David Sterman

Has Bruce Berkowitz been exposed to kryptonite? His money-management firm, Fairholme Capital, is on a losing streak few could have anticipated. After all, this is a fund that handily outperformed the S&P 500 in 10 out of 11 years through 2010. That streak ended with a loud bang in 2011, as his fund lost a stunning 32%, even as the S&P 500 rose 2%.

Berkowitz was surely glad to turn the page on 2011, but 2012 has been horrific as well, especially over the past three months. Take a look at these seven stocks, all of which are owned by Berkowitz, and how they have performed in the past three months.


 
For savvy investors, such a lousy performance brings opportunity. We get the chance to dig deeply into these washed-out stocks, seeking out the stocks that now offer even more compelling value.

A bad sector bet
Much of the recent underperformance can be attributed to Berkowitz's aggressive positioning with financial services stocks. He anticipated a big sector rally in 2011 and 2012, but the never-ending crisis in Greece has led to deep pain for banks of all stripes. You already know I'm a big fan of Citigroup (NYSE: C), and I think Berkowitz will be vindicated with this pick during the next few years, as we move away from the European economic crisis. And in a moment, I'll note another out-of-favor financial stock in this group that should be on your radar.

Too much faith in Lampert?
Berkowitz is a big fan of financial engineering, even when it exists for companies in nonfinancial sectors. That's why he built up a $1 billion position in Sears Holdings in 2010 and early 2011. He knew Sears Holdings (Nasdaq: SHLD) was a lousy retail operator, but also knew Chairman Eddie Lampert could pull a lot of levers to squeeze cash flow out of Sears and Kmart stores.


David Sterman

David Sterman has worked as an investment analyst for nearly two decades. He is currently an analyst for StreetAuthority.com