petec

I know there have been a number of similar threads over the years, but... I'm looking for stocks with a decent chance of compounding at 15% for the next 10 years. I don't care about size or industry, but they need to have a big addressable market, a competitive edge, outstanding management, and compelling economics. They also need to be reasonably priced, but I'm not looking for deep value. BAM and MSFT meet these criteria in my view and I am looking for two or three more ideas. If you have one please give the name and a sentence (or more) on why. Many thanks Pete

For those not watching the Seaspan thread, Fairfax have sold their private holding APR to Seaspan. APR owns and leases rapid-deployment power generation units so this gives Seaspan an entirely new vertical. It also increases Fairfax's position in Seaspan still further. The deal appears to be done at Fairfax's current carrying value for APR (67.9% stake * $425m equity value = $298m APR valuation at YE18) so no gain for Fairfax, but it does boost dividend income (I don't think APR paid a divi as it needed all its cash flows to reduce debt; Seaspan shares do pay a dividend). I have not yet listened to the Seaspan investor day which was held on Friday but I believe they said they bought APR for less than 5x ebitda and gave reasons for why it would do better under Seaspan than Fairfax. Seaspan will convert to a holding company (Atlas) and aims to continue diversifying in hard asset asset management under Sokol. I think Seaspan, Recipe, FIH, and FIH can all be viewed as long term Fairfax partnerships in their respective niches.

Held for years. Diluted to Oblivion. Re-upped their capital commitment. Held for more years. And then they reduce right before the real money seems it's going to be made? Seems odd. It does. In reality it’s a tiny reduction but I agree it feels like they’re leaving a lot on the table.

Fairfax appears to be reducing Eurobank. Bloomberg says that in an emailed statement the bank announced Fairfax’s voting rights had fallen below one third, to 1.160m. I assume that means they’re selling shares.

I spend quite a bit of time in Chile over the years. The background to the unrest is that 40 years of some of the most free market policies in the world have transformed Chile from a basket case into a fairly developed country, but the cost was no social safety net. The population was prepared to pay that price when the economy was growing at 5%, but a lot of the easy gains have been made and commodity prices aren't booming so it's now growing at more like 2%. A lot of the newly created middle class don't feel that secure, hence the protests. That and some agitation by hard left nutjobs. This will die down, but it might take time. The government has just agreed to rewrite the (Pinochet-era) constitution. I wouldn't touch a Chilean ETF with a bargepole - full of commodity exposure, which means you're not really getting exposure to Chile. CCU, Falabella, and the banks are probably the way to go. All very impressive companies, but they're only cheap relative to their own histories, not in absolute terms. Chile is traditionally an expensive market because there's a huge local pension fund bid. Personally I'd be more interested in Brazil, where economic reforms are setting the stage for a potential boom.

Interesting comments on the call about their confidence in Android and "indicative bids" on Blue Goose. I feel like the NAV continues very slowly to harden up. Edit: also positive commentary on Android (growth in 2020), Parq (doing better and plenty more to come in knowhow from new partner), Blue Goose ("starting to make money"), Dundee Merchant Partners (fund launch planned for 2020 and reiterated that with junior mining valuations at bottom there is opportunity if you have good due diligence), head office costs (heading to $12m including cost of prefs). 2q commentary was also positive on Aquamarine (approaching ebitda breakeven after investment), Taurx (decent chance of a sale), and Delonex (Phase 1 drilling successful, planning Phase 2, will spend far more than committed). Slowly I feel this is coming together.

Pleasure, and glad you find it helpful. SSW isn't my biggest position and never had been, but it's a decent size. I've discussed it in some detail on the SSW thread but in short, what interests me is that I can buy 20c of free cash flow for every $1 I spend on the shares, and that FCF sits in the hands of an outstanding capital allocator. Clearly in an operationally and financially levered business, cash flows can be volatile. Two things give me some confidence here: the industry's record-low order book, and SSW's contracts, although I expect these to shorten over time. I don't look so much at NAV for various reasons and I haven't compared SSW to peers because I regard the management element as central to the thesis. I did lighten up the position at about $11.50, and would add to it if it fell sharply on e.g. macro concerns. They are running the business beautifully (safety rates, occupancy, innovative financing and contract structures - all matter because the customer base has consolidated and they want high quality providers). I think they have a great opportunity to consolidate their industry accretively and branch out into related industries. As a result the capacity to compound value per share at an attractive rate is immense, but the share price won't be a smooth ride and I hope to add rather than detract value by flexing the position size over time.

