Is Legendary Investor Bruce Berkowitz Worst Stock a Buy?

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Legendary value investor Bruce Berkowitz likes to bet big on just a couple of stocks. His Fairholme Capital Management owns just seven stocks.

When he is right, he hits massive home runs. For more than two decades he has trounced the S&P 500 , generating returns of 942% compared to 413% by the benchmark index. In 2009, he was named Morningstar’s Domestic Stock-Fund Manager of the Decade.

However, when he's wrong, a thunderclap follows his big swing and miss. Arguably Berkowitz's worst investment was having 40% of his portfolio invested in American International Group ( NYSE:AIG ) in 2011. The insurance company had been nearly wrecked by the financial market's collapse three years earlier and had to be bailed out by the Federal Reserve , which loaned it $85 billion under its emergency powers to stay afloat.

By the start of 2011, AIG had repaid its loans in full, with interest, but went on to have a terrible year. The stock lost 46% that year, resulting in Fairholme having negative 32% returns. That was a stinging rebuke to all the investors that had piled into Fairholme the year before on the basis of Morningstar's ranking of the manager.

Key Points About This Article:

• Famed value investor Bruce Berkowitz has been handily beating the market for over two decades, trouncing the S&P 500 's returns by better than two-to-one.
• It isn't always a straight-line shot higher though as the the billionaire investor likes to bet big on just a handful of stocks, which can cause negative returns when a stock goes south.
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Concentrated bets on growth

Bank teller accepting deposit from customer

Berkowitz still swings for the fences. Fairholme currently has 85% of his portfolio in just one stock, Florida real estate developer, St. Joe ( NYSE:JOE ). But he's doing quite well on the investment that he's owned for well over a decade. Because his average buy-in price is so low  (around $21 a share), the billionaire investor is enjoying returns of 178% on his bet.

Yet he's up on all of the other investments in his very narrowly focused portfolio. All except one, that is. Bank OZK ( NYSE:OZK ), which was formerly known as Bank of the Ozarks until 2018 when it changed its name, is down 6.7% from his average purchase price.

That's not too shabby and means the hedge fund is performing well overall. Yet should you buy OZK shares now and get in at an even better price than Berkowitz did?

A financially sound regional banking operator

Although its name doesn't have the same flash as other online banking outfits, Bank OZK is a regional operator that stands on a solid financial foundation. It has a strong balance sheet with $29.9 billion in deposits and $2.6 billion in cash and equivalents while only having some $847 million in debt.

Bank OZK posted record profits in the second quarter of $173.5 million, or $1.52 per share, up more than 3% from last year. It also enjoyed record net interest income of $388 million. With a recently launched secondary mortgage lending business, the bank seems well positioned to continue growing, especially as interest rates get cut.

Now its total allowance for credit losses did grow $147 million during the period to $574 million, but its charge-offs so far this year total just over $19 million. Up slightly from last year, but nothing particularly concerning.

A stock worth swinging at

Berkowitz likes his chances with Bank OZK. It was the biggest bet he made in the second quarter, increasing his holdings in the stock by 69% after adding 224,000 shares to his portfolio. That brings his total holdings in the bank to 548,000 shares, which are currently valued at $22.5 million. While that's only good for a 1.6% position in Berkowitz portfolio, it indicates he sees significant growth in the future.

Bank OZK looks to have the financial wherewithal to withstand economic pressures. With its stock down 15% in 2024 -- though up 21% from its lows -- OZK stock seems to justify the confidence Berkowitz has placed in its recovery.

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