Fairfax stock positions

[glider3834]

4 minutes ago, glider3834 said:

 

Chou Associates Fund have increased the valuation of their Exco shares by 100% over 6mths to 30 Jun-22 

 

Using their 30 Jun-22 valuation of approx USD 23.16 per share (note CAD figures below) x 51.34 mil shares outstanding for Exco gets you to USD$1.19B valuation - implies Fairfax 43.3% stake  worth approx USD 515 mil 

 

 

 

 

 

 

Chou Fund Commentary below

Edited August 31, 2022 by glider3834

[Parsad]

1 hour ago, Viking said:

I have put together a list of Fairfax's investments since 2010 (the Excel file is attached below). It is by year with insurance and non-insurance transactions captured separately. It is a pretty eclectic list (stuff I found interesting). It is also a work in progress. And not definitive. And it likely has errors.

 

Bottom line, I wanted to better understand the decisions Fairfax was making with their investment portfolio over the years.

 

As I said in my previous post, I think the collective decisions from 2018-2022 are much better than those made from 2014-2017. And that should lead to improved results from investments (both realized/unrealized gains) in future years (than past years). 

----------

The 2014-2017 period also saw sizable losses from both equity hedges and CPI derivatives. The equity hedges were largely removed at YE 2016 with the last position sold in 2020. Sorry to pick that scab...

 

 

Fairfax Equity Holdings Aug 15 2022.xlsx 224.54 kB · 0 downloads

 

Whoa!  Amazing work!  I nominate Viking for a special Fairfax shareholder analyst award. 

 

This is probably more extensive than stuff the analysts at Fairfax put together! 

 

Cheers!

[nwoodman]

1 hour ago, glider3834 said:

Chou Fund Commentary below

Thanks, that answers the obvious of question of how he revalued the shares without any price discovery.  Anyone have any thoughts on why they run this as such a black box?

[nwoodman]

1 hour ago, Parsad said:

 

Whoa!  Amazing work!  I nominate Viking for a special Fairfax shareholder analyst award. 

 

This is probably more extensive than stuff the analysts at Fairfax put together! 

 

Cheers!

@Viking above and beyond as always.  Great work.  I look forward to having a deeper look later tonight but first thoughts are what an amazing concentration of cash consuming 6’ hurdles. “The fish that John West reject”

[Spekulatius]

On 7/28/2022 at 1:59 PM, StubbleJumper said:

 

IMO, valuation is not the right way to think of it.  I tend to handicap the risk in rough terms of a mental frequency table of how often the FFH stock price tends to decline, irrespective of whether it is fully valued.  So, for a 10% price decline, I'm guessing that occurs a couple of times per year for FFH.  For a 20% price decline, I'm guessing that occurs about once every 2 years.  And for a 30% price decline, that might occur about once every 5 years.  And then there are the infrequent black swan events like 9/11, or the KRW hurricanes, or the 2008 stock market plunge , or the 2020 pandemic panic that might push the stock price to drop by 40% or more.  I haven't actually downloaded the stock price data to see whether reality corresponds to my perception of the frequency of these types of drops, but a more industrious fellow could actually do so (and I hope that Jen Allen has actually done so)!

 

So, even at the current stock price, for the 10% decline, FFH needs to write a cheque of ~US$80m to the TRS counter-party, which isn't such a problem, but it should be fully expected a couple of times during a year.  But, moving up the scale, that 30% decline starts to look like a cheque (or a series of cheques) for a quarter-billion dollars.  That begins to get into the range of real money in the context of Prem's preferred holdco cash balance of ~$1b.  It's not a big deal, but it should drive a bit of a thought process by the CFO about whether that preferred cash balance ought to be bumped up a bit, and it should trigger a bit of reflection about how the large revolver plays into this.

 

 

Agreed that the risk predominantly skews to the upside.  It's not even close.  But, I do hope that Jen Allen is banging on Prem about risk management a bit more than some of the previous CFOs have done.

 

 

SJ

Belated reply - but this is something I don't like about FFH. The Holdco seems to be constantly cash poor and there is considerable leverage at a Holdco level as well, both in terms of preferred stock (~$1.3B), as well as with debt, (the latter I am not sure about how much).

 

In Q2, they had about $1B i n Holdco cash but this has been going down for several quarters. it was north of $1.5B last year.

[Viking]

2 hours ago, Spekulatius said:

Belated reply - but this is something I don't like about FFH. The Holdco seems to be constantly cash poor and there is considerable leverage at a Holdco level as well, both in terms of preferred stock (~$1.3B), as well as with debt, (the latter I am not sure about how much).