Good set of results from SSW overnight. Accounting earnings were below expectations but operating results were superb (highest ever utilisation, costs down etc.) and cash flows continue to track towards $500m FCF to common excluding the big one off in q2. That puts the stock on a free cash flow yield of over 20%. Cash flows are growing as they pay down high cost debt/prefs and the company is highly liquid given the new debt facility they announced in q2, so expect them to ramp up acquisitions as they find targets that meet their requirements. Market remains tight and shipping rate commentary is positive.

Incidentally I see that Recipe recently bought a decent chunk of its shares from FFH, who slightly more bought from the family; the net result is FFH owns slightly more shares and has an additional 4% of the equity, getting them to 48%. Recipe has also been adding to its stake in The Keg Income Fund and now have 29%.

Thanks, Viking. This tallies with my version and you caught some CIB shares I had missed. Couple of thoughts: 1) You're double counting Quess - it hasn't spun off from TCIL yet. 2) I think you ought to subtract the cost of exercising the SSW warrants ($8.05 per share). So the value of the warrants is 25*(11.32-8.05). I see Exco has relisted. The stake is worth $10m. Another epic win :(

Couple of questions for those who know more than me (i.e. most): 1) BHE doesn't may dividends, and I can see that's a huge differentiator. But do the subs pay dividends to BHE? In other words, could profits from one area be invested in another? If so, I would have thought a regulator would view BHE's dividend policy as the same as anybody else's in terms of its impact on investment locally. If not, doesn't that restrict BHE's capital allocation? 2) Is BHE likely to go international? I know they have the UK business (at least until Corbyn nationalises it) but this is a business that could scale in an epic way if they're prepared to go global. For example Brazil is privatising a huge slug of electric assets under an attractive regulatory regime that's been in place for 20 years. Thanks Pete

+1 to all of this. As you work through the equity holdings, would you post summary writeups on the Fairfax stock positions page? I for one would be interested, having done the same exercise a while ago.

What I thought was even more interesting was the commentary later on about wanting a more diverse, more liquid portfolio, albeit still with a value/opportunistic bent. They were also quite explicit about not wanting positions over $1bn (although that would mean reducing Eurobank which I think is unlikely and a mistake at this point). Short answer to your question is I have no idea what they will sell but the changes might go some way towards addressing a lot of the concerns raised here over the years. Given the comments made on the call related to a more liquid portfolio it would seem a number of existing private investments would be the initial candidates for monitization. The would also be consistent with the comment mae by Prem in his march/2019 letter to shareholders: "We expect to monetize some of our remaining investments in private companies with similar results!" Therefore the likely candidates would inlcude the following: - APR Energy -Davos -Peak Performance (formerly Performance Sports) -Farmers Edge -Toys R US (land value which they continually say is the value of the investment made) -Boat Rocker -Sporting Life/Golf Town Monitization could take several forms including IPOs and/or sale of a part or whole of these investments to a private equity buyer. The following from their public holdings are also possibilities: -CIB (Egypt) -Sterling Resorts (held through Thomas Cook) -Thomas Cook itself -Resolute Forest (take the hit and move on) I believe they were considering Quess a while ago but I can't believe they would sell it at this price. I think CIB may be a very long term position given how profitable it is and how underbanked Egypt is. Maybe they'll merge it with ATMA one day ;)

Some of the commentary around the hard market (generational shift etc.) is very different in tone to anything I remember them saying in the last decade. I am also struck by the commentary around the equity portfolio: they want more diversified and more liquid, and they can add to equities in a recession via converts (an obvious thing I hadn't really thought through properly).

