Bruce Berkowitz, manager of Fairholme FAIRX, and Susan Byrne, manager of WHG LargeCap Value WHGLX, are two of our favorite large-cap managers. Here is a play-by-play on some of the sectors and individual stocks that they talked about at the Morningstar Investment Conference this morning:

Energy
Byrne has been hanging on to oil & gas firm Apache APA for 6 or 7 years. Lately, she’s been trimming back that stake but still sees excellent value in the firm. Byrne has been stress-testing energy holdings by assuming major drops in oil prices, and as for natural gas-related firms falling a bit behind, she sees global demand pushing those prices up over time.

Berkowitz has been ignoring the energy-related headlines. He’s fine with oil prices staying high (but acknowledged that he’s been driving a lot less!). One of his main concerns in this sector is how easy it is for government to tax energy. He also commented on how Buffett is spending tens of millions on wind power.

Health Care
Berkowitz is looking to health care since it’s such a stressed-out area and because baby boomers are getting into Medicare. So, he’s become a big buyer of HMOs. He noted that some drug companies have done a horrible job on their capital allocation, and since the November election has caused a huge fear in the marketplace, he has been able to buy them at a big discount to cash flows. Regarding pharma, Berkowitz thinks that a lot of the big firms have been arrogant in their attitudes toward generics over the years. He’s seeing more joint ventures abroad and Indian firms being bought out. Essentially, he thinks that something has got to give because competition from generics is getting big.

Financials
Byrne is staying away! She commented that they know how investment banks are run in the back, but it’s a problem of evaluating their business models. Basically, what is the business model if the balance sheet is no longer there? Unattractive return on equity, which was very different in recent years, has been another reason that she’s stayed away. Byrne plans to wait for transparency and doesn’t think it’s time to buy the banks because we aren’t in the midst of the same old cyclical story.

Berkowitz explained that it’s almost impossible to know what some of these firms own, which has resulted in a loss of faith. To illustrate, he’s not certain whether JP Morgan JPM had to buy Bear Stearns because of counterparty risk. So, like Byrne, he’s been staying away from financials. As for housing and real estate, as long as the cash is there, he is is OK with investing.

Another area that Byrne and Berkowitz agree on is homebuilders. Bryne doesn’t want to deal with the risk of off-balance-sheet contingencies. As for Berkowitz, he doesn’t see the value in trying to comprehend their balance sheets or free cash flows. Plus as governments became bigger partners all around the world, he sees things getting complicated since everyone wants a piece of your ownership.

Berkshire Hathaway
Berkowitz has brought his hefty stake in Berkshire BRK.B down, in part guided by Buffett’s modest projections in terms of beating the S&P 500. He noted that a post-Buffett company wouldn’t be quite as good and that he would like to see a successor in place while Buffett is still there. He explained that property/casualty insurance is a tough business because the money you get in premiums is so seductive that it can lead to big mistakes. He thinks that Buffett really has all points covered by writing to maximum losses and being over-capitalized, which most companies aren’t able to do.

GE
Byrne noted that her competitive advantage in researching a large firm like GE GE is valuing what the company can do in tough times as well as 3 to 5 years down the road.  She mentioned the importance of solid cash flows, which allow large companies like this one to move forward and exploit their brand names.

Nike
Byrne mentioned Nike NKE as another firm that has generated enough cash flow to move forward and support its brands. Though WHG LargeCap Value doesn’t have any foreign holdings, Byrne puts a lot of emphasis on how the firms are faring abroad, particularly in Asia and South America. This is another reason that she’s hanging on to Nike.