 

In Q2, they had about $1B i n Holdco cash but this has been going down for several quarters. it was north of $1.5B last year.

A big reason i like Fairfax today is the dramatic increase we are seeing in operating income:

1.) underwriting income: at a 95 CR = $1 billion/year

2.) interest and dividend income: current run rate is $1 billion

 

$500 million per quarter ($2 billion per year) from these two items will provide Fairfax with a level of predicability and stability when it comes to quarterly cash flow that we have not seen in quite some time. 
 

The pending deals (when they close)will provide even more cash:

- pet insurance sale = $1.4 billion (almost $1 billion after tax gain)

- Resolute sale = $600 million (pre tax $200 million gain)

 

A successful Digit IPO would be icing on the cake. And we likely will see more asset monetizations in the next 6-12 months (EXCO Resources?). They could tender their 13 million Stelco shares at $C$35 if they wanted to monetize another asset at a fair price. 
 

Yes, the money will need to find its way to hold co. But given we are nearing the end of the hard market i would expect the insurance subs to be dividending more to hold co in the coming years.

 

Given the size of Fairfax today i do think it makes sense for them to hold more than $1 billion at hold co.

Edited September 1, 2022 by Viking

[glider3834]

2 hours ago, Spekulatius said:

Belated reply - but this is something I don't like about FFH. The Holdco seems to be constantly cash poor and there is considerable leverage at a Holdco level as well, both in terms of preferred stock (~$1.3B), as well as with debt, (the latter I am not sure about how much).

 

In Q2, they had about $1B i n Holdco cash but this has been going down for several quarters. it was north of $1.5B last year.

I would frame that Holdco cash position in context of the dividend paying capacity of subs, the transactions announced in '22 and the operating performance of insurance business. 

 

Also check out S&P Upgrades Fairfax Operating Subsidiaries to ‘A’; Outlook Stable

https://www.insurancejournal.com/news/international/2022/06/01/669854.htm

 

 

Edited September 1, 2022 by glider3834

[glider3834]

On 8/10/2022 at 6:28 AM, petec said:

 

As someone who runs a restaurant, I am always a little sceptical of these claims. Get it right - right offer, right brand, right location - and it is a very cash generative business. The problem is that few restaurants fit that mould, so 90% fail - but that's not a reason to write off the other 10%. I think the risk is reinvesting in it - which is why I agree I hope they use it as a cash cow, and if they do grow it I hope they do it on someone else's balance sheet by franchising it.

@petec I was curious to know your thoughts given your experiences - do you think that technology will be able meaningfully reduce labour cost in restaurants over next 3-5 yrs? And will larger restaurant chains have a scale advantage in implementing tech solutions? I am thinking about a bit about the Recipe transaction but also about the industry generally. From my own customer experience at a restaurant recently (not at a Recipe restaurant) - I used a barcode to scan the menu, ordered my food & paid for order on a mobile phone. Then the waitress brought my food when it was ready (but I guess a phone notification to pick up my food could have also worked). So I can see where staffing can be reduced and its come about partly due to contactless solutions developed during covid.

 

I also read Recipe are looking at tech solutions including

 

developing food automation solutions 

https://www.prnewswire.com/news-releases/gastronomous-technologies-awarded-1-9m-in-partnership-with-canadian-food-innovation-network-recipe-unlimited-and-sodexo-canada-limited-301563794.html

 

implemented a customer data platform for marketing https://www.prnewswire.com/news-releases/recipe-unlimited-implements-mparticle-as-customer-data-infrastructure-for-restaurant-portfolio-301612364.html

 

 

Edited September 2, 2022 by glider3834

[petec]

On 8/31/2022 at 6:58 AM, Viking said:

My read is Fairfax continues to evolve over time with how it is managing its investment portfolio. Prior to 2018 they had a 4 year stretch where they were making lots of mistakes with their equity purchases (buying value traps/bad companies - some run by poor management teams). For the past 5 years (2018-2022) Fairfax's success rate on new equity purchases has improved dramatically - generally they have been buying value run by good to great management teams.

 

I certainly think they've thought hard about what they do and are arguably a bit better at it. But I think there's a danger in assuming that that is what has led to better outcomes so far. The biggest driver of improved performance by far has been the uplift in all commodity prices (from interest rates to shipping rates to gas and steel and timber).