What I thought was even more interesting was the commentary later on about wanting a more diverse, more liquid portfolio, albeit still with a value/opportunistic bent. They were also quite explicit about not wanting positions over $1bn (although that would mean reducing Eurobank which I think is unlikely and a mistake at this point). Short answer to your question is I have no idea what they will sell but the changes might go some way towards addressing a lot of the concerns raised here over the years.

I just think they make life harder than it needs to be. When I think about the excitement on this board about BAC warrants a few years ago, which Fairfax didn't buy, despite the US clearly being prepared to debase its currency to avoid a depression and a general banking collapse - but then they were happy to buy a chunk of BKIR and Eurobank, in two economies that don't even control their currencies, as a result of whcih one of them slipped into a real depression... Mind you there are others I see more sense in. Stelco has a huge amount of hidden value (read the last call). And I think they often go for things where some secondary asset backstops a lot of the value - eg land at Bangalore Airport, Stelco, Toys R Us. As you say, SSW is working well (phew - one of my larger positions).

That's rational, but only if low ROEs cause capital to leave the industry. Unfortunately that hasn't been happening as far as I can tell. If anything low rates and innovative financial instruments have brought more capital into the industry, depressing CRs, such that bond yields and CRs may actually be positively correlated. Regardless, my broader point is that if the through-the-cycle CR is 95% then at times it will be above and at times below, so you need to know where you are in the cycle to know whether they are on target. My guess is they are: they are not much above 95% after years of soft-ish markets. Suggests to me they will do better than 95% in a hard market. Understood, thanks. I perhaps make less of a distinction between whether I trust management and whether they are shareholder friendly - I think it's largely the same thing - but I'm an active proponent of family control so I worry less about that part.

This is all rather disappointing. My main reason for holding on was excessive pessimism. I may have to sell ;)

A couple of thoughts. 1) The 95% combined ratio target is almost certainly a long term/through the cycle target (like the ROE target). You therefore need to work out where we are in the cycle to know whether Fairfax is hitting its target or not. 2) You say management are honest but the company is not run in the interest of shareholders. Leaving aside whether either statement is true, could you explain why they don't contradict each other? I'm interested. Thanks Pete

Precisely and that is the enormous error the Labour Party are making, because they are blinded by internal division, a fear of letting the Tories be seen to win (by getting a deal), and also a fear that any real Brexit will allow the Tories to roll back EU labour and environmental legislation and sell the NHS - all fatuous concerns given that such policies would have to be tested at the ballot box.

:o :'(

Jesus wept. This is starting to drive me mad. Not sure it is a blow for BoJo yet though. He is only rising in the polls and politics is now so fragmented that under our voting system he could get a majority with 35% of the vote. The opposition (Labouor, SNP, Tory rebels) claim their only goal is to ensure a no-deal Brexit can't happen. They already look silly because they said BoJo was a hardline no-dealer (which he never was) and that he couldn't get the EU to reopen the WA (which he did). Now they're proposing to sabotage his deal by amending it to include a confirmatory referendum, which doesn't seem to command a majority, or a customs union, which does despite the fact that nobody in their right mind would want it. As a result we are heading for a situation where Boris can say: I have got a reasonable deal, whcih involved compromises on both sides, and which Parliament has blocked for no good reason, so I want an election, which Labour are blocking because they'd lose. That is polling gold. One thing I think we have to revisit is the fucking Fixed Term Parliament Act, which has had the unintended consequence of allowing the opposition to block an election for fear of being wiped out. But that is only one of the many mistakes that have led us to this. Theresa May agreeing to the EU's demand that the "divorce agreement" and the future relationship be negotiated in sequence, rather than in tandem, was the first and biggest.

