Surprisingly Fairholme halved their position in Berkshire Hathaway citing:

We also halved our position in Berkshire Hathaway in the November-May period.
While we have the greatest respect for Chairman Warren Buffett, we made this
move because we cannot see how the company can replicate its past stellar performance
given its current size and the age of its key personnel. Berkshire should
still make good money for shareholders, but not enough to justify so large an investment
at prices sold

Obviously, Bruce Berkowitz feels Berkshire does not represent the opportunity a WellPoint (WLP) does. For WellPoint to double, its price would have to reach $90-100, something that can certainly be attained since in the past 52 weeks WellPoint has traded as high as $90. Now, for Berkshire to double it would have to have a stock price of $225,000.00. Possible? Yes, but it will take time considering Berkshire’s current market cap of 177 billion (GE has a market cap of 280 billion). For the 6 months ended 6/30/2008, Fairholme has outperformed the market by 6%, due to avoiding financials.Management  had the following to say:

We have avoided most banks, brokerage firms, and other highly leveraged financial
companies given our inability to understand what they own and who they owe.
Furthermore, many of these companies are raising capital on terms that are highly
dilutive to existing shareholders.

It will be interesting if Burkowitz does indeed jump into financials. If memory serves me correct, Berkowitz mentioned in an interview he established a position in American Express (AXP), but I am not 100% sure. Finally, Berkowtiz ended the letter with something to say about current headlines:

We understand that the recent volatility in financial markets and in the Fund’s daily
price can be jolting for shareholders. However, we do not mind such vicissitudes,
but do mind permanent loss. Today, shareholders are facing scary headlines while
we believe the Fund is buying great businesses at better than reasonable prices, a
practice that in the past has produced an outstanding record. Since the Fund’s
inception in late December, 1999, it has gained about 240% while the S&P 500 is
essentially flat. We are proud of this performance, optimistic about our future, and
continue to invest in the professional staff and infrastructure needed to serve our
valued shareholders.

What else can I say? Berkowitz as Contrarian-Value Investor written all over him

Below is a list of stocks that I have a.) looked at or b.) currently looking at. As always, due your homework.

DOW Stock at or near 52 Week Lows

American International Group (AIG) – Stay away, I was wrong, management sucks. Firm has lost its culture

American Express (AXP)-  Trading at historically low valuations; Buffett might be buying

Boeing (BA)- Cannot produce a plane

Bank of America (BAC)- Again, Buffett might be buying here as he originally started buying at $35?

Citigroup (C)- Who knows how much junk is left in the trunk?

DuPont (DD)-  I don’t know much about….

General Electric (GE)- Old Faithful

General Motors (GM)- “I want my MPG…….oooops!”

Home Depot (HD)- Trading at historically low valuations

Intel (INTC)-  Outside Circle of Competence

JP Morgan (JPM)- Has one of the best CEO’s

Coca-Cola (KO)- BRAND

3M (MMM)- Great ROE%

Merck (MRK)- Don’t know much, I believe they still have viagra lawsuits….

Microsoft (MSFT)- Don’t Know Much

Pfizer (PFE)-  N/A

Proctor and Gamble (PG)- I love and own it at these levels

AT&T (T)- Surprisingly, not much buzz among the college crowd. More buzz surrounding Blackberry ( I have a blackberry myself )

United Technologies (UTX)- Im interested….

Verizon (VZ)- Love their products, hate their customer service

Im also very interested in Exxon (XOM)- The company is priced for $85 oil and estimates appear to be very low. (thanks Daveinhackensack!). Whether we like it or not, Exxon is a cash machine with a credit rating that is better than some countries.

Disclosure: I own PG,

After acquiring Marmon Holdings, Buffett acquired a re-insurer from AIG financial and started his own bond insuring business. Apparently, the bond insurer will start doing business in New York and expand throughout the country.

On the other hand, David Dreman’s new article came out earlier in the week. Being a contrarian, he gave out a list of financials that should perform well in the coming years. Also, he does mention that the “worst might have been over.” Below is the list of banks being recommended. All have adequate size and attractive dividend yields.

• Bank of America (BAC)
• Wachovia (WB)
• Citigroup (C)
• KeyCorp (KEY)
• JP Morgan (JPM)

Along with the above names, David Dreman gave another list in which the banks are more volatile but might provide better returns.

• Washington Mutual (WM)
• Freddie and Fannie (FRE) & (FNM)

Being a student of Dreman, its satisfying knowing he is looking in the same location as I am. Although,I do have different picks than the above list, its great knowing we are fishing in the same lake. Currently, financials represent the majority of the Garcia Value Fund with 31% invested in the financial sector. My financials include American Express (AXP), US Bancorp (USB) , Wells Fargo (WFC), American Insurance Group (AIG),E-Trade Financial (ETFC), Moody’s Corp (MCO) and Capital One Financial (COF).

American Express has been beaten down for subprime fears and fears that consumer spending is slowing. I found this interesting as American Express has a great business clientele and little if any exposure to subprime. It currently trades at about 13 times forward earning which is amazing considering the moat the company has. Patient investors buying in the low 50′s will be rewarded 3-5 years from now.

US Bancorp (USB) and Wells Fargo (WFC) are both conservative banks with great management and great histories. Both banks have little sub prime exposure but for some reason are beaten down. Both banks also trade at lower valuations than their historical averages and post consistent ROE around 20%, which is above the industry average of 15%.

American Insurance Group (AIG) is another business trading at a discount. The big insurer stated its subprime exposure is manageable and re-affirmed the company’s growth of 10-12% for the next 5 years. Yet, the stock is trading below $60 with forward P/E of 8! Analyst have AIG earning $6.20/share this year. Assuming management is able to maintain a conservative growth rate of 8% for the next 5 years we can do a quick back of the envelope valuation using simple math.

• 2008 : $6.70 EPS
• 2009 : $7.23
• 2010 : $7.81
• 2011 : $8.44
• 2012 : $9.10

using a P/E of 10 on 2012 earnings we arrive at a $91 stock. Demanding my standard 34% margin of safety, the stock is a buy below $60. The stock currently trades at about $58.
I also have Moody’s (MCO) and Capital One Financial (COF) on my financials list. Both businesses follow the same idea that in 3 years these businesses will be more valuable than what the street is valuing them today.
Now time to comment on E-trade Financial (ETFC)*sigh*. The worst performer in the Garcia Value Fund and also the riskiest stock in the portfolio. The main thesis behind E-Trade is that the company will get rid of its subprime mess and stick to its retail operations. So far so good. The company is trying to make progress by launching a customer “win back” campaign. The street is valuing the whole business at roughly $1.6 billion . I think the business is worth more. Obviously, this is going to be a wild ride as management turns things around but hopefully being patient will result in a great investment as it has been a drag on the Garcia Value Fund.
In an earlier post, I mentioned I was going to read Ben Graham’s The Intelligent Investor. Well, change of heart. I read it twice in 07′ and decided it would be more interesting reading something else. So I decided of digging into my David Dreman collection. Which book will I re-read ? Undecided.
Finally, I would like to wish everyone a happy and safe New Year. 2007 has been an incredible year for me as I met a personal goal. 2008 will be better. God bless.

-Alex Garcia

Disclaimer: I own shares of US Bancorp (USB)