In its portfolio for the first quarter of 2021, which was released earlier this week, the Fairholme Fund (Trades, Portfolio) disclosed it reduced its position in one stock while completely divesting another.
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 handful of undervalued stocks whose underlying companies have good management teams and steady cash flow generation.
Bank of America
After establishing a new stake in Bank of America (BAC, Financial) during the fourth quarter, the fund sold all 1.35 million shares, impacting the equity portfolio by -3.91%. The stock traded for an average price of $31.41 per share during the quarter.
GuruFocus estimates Fairholme gained 13.66% on the investment.
The Charlotte, North Carolina-based bank has a $353.12 billion market cap; its shares were trading around $41.11 on Friday with a price-earnings ratio of 17.64, a price-book ratio of 1.41 and a price-sales ratio of 4.15.
The GF Value Line indicates the stock is modestly overvalued currently based on historical ratios, past performance and future earnings projections.
The valuation rank of 4 out of 10 also supports this assessment since the share price, price-book and price-sales ratios are all approaching multiyear highs.
GuruFocus rated Bank of America’s financial strength 3 out of 10. Even though the company has issued approximately $8.6 billion in new long-term debt over the past three years, it is at a manageable level. Additionally, while the cash-to-debt ratio of 1.22 is high in comparison to the company’s history, it is underperforming compared to over half of other industry players.
The company’s profitability scored a 5 out of 10 rating on the back of outperforming margins and returns that underperform over half of its competitors. While revenue per share growth has slowed down over the past 12 months, Bank of America has a moderate Pitroski F-Score of 5, which indicates operating conditions are stable, and a predictability rank of one out of five stars. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.
Of the gurus invested in Bank of America, Warren Buffett (Trades, Portfolio) has the largest stake with 11.68% of outstanding shares. Dodge & Cox, PRIMECAP Management (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Hotchkis & Wiley, Diamond Hill Capital (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Li Lu (Trades, Portfolio) and Richard Pzena (Trades, Portfolio), among several other gurus, also have large positions in the stock.
Fairholme trimmed its Imperial Metals (TSX:III, Financial) stake by 0.44%, selling 30,300 shares. The transaction had an impact of -0.01% on the equity portfolio. Shares traded for an average price of 4.68 Canadian dollars ($3.81) each during the quarter.
The fund now holds 6.8 million shares total, which represent 2.03% of the equity portfolio. GuruFocus data shows it has lost an estimated 55.82% on the investment since the fourth quarter of 2013.
The Canadian mining company, which produces base and precious metals mainly from its mineral properties in British Columbia, has a market cap of CA$652.91 million; its shares closed at CA$5.08 on Thursday with a price-book ratio of 0.9 and a price-sales ratio of 4.41.
According to the GF Value Line, the stock appears to be significantly overvalued currently.
The valuation rank of 4 out of 10 also supports overvaluation since the share price and price-sales ratio are both approaching multiyear highs.
In his annual commentary, Berkowitz noted there are “great expectations” for Imperial as its operations resume and commodity prices rise.
Imperial Metals’ financial strength was rated 6 out of 10 by GuruFocus despite the cash-debt ratio being below average for the industry. Its equity-to-asset ratio and debt-to-Ebitda ratios, however, are well above average. The Altman Z-Score of 1.71 also indicates the company could be in danger of bankruptcy as its revenue per share has declined over the past five years.
The company’s profitability did not fare as well, scoring a 3 out of 10 rating on the back of negative margins and returns that underperform a majority of industry peers. Imperial is supported by a moderate Piotroski F-Score of 6, however, as well as a one-star predictability rank.
Fairholme has a 5.32% stake in the miner. No other gurus are currently invested in the stock.
Portfolio composition and performance
The real estate sector has the largest representation in Fairholme’s $1.24 billion equity portfolio, which is composed of four stocks, at 90.15%. The financial services and basic materials spaces have much smaller allocations.
The fund also has a position in The St. Joe Co. (JOE, Financial) as well as holds preferred shares of both Fannie Mae (FNMAS.PFD) and the Federal Home Loan Mortgage Corp. (FMCKJ.PFD), which is also known as Freddie Mac.
In his annual letter to shareholders, Berkowitz said the fund returned 46.9% in 2020, outperforming the S&P 500’s return of 18.4%.
Disclosure: No positions.
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