Berkowitz Interviewed in Forbes

Fairhomes’s (FAIRX) Bruce Berkowtz gave an interview to Forbes. Here are the relevant passages for us…

Link to full article below:

Forbes.com: This has been an obviously volatile, frustrating market for investors. How do you see the market behaving for the rest of 2008 and into 2009?

Berkowitz: There are two ways you can invest: You can try to predict or you can react. We react. We look for stressed situations and buy if appropriate.

I hope that the market stays weak and tough and that it doesn’t go up much. In the last eight years the market has done nothing, and we are up 300%. This is our kind of environment.

Some companies have been destroyed, such as Sears (SHLD), which is a big position of ours. It is a huge opportunity. It is so cheap. Everyone thinks that Sears will be worthless; meanwhile, the store generates $50 billion in revenue, significant free cash flow and has tremendous assets. So the fear, or the prediction of the death of the consumer, has allowed us to react and buy a retailer like this one.

(My Note: Now, Big Pharma just scares me but not Bruce:)

Forbes.com: One of your top picks is drug giant Pfizer (PFE). How come?

Berkowitz: $17 billion of free cash, which turns out to be over $2 per share of free cash for a triple-A quality company. This is the largest pharmaceutical company in the world trading under $20 per share.

Let me make sure we all understand what I mean by free cash: It’s the amount of money that is possible to pull out of the business without hurting the franchise. Ten years ago, everybody loved Pfizer. It was trading between 40 and 50 times earnings. Today, it’s under 10 times earnings and nobody wants it.

Forbes.com: How come?

Berkowitz: Because they are all worried about Lipitor and the new president. Lipitor doesn’t come off patent for another three years, and the company is dramatically changing. There is a new CEO with a wonderful strategy.

You will see Pfizer, in my opinion, do a lot more joint ventures. I think they will become almost like Exxon Mobil, which is really a merchant bank that has the distribution, size and cash to partner up with a lot of people around the world. Pfizer will do that. People just don’t realize the number of joint ventures they have and the power of their distribution channel.

Also, the pharmaceutical companies in the past have been quite stodgy and lazy in not pursuing generics. They have given the generics away. I don’t think we will as much now. We will see Pfizer become a larger generic manufacturer. As their drugs go off patent, you will see them compete more with the generics too.

Forbes.com: You also like Mohawk Industries (MHK), which manufactures flooring products.

Berkowitz: It’s run by a great guy. [The CEO is Jeff Lorberbaum]. They are well diversified between hardwood floors, tiles, carpets. They have made a good push in Europe. What is amazing is that, for a difficult period of time, Mohawk is still generating a tremendous amount of free cash. So, you have a great manager that knows how to react when times get tough. He will come out of this with a great balance sheet, still making money during this entire period, and will be stronger and better than ever.

Forbes.com: The stock is down about 20% in the past year. One worry here is that customers will move to cheaper, lower quality products.

Berkowitz: Does it concern me? Yes. Does it make sense that people will do that? Yes. Business is not a smooth process. It’s bumpy. You have to expect these periods. The price of the stock, in my opinion, already reflects that. You know, the greatest company in the world at too high a price is nothing more than a speculation. Another company, whose prospects are looking a bit negative for the next year or two, at the right price, is a great investment.

Forbes.com: But you do like AmeriCredit (ACF), a specialty finance company that provides credit to buyers of new and used autos. (My note: Leucadia (LUK) owns 20% of Americredit.)

Berkowitz: They got caught up in the shutting down of the securitization market, which is a tough business. At the end of the day, if you are dependent on securitizations and nobody can securitize for you anymore, it can be a death blow. But with AmeriCredit, they did it the right way. They give loans to people that need cars to get to work. They do the loans based upon the income of the person, not the collateral value of the car. They do their own work as to whether or not the person can afford the car. They don’t want to sell the car to someone who can’t afford it, unlike a dealer that just wants to sell the car, get the commission and thank you very much. So they do the work and the management is smart.

They are still making a few pennies and have good cash coming in the door. They will be a survivor. So good management, good strategy, the class act in the industry and the stock has been crushed. We started buying.

Forbes.com: You’re not afraid of wading into some of the scarier sectors of the market. The fund carved out a stake in the St. Joe Co. (JOE), the largest land owner in Florida. What do you like about this company?

Berkowitz: Something good usually happens when you can buy a debt-free company that has 300,000 acres of land within 10 miles of the Gulf of Mexico, with hundreds of miles of land that touch the Gulf or the bay or rivers or coastal waterways.

There is an international airport being built right in the middle of St. Joe that opens up in May 2010. What is amazing is that billions of dollars of infrastructure are going in, compliments of the state of Florida. This is the last big play that is open for the migration of people from up north and from other areas. Also, there has never been an easy way to access the beaches. It was never easy to get to. This airport will make a difference. Then there will be commercial business.

There is a new CEO. He’s great and gets it. Once that airport opens up, that will be the catalyst. You know, we’re buying beachfront for $12,000 a square foot. The pricing is depressed, but the value of the land is quite good.

Forbes.com: What is the area like?

Berkowitz: It’s a beautiful part of the world. People don’t understand. The biodiversity is amazing. These are some of the best beaches in the United States. You want an idea of St. Joe? Look at Hilton Head before it was developed.

Whole interview:

Disclosure (“none” means no position):Long SHLD, none

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