)s, the stock is held by Chuck Royce (Trades, Portfolio), Hotchkis & Wiley, First Eagle, Ray Dalio (Trades, Portfolio)’s Bridgewater Associates, Paul Tudor Jones (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio).

Federal Home Loan Mortgage

The fund’s Federal Home Loan Mortgage (FMCC, Financial) holding was trimmed -0.15%, or by 8,100 shares. During the quarter, the stock traded for an average price of 57 cents per share.

It now holds 5.24 million shares in total, making up the fourth-largest position with a 1.66% weight. GuruFocus says the fund has gained approximately 6% on the investment so far.

More widely known as Freddie Mac, the government-sponsored enterprise that invests in mortgage loans and other related securities has a market cap of $339.17 million; its shares were trading around 53 cents on Monday with a price-earnings ratio of 7.15 and a price-sales ratio of 0.08.

The GF Value Line suggests the stock is significantly undervalued currently.

The GF Score of 58 indicates the company is likely to have poor performance going forward. While its momentum received a high rating, it got middling marks for profitability and growth and low points for financial strength and GF Value.

Freddie Mac’s financial strength was rated 1 out of 10 on the back of assets building up at a faster rate than revenue is growing. The WACC also surpasses the ROIC, so it is struggling to create value.

The company’s profitability scored a 5 out of 10 rating. While the net margin and ROE are outperforming versus industry peers, the ROA is underperforming. Further, the company has a moderate Piotroski F-Score of 5 and a one-star predictability rank.

The two Fairholme Fund (Trades, Portfolio)s are the only gurus invested in the stock currently.

Portfolio composition and performance

The real estate sector has the largest representation in Fairholme’s $960 million equity portfolio, which is composed of eight stocks, at 83.27%.

The fund returned 6.87% in 2021, underperforming the S&P 500 Index’s return of 28.71% by a wide margin.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours.