"Tracking Bruce Berkowitz’s Fairholme Portfolio – Q3 2016 Update"
"Bruce Berkowitz’s US stock portfolio decreased this quarter from $1.45B to $1.25B.Fairholme's stakes in AIG warrants and Bank of America common & warrants were reduced while increasing Lands’ End.The portfolio is very concentrated with the largest three positions accounting for ~75% of the US long assets.This article is part of a series that provides an ongoing analysis of the changes made to Fairholme’s US stock portfolio on a quarterly basis. It is based on Fairholme’s (FAIRX) (FOCIX) (FAAFX) regulatory  filed on 11/14/2016. Please visit our  article for an idea on how his holdings have progressed over the years and our  for the fund’s moves during Q2 2016.Berkowitz’s US stock portfolio decreased ~14% from $1.45B to $1.25B this quarter. The portfolio continues to be very concentrated with the vast majority invested in just five businesses. The largest three positions are St. Joe Companies, Sears Holdings, and Seritage Growth Properties and together they account for 75.48% of the 13F portfolio.Berkowitz’s flagship Fairholme Fund (FAIRX) has generated significant alpha since its December 1999 inception: thru Q2 2016, the fund’s annual returns are at 10.07% compared to 4.20% for the S&P 500 index. The fund has however underperformed over the most recent 10-year period.Top equity holdings that are not in the 13F report include Fannie Mae pfds (FNMAS), Freddie Mac pfds (FMCKJ), and Imperial Metals (IPMLF). Fairholme Fund is known to hold significant cash especially when markets are high. The current cash allocation is ~24%.Stake Increases:Lands’ End (LE): The ~4% LE stake was purchased in Q3 2015 at prices between $21 and $29 and increased by 63% the following quarter at prices between $21 and $28. Q1 2016 had seen a ~5% trimming while last quarter saw a ~3% increase. There was a ~12% increase this quarter at prices between $14.21 and $19.36. The stock is currently at $16.80.Note: Lands’ End is an April 2014 spinoff from Sears Holding. Berkowitz received ~7.35M shares but that stake was sold out by the end of that year. The current position is ~10.5% of the business.Sears Canada (SRSC): The ~4% SRSC position was established in Q4 2014 as a result of Fairholme participating in a rights offering from Sears Holdings. They distributed one subscription right for each share of Sears Holdings held and it allowed the purchase of 0.375643 shares of Sears Canada at $9.50 per share. The rights would have resulted in the purchase of around 10M shares but Berkowitz ended up with ~40% more (oversubscription privilege). The stake was since increased. Last quarter saw a ~5% increase while this quarter saw a marginal further increase. The stock is now at $1.75.Stake Decreases:American International Group (AIG) WTS 45 Strike: AIG was Berkowitz’s largest position as of Q2 2015 even after a ~78% reduction in the common during the previous seven quarters. Q3 2015 saw the common stake almost sold-out (~96% reduction) at prices between $55.50 and $64.50. Q4 2015 saw another ~63% reduction. The remainder common stake was sold out in Q1 2016. The stock currently trades at $64.60. Q1 2016 also saw a large ~52% reduction in the warrants. Last quarter saw that stake again reduced by ~50% and that was followed with another ~18% selling this quarter. The remaining position is still fairly large (top five) at 7.42% of the portfolio.Bank of America (BAC), WTS 13.30 Strike, and BAC WTS 30.79 Strike:  BAC was Berkowitz’s third largest position at 15.66% of the US long portfolio as of last quarter. The stake was first purchased in 2010. Q1 2015 saw a ~19% reduction in the common and a ~8% increase in the warrants. Q3 2015 saw an almost two-thirds reduction in the common at prices between $15 and $18.50. In Q4 2015, the common saw an 86% reduction while the warrants were increased by 21%. The common stake was more than doubled in Q1 2016 at prices between $11 and $17. Last quarter saw another ~50% increase in the common stake at prices between $12 and $15. This quarter saw a huge ~87% reduction in the common at prices between $12.74 and $16.19. The warrants also saw a ~18% reduction. The stock currently trades at $20.16.Sears Holdings Corp (SHLD) and Sears WTS 28.41 Strike: Sears is Berkowitz’s second-largest position at 27.39% of the US long portfolio. The original stake was established in 2007 although the position size has fluctuated over the years. The current stock price ($12.32) is far below Fairholme’s cost-basis. He controls ~25% of the business. Last quarter saw a ~5% increase in the common and a marginal reduction in the warrants. There was marginal trimming this quarter.St Joe Companies (JOE): JOE is the largest stake at 35.99% of the 13F portfolio. The bulk of the position was purchased in the 2008-2009 timeframe and there have only been minor adjustments since. Currently, it trades at $19.30. Last quarter saw a minor increase while this quarter saw marginal trimming.Note: Fairholme see’s JOE investment as a good hedge against rising inflation.Kept Steady:Seritage Growth Properties (SRG): SRG is a top-three 13.94% position. It was spun-off from Sears Holdings through a Rights Offering in July 2015 and Fairholme participated in the transaction. Trading started at $37 per share and it currently trades at $48.84.Leucadia National (LUK): LUK is a very long-term holding that was built-up over several years. The position has seen large reductions since Q2 2013. Q4 2015 saw a ~55% reduction at prices between $16.08 and $21.11 and the remaining stake was almost eliminated the following quarter at prices between $14.45 and $17.39. It currently trades at $20.87.Sears Hometown & Outlet Stores (SHOS): SHOS is a minutely small 0.31% position. It saw a ~89% increase in Q4 2015 but the relative sizing is still very small.Note 1: Sears Hometown and Outlet Stores is a spinoff from Sears Holdings (mid-October 2012 rights offering).The spreadsheet below highlights changes to Fairholme’s US stock holdings in Q3 2016:13D/G/A & Form 3/4 filings thru 8/17/2016: Form 4 8/15/2016 & previous - SHLD - slight net reduction.: Commentary: 1) Fannie/Freddie termed best businesses ever owned - they own preferreds. 2) Sears - optimistic although taking longer than expected. Unlocking value - exploring strategic alternatives for Home Services as well as Kenmore, Craftsman, and DieHard brands. Also talks about Innovel Solutions (previously known as Sears Logistics Services), a 1100-truck delivery service that has grown 238% since 2014. 3) Seritage: steady progress in repurposing, re-tenanting, and redeveloping many of the 266 properties that it purchased from Sears last year. “Redeveloping anchor space comes at a cost to landlords, but holds the promise of hefty returns as department stores paying as little as $2 a square foot in rent are replaced by new anchors paying $15 to $20 a square foot..." 4) St. Joe - optimistic about St. Joe’s current trajectory and owned land – a good hedge against rising inflation. 5) Imperial Metals - should double output while rivalling lowest-cost producers with their Red Chriss & Mount Polley mines. Also highlighted copper’s potential medical use as it kills bacteria. 6) Chesapeake short-duration bonds - assets should be valuable and so equity like safety w. income, 7) Atwood Oceanics 2020 senior bonds 17% yield - they bought back 30% and that should mean management believes it is a viable business. 8) Bofa - Improving operating efficiencies more than counter declining net interest margins. 9) AIG - Except for last year’s large tax bill, we have little to complain about. Our views on AIG are well documented. Remaining warrants are attractive given (i) a 2021 expiry, repricing terms, and related stock price, and (ii) increases in underwriting margins, operational efficiencies, and share repurchases.Overall Allocation as of May 31, 2016:This is compared to the following figures in their annual report as of 11/30/2015:"