Last week, the Fairholme Fund (Trades, Portfolio) released its portfolio for the fourth quarter of 2021, which ended Nov. 3.
The fund is part of Bruce Berkowitz (Trades, Portfolio)’s Miami-based Fairholme Capital Management. As he believes that more diversified portfolios lead to more average returns, the guru invests in a handful of undervalued stocks whose underlying companies have good management teams and steady cash flow generation.
Fairholme’s most significant trades for the quarter were additions to its holdings of Commercial Metals Co. (CMC, Financial), Intel Corp. (INTC, Financial), Enterprise Products Partners LP (EPD, Financial), Energy Transfer LP (ET, Financial) and Kinder Morgan Inc. (KMI, Financial).
Commercial Metals
The fund increased the Commercial Metals (CMC, Financial) position by 126.49%, buying 558,700 shares. The transaction had an impact of 1.47% on the equity portfolio. The stock traded for an average price of $32.21 per share during the quarter.
With over 1 million shares and representing 2.63% of the equity portfolio, the stock is now the fund’s third-largest position. GuruFocus estimates it has gained 12.17% on the investment so far.
The Irving, Texas-based steel and metal manufacturer has a $4.36 billion market cap; its shares were trading around $35.95 on Thursday with a price-earnings ratio of 7.54, a price-book ratio of 1.76 and a price-sales ratio of 0.6.
The GF Value Line suggests the stock is significantly overvalued currently based on historical ratios, past performance and future earnings projections.
GuruFocus rated Commercial Metals’ financial strength 6 out of 10 on the back of adequate interest coverage and a high Altman Z-Score of 4.42. The return on invested capital also overshadows the weighted average cost of capital, indicating value creation is occurring as the company grows.
The company’s profitability scored a 7 out of 10 rating, driven by operating margin expansion, strong returns on equity, assets and capital that top a majority of competitors and a moderate Piotroski F-Score of 6 out of 9, meaning conditions are typical for a stable company. Commercial Metals also has a predictability rank of one out of five stars. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.
Of the gurus invested in Commercial Metals, Berkowitz has the largest stake with 0.94% of its outstanding shares. Richard Snow (Trades, Portfolio), Chuck Royce (Trades, Portfolio), the Fairholme Focused Income Fund (Trades, Portfolio), Hotchkis & Wiley, Ray Dalio (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and First Eagle Investment (Trades, Portfolio) also own the stock.
Intel
Fairholme boosted the Intel (INTC, Financial) holding by 135.46%, buying 170,000 shares. The transaction impacted the equity portfolio by 0.71%. Shares traded for an average price of $52.19 each during the quarter.
The fund now holds 295,500 shares total, accounting for 1.23% of the equity portfolio. The stock is Fairholme’s seventh-largest holding. It has lost about 7.95% on the investment so far based on GuruFocus estimates.
The semiconductor chip manufacturer, which is headquartered in Santa Clara, California, has a market cap of $199.94 billion; its shares were trading around $49.10 on Thursday with a price-earnings ratio of 10.1, a price-book ratio of 2.09 and a price-sales ratio of 2.54.
According to the GF Value Line, the stock is modestly undervalued currently.
Intel’s financial strength was rated 6 out of 10 by GuruFocus as it is being supported by a comfortable level of interest coverage as well as a high Altman Z-Score of 3.35. The ROIC also eclipses the WACC, so value is being created.
The company’s profitability fared better, scoring an 8 out of 10 rating as a result of operating margin expansion, strong returns that outperform a majority of industry peers and a moderate Piotroski F-Score of 6. As a result of recording a slowdown in revenue per share growth, Intel’s two-star predictability rank is on watch. GuruFocus says companies with this rank return an average of 6% annually.
With a 0.89% stake, PRIMECAP Management (Trades, Portfolio) is Intel’s largest guru shareholder. Other top guru investors include Seth Klarman (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Chris Davis (Trades, Portfolio), Al Gore (Trades, Portfolio), Daniel Loeb (Trades, Portfolio), the Parnassus Endeavor Fund (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies and Michael Price (Trades, Portfolio).
Enterprise Products Partners
The fund upped the Enterprise Products Partners (EPD, Financial) stake by 31.44%, buying 349,000 shares. The transaction had an impact of 0.63% on the equity portfolio. The stock traded for an average per-share price of $22.71 during the quarter.
Enterprise Product Partners is Fairholme’s second-largest holding, making up 2.65% of the equity portfolio. The fund holds 1.45 million shares total. According to GuruFocus, it has gained 1.61% on the investment so far.
