"Tracking Bruce Berkowitz’s Fairholme Portfolio – Q3 2017 Update"
"Bruce Berkowitz’s 13F stock portfolio value decreased this quarter from $982M to $907M.Small positions in Lands’ End, Sears Canada, Sears Hometown & Outlet Stores, and Washington Prime Group were all dropped during the quarter.The portfolio is very concentrated with St. Joe Companies, Sears Holdings & its spinoff Seritage Growth Properties forming almost the entire portfolio.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 11/14/2017. 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 2017.Berkowitz’s 13F stock portfolio value decreased ~8% from $982M to $907M this quarter. The portfolio continues to be very concentrated with the entire portfolio invested in St. Joe Companies, Sears Holdings, Seritage Growth Properties, and Leucadia National.Berkowitz’s flagship Fairholme Fund (FAIRX) has generated significant alpha since its December 1999 inception: thru Q3 2017, the fund’s annual returns are at 10.17% compared to 5.12% for the S&P 500 index. FAIRX has however underperformed over the most recent 10-year period. Large equity holdings that are not in the 13F report include Fannie Mae (FNMA) pfds (FNMAS), Freddie Mac (FMCC) pfds (FMCKJ), and Imperial Metals (IPMLF). They also have small positions in International Wire Group (ITWG), Bristow Group (BRS), and Monitronics International. Stocks and Preferreds together account for ~70% of the AUM. The rest are in cash (~18%) and bonds (~12%). Fannie/Freddie Pfds are at one-third of AUM.Stake Disposals:Lands’ End (LE): LE was a 4.33% stake purchased in Q3 2015 at prices between $21 and $29 and increased by 63% the following quarter at prices between $21 and $28. There was a ~12% increase in Q3 2016 at prices between $14.21 and $19.36. Last quarter had seen a ~13% reduction and the disposal this quarter was at prices between $11.30 and $14.90. The stock is currently at $11.50.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.Sears Hometown & Outlet Stores (SHOS): SHOS was a minutely small 0.21% position disposed this quarter. The original position came about as a result of the spinoff of Sears Hometown from Sears Holdings through a rights offering in mid-October 2012. Trading started at ~$31 per share and it currently goes for $1.60.Sears Canada (SRSCQ): SRSCQ was a 1.76% position 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 position was increased since. The stake was sold out this quarter following Sears Canada’s bankruptcy filing on June 22nd at prices between $0.15 and $0.61.Washington Prime Group (WPG): WPG was a small ~1% portfolio position. It was established in Q1 2017 at prices between $8 and $11 and increased by ~300% last quarter at prices between $7.50 and $9.35. The disposal this quarter was at prices between $8.25 and $9.60. The stock is now at $7.05.Stake Increases:St Joe Companies (JOE): JOE is the largest stake at 56.14% of the 13F portfolio. The bulk of the position was purchased in the 2008-2009 timeframe and there had only been minor adjustments since. Last quarter saw a ~4% increase and that was followed with another ~6% increase this quarter at ~$19 per share.  Currently, it trades at $18.60. Berkowitz’s ownership stake is at ~40% of the business.Note: Earlier this year, Bruce Berkowitz stated that JOE would be his pick “to buy more of one stock right now”.Stake Decreases:Sears Holdings Corp (SHLD): Sears is Berkowitz’s second-largest 13F position at ~23% of the portfolio. The original stake was established in 2007 although the position size has fluctuated over the years. The current stock price ($3.81) is far below Fairholme’s cost-basis of ~$61. There was marginal trimming this quarter.Note 1: Regulatory filings since the quarter ended show them owning ~26M shares (~24% of the business). This is compared to ~27M shares in the 13F – distributions from the fund to limited partners account for the difference.Note 2: Bruce Berkowitz stepped down from the board of directors of Sears effective October 31st.Note 3: In their Q2 report, Faiholme indicated that their NAV estimate on SHLD is now $90 per share.  