 

For example Eurobank was always a good franchise run by a good (perhaps great) team. It's probably a better company than Keells and certainly a simpler one. But the only reason it was so cheap is that it was in the wrong country. I think we should expect Fairfax to continue to make investments like that that take years - even decades - to pay off.

 

Similarly Digit is no different, conceptually, to ICICI Lombard.

 

Seaspan and Stelco are different to Resolute. They're better run and better capitalised. That's great but a) there's been a lot of luck in the timing of the cycle turn and b) don't forget that the only reason Seaspan is better capitalised is that it issued an absolute boat-load (pun intended) of stock after Fairfax invested.

 

Recipe is the same company it always was, just at a lower price.

 

I'd be a lot more confident in your thesis if Fairfax was actively selling failed historic investments, like Blackberry and Farmer's Edge. But as far as I can recall, despite all the talk of "monetisation", they have only sold one: Resolute. 

 

None of this is a criticism. I have held Fairfax since 2008, in part because they swim where others see only sharks. Sometimes they get bitten. I am fine with that. Today, it's my biggest holding, because I think they are going the right way and very cheap. I am just cautioning against reading too much into what is primarily a cyclical turn. I believe they are more focussed on investing, having taken their eye off the ball. I think they are better at doing what they have always done. But I do not believe the leopard has changed its spots. 

[petec]

21 hours ago, Spekulatius said:

Belated reply - but this is something I don't like about FFH. The Holdco seems to be constantly cash poor and there is considerable leverage at a Holdco level as well, both in terms of preferred stock (~$1.3B), as well as with debt, (the latter I am not sure about how much).

 

FWIW, I think this is the wrong way to look at things.

 

What matters is total resources available, not where the resources are.

 

The subsidiaries have significant dividend capacity - and that capacity would grow rapidly if they decided not to grow premiums written. In extremis, a subsidiary can even be sold. So, if the holdco needs cash it can have it. But that would be a choice, and the cost would be growing slower or investing less.

 

It took me a while to grasp this, but I think the structure here is smart and an advantage.  Same for Brookfield, where I ended up thinking the way the leverage was designed in BPY was an active advantage, not a weakness. I have come to actively seek businesses that are levered in such a way that the leverage cannot impair the franchise in a short term crisis.

[petec]

10 hours ago, glider3834 said:

@petec I was curious to know your thoughts given your experiences - do you think that technology will be able meaningfully reduce labour cost in restaurants over next 3-5 yrs? And will larger restaurant chains have a scale advantage in implementing tech solutions? I am thinking about a bit about the Recipe transaction but also about the industry generally. From my own customer experience at a restaurant recently (not at a Recipe restaurant) - I used a barcode to scan the menu, ordered my food & paid for order on a mobile phone. Then the waitress brought my food when it was ready (but I guess a phone notification to pick up my food could have also worked). So I can see where staffing can be reduced and its come about partly due to contactless solutions developed during covid.

 

I also read Recipe are looking at tech solutions including

 

developing food automation solutions 

https://www.prnewswire.com/news-releases/gastronomous-technologies-awarded-1-9m-in-partnership-with-canadian-food-innovation-network-recipe-unlimited-and-sodexo-canada-limited-301563794.html

 

implemented a customer data platform for marketing https://www.prnewswire.com/news-releases/recipe-unlimited-implements-mparticle-as-customer-data-infrastructure-for-restaurant-portfolio-301612364.html

 

 

 

I think it depends on the type of restaurant. If you're looking at places where service/relationship is not important, then tech can reduce labour, although I think this is somewhat commoditised.

 

In places where service (high end) or relationship (your local community restaurant where everyone knows Abdul) then no, I'm not sure there is much scope for tech to reduce labour unless it is in the kitchen.

 

The area where chains have a MASSIVE advantage is in developing loyalty apps. They have a way to gather data, learn, and drive demand via personalised offers that single restaurants or smaller chains never will. Apps also allow them to get around the aggregators which is another big advantage.

[petec]

19 hours ago, Viking said:

They could tender their 13 million Stelco shares at $C$35 if they wanted to monetize another asset at a fair price. 

 

That is not even remotely close to a fair price.

[glider3834]

5 hours ago, petec said:

 

I think it depends on the type of restaurant. If you're looking at places where service/relationship is not important, then tech can reduce labour, although I think this is somewhat commoditised.

 

In places where service (high end) or relationship (your local community restaurant where everyone knows Abdul) then no, I'm not sure there is much scope for tech to reduce labour unless it is in the kitchen.