The Houston-based midstream oil and gas company has a $52.15 billion market cap; its shares were trading around $23.90 on Thursday with a price-earnings ratio of 11.38, a price-book ratio of 2.09 and a price-sales ratio of 1.29.
Based on the GF Value Line, the stock is modestly undervalued currently.
GuruFocus rated Enterprise Products Partners' financial strength 4 out of 10. As a result of issuing approximately $3.7 billion in new long-term debt over the past three years, it has weak interest coverage. The low Altman Z-Score of 1.58 also warns the company could be at risk of bankruptcy if it does not improve its liquidity. The company is creating value as it grows, however, since the ROIC exceeds the WACC.
The company's profitability fared better with a 7 out of 10 rating. In addition to an expanding operating margin, Enterprise Products Partners has strong returns that top over half of its competitors and a moderate Piotroski F-Score of 6. As a result of revenue per share declining over the past three years, the one-star predictability rank is on watch.
First Eagle Investment (Trades, Portfolio) is the company’s largest guru shareholder with a 0.13% stake. David Tepper (Trades, Portfolio) and Berkowitz also have large positions in Enterprise Products Partners.
Energy Transfer
Fairholme added 383,500 shares to the Energy Transfer (ET, Financial) position, expanding it by 136.96%. The equity portfolio was impacted by 0.27%. The stock traded for an average price of $9.45 per share during the quarter.
The fund now holds 663,500 shares total, giving it 0.47% space in the equity portfolio. The company is its eighth-largest position. Fairholme has gained 2.24% on the investment so far.
The midstream energy company, which is headquartered in Dallas, has a market cap of $32.07 billion; its shares were trading around $10.08 on Thursday with a price-earnings ratio of 5.6, a price-book ratio of 1.01 and a price-sales ratio of 0.46.
The GF Value Line suggests the stock is fairly valued currently.
Energy Transfer’s financial strength was rated 3 out of 10 by GuruFocus. In addition to weak interest coverage, the low Altman Z-Score of 1.21 warns the company could be at risk of bankruptcy in the near term. The ROIC surpasses the WACC, however, so value is being created.
The company’s profitability scored a 6 out of 10 rating on the back of operating margin expansion, strong returns that top a majority of industry peers and a moderate Piotroski F-Score of 6. Although revenue per share has declined in recent years, Energy Transfer still has a one-star predictability rank.
Of the gurus invested in Energy Transfer, David Abrams (Trades, Portfolio) has the largest stake with 0.82% of its outstanding shares. Tepper, Leon Cooperman (Trades, Portfolio), Pioneer Investments, Francisco Garcia Parames (Trades, Portfolio) and Berkowitz also have significant positions in the stock.
Kinder Morgan
The fund expanded the Kinder Morgan (KMI, Financial) holding by 112.67%, buying 169,000 shares. The transaction impacted the equity portfolio by 0.22%. During the quarter, shares traded for an average price of $16.80 each.
At 319,000 shares, the stock is now Fairholme’s 10th-largest holding. GuruFocus data shows the fund has lost an estimated 0.01% on the investment so far.
The Houston-based energy infrastructure company has a $39.1 billion market cap; its shares were trading around $17.23 on Thursday with a price-earnings ratio of 22.13, a price-book ratio of 1.27 and a price-sales ratio of 2.35.
According to the GF Value Line, the stock is fairly valued currently.
GuruFocus rated Kinder Morgan’s financial strength 3 out of 10. In addition to poor interest coverage, the low Altman Z-Score of 0.74 also warns the company could be at risk of bankruptcy.
The company’s profitability fared better with a 6 out of 10 rating as a result of strong margins and returns that outperform over half of its competitors. Kinder Morgan also has a moderate Piotroski F-Score of 6. Despite recording a decline in revenue per share over the past several years, it still has a one-star predictability rank.
With a 0.55% stake, Abrams is Kinder Morgan’s largest guru shareholder. Other top guru investors include First Pacific Advisors (Trades, Portfolio), Steven Romick (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Simons’ firm.
Portfolio composition and performance
During the quarter, the fund also exited its investments in Enbridge Inc. (ENB, Financial), Western Midstream Partners LP (WES, Financial) and William Companies Inc. (WMB, Financial).
The real estate sector has the largest representation in Fairholme’s $1.18 billion equity portfolio, which is composed of nine stocks, at 87.82%.
In his annual to shareholders, Berkowitz said the fund returned 6.87% in 2021, underperforming the S&P 500’s return of 28.71% by a wide margin.
