Fairholme Fund 13F Comparison, BP Plc, & LEAPs

It’s 13F filing season again and I’ll start off with the Fairholme Fund managed by Bruce Berkowitz.

Bruce is very open about his portfolio and about the investment thesis behind each position. His latest moves into financials have been well documented but the BP Plc (BP) position comes as a surprise.

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Spreadsheet made from data provided by Whale Wisdom.

Maybe I haven’t paid enough attention lately but I haven’t heard Mr. Berkowitz discuss BP Plc before and in my brief search I could not find one. However, Whitney Tilson of T2 Partners, another big name in value investing, has outlined their investment thesis behind BP Plc (BP) in their July Letter to investors (scroll down to page 3).

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T2 letter courtesy of Market Folly. Click here for their original post.

In my opinion, this is the benefit of 13F filings. I’m not a big advocate in blindly following a “guru” through a delayed SEC filing. There are replicating programs out there that have shown tremendous success but for me I like to research a position before investing and I view 13F’s as another tool to generate ideas.

BP Plc is an interesting and controversial idea and I think Whitney Tilson of T2 partners lays out a good argument for investing in BP plc. Yes, there are a lot of risks still associated with BP Plc, mainly the open-ended liability of the oil spill, but this is investing; risks will always be there but do the potential rewards pay you enough to take the risk?

LEAPs

In the book “You Can Be a Stock Market Genius” Joel Greenblatt outlines an early 1990s Wells Fargo (WFC) investment using LEAPs. Coincidentally, the idea for investing in Wells Fargo (WFC) came from a young investment manager named Bruce Berkowitz. The crux of the argument was either Wells Fargo was going to go bankrupt or it was going to return to its historically strong earnings power after taking write-downs to its loan portfolio. If Wells Fargo (WFC) returned to its normal level of profitability then the stock would be at least a double.  By using LEAPs and their inherent leverage Mr. Greenblatt was able to create a stronger risk/reward profile in his Wells Fargo investment.

I think with BP Plc (BP) we have the same investment scenario as Wells Fargo (WFC) in the early 1990s. Either BP Plc is going bankrupt under the weight of its open-ended liabilities or it will return to its high levels of profitability after paying off its clean-up costs. If BP Plc does return to its previous levels of profitability then its stock could very easily double. Using LEAPs an investor can skew BP Plc’s risk/reward profile heavily in their favor, especially using the 2-year LEAPs. As outlined in a previous post, I’m more partial to deep-in-the-money LEAPs but the 2-year BP Plc LEAPs that are slightly out-of-the-money become very attractive in this either-or investment scenario.

Related posts:

1. 13F Comparison: David Einhorn & Greenlight Capital 1Q 2010 vs 2Q 2010
2. AIG and Sears Holdings are Top Two Positions in the Fairholme Fund
3. BP plc and Hewlett-Packard are Top Equity Holdings for the Baupost Group