Sandridge

[Luckyone77]

Sandridge was downgraded to zero value in this guys opinion. Never really understood the investment here and the fascination with Tom Ward (no longer with the company). The big blustering ego red flags surrounded the guy. In addition, it appears that Fairfax actually purchased more of it in the last qtr of 2014. Huh? I'm a Watsa fan but some of these investments are simply baffling. In this sense, he has a decidedly different approach from Buffett who believes in buying great companies at a fair price. Too often lately, it appears he's buying average (at best) and dying companies at a high price. Dell, Blackberry and Sandridge all come to mind. Maybe in time he'll be vindicated but I wonder if he shouldn't adhere to Mungers advice to Buffett a little more.

 

http://www.thestreet.com/story/13064256/1/shale-oil-bust-enters-phase-two-led-by-hercules-and-sandridge.html?puc=yahoo&cm_ven=YAHOO

[barsax]

Prem Watsa has been bearish on oil prices for quite some time, so I view the SDR purchase as a hedge against his bearish oil call.  Yes, SDR is well on it's way to zero.  C'est la vie, but other parts of the portfolio profit from the oil drop.  As for Blackberry...it's too soon to throw in the towel on BB and John Chen.  Every person on the planet knows BB will never threaten AAPL, Samsung or Google for handset market share, and yet the market is full of super confident, super intelligent hedge fund managers shorting BB on that premise, even though its already priced in.  John Chen is skating to where the puck is going, not where it already is...

[abyli]

Why Prem bought BlackBerry but not Apple shares? Apple was trading PE 6 excluding cash two years ago. Was BlackBerry easier to understand than Apple?

[Luckyone77]

Barsax:

 

If he's bearish on oil prices then why in the world would he have bought more of Sandridge in the 4th qtr? Maybe I'm missing something here but it just doesn't add up...especially in light of all the debt that Sandridge is carrying. And as far as buying Blackberry goes vs buying Apple, again, who knows. Maybe being a Canadian company he felt like he had some insight or possibly bias to it. Baffling. Simply seems to go completely counter to Mungers advice to Buffett that Buffett in his latest yearly letter credits for being the cornerstone of Berkshire. Buying great companies at a fair price.

[Luckyone77]

So much oil there's no place to put it?

 

"That extra crude is flowing into storage tanks, especially at the country's main trading hub in Cushing, Oklahoma, pushing U.S. supplies to their highest point in at least 80 years, the Energy Department reported last week."

 

http://news.yahoo.com/us-running-room-store-oil-price-collapse-next-171025276--finance.html

[barsax]

Luckyone:

 

Just from reading your posts it appears to me that Berkshire is the stock for you.  I'm quite comfortable with FFH.

[Luckyone77]

Barsax:

 

Possibly so but Fairfax is still, by far, my largest holding. With that said, can you really dispute my points? I mean Sandridge possibly at zero?! That would be the mistake of all mistakes. We're talking about ZERO and they just bought more a few months ago??? Shouldn't somebody at Fairfax have factored that possibility into the equation? Especially considering their debt load. As I said, it's totally baffling. Now maybe he knows something about Sandridge that I don't and he ends up making money on this deal. Not sure how considering what they've paid but it's for that kind of insight why I have so much invested with him. I'm just teetering a bit and trying to get my hands around the logic and philosophy here.

[barsax]

OK...here goes: the investment logic is simple.  Prem makes a bearish call on oil.  But, in keeping with his investment history, he lays off some of the risk to the company's capital by taking out a hedge against his position.  That hedge, in my humble opinion was purchasing SDR.  Any cursory financial analysis would have raised alarm bells with respect to debt levels. The market hates SDR so they trade it down...it's cheap, and for good reason.  Therefore, SDR is a HIGHLY leveraged bet on a rebound in oil prices.  In effect Prem bought a call option on a rebound in energy prices.  And like all call options it has limited time value.  If oil prices rebounded sharpley - counter to his original investment thesis - then it would be a profitable trade.  But, Prem was right, no rebound...SDR goes down to almost zero...just like a call option expiring worthless.  In a nutshell, that is the logic.  Prem takes out hedges against long equity positions all the time.  By definition it means he buys things that - in all likelihood will go to zero.  Why? Because if he is wrong he wants to protect the firms capital.  BB is a completely different kettle of fish.  Long term BB will pay off...full stop.

