"Tracking Bruce Berkowitz’s Fairholme Portfolio – Q3 2015 Update"
"Bruce Berkowitz’s US stock portfolio decreased this quarter from $4.92B to $3.47B.Fairholme's huge stake in American International Group common shares was almost eliminated this quarter. They still have a large stake in the warrants.The portfolio is very concentrated with the largest three positions accounting for ~50% 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 11/16/2015. Please visit our  article for an idea on how his holdings have progressed over the years and our  highlighting the fund’s moves during Q2 2015.Berkowitz’s US stock portfolio decreased 29.43% from $4.92B to $3.47B this quarter: the huge stakes in American International Group and Bank of America were both sold down during the quarter. The portfolio continues to be very concentrated with the vast majority invested in just five businesses. The largest three positions are Sears Holdings, American International Group, and Bank of America and together they account for 52.08% of the 13F portfolio.Berkowitz’s flagship Fairholme Fund (FAIRX) has generated significant alpha since its December 1999 inception: through 9/30/2015, the fund’s annual returns are at 11.03% compared to 3.70% for the S&P 500 index. It is down 7.98% YTD compared to down 0.61% for the S&P 500 index. The fund has also underperformed over the most recent 5-year period. Top holdings that are not in the 13F report include Fannie Mae pfds (FNMAS), Freddie Mac pfds (FMCKJ), and Imperial Metals (IPMLF). They are known to hold significant cash especially when markets are high. The current cash allocation is at 25.5%.New stakes:Canadian Natural Resources (CNQ), Citigroup Inc. (C), International Business Machines (IBM), Now Inc. (DNOW), and Seritage Growth Properties (SRG): These are medium-sized positions established this quarter. CNQ is a 5.44% of the portfolio stake established this quarter at prices between $19.05 and $27.16. The stock currently trades at $24.69. C is a 4.30% of the portfolio position purchased this quarter at prices between $49 and $60 and the stock is now at $54.72. The 3.15% IBM stake was established at prices between $141 and $173 and it is now below that range at $139. The 2.88% DNOW stake was purchased at prices between $14.80 and $19.74 and the stock currently trades at $18.37. SRG is a 3.61% position. It was spun-off from Sears Holdings through a Rights Offering in July. Fairholme participated and accumulated 3.37M shares (13.5% of the business).Note 1: Canadian Natural Resources has seen a recent roundtrip in the portfolio: It was a minutely small position established in Q4 2014 that was eliminated last quarter.Note 2: Now Inc. is a May 2014 spinoff from National Oilwell Varco (NOV). It is down ~43% since. Fairholme’s ownership stake in the business is at 6.3%.Lands’ End (LE) and MRC Global (MRC): These are small (less than ~2% of the portfolio each) stakes established this quarter. The 1.45% LE stake was purchased at prices between $21.26 and $28.92 and the stock is currently near the low end of that range at $22.54. MRC is a 1.71% position established at prices between $10.90 and $15.72 and it now trades at $13.99.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 last year. The current position is 1.86M shares (5.8% of the business).ASA Gold and Precious Metals (ASA) and Sears Hometown & Outlet Stores (SHOS): These are minutely small positions established this quarter.Note 1: ASA is a CEF (closed-end-fund) that is trading at a ~14% discount to NAV. Majority of their holdings are in large cap gold producers. The fund does not use leverage.Note 2: Sears Hometown and Outlet Stores is a spinoff from Sears Holdings (mid-October 2012 rights offering).Stake Disposals:JP Morgan WTS 42.42 Strike, Lincoln National WTS 10.92 Strike, and Wells Fargo WTS 34.01 Strike: These are minutely small positions that were eliminated this quarter. The position sizes were too small to indicate a clear bias.Stake Increases:National Oilwell Varco (NOV): NOV is a very small 1.11% of the US long portfolio stake established last quarter at prices between $48 and $56. It was increased by ~46% this quarter at prices between $36.72 and $47.42. The stock currently trades at $37.26.Sears Canada (SRSC) and Sears WTS 28.41 Strike: These positions were established in Q4 2014 as a result of Fairholme participating in two rights offerings from Sears Holdings. The SRSC rights offering 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 Notes & WTS rights offering was for $625M in notes and 22M in warrants (strike $28.41 expiring in five years - 2019). Here again, the rights offering would have allowed the acquisition of around 6.1M warrants but Berkowitz ended up with 6.4M. Last two quarters have seen further increases in both positions.Sears Holdings Corp (SHLD): SHLD is Berkowitz’s largest position at 17.35% of the US long portfolio. The original stake was established in 2007 although the position size has fluctuated over the years. Last two years saw consistent buying and the share count increased from around 16.8M shares to 26.6M shares. Last two quarters have also seen minor increases. The current stock price ($19.96) is far below Fairholme’s cost-basis. The pattern of buying signifies a strong bullish bias. For investors attempting to follow Berkowitz, SHLD is a good option to consider for further research. He controls ~25% of the business.Note: In the H1 2015 shareholder letter, Berkowitz indicated that his updated sum-of-parts valuation for SHLD was at $125 per share..Stake Decreases:American International Group (AIG) & AIG WTS 45 Strike: AIG was Berkowitz’s largest position as of last quarter even after a ~78% reduction in the common during the previous seven quarters. This quarter saw the common stake almost sold-out (~96% reduction) at prices between $55.66 and $64.54. The stock currently trades at $62.23. Warrants have also seen marginal reductions in the last three quarters. The warrants and the common stock together is still a huge (second-largest) stake at 16.65% of the portfolio.Note: In the H1 2015 shareholder letter, Berkowitz revealed he has almost tripled his money on AIG when the stock was trading at ~$62.Bank of America (BAC), WTS 13.30 Strike, and BAC WTS 30.79 Strike:  BAC is Berkowitz’s third largest position behind Sears and AIG at 14.68% of the US long portfolio. The stake was first purchased in 2010 and minor adjustments had since been made every quarter. Q1 2015 saw a ~19% reduction in the common and a ~8% increase in the warrants (Jan 2019 13.30 Strike, Yahoo Ticker - BAC-WTA, Current Quote - $6.32). This quarter saw an almost two-thirds reduction in the common at prices between $15.26 and $18.45. The stock currently trades at $17.65.Berkshire Hathaway (BRK.B) (BRK.A): BRK.B is a very small 0.56% of the US long portfolio position. The stake was reduced marginally this quarter.St Joe Companies (JOE) & Leucadia National (LUK): JOE and LUK are large stakes at 13.48% and 5.96% of the US long portfolio respectively. The bulk of the JOE stake was purchased in the 2008-2009 timeframe and there have only been minor adjustments since. LUK is a very long-term holding that was built-up over several years. Since Q2 2013, the LUK position was sold down from 18.8M shares to 10.2M shares. The JOE stake has remained almost steady during that same period. Currently, JOE trades at $19.65 and LUK at $18.06. This quarter saw a 17% reduction in LUK and marginal selling in JOE.The spreadsheet below highlights changes to Fairholme’s US stock holdings in Q3 2015:"