One thing I am noting from the latest filing is Sanmar common equity went from 554 (million Indian rupees) to 208,854. There is a section that gives reasoning but it is a 376 fold increase in a quarter and holds up the shareholder equity and book value per share in the bottom line for the year and the quarter. How does such a dramatic increase work out? https://s1.q4cdn.com/293822657/files/doc_financials/quarterly_reports/2018/2018-Q3-Interim-Report-(FIH)-(Final).pdf "Sanmar Common Shares At September 30, 2018 the company estimated the fair value of its investment in Sanmar common shares using a discounted cash flow analysis based on multi-year free cash flow projections with assumed after-tax discount rates ranging from 13.4% to 16.6% and long term growth rates ranging from 3.0% to 4.0% (December 31, 2017 - 15.2% to 19.5% and 2.0% to 3.6%, respectively). Free cash flow projections were based on EBITDA estimates derived from financial information for Sanmar's four business units (with additional financial information and analysis completed for Chemplast's underlying business units involved in new capital projects) prepared in the third quarter of 2018 by Sanmar's management. Discount rates were based on the company's assessment of risk premiums to the appropriate risk-free rate of the economic environment in which Sanmar operates. In the third quarter of 2018 Fairfax India recorded unrealized gains of $225,013 on its investment in Sanmar common shares primarily as a result of: (i) positive operational developments at Sanmar Egypt (successful completion of its increased capacities in Egypt) and Chemplast (will benefit from the completion of new capital projects); (ii) continued strong demand for PVC and related products in India, Europe, the Middle East and North Africa; and (iii) the decrease in the after-tax discount rates (principally related to the decreased risk at Sanmar Egypt as a result of the completion of its capital expenditure project to increase capacity). At September 30, 2018 the company's internal valuation model indicated that the fair value of the company's investment in Sanmar common shares was $208,854 (December 31, 2017 - $556). The changes in fair value of the company's investment in Sanmar common shares for the third quarters and first nine months of 2018 and 2017 are presented in the tables disclosed earlier in note 5." Didn’t Sanmar repay a big loan to FFH? My recollection was the original equity investment was valued almost at 0 and most of the financing was the loan, so when the company repaid the loan the equity value will have risen dramatically. I am not sure that can be the reason. Fairfax India reports loans and stocks separately. Indeed, the report for that year included another, specific, line for the loan to Sanmar. Additionally, FIH explained the reason for the difference; more specifically, it provided three reasons. None of them related to the loan. But maybe I am not understanding you correctly, and what you mean is that part of the loan was repaid, and that repayment was in kind, actually, stocks. There is actually some comments that might point to that, but then why did the loan line "Sanmar bonds" not decrease accordingly? It actually increased... Jan 1, 2018 - Dec 31, 2018 Sanmar equity: 556 - 217,000 (increase classified as net change in unrealized gains on investments) Sanmar bonds: 333,000 - 392,000 (increase classified as net change in unrealized gains on investments 60,000, and net unrealized currency translation loss (30,000)) EDIT Well, apparently the bonds were a very good investment, and the amount Sanmar owed to FIH at their maturity was ca $600,000 From that we can easily see how "Sanmar equity" increased to $200,000 even when "Sanmar bonds" did also increase by ca $100,000 Chapeaux for FIH On the face of it you're right and my comment was dumb (if they paid off ther loan with cash on hand, which is what I was thinking, it would have no impact on BV. D'oh). Wopuld need to go back and look closely to ascertain the answer but one thought is that IIRC the terms of the loan were pretty attractive and I wonder if it might have been on Sanmar's books at more than face value, causing a gain to be booked when it was repaid. I will check.

It's worth bearing in mind they didn't want to sell. If anything they wanted a higher stake, but ICICI wanted an IPO and control and the remaining % was too small for Fairfax so they decided to build Digit. I strongly suspect that, had the law allowed, FFH would have had a higher % of ICICI from day 1, and possibly control. The law now allows them control and they have it at Digit. I'll be interested to see what they do with that. Separately, are mine eyes deceiving me or did they sell this at 10x book?!

Probably not for this thread, but I'd be really interested to hear a well reasoned sell thesis for any of these stocks at current levels, if you have the time. Preferably one that goes beyond "I believe in investing in high quality businesses and these are junk", which is reasonable but has been aired before.