Fairholme Capital Has 97% In Just These 2 Stocks

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Famed value investor Bruce Berkowitz is the founder and chief investment officer of Fairholme Capital Management . He was once named by Morningstar ( NASDAQ:MORN ) as the stock fund manager of the decade. He runs two mutual funds, his flagship Fairholme Fund (MUTF:FAIRX) that seeks long-term capital appreciation, and the Fairholme Focused Income Fund (MUTF:FOCIX) that looks for current income.

While there are money managers who like to run very focused funds, Berkowitz is fairly unique in that the Fairholme funds are highly concentrated as in literally a handful of stocks each. Both funds own 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 and only buy a few companies which 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 wealthy."

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.
• His flagship Fairholme Fund looks for long-term capital appreciation while the Fairholme Focused Income Fund seeks immediate income. Both have very concentrated portfolios with just four stocks each.
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Fairholme Capital has almost $1.4 billion in assets under management, and 97% of that total is invested in just two stocks. That's a very narrow bridge to cross. It means you've got to get your investment just right or you ruin the performance of your entire portfolio.

Since Berkowitz is willing to bet the farm on a pair of stocks, let's look closer at each and see if they are worth it for you to invest in them too. You might not have (or even want) such a concentrated portfolio, but the stocks still might be good to add in a more diversified portfolio.

St. Joe (JOE)

Residential housing development

Berkowitz biggest holding by far is in real estate developer and asset management company St. Joe ( NYSE:JOE ). He owns over 19.4 million shares of the company in the Fairholme Fund that are valued at $1.24 billion. In fact, JOE stock accounts for 91% of the portfolio.

He has actually sold off some shares of the company over the past year as in last year's second-quarter he owned almost 24 million shares. Yet Berkowitz, in keeping with the mission of the flagship fund, has been a long-time believer in the stock. He's owned St. Joe for well over a decade, even during a scandal back in 2009 and 2010 when the Securities & Exchange Commission accused the company of misconduct by materially overstating earnings and assets.

The real estate developer has long since moved on from those issues and has a different management team today, but it indicates the value Berkowitz still saw in the company that he held on. Yet St. Joe has lagged the market over that time frame. Since 2010, JOE has a total return of 133% compared to a 555% return by the S&P 500.

You might ask why Berkowitz continues to hold onto the stock. St. Joe is one of the biggest land owners in Florida and the value proposition of the land is beginning to be realized. As Mark Twain once said, "buy land, they're not making it anymore." It has taken a long time for the value of the real estate to be realized.

As St. Joe sells off parcels, it is beginning to realize profits that are reflected in the stock price. In just the last five years, JOE has returned 226% versus the benchmark index's 100% gain. Berkowitz also serves as the company's board chairman, a position he's held since 2011.

Enterprise Products Partners (EPD)

Oil pipeline running through hills

The second biggest position Berkowitz has is in oil and gas middleman Enterprise Products Partners ( NYSE:EPD ). While the holdings pale in comparison to St. Joe they are still a substantial portion of Fairholme Capital's portfolio. Spread across both the flagship fund and the Focus Income fund, Fairholme owns over 5.4 million shares of the midstream operator, shares that are currently worth over $158 million.

It is a smart investment. Enterprise Products Partners is one of the largest midstream operators in the field with over 50,000 miles of pipeline and storage capacity for more than 300 million barrels of liquids. And because it operates on long-term, take-or-pay contracts , EPD gets paid no matter if its customers use its pipeline capacity or take possession of the oil and gas running through them. It makes for very stable revenue streams as there is little volatility and the fluctuations in the spot price of oil and gas are negated.

No doubt Berkowitz likes Enterprise as an investment because of its dividend, which yields 7% annually. Its stock is also valued at discounted prices. EPD stock goes for 10 times estimated earnings and less than twice sales.

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