Magic Formula Investing » Bruce Berkowitz

Bruce Berkowitz Consuelo Mack Interview

Alexg — Thu, 02 Sep 2010 02:08:09 +0000

Always love the Consuelo Mack interviews as they give portfolio managers a chance to give a better analysis of some of their holdings as opposed to the quick 5 to 10 minute appearances they have on the major financial networks. This is the case in the latest Consuelo Mack interview with Bruce Berkowitz which aired this past weekend which I believe is a must watch if you are serious about investing.

Bill Ackman Betting Against BP’s Debt

Alexg — Wed, 01 Sep 2010 23:51:40 +0000

Through credit default swaps (CDS), Bill Ackman is betting against BP’s debt. Not to be confused with him shorting BP’s stock as I have seen several bloggers doing since the trade was announced.

Ackman wrote to Bloomberg:

The accident has (BP oil spill) “likely permanently impaired the ability of BP to operate effectively in the U.S.,” Ackman wrote today in a letter to investors obtained by Bloomberg News. “The clean-up costs, penalties, and legal liabilities of the spill will continue to impair the company’s credit for many years.”

It seems as Ackman is pretty confident in the trade according to the same article.

“We believe it is unlikely that credit spreads will return to the pre-crises levels for many years, if ever,” Ackman wrote.

While the move is contrarian considering the huge event that is the BP oil spill, it also comes at a time when some well known value investors are going long on the stock. For example, some of the value investors who have bought BP’s stocks include Bruce Berkowitz, the folks at Dodge & Cox, David Dreman, and Irving Kahn to name a few.

Bruce Berkowitz Establishes Position In MBIA

Alexg — Tue, 13 Jul 2010 15:09:40 +0000

Bruce Berkowitz, Morningstar’s Fund Manager Of The Decade, has established a position in MBIA, Inc. which provides financial guaranty insurance for municipal bonds and asset-backed securities in the United States and internationally. According to Gurufocus.com, Berkowitz purchased 22,736,200 shares at a cost around $5.61, which turns out to be around 11% of the company. If you recall, Berkowitz avoided much of the financial crisis by not investing in financial and insurance companies as he found their balance sheets to hard to read. It appears that has changed recently as he has established positions in several financial companies that were hit hard by the financial crisis. With the addition of MBIA, financials have now become Fairholme’s largest sector weight as financials now represent 57% of the total portfolio. Other financial and insurance companies in the Fairholme Fund include:

Bank of America (BAC) in which Fairholme owns 39.3 million shares representing 6.69% of Fairholm’e portfolio
AIG (AIG) in which Fairholme owns 15.3 million shares representing 4.89% of Fairholm’e portfolio
Regions Financial (RF) in which Fairholme owns 75.815 million shares representing 5.67% of Fairholm’e portfolio
Citigroup (C) in which Fairholme owns 227.460 million shares representing 8.78% of Fairholm’e portfolio
Leucadia National Corp. (LUK) in which Fairholme owns 20.302 million shares representing 4.8% of Fairholm’e portfolio
Humana Inc. (HUM) in which Fairholme owns 15.8 million shares representing 7.04% of Fairholm’e portfolio
WellCare Health Plans (WCG) in which Fairholme owns 7.8 million shares representing 2.2% of Fairholm’e portfolio
Ameri Credit Corp. (ACF)in which Fairholme owns 30.673 million shares representing 6.94% of Fairholm’e portfolio

Bruce Berkiwitz Fairholme Buys Q1 2010

Alexg — Mon, 17 May 2010 14:21:09 +0000

These are the trades for Bruce Berkowitz and his Fairholme Fund according to Gurufocus.com

New Purchases: AIG, BAC,
Added Positions: C, CMCSK, RF, RRR,
Reduced Positions: BRK.B, DJCO,
Sold Out: BMY, FRX, KO, MI, PFE, PWE, URI, WLP, WTM

It’s obvious where the portfolio is heading, financials. It’s a classic Bruce Berkowitz portfolio move and sure is sticking to the Fairholme Fund’s slogan of “Ignoring the Crowd”.

Bruce Berkowitz Buys Goldman Sachs

The one big trade not too many people are catching on to is his trade in Goldman Sachs (GS). I found this story by StreetInsider.com highlighting his speech at the Value Investing Congress in which he discloses his stake:

“Speaking at the Value Investing Congress currently going on in Pasadena, Fairholme Capital Management’s Bruce Berkowitz has just disclosed that he has a reportedly “giant stake” in Goldman Sachs (NYSE: GS). The fund manager did not give any specific numbers on the size of his stake, however, but told the audience that, according to a Bloomberg headline, “it’s the first time I’ve told anyone” about the stake.”

Source: http://www.streetinsider.com/Insiders+Blog/Bruce+Berkowitz+Says+Fairholme+Has+a+Giant+Stake+in+Goldman+Sachs+%28GS%29/5593314.html

Earlier this month, Morningstar reported on the trade. If this isn’t “Ignoring the Crowd” I don’t know what is, check out his thesis for Goldman.