[Luckyone77]

You're probably right but zero is still zero. Was it that hard to see? Unless I'm mistaken, Sandridge wasn't making any money at $100 barrel because of their debt. Why would they stand a chance at $50-$60 or less. (A condition shared by many of these overextended oil companies). Nevertheless, I get your point but it seems like SD has been a money hole for a long time. I owned quite a bit for awhile but sold at a significant loss. Thank God I sold it when I did. It just kept getting worse and worse and that was in good times. Just not sure what the Fairfax team saw (or see) in it. Don't they own something like 62,000,000 shares. How much have they lost on Sandridge?

 

Fair company at a great price? I think not on both points. Here's hoping Watsa and his team proves me wrong. Ironically, and to your point about hedges, his deflation bets and his hedging are why I'm still in it. I share his view that this is a 1 in 50 or a 1 in a 100 year event that hasn't played out yet. I've been wrong since 2009 but still maintaining course.

 

Look, I still believe in Watsa or I would have sold out my position but some of these stocks are head scratchers and are giving me pause. Making such a huge bet on a company that gets cut in half is one thing, at least there's some value there. But possibly belly up? Hedge or no hedge that's perplexing. Somebody in the team should have seen zero coming at them. That's a lot of money, some of which is mine, down the drain. I'm just trying to connect some dots here. That's all.

[cwericb]

I find it ironic that over the past year or so some people think Watsa’s investments in Blackberry, Sandridge, deflation hedges, etc, etc have been terrible, terrible investments. The financing of the acquisition of Brit is all wrong and the fact that Fairfax issues a dividend is a terrible move that makes no sense.

 

However, people said the same things about his Credit Default Swaps back a few years ago. But then they paid off big time helped make FFH into what it is today.

 

When Watsa doubled down on Blackberry at around seven bucks it was the dumbest, stupidest thing ever! Obviously the company would be toast  within a few months.  But now it’s pushing $14 and is looking better every day. Inflation was about to take hold and those hedges were going to cost a fortune, but I haven't heard much complaining about the hedges lately. And SD? Well who knows? But what investor or group is right all the time? Some times these things take years to pay off and some never do.

 

But these combined “mistakes” don’t seem to have hurt the share price which has risen by 17% in the U.S. and 29% in Canada in just four months.

 

Don’t get me wrong. Criticism is healthy. But I think we should not expect Fairfax’s performance to be 100% right, 100% of the time, and to have their investment strategy clearly obvious to everyone immediately.

 

Sometimes these guys do these investments for reasons that fit into an overall plan that is not so clear to us mere mortals. So my take on all of these “mistakes” is to not get fixated on their individual investments and just look at their overall progress.

 

PS. One rule that many of us here have learned over the years. Be very, very careful of buying into any company in which Fairfax invests. Their objectives and timeline are unlikely to be in line with yours.

[abyli]

After observing Fairfax for 13 years, I realized that they are not very good at stocks, but they made most of their money from bonds. Fairfax is first an investment company, then an OK insurance company (cost 2% a year for float if I remember correctly). Fairfax just can not underwrite like Lancashire or RNR. It is not their culture and they just can never get to that level of underwriting. When next hurricane or big events hit, I bet Fairfax will need to separate normal underwriting and Big Cat loss again. So Fairfax has to hedge all the time to protect the company. Well, the hedge was supposed to protect their stock holdings, so why Fairfax sold Johnson & Johnson (Prem said JNJ is long term investment) then? So what those hedges protect if they sold their only long term stock holding?

 

I think there is something wrong with Fairfax's business model. Those hedges are not free and it costs money, sometimes lots of money. If Fairfax can not underwrite for profit in the long run (overall have not achieved that since 1985), then Prem has to buy lots of hedges to protect the company from going under.

