market folly

We haven't covered Bruce Berkowitz on Market Folly before since we primarily track hedge funds here. However, there's no reason we shouldn't track him seeing how he is smart, an excellent stockpicker, and runs a concentrated portfolio. For those of you unfamiliar, Berkowitz runs the Fairholme mutual fund (FAIRX).

A $10,000 investment in his fund back in 1999 would today be worth almost $33,000. He founded Fairholme back in 1997 after a career as a managing director for Smith Barney. His Fairholme portfolio typically holds only 15-25 stocks, 20% cash, and employs a value approach. Berkowitz likes to see solid management teams coupled with undervalued companies. His concentrated portfolio allows him to 'bet big' on the stocks he sniffs out.

With this in mind, let's check out his latest focus: healthcare reform. In a recent publication from Money magazine, Berkowitz said he thinks the market is overestimating the impact that Obama's plans will have on healthcare companies. In fact, Berkowitz likes healthcare plays so much that he's put around 25% of Fairholme's portfolio in these sorts of companies. He doesn't think that healthcare reform will hurt profits for drug and hospital companies as much as others anticipate.

So, what companies does Berkowitz like? Here are his picks:

Humana (HUM) and WellPoint (WLP)

With both companies possessing P/E ratios of less than 10, they certainly fit Fairholme's undervalued focus. Berkowitz says that, "these insurers are both generating a significant amount of cash, and that's not reflected in their low stock prices. We don't believe the government will take over providing health insurance, despite fears otherwise."

Pfizer (PFE) and Forest Laboratories (FRX)

These companies also sport low P/E ratios and Berkowitz has taken notice. He says that, "a decade ago people overpaid for drug stocks because they were overly optimistic about earnings potential. Today that pendulum has swung so far the other way that some stocks are priced below their true value." Shares of Pfizer have been marching higher in stair-stepping fashion and trade at much lower multiples than they have historically.

We make special note of PFE because we've noticed many hedge funds buying shares over the past few quarters. After all, Pfizer was the second most popular stock held by hedge funds. Berkowitz is certainly not alone in his fondness for this name. John Griffin's hedge fund Blue Ridge Capital had Pfizer as their third largest US equity holding when last we checked. Whitney Tilson's hedge fund T2 Partners is long PFE. Also, David Einhorn's Greenlight Capital also has a sizable stake in Pfizer and has been bullish on their prospects. While shares have been marching higher, we'll have to see if they continue to do so given the large 'smart money' presence.

So, some interesting picks from Fairholme's Berkowitz. He certainly feels others have overestimated the impact of healthcare reform on these companies. After all, he has almost a quarter of his portfolio in this sector. Lastly, in other interesting news out of Fairholme, we saw earlier that Berkowitz would be opening a bond fund after enjoying success with his equity fund. We'll continue to track his portfolio going forward.