Bruce Berkowitz’s Fairholme Management (FAIRX) has been giving out its thesis on how investments are planned and executed on a number of its holdings. All of these case studies are based around the tenant “market price does not equate to the intrinsic value of a stock/investment” and that one should forget what the crowd is saying. The latest of these case studies go through MBIA Inc. (NYSE:MBI) and Sears Holdings Corporation (NASDAQ:SHLD)
MBIA Inc
MBIA securities comprised 3.0% of The Fairholme Fund’s total assets.
The Good and Bad
MBIA’s biggest upside is its market cap of 2.23 billion. While the many factors that weigh it down are its legal structure, its new business, run-off derivatives, run off insurance claims, and the net asset values.
Catalysts
The number one catalyst for the company could be its National Public Finance Guarantee Corporation, which is a standalone subsidiary of MBIA Inc. (NYSE:MBI). The unit operates separately both legally and financially. Currently the company is embroiled in litigation with Bank of America Corp (NYSE:BAC) and Societe Generale SA (EPA:GLE) (PINK:SCGLY). If MBIA’s transformation materializes, this could lead to a chain of events that will bring about increased credit ratings, lower expenses, expansion in capital and a new municipal business.
The establishment of National Finance is seen by Bruce Berkowitz as a source of “much needed supply of financial guarantee insurance to the municipal market”.
Another catalyst would come from the de-risking of MBIA’s insurance business and reimbursement from claims paid under mortgage loans. If indeed these claims are recovered, this would serve as a boost for business. Fairholme expects at least half of these claims to be paid back.
Sears Holdings
Sears Holdings Corporation (NASDAQ:SHLD) comprised 10% of the FairholmeFund’s total net assets. The key factors that go in favor of the corporation are the vast base of operations, a handsome portfolio in real estate, the strong standing of its top brands like Revenue Beyond, Sears & Kmart. The company is also liquid enough to meet all liabilities and opportunities.
The key drivers for the real estate business which is based on over 250 mm square foot space, is an increase in expansion plans of national retailers, popularity of metro locations where business is mostly located, the long period of leases by Sears and Kmart, business in favorable locations and very few operating covenants on properties.
Close to half of Americans shopped at Sears Holdings Corporation (NASDAQ:SHLD) and Kmart in the last year. The company is gradually increasing in efficiency and cutting costs. Eddie Lampert of ESL owns 64% of sears.
Berkowitz’s top holdings are American International Group, Inc. (AIG), Sears Holdings Corporation, Bank of America Corp (BAC), CIT Group Inc. (CIT), The St. Joe Company (JOE), MBIA, and erkshire Hathaway Inc. (BRK.A) (BRK.B)
H/T MarketFolly
The full MBIA & Sears case studies are embedded in scribd:
Case Study IV MBIA v7.0_0 Fairholme
SHLD Presentation Fairholme