 

Last year was the year that all stars were aligned to make big profit for FFH: no big hurricane, interest rate went lower so bonds made money, stock market was good, so FFH made a good profit last year, but I do not expect them to repeat that easily. With the current business model, I do not think FFH can achieve their 15% target in the long run. Last year, someone did calculation, FFH has not achieved that goal for the last 5 years, 10 years and 15 years!

[cwericb]

That brings up a very valid concern that I have about Fairfax.

 

What happens to Fairfax if we get hit with a couple of huge catastrophic events? Actually that should probably read "When".

 

But that is probably a subject for a thread of its own if someone wants to pose the question.

[Zorrofan]

After observing Fairfax for 13 years, I realized that they are not very good at stocks, but they made most of their money from bonds. Fairfax is first an investment company, then an OK insurance company (cost 2% a year for float if I remember correctly). Fairfax just can not underwrite like Lancashire or RNR. It is not their culture and they just can never get to that level of underwriting. When next hurricane or big events hit, I bet Fairfax will need to separate normal underwriting and Big Cat loss again. So Fairfax has to hedge all the time to protect the company. Well, the hedge was supposed to protect their stock holdings, so why Fairfax sold Johnson & Johnson (Prem said JNJ is long term investment) then? So what those hedges protect if they sold their only long term stock holding?

 

I think there is something wrong with Fairfax's business model. Those hedges are not free and it costs money, sometimes lots of money. If Fairfax can not underwrite for profit in the long run (overall have not achieved that since 1985), then Prem has to buy lots of hedges to protect the company from going under.

 

Last year was the year that all stars were aligned to make big profit for FFH: no big hurricane, interest rate went lower so bonds made money, stock market was good, so FFH made a good profit last year, but I do not expect them to repeat that easily. With the current business model, I do not think FFH can achieve their 15% target in the long run. Last year, someone did calculation, FFH has not achieved that goal for the last 5 years, 10 years and 15 years!

 

Uh....the combined ratio was 90.8 in 2014 versus 92.7 last year, so they actually had an underwriting profit.  As far as stock picking goes, they have averaged stock returns something like twice the S & P over the last 15 years or so.......i'm a bit confused by your comments

 

http://www.fairfax.ca/news/press-releases/press-release-details/2015/Fairfax-Financial-Holdings-Limited-Financial-Results-for-the-Year-Ended-December-31-2014/default.aspx

 

 

cheers

Zorro

[Jurgis]

PS. One rule that many of us here have learned over the years. Be very, very careful of buying into any company in which Fairfax invests. Their objectives and timeline are unlikely to be in line with yours.

 

Amen!

 

Watsa usually thinks like vulture investor, like Marty Whitman. He invests with one eye on bankruptcy. He buys shares, but he prepares to buy distressed bonds, BK, recap, etc. So, yes, like cwericb says, you should not follow Fairfax into weak companies. They have exits that you don't and they may make money where you won't.

[Luckyone77]

"He invests with one eye on bankruptcy." ---Jurgis

 

 

In the case of Sandridge, maybe he should have had both eyes on bankruptcy. Not that Sandridge is zero yet but even I have never had a stock pick go to zero. And they have (or should have anyway) a helluva lot more stock picking expertise than me who does this on the side.

[cwericb]

"even I have never had a stock pick go to zero" Oops, wish I could say that  :)

 

Okay Lucky, if you want an education in understanding how Fairfax operates, see if you can find an old share price chart for a company originally named SFK Pulp, later called Fibrek. Go back to the prices in the mid to late 2000's and then read the 47 pages on “SFK Pulp” in our board here:

 

http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/sfk-pulp/

 

Then follow that up with the 72 pages on “Resolute Forest Products Commences Takeover bid of Fibrek”

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/resolute-forest-products-commences-takeover-bid-of-fibrek/

 

Or perhaps just the last 72 pages if you are in a hurry.