The Fairholme Fund manager said he “didn’t see” the government’s case against Goldman, adding that as a market maker, the investment bank didn’t do anything its peers weren’t doing. – Source: http://news.morningstar.com/articlenet/article.aspx?id=336063

How to Determine A Company’s Stock Is Undervalued

Alexg — Sat, 01 May 2010 15:43:03 +0000

As value investors, we might have a value framework in mind where we finally understand that buying low, selling high is the best way to go. It’s the way Warren Buffett and other have done it for a long time and most importantly, have done it successfully. If you “get it” (value investing), you have climbed that six foot wall that many beginners and even veterans struggle to overcome. I will paraphrase Warren Buffett when he says in the Supers investors of Graham-Doddsville when he states that individuals get it or they don’t, some individuals will get in 5 minutes while others, you can explain to them all day and they still wont get it. Of course when I’m referring to “getting it”, I am referring to value investing. So now that we have climbed that mental barrier, the next question we ask is how do we determine if a company’s stock is undervalued.

How to Determine A Company’s Stock Is Undervalued

First and foremost, there are a tons of theories and models about calculating the fair value of a company. Some are simple and some are a bit more complicated but all have the same goal: helping is determine whether a company’s stock is undervalued. On a side note, from being in undergrad school, sometimes I sit there in awe and think about how academia has created something “complicated” but doesn’t make since. Beta? CAPM?Standard Deviation? From personal experience, I have used three valuation techniques. I have chosen these techniques for two reasons. First, they work. Secondly, they make sense.

Discounted Cash Flow

Introduction to Discounted Cash Flow- If you ever go to business school, you will do a discounted cash flow consistently. Its based on the concept of time value of money. Basically, you calculate trailing cash flow which will be your Year “zero” or starting point. From security and industry analysis you feel confident the company will grow at a certain growth rate in the near feature , usually 5 years. After those 5 years, growth would then slow. After the second stage of growth (another 5 years), you assume the company will growth at a certain rate until eternity. After projecting future cash flow you then discount those cash flows using an appropriate discount rate.

Wikipedia Cash Flow – Discounted Cash Flow

Discounted Cash Flow Calculator

Pretty basic introduction, but Wikipedia (link above) should do a better job of teaching you about discounted cash flows. There’s also a lot of resources online that will take the heavy lifting out of discounted cash flows. In the end, a discounted cash flow will give you an estimate of intrinsic value. But, its subject to a lot of errors and variables and thus I use them less and less. For one, your forecasting into the future. Can you imagine doing a discounted cash flow model on homebuilders sometime before 2007? Secondly, not all firms have positive cash flows. Thirdly, high growth companies will have wider range of growth rates. Finally, small changes such as changes in the discount rate can have big impacts on the whole model.

Earnings Yield

Magic Formula Investing system and other value investors use the earnings yield. Earnings yield is the inverse of the P/E but can be broken down further to take into account the effect of financing and accounting issues that net earnings. In other words, its a way to get a picture of what the company truly earned. To calculate earnings yield the formula is as follows.

EBIT/ EV

Where EBIT is earnings before interest and taxes and EV is equal to Market Capitalization + Interest Bearing Debt + Preferred Stock – Excess Cash.

Cash Flow Yield

I learned this metric from Bruce Berkowitz and has made a big difference. It’s similar to earnings yield but the focus is now on what counts, cash. Under current accounting rules, its simply a lot tougher to manipulate cash flow.

How to calculate free cash flow?

Free Cash Flow Per Share/ Current Market Price Per Share

Pretty basic right. For some it may be too basic but value investing is simple but not easy. So what do we do with earnings yield and cash flow yield?

Answer: you compare it against two things. First, we compare it against a risk free asset such as a t-bill. If the stock has a free cash flow yield of 15% versus government bills of 5%, it should and usually returns more than that. If Stock “A” has a free cash flow yield of 8% and Stock “B” has a free cash flow yield of 10%, Stock B is cheaper than Stock A. Put it this way:

Stock A= P/E 12 (8.33%)
Stock B = P/E 10 (10%)

Security Analysis Benjamin Graham

Alexg — Thu, 18 Mar 2010 02:45:58 +0000

I just ordered Benjamin Graham’s Security Analysis 6th Edition, which is the new and updated edition and includes some of today’s top value investors. Among them, Bruce Berkowitz, Seth Klarman, Gleen Greenberg, and a few others. At one point, I did own the 1951 edition but between a new job and school, it pretty much collected dust. If you haven’t seen or read Security Analysis, its an intimidating book and its definitely not for beginners. For value investing beginners, I would recommend Benjamin Graham’s other book The Intelligent Investor which is intended for the casual investor. The book is often called the “value investing bible” and for good reason. It looks like a bible!!! Its about 800 pages long and is full of details and numbers. The main reason I decided to go with the new edition is due to it having updated examples. I simply grasp things easier.

Why I’m I Purchasing Security Analysis Despite reading The Intelligent Investor?

