Fairholme fund manager Bruce Berkowitz — who has weathered the recent market storm with much better results than many of his value peers — tells Kiplinger’s that the recent market plunge “has been a blessing”.
“We’ve been buying companies at prices that even when I was in my most pessimistic mood, I didn’t think we would see so quickly,” Berkowitz told Kiplinger’s Manuel Schiffres. “These are 1974-type valuations, and what’s fascinating is that stocks fell to these levels not because of earnings issues but because of the sheer magnitude of the forced liquidations. So this is still a bargain hunter’s dream.
Berkowitz, who is something of a contrarian investor, is particularly high on a number of energy and healthcare companies right now. He says that when looking for investments, he focuses not on earnings but on free cash flow yield, which divides the amount of free cash a firm generates by its market cap. Free cash flow yields in the double-digits catch his eye, he says.
One interesting point Schiffres makes involves the reason why Berkowitz has fared better this year than many other prominent value managers. (For the year, Berkowitz’s fund is beating the market, though it was still down 28 percent as of early November). “He applied strict value criteria when he assessed stocks, and he adhered to the simple (but wise) rule of not investing in anything he couldn’t understand,” Schiffres writes. “So Berkowitz was never tempted by the likes of AIG, Bear Stearns or Lehman Brothers, no matter how cheap their stocks had seemingly become.”
Since its inception, Fairholme remains well ahead of the market, posting annualized gains of 11 percent (through early November) compared to the S&P 500’s -3 percent.