 

 

[Jurgis]

cwericb, can you summarize for tl;dr?

 

Thanks

[alertmeipp]

Are u guys so sure sd will hit zero.

 

It is smallish position for them. Why the fuss.

[Luckyone77]

Are u guys so sure sd will hit zero.

 

It is smallish position for them. Why the fuss.

 

61,000,000 million shares may be a smallish position now but it wasn't about 8 bucks a share ago or whatever their average cost is.

[Luckyone77]

"even I have never had a stock pick go to zero" Oops, wish I could say that  :)

 

Okay Lucky, if you want an education in understanding how Fairfax operates, see if you can find an old share price chart for a company originally named SFK Pulp, later called Fibrek. Go back to the prices in the mid to late 2000's and then read the 47 pages on “SFK Pulp” in our board here:

 

http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/sfk-pulp/

 

Then follow that up with the 72 pages on “Resolute Forest Products Commences Takeover bid of Fibrek”

 

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/resolute-forest-products-commences-takeover-bid-of-fibrek/

 

Or perhaps just the last 72 pages if you are in a hurry.

 

 

 

Maybe you can give me the Readers Digest version of what all that would tell me. I'm really not trying to be antagonistic, I'm just trying to follow the logic that potentially might get us to zero on an investment. I thought I did understand how they operated and though they're doing great so far this year, I'm losing a little religion with this SD news. After all, isn't Rule #1: Don't lose money?

[Parsad]

Barsax:

 

Possibly so but Fairfax is still, by far, my largest holding. With that said, can you really dispute my points? I mean Sandridge possibly at zero?! That would be the mistake of all mistakes. We're talking about ZERO and they just bought more a few months ago??? Shouldn't somebody at Fairfax have factored that possibility into the equation? Especially considering their debt load. As I said, it's totally baffling. Now maybe he knows something about Sandridge that I don't and he ends up making money on this deal. Not sure how considering what they've paid but it's for that kind of insight why I have so much invested with him. I'm just teetering a bit and trying to get my hands around the logic and philosophy here.

 

Really...this is what you have to worry about?  Mistake of all mistakes!?  I crack up every time I hear people second guess Prem. 

 

He's not going to be right on everything, and yes they will f**k up royally on some things from time to time, but he will still be right on enough things to outperform almost all of his peers over the long-term...due to the amount of asset/equity leverage they utilize and their pure Ben Graham investing framework.

 

What percentage of their $30B portfolio is in SD?  Forget them buying at $8 down...even if they totally screwed up the valuation and understanding of the business, and then they started buying at $20 down...what is the total percentage of the $30B they put into SD...at cost, not today's valuation.  They would have had to put in at least $1B at cost into SD to even begin to think it would seriously hurt shareholder equity long-term if it went to zero. 

 

I would think their total cost is probably around $400M...if that.  And the assumption is that the other $24.6B of their $25B+ investment portfolio is sitting idle doing nothing.  Once you get past that, then you can see why this concern is irrelevant!  Cheers! 

 

 

 

[Green King]

Barsax:

 

Possibly so but Fairfax is still, by far, my largest holding. With that said, can you really dispute my points? I mean Sandridge possibly at zero?! That would be the mistake of all mistakes. We're talking about ZERO and they just bought more a few months ago??? Shouldn't somebody at Fairfax have factored that possibility into the equation? Especially considering their debt load. As I said, it's totally baffling. Now maybe he knows something about Sandridge that I don't and he ends up making money on this deal. Not sure how considering what they've paid but it's for that kind of insight why I have so much invested with him. I'm just teetering a bit and trying to get my hands around the logic and philosophy here.

 

Really...this is what you have to worry about?  Mistake of all mistakes!?  I crack up every time I hear people second guess Prem. 

 

He's not going to be right on everything, and yes they will f**k up royally on some things from time to time, but he will still be right on enough things to outperform almost all of his peers over the long-term...due to the amount of asset/equity leverage they utilize and their pure Ben Graham investing framework.