For one, the school semester is over and I will have a lot more time on my hands to catch up on reading. Secondly, Security Analysis has withstood the test of time. According to Amazon.com, the various edition have sold over 1 million copies ever since the book was released over 75 years ago. Also, as a value investor, I feel as if something is missing. In addition, to read an 800 page book is somewhat of a challenge. While I have read several long books, 800 pages of value investing is sure to be a challenge. Plus, the minds behind the book are well worth the read in itself. Finally, more than ever Security Analysis should reinforce my framework on stocks . For years, I have done a remarkable job managing a bit of money and managing virtual portfolios but I plan to take my career to the next step as graduation is around the corner. I have several projects that will hopefully allow me to invest more money and would look for any nugget that will help me improve my returns.

Warren Buffett On Benjamin Graham and Security Analysis

Below is a video I uploaded onto Youtube. Its Warren Buffett giving a 5 minute speech on what Benjamin Graham and his investment books meant to him.

What I expect To Get From Security Analysis?

Value Investor Martin Whitman once said, “the funny thing about Graham and Dodd is, everyone talks about them and nobody read them”. I don’t want to fall under Whitman’s comment. While I have read my fair share of Value Investing books, Security Analysis most likely will be the one that completes my library. Its a gut feeling but its a good feeling. I have read a great number of value investing books but my thinking behind each purchases goes along the lines of “If I learn just one thing, it was well worth the purchase.” So far, I have learned something from each value investing book that I have read. I also hope to expand my knowledge on the credit side of things. I have put analyzing credit on the back seat and hopefully I will become above average in that area of security analysis. Finally, I will be reading the book from a value investing fa perspective. I fell in love with value investing and over time have developed my unique idea of analysis securities. Below are two virtual funds I manage. Not bad right? I’m working on getting my real money portfolio up and running soon but that’s another story in itself.

Fairholme Fund Transaction

Alexg — Tue, 02 Feb 2010 03:49:40 +0000

The trades are in and its time to take a look at Bruce Berkowitz recent moved in the Fairholme Fund. As explained in an earlier post, I follow Bruce Berkowiitz and every once in a while will follow him into a position. Anyway, these reports come around about every 3 quarters and some people follow so called super-investors blindly into positions. For example, people look forward to the day Berkshire Hathaway’s positions come out and will make an investment on the pure basis that Warren Buffett invested into “ABC” company. Wrong on a couple of fronts. First, Warren Buffett has a special deal with the SEC in which he can report his trades a bit later than when he initially established his position. As such, you might be paying a higher price than Warren Buffett and might not mirror his results. Secondly, who said Warren Buffett made Berkshire’s position (s). Lets not forget Berkshire is a conglomerate and there are managers inside the Berkshire umbrella making investments such as GEICO investment officer Lou Simpson.

Fairholme Fund Transactions

Buy: BNI, FUR, C, RRR

Added: BRK-A, BRK-B, HTZ, HUM, JOE, SPR, WLP,

Reduced: PFE, URI,
Sold Out: BA, NOC, UNH

Some quick comments….

His reduction in Pfeizer (PFE) is interesting as its his top holdings. hish cost basis is about $16 so no one really knows why he reduced. My guess is he is raising cash but it;s pure speculation.

Citigroup (C) is ineteresting as its one of those financials that were hit hard during the current? credit crisis. I have no idea what lies in there balance sheet but his investment in Wells Fargo comes to mind.

RRR- very similar to his investment in United Rentals. I was looking for some old video footages/.pdf file in which he goes into detail of United Rentals but couldn’t find it. I rmemeber something about accounting for rental companies being very favorable due to tax and stimulus incentives.

FUR- the one that has y attention mainly due its balance sheet. Bruce Berkowitz does mention its management but I like to stick to pure financials as I have been burned by management comments in the past. Also, the contrarian in me cannot think of another sector in which being a contrarian might pay off in the future. Real Estate has seemed to bottomed. It might not be the exact bottom, but we are definitely not at the peak in my opinion.

Bruce Berkowitz

Alexg — Wed, 27 Jan 2010 02:55:20 +0000

As time goes on, most value investors will imitate someone else’s strategy and then work around that strategy to fit there needs. The obvious example is Warren Buffett, who is followed by thousands, if not millions of individuals around the globe. One a personal level, I originally started off as a strict low P/E guy. Dozens of studies have proven that purchasing stocks with low P/E’s outperform the market over the long-haul. I then moved on to the magic formula and then to a Bruce Berkowitz type of investor which focuses on free cash flow yield and quality management. Well if Warren Buffett believes hes “85% Gragham and 15% Fisher“, then I’m “85% Greenblatt and 15 % Berkowitz.” Bruce Berkowitz is the founder and the Managing Member of the Fairholme Fund (FAIRX). Morningstar recently named him domestic fund manager of the year.

Bruce Berkowitz Investment Strategy

Bruce Berkowitz basic investment strategy relies around the idea of counting the cash and ignoring the crowd. In addition, while he has 20 or so stock holdings, the majority of his money is in his best ideas. More importantly, he keeps in mind the idea of not losing money for his shareholders. As a backup plan he keeps cash at 10-20% levels.