Two Investment Legends At The Harbor Investment Conference (GGP, HHC, JOE, C, GS)
Bruce Berkowitz and Bill Ackman spoke at the Harbor Investment Conference yesterday and discussed a wide variety of topics, with the two legendary investors interviewing each other over a wide variety of topics.
Berkowitz of Fairholme Capital, was interviewed by Bill Ackman, the conference’s Co-Chair, and he discussed why he’s been long Berkshire Hathaway (NYSE: BRK-A) and Leucadia National Corp. (NYSE: LUK) for a long time. He bought both of them around 1985, for similar reasons. He liked the company’s management, and he specifically liked Berkshire because he said that Warren Buffett was a “smart guy” who ran other people’s money. He paid about $2,700 per share for each A share he owns.
Ackman of Pershing Square Capital, asked what Berkowitz’s biggest investment error was of his career. Berkowitz responded by saying that his biggest mistake was trusting management, and not verifying them. He said that in order to verify management, you have to try to prove them wrong, and kill their thesis.
He also discussed some of his better investments, like Imperial Metals, which Berkowitz said he has no idea why it’s doing well, it just is. He discussed his position in Wells Fargo (NYSE: WFC) in the late 1980’s and early 1990’s, and said that he really likes the banks now. He believes we are rebuilding now, and a lot of banks are trading below book value, with low valuations, and said that the worse the bank was perceived, the better it will probably wind up being. He owns positions in Goldman Sachs (NYSE: GS), Regions Financial (NYSE: RF), AIG (NYSE: AIG), CIT Group (NYSE: CIT), Bank of America (NYSE: BAC), Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS) in the financial sector. Berkowitz said there is a black box risk to owning banks, but after three years, you can get an idea of who’s going to do well. Berkowitz said he would own more of Goldman Sachs if he could, but as a mutual fund, he’s forbidden by law.
Regarding AIG, he said that AIG is more respected in Asia than it is here, and he sees tremendous value in the company’s remaining assets, which it has so many of. Berkowitz said that former AIG CEO Hank Greenberg was a serial acquirer of assets, and there is tremendous value still there. He said that the current AIG is trading below book value, and it’s trading at a single digit P/E. A major reason why he likes AIG is the company won’t have to pay taxes for quite some time, as the company lost over $100 billion in market cap.
During the initial proceedings during Chapter 11, Ackman needed to convince GGP’s board of his plan for operating through bankruptcy, and he needed Berkowtiz’s help. He bought $2 billion worth of debt after hearing the plan for 42 minutes, as the two have known and respected each other for over 15 years. Ackman knew that David Simon of Simon Property Group (NYSE: SPG) was a threat, and Berkowitz was able to help him out, and the rest is history in this case.
Ackman asked Berkowitz about his stake in MBIA (NYSE: MBI), and Berkowitz said that he thinks MBIA will be able to survive, and will become more valuable as municipalities need to raise money to cover their debts. He thinks the company has a liquidation value above 0, and will ultimately survive. Ackman on the other hand, is famous for being short MBIA at $65 per share, and watching it go down to $2 per share during the height of the financial crisis. Ackman said that he probably would never be able to go long MBIA, but that he wished Berkowitz well in his trade.
Berkowitz also has investments in Sears Holdings (NASDAQ: SHLD) and General Electric (NYSE: GE). Berkowitz described the situation in Sears as a “thong tin,” in which the person with the last shares win. Between CEO Eddie Lampert and Berkowitz, the two around around 73% of outstanding shares. He said that he likes GE because he thinks it’s cheap relative to the company’s normal earnings power.
Ackman brought up his battle with David Einhorn over St. Joe Company (NYSE: JOE). He said that he heard about David’s presentation at the Value Investing Congress, and he thought it was an excellent presentation. He said that Einhorn might be right in the short term about the company, but he believes he will be right over the long term about the company. The company, which was founded by one of the Dupont’s (NYSE: DD), bought 200,000 acres in Forida and started buying real estate there in the 1930’s. It still carries a lot of the land at 1930’s valuations. The SEC recently started an inquiry into how St. Joe values its land.
Berkowitz told a story about Walt Disney (NYSE: DIS) wanting to buy some of St. Joe real estate for Disney World. Disney was waiting for six hours waiting to meet the company CEO, and after six hours, the CEO’s assistant came out with a note for Disney from the CEO, and said St. Joe doesn’t deal with “carneys.” The rest obviously is history.
Ackman said that he was excited about owning J.C. Penney, saying it had the most potential of any company in his portfolio. The company owns 110 million square feet of some of the best real estate in the world, and for a company that is trading at less than 5 times EBITDA, it’s incredibly cheap. Ackman along with Vornado Realty Trust (NYSE: VNO) co-own about 26% of the company’s outstanding stock.
Ackman said that he wants to change the operations of the company, and that management is very open to it. He will soon be on the board of directors of the company, but is not yet. He did not mention anything about changing the company’s real estate structure.
Regarding General Growth Properties, he said that he hasn’t sold a share of the Chicago-based company, and that 2011 and beyond will see increased profitability for the company, as it gets rid of non core assets, and is able to refinance its debt at lower interest rates. He was positive on new CEO Sandeep Mathrani, who came over from Vornado Realty Trust (NYSE: VNO). Including total return swaps, warrants, and common stock, Ackman owns 14.3% of General Growth.
Ackman went on to answer a question from the audience on Howard Hughes. Ackman said that he’s chairman of the real estate development company, and that as chairman, it was his job to find a management team that is committed to creating shareholder value for the company, something which the management team of other development companies like St. Joe has been unable to do. Ackman said he thinks Howard Hughes is undervalued by the market, and that the company’s assets in Hawaii, the Ward Center is worth more than the company is right now.
Lastly, Ackman disclosed that he has sold his stake in Target (NYSE: TGT). He believes that Target shareholders will still continue to make money over the long term, but he is concentrating his efforts on J.C. Penney now.
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