When the employees of Florida-based Fairholme Capital came into work on Jan. 11, 2010, they were greeted with great news. Rating firm Morningstar had just selected Fairholme's Bruce Berkowitz as the "Domestic-Stock Fund Manager of the Decade." That's quite an accolade, considering the heady competition.
Morningstar chose him because "his aptitude for picking stocks sets him apart from his peers, and Fairholme's portfolio is filled with attractively priced firms that generate high free cash flow." In the just-completed decade -- a decade in which the S&P 500 delivered slightly negative returns -- Berkowitz's Fairholme generated a 10-year annualized total return of 13%.
The accolades are still pouring in. GuruFocus.com anointed Berkowitz as its "Investing Guru of the Year 2012."
These days, Berkowitz is still seeking out stocks with solid value and cash flow characteristics. According to recent filings, Berkowitz is loading up on shares of four insurers that are the epitome of deep value.
Berkowitz's Insurance Picks
In the second quarter, Berkowitz couldn't resist the urge to buy yet more shares of American International (NYSE: AIG).
This much beleaguered company survived a near-death experience, and is now on the mend. I profiled AIG about a month ago and completely agree with Berkowitz that it offers tremendous value, trading at just 0.71 times tangible book value. The fact that AIG recently put into place a dividend and buyback program simply underscores this stock's appeal.
Berkowitz is beginning to build a major position in Genworth Financial (NYSE: GNW) as well. Although he has bought this insurer at an average price of $9.38 a share, and it has already risen to $12, look for Berkowitz to keep on buying. After all, tangible book stands at $27 a share. Equally important, book value has been rising roughly $4 per year, implying this figure may move above the $40 mark in the next three to four years.
More broadly, all insurers are entering the sweet spot of their cycles: "The fundamental outlook of the life insurers continues to strengthen, reflecting stronger macro conditions, favorable operating leverage, and robust capital management," noted analysts at Morgan Stanley, adding that "while the stocks have reacted positively to these developments, with the sector having increased about 45% year to date, the valuations remain low relative to other financial services sectors."
|Berkowitz was selected by Morningstar as the "Domestic-Stock Fund Manager of the Decade."|
The appeal of Hartford Financial stems from its below-book valuation but also a move to refocus the core business on fewer but more profitable niches. The company is slowly exiting the annuities business and recently sold a division that operated retirement plans. The remaining core: property and casualty (P&C) insurance, employee benefits programs and mutual funds.
With those moves largely complete, Hartford Financial "has significant capital flexibility to de-lever its balance sheet, reduce risk in its runoff variable annuity block, and return cash to shareholders," noted Citigroup analysts who rate the stock as a "buy" with a $37 price target. "Over time, we see significant value as results in the core P&C and group benefits businesses improve."
Some of that returning cash to shareholders is coming in the form of a stock buyback. As I've written, buying back shares while they trade well below tangible book value is a no-brainer. Hartford Financial said in June that it was adding $750 million to its buyback program, bringing the total authorization to $1.25 billion. If the move is completed at current prices, it would reduce the share count by more than 100 million shares -- roughly 22% of the total share count.
Risks to Consider: Insurance stocks have already posted solid gains this year and may need a breather before resuming their climb toward book value.
Action to Take --> It always pays to track the moves of Bruce Berkowitz, as his value investing approach never goes out of style. These insurers not only possess solid upside in an improving economy but also offer solid downside protection if the economy stumbles, thanks to their below-book valuations.