The “Stock Manager of the Decade” Bruce Berkowitz has managed to deliver more than 13% annual return in the first 10 years of the 21stcentury with quite a concentrated portfolio. Although the concentration has made him lose more than 32.4% in 2011, it also helped him gain a return of more than 37% in 2012. I have written about his four biggest positions, including American International Group, Inc. (NYSE:AIG), Sears Holdings Corporation (NASDAQ:SHLD), Bank of America Corp (NYSE:BAC) and The St. Joe Company (NYSE:JOE). In this article, I will talk about other three big positions in Bruce Berkowitz’s portfolio, which when combined accounted for nearly 20% of his portfolio. They are MBIA Inc. (NYSE:MBI), CIT Group Inc. (NYSE:CIT), and Leucadia National Corp. (NYSE:LUK).
Three Catalysts for MBIA
MBIA is the provider of several financial services, including financial guarantee insurance, reinsurance, and asset management advisory. MBIA has three main business segments: US Public Finance Insurance; Structured Finance and International Insurance; and Advisory Services. The majority of MBIA’s revenue came from US Public Finance Insurance, with $599 million in revenue, accounting for 57.7% of the total revenue. Structure Finance and International Insurance was the second biggest revenue contributor, with $319 million in revenue in 2011. However, the consolidated revenue of the company was negative in 2011, at -$1.56 billion, due to the large realized and unrealized losses on insured derivatives and other settlements.
Bruce Berkowitz owned nearly 44.3 million shares of MBIA, accounting for 6.4% of his total portfolio as of September 2012. He liked MBIA due to three main catalysts. The first catalyst was one of its subsidiaries, National Public Finance Guarantee Corporation. This subsidiary is quite independent of MBIA. Berkowitz considered this firm as a “profitable, stale and valuable enterprise.” The second catalyst was the significant decrease in structured financial exposures of MBIA Insurance since 2007. During the same time period, MBIA has paid $5 billion to terminate $68 billion insurance policies. In addition, MBIA has experienced a 69% decline in claims paid on second-lien RMBS since 2009. The third catalyst was the reimbursement for claims paid. Berkowitz estimated that the company might recover at least 50% of the gross claim paid in a 2012 settlement, or all in a 2013 trial.
A Leveraged Bank Holding Company
The next Bruce Berkowitz position was in CIT Group, a bank holding company. CIT mainly focused on commercial clients, including small business and middle-market companies, with customers in more than 30 industries in 20 countries. CIT operates in several segments such as Corporate Finance, Transportation Finance, Trade Finance, Vendor Finance, and Consumer. The majority of its interest income came from Corporate Finance and Vendor Finance segments, with $934 million and $793 million, respectively, accounting for 42.2% and 35.8% of the total interest income, respectively. As of September 2012, CIT booked more than $8 billion in total stockholders’ equity, $8.7 billion in deposits, and $24.1 billion in long-term debt. Berkowitz owned more than 11.1 million shares in the company, accounting for 6.3% of his total portfolio. At the current trading price of $39.80 per share, CIT is valued at 12.5x forward earnings and 1x its book value.