Fairholme Capital has 97% in just these 2 stocks

Renowned value investor Bruce Berkowitz is the founder and chief investment officer of Fairholme Capital Management. He was once named by Morningstar (NASDAQ:MORN) as Equity Fund Manager of the Decade. He runs two mutual funds, his flagship The Fairholme Fund (MUTF:FAIRX) which seeks long-term capital appreciation and Fairholme Focused Income Fund (MUTF:FOCIX) looking for current income.

While there are money managers who like to run highly concentrated funds, Berkowitz is quite unique in that Fairholme’s funds are highly concentrated, as in literally a handful of shares each. Both funds hold just four stocks.

Berkowitz once noted“We act like owners. We focus on very few companies. We try and know what you can know. We try to buy only a few companies that we believe have been built to last in all environments. We recognize that you only need a few good ideas in a lifetime to be fabulously rich.”

Key points about this article:

• Bruce Berkowitz is a well-known value investor who founded and runs Fairholme Capital Management, which runs two mutual funds.
• Its flagship Fairholme Fund seeks long-term capital appreciation, while the Fairholme Focused Income Fund seeks immediate income. Both have very concentrated portfolios with only four stocks each.
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Fairholme Capital has nearly $1.4 billion in assets under management, and 97% of that total is invested in just two stocks. It is a very narrow bridge to cross. It means you have to get the investment right or you destroy the performance of your entire portfolio.

Since Berkowitz is willing to bet the farm on a pair of stocks, let’s take a closer look at each and see if they’re worth investing in, too. You may not have (or even want) such a concentrated portfolio, but stocks could still be good to add to a more diversified portfolio.

St. Joe (JOE)

Residential housing development

Berkowitz’s largest holding by far is in real estate developer and asset management company St. Joe (NYSE:JOE). He owns more than 19.4 million shares of the company in the Fairholme Fund, which are valued at $1.24 billion. In fact, JOE shares make up 91% of the portfolio.

In fact, he has been selling some shares of the company over the past year, as he owned nearly 24 million shares in the second quarter of last year. Yet Berkowitz, in keeping with the flagship fund’s mission, has been a longtime believer in stocks. He owns St. Joe for over a decade, even during a scandal in 2009 and 2010 when the Securities & Exchange Commission charged the company with misconduct by materially overstating earnings and assets.

The real estate developer has long since moved on from those problems and has a different management team today, but it points to the value Berkowitz still saw in the company he owned. However, St. Joe lagged behind the market during that time frame. Since 2010, JOE has a total return of 133%, compared to a 555% return for the S&P 500.

You may be wondering why Berkowitz continues to own stock. St. Joe is one of Florida’s largest landowners and the land’s value proposition is starting to come to fruition. As Mark Twain once said, “buy land, don’t make it.” It took a long time for the value of the property to be realized.

As St. Joe sells packages, starts making profits which are reflected in the stock price. Over the past five years alone, JOE has gained 226% versus the benchmark’s 100% gain. Berkowitz is also chairman of the company’s board of directors, a the position he occupies since 2011.

Enterprise Products Partners (EPD)

Oil pipeline running through the hills

Berkowitz’s second largest position is an oil and gas broker Enterprise product partners (NYSE:EPD). Although holdings pale in comparison to St. Joe, these are still a substantial part of Fairholme Capital’s portfolio. Spread across both the flagship fund and the Focus Income fund, Fairholme owns more than 5.4 million shares of the midstream operator, shares that are currently worth more than $158 million.

It’s a smart investment. Enterprise Products Partners is one of the largest midstream operators in the industry, with more than 50,000 miles of pipeline and storage capacity for more than 300 million barrels of liquids. And because it works long-term contracts, take-or-pay typeEPD is paid whether its customers use their pipeline capacity or take possession of the oil and gas that flows through them. This generates very stable income streams as there is little volatility and fluctuations in the spot price of oil and gas are canceled out.

Berkowitz no doubt likes Enterprise as an investment because of its dividend, which yields 7% annually. Its stock is also valued at a discount. EPD stock trades at 10 times estimated earnings and less than two times sales.

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