Bloomberg News

Berkowitz Loses Again as Sears Drop Adds to Failed Bank Bets

January 04, 2012

(Adds closing stock price in seventh paragraph.)

Dec. 27 (Bloomberg) -- Bruce Berkowitz, whose $8 billion Fairholme Fund is suffering its second-worst year on record because of wrong-way bets on financial firms, may have lost $203 million today on Sears Holdings Corp., the third-largest investment of his flagship fund.

Sears, the retailer controlled by hedge-fund manager Edward Lampert, fell 27 percent after saying it will close as many as 120 stores because sales of consumer electronics declined in the holiday shopping period. Berkowitz’s funds owned 16.3 million shares, or 15 percent of the company, as of Sept. 30, data compiled by Bloomberg show.

Berkowitz, named Morningstar’s domestic stock manager of the decade in 2010 for returning an average of 13 percent over that period, is trailing 99 percent of peers this year after betting that financial stocks would rebound with the economy. Sears, based in Hoffman Estates, Illinois, has declined 55 percent since the start of the year.

“I just don’t see how we get hurt with Sears,” Berkowitz said in a May conference call with investors in his fund. “Maybe we make an awful lot of money, time will tell. So far I’ve been wrong.”

Tom Pinto, a spokesman for Berkowitz, didn’t respond to a message seeking comment.

At the end of 2010, Berkowitz’s firm, Miami-based Fairholme Capital Management LLC, owned 14.9 million shares of the retailer. In the first quarter of 2011 he added 1.4 million shares. Sears sold for an average of $80.53 a share in the quarter, according to data compiled by Bloomberg.

Declining Sales

The company will record total non-cash charges of as much as $2.4 billion in the fourth quarter related to a valuation allowance and goodwill impairment. The shares fell $12.47, or 27 percent, to $33.38 in New York, the steepest drop since 2003.

Fairholme Fund owned 14.5 million Sears shares as of Aug. 31. It purchased the shares at an average cost of $79.81 each, according to a May 31 filing, which means that fund had a paper loss of about $672 million on the investment as of today if the size of the holding hasn’t changed.

The fund lost 29 percent this year through Dec. 23, its second-worst performance after a 30 percent decline in 2008. Berkowitz, 53, started the fund in 1999.

Fairholme Fund had 76 percent of its stock holdings in financial shares as of Aug. 31, including New York-based American International Group Inc. and Charlotte, North Carolina- based Bank of America Corp., Morningstar data show. Financial shares have declined about 18 percent this year, making them the worst-performing group in the Standard & Poor’s 500 Index.

St. Joe

Berkowitz has also been hurt by his investment in St. Joe Co., a Watersound, Florida, real estate firm. Berkowitz was elected chairman of the company in March after he criticized the previous management’s spending and corporate governance.

Fairholme owned 29 percent of St. Joe as of Oct. 1, Bloomberg data show, making the firm the largest shareholder. St. Joe shares have fallen 30 percent in 2011.

Investors pulled money from Fairholme Fund for nine consecutive months through November with net redemptions totaling more than $7 billion over that stretch, Morningstar data show.

Dan Teed, president of Wedgewood Investors Inc., dumped his holdings in Fairholme Fund several months ago.

“They were concentrated in areas we were not comfortable with,” Teed said today in a telephone interview from Erie, Pennsylvania. His firm manages more than $100 million.

Sears is the sixth-worst performer in the S&P this year, according to data compiled by Bloomberg. Bank of America, the fourth-worst performer, was Fairholme Fund’s fifth-largest holding as of Aug. 31.

Lampert, who along with his hedge fund owns 60 percent of Sears, has presided over 18 consecutive quarters of declining sales.

--Editors: Josh Friedman, Christian Baumgaertel

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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