They are aligned with equity & unsecured debt holders - owns 27% of common stock, 30% of warrants, and 58% of 8% unsecured 2019 bonds.Seritage Growth Properties (SRG): SRG is a top-three ~19% position. Seritage 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 $40.28. H1 2017 saw a ~12% increase while this quarter saw marginal trimming.Sears WTS 28.41 Strike: The very small 1.58% position in Sears WTS saw marginal trimming this quarter.Kept Steady:Leucadia National (LUK): LUK is a very long-term holding that was built-up over several years. The position had seen large reductions since Q2 2013. Recent activity follow: Q4 2015 saw a ~55% reduction at prices between $16 and $21 and the remaining stake was almost eliminated the following quarter at prices between $14.50 and $17.50. It currently trades at $25.32.The spreadsheet below highlights changes to Fairholme’s US stock holdings in Q3 2017:Regulatory Filings thru 8/14/2017: 13G/A – 8/10/2017 – LE – 851K – 2.7%. 13D/A – 8/8/2017 – Sears Canada – 19M shares – 18.7%, 13D/A – 7/10 & 27/2017 – 21.09M shares – 20.7%. 13D/A – 7/18/2017 – JOE – 25.47M shares – 36.1%, 5/31/2017 – 25.12M shares – 34.9%.6/29/2017: : SHLD - cost-basis is $61, NAV estimate is ~$90. Aligned with equity & unsecured debt holders - owns 27% of common stock, 30% of warrants, and 58% of 8% unsecured 2019 bonds - no preference of one over the other. Sears Canada - believes NAV after adjustments after court costs is around $7 per share. SRG - Seritage has been tarnished by Sears. But, the company will be able to continue its pace of redevelopment, especially given the nature of the calls and the puts. Seritage will call a property when they have tenants lined up for that space with much higher rental rates. And if Sears puts part or all of a property to Seritage, then Seritage receives one year’s worth of rent and operating expenses and most likely, they’ve already identified potential customers for the space. It still could double the dividend to $2 per  share in three years and double again to $4 per share in six years. Fannie/Freddie - why did you purchase certain prefs but not others? - each is trade-off between price and stated terms & conditions - we wanted a spectrum of the different prefs. The companies remaining nationalized is the worst-case scenario - it is improbable. The 80% government ownership (the warrants) makes them aligned with the government. JOE - it is still the investment he will buy if he could purchase only one investment with new capital.6/20/2017: : Longest time to have underperformed is now. Always been a balance sheet buyer - buy assets at significant discount to value - that means they have issues but you invest when you believe it is fixable. Public investing involves other people liking what you like - eventually - otherwise, even if he is right, he loses. Highfliers: Priced for a rosy future - but not in his circle of competence. He is convinced what is holding now will appreciate just like BAC & AIG did. Fannie/Freddie is exponentially better than BAC/AIG was when he invested. Real Estate: his margin-of-safety is that in retailing rather than him being a retailer analyst. Sears worth - asset worth is between $90 and $100 per share. Will have to show operating profits before investors realize value - the RE part of the equation is also depressed because of operational problems. Amazon & Whole Foods deal - positive for Sears because it says physical locations are important. Amazon buying Sears would be an intelligent move - but no reason to believe they will make an offer - math makes perfect sense. Premature accumulation was the big mistake. St. Joe is another - ten years - still quite optimistic. Fannie/Freddie end-game: They are insurers conceived to make sure there is affordability. They should continue as private companies. Previous administration worried about markets and debt of Fannie/Freddie - thought conservatorship is a good idea. In 2012, when it was clear the companies was going to succeed, the previous administration changed the setup. Ten year process - so probably 5 years out for resolution. St. Joe - focused on tangible values - net-debt free - 400M liquidity - less than 50 employees at headquarters - very low fixed expenses - more than 100,000 acres of premium land. EV is 800M. It has Fort Lauderdale/Miami like potential. Catalyst - high-20s cost-basis - it is an all-weather stock - it is dependent on stars aligning. Company is very different - we can sit on it while the value is materialized. Liquidity risk - for holding Fannie/Freddie - has happened before when they held AIG and before. Fannie/Freddie has realized some gains but expect to make a lot more. Buys and sells too soon has been Fairholme history. More of one stock right now - what would it be - St. Joe."