 

What percentage of their $30B portfolio is in SD?  Forget them buying at $8 down...even if they totally screwed up the valuation and understanding of the business, and then they started buying at $20 down...what is the total percentage of the $30B they put into SD...at cost, not today's valuation.  They would have had to put in at least $1B at cost into SD to even begin to think it would seriously hurt shareholder equity long-term if it went to zero. 

 

I would think their total cost is probably around $400M...if that.  And the assumption is that the other $24.6B of their $25B+ investment portfolio is sitting idle doing nothing.  Once you get past that, then you can see why this concern is irrelevant!  Cheers!

 

+1 Perm always said that stock individually will not beat the market but the portfolio as a whole will do great over time.

 

Cheers

GK

[kfh227]

Look at what Watsa did with BBRY regarding convertible debt.

 

He could do the same with SD.

 

BBRY - off topic but it was brought up....

Also, I've been following BBRY and invested in BBRY for a very long time.  My costs basis is in the $9-$10 range but I messed up with some options so it's really more like $13 or so per share.  Don't ask about options, it's a sore wound.  Made a shitload and got greedy and lost it all.  Anyway, I can not stress enough that BBRY is not just phones.  They are a lot more than that and IoT has the potential to totally transform BBRY over the next 5 years.  If I say Nanthealth, people here probably don't know what I mean.  Then you can read about it and find that BBRY owns an unknown percentage of that company.  And then you can read about what they do and how.  Oh Chen just recently made a statement that hsows that he is moving BBRY into a business model where they are pushing responsibility down the chain as far as possible.  No more dictatorship like there was pre-Chen.  For example .... This means that if one business unit is responsible for BB10 and another can make a business case to Chen that an Android phone is something BBRY should release, the BB10 team has no say in the decision making process.

 

Chen is really turning into the next Steve Jobs.  This guy is definitely looking forward.  5 years forward.  Like someone else said, he's not playing the puck, he's playing where the puck is going.

 

 

[cwericb]

Fully agree with Parsad and Green King

 

Why on earth whould anyone expect Prem to be right on every single investment, every single time? He may be one of the best investors out there - but he doesn’t have a crystal ball. And as has said before, he may have his reasons for investing in SD that are vastly different from yours. He may well be delighted to be see SD’s drop in price.

 

As far as the Fibrek saga is concerned, there are differing opinions on it and there those here that are probably better equipped to give a critique on it than I, but the story and opinions are well reflected on the threads on this board. It is a good dose of reality for anyone that sees Prem as some warm, fuzzy, sweet little old guy who doesn’t have a ruthless bone in his body. It is a true “cautionary tale” for those who invest alongside with Fairfax.

 

Investing in tandem with FFH is not necessarily a great idea. He may have ulterior motives for investing that are not only different than ours, but may be directly opposite to our goals. And, ‘long term’ in their eyes could be decades. If I invest in a company that Fairfax has invested in like Blackberry, it it only makes me look more closely. (kfh227 - probably right on about BBRY)

 

PS: as for “Rule #1: Don’t lose money”. Horse Apples! That’s a nice “goal” but if anyone has been able to put that into practice 100% of the time they must be invested in GIC’s at 1%.

 

 

[kfh227]

Ya, Prem buying into BBRY made me look and I was shocked that the stock tanked like it did.  What I was reading and what I saw in the share price were not the same.  I think at one point, they had no debt, and trading at something like 0.99x cash on hand.  It was totally irrational.

 

But my original turn around thesis failed miserably.  I saw BB10 pre-release and saw what it is.  A true second generation smartphone UI where iOS and Android are still on gen 1 and show no signs of evolving.  But no comeback to the consumer smartphone segment as a dominant player.  But now with Chen on board and the diversity within BBRY, this really looks like a no risk investment going forward.

 

Anyway ... I digress.  This is a Sandridge thread.  There is a BBRY thread in the investment thread.  I will say this though.  I wish I started writing a book 3 years ago about BBRY.  It would be a thesis on a failure or one of the greatest comebacks ever.  The conclusion to the book is still being drawn.