The financials I am copying of Bruce are C, AIG and GS. I do not know if you ever read his write up years back in OID when he bought WFC but it was pretty good.
Bruce Berkowitz achieved good returns well before he started his own shop. Even Joel Greenblatt borrowed his ideas to profit. In his book “You can be a stock market genius”, page 221 - 223, Joel Greenblatt wrote:
“In December 1992, I read an interview conducted by OID with an investment manager at Lehman Brothers who was previously unknown to me, Bruce Berkowitz. The fact that I had no idea who he was didn’t matter. The logic and clarity of the investment case he made for Wells Fargo stock was overwhelming on its own. At that time, Wells Fargo, a large California-based bank, was trading at around $77 per share. California was in the middle of the worst real estate recession since the 1930s. Wells Fargo had by far the largest concentration of commercial real estate loans on its balance sheet equal to only $48 per share (its stock price was approximately $47 per share). Wells Fargo, on the other hand, had commercial real estate loans totaling about $249 per share (as compared to a stock price of about $77), Further, Wells had taken a loss provision (reserves that anticipate future loan losses) of $27 per share the previous year, wiping out almost all of its earnings. In just the first nine months of 1992, Wells had provisioned for an additional $18 per share of losses. Many investors questioned whether Wells Fargo would survive the real estate downturn."
"Berkowitz’s investment case was fairly simple. If you excluded the loss provisions, Wells (adjusting for cash earnings and one-time expenses) was already earning nearly $36 per share before taxes. Of the real estate environment ever recovered to a more normalized level, loan-loss provisions, based on past experience, would probably fall to approximately $6 per share on an annualized basis. This would translate to normalized pretax earnings of $30 per share, or $18 per share in earnings on an after-tax basis (assuming a 40-percent tax rate). At a price of nine or ten times earnings, Wells Fargo could be trading at $160 to $180 per share (versus its then current price of $77). The question wasn’t how Wells Fargo could increase its earnings power to reach $18 per share in after-tax earnings. Wells was already earnings that earning that kind of money – but for the effect of the extraordinary loan-loss provisions. According to Berkowitz, the real question was: What was the right way to look at the loan-loss provisions and how bad were they?" |