 

The area where chains have a MASSIVE advantage is in developing loyalty apps. They have a way to gather data, learn, and drive demand via personalised offers that single restaurants or smaller chains never will. Apps also allow them to get around the aggregators which is another big advantage.

Cheers! @petec

[petec]

21 hours ago, glider3834 said:

Cheers! @petec

 

Pleasure. I will recant one part though which is the commoditisation of tech where service doesn't matter. Actually, very few companies can afford the kind of automated ordering MacDonald's has. I am not sure the QR code ordering at table actually works - nobody who goes to a full service prefers it to talking to a human, in my experience.

 

So yes, tech is yet another way for the big fast food chains to lower costs vs. their competition.

[maxthetrade]

1 hour ago, petec said:

I am not sure the QR code ordering at table actually works - nobody who goes to a full service prefers it to talking to a human, in my experience.

 

When I go to a high end restaurant I want human interaction. I want to talk to the sommelier and want to make sure that my steak comes medium rare without some sauce on top of it. For fast food chains automation should be perfectly reasonable.

[Viking]

Below is an update of Fairfax's equity holdings two months into Q3: +$860 million. Mark-to-market holdings are up slightly (essentially flat) to June 30. And the remaining holdings are up about $850 million (@$35/share pre-tax), erasing the $800 million deficit they were in at June 30. Not surprisingly, Atlas (take private), Resolute (sale) and Recipe (take private) are the three big movers driving $800 million of the gain Q3YTD.

Fairfax Equity Holdings Sept 2 2022.xlsx

[Crip1]

On 9/3/2022 at 1:30 PM, petec said:

 

Pleasure. I will recant one part though which is the commoditisation of tech where service doesn't matter. Actually, very few companies can afford the kind of automated ordering MacDonald's has. I am not sure the QR code ordering at table actually works - nobody who goes to a full service prefers it to talking to a human, in my experience.

 

So yes, tech is yet another way for the big fast food chains to lower costs vs. their competition.

This observation is less to do with the restaurant industry and more to do with virtually all industries. Technology is often sold as a way to cut costs or improve profitability. In reality, it's a matter of survival, really. Everyone eventually adopts new technologies (Word Perfect, Desktop Publishing, Robotics, etc). Those who don't fail, it's as simple as that. Accordingly, I'd not project this to have a major impact on profitability. What is forseeable is that if bringing this into the restaurant environment is not done correctly, it will have a deleterious impact on the company as a whole.

 

-Crip

[Parsad]

With shipping rates dropping like a stone due to a possible pending recession, the Atlas offer may have been a blessing in disguise!

 

(Paywall)

https://www.wsj.com/articles/ocean-shipping-rates-have-plunged-60-this-year-11662375780?siteid=yhoof2

 

Hopefully, ONE may back out of the deal or it doesn't pass, and we'll get to pick up Atlas around $10-$10.50 again.  Long-term contracts put Atlas in a better position than the competition.

 

Cheers!

[glider3834]

Based on GS research, impact of ECB rate increases on Eurobank (below) - the recent 0.75% increase by ECB is not in the raised guidance for 2022 provided by Eurobank after 1H results. So should have positive impact.

 

 

 

 

[Dazel]

I think what is being missed is the fact that Fairfax has historically made capital gains in the bond portfolio over the last two decades rather than reach for yield and bring interest income. Because of this they were not looked at for the interest income that their size afforded (this is contrary to other insurance companies). Brian Bradstreet is the best bond guy in the world…in fact no one is close! I have said this repeatedly since 2003. In order to grow the insurance units they had to pay very close attention to capital levels. They defaulted to take the gain add capital=grow. Now that they have grown  premiums from 2015-$8b, 2018-$15b, $28b today! The size of investment portfolio is now $49b. They were holding at least 30% to 50% cash for most of the last two decades except when Bradstreet made big bets usually on long term treasuries and corporates which made ridiculous gains. 
Markets did not like the lumpy interest income because it did not fit their spread sheets. Now they are in position to buy 3 year treasuries and have 4% income with little to zero risk…the rest of the industry does not have the cash they are stuck in huge hole from bond losses mark to market. This discipline will separate Fairfax in this cycle. They have been waiting for this….

We are in a hard market so the Subs need all the capital they can get to take advantage of it…when it softens and premiums come down they will dividend cash to the holding company. 

 

[MMM20]

1 hour ago, Dazel said:

I think what is being missed is the fact that Fairfax has historically made capital gains in the bond portfolio over the last two decades rather than reach for yield and bring interest income. Because of this they were not looked at for the interest income that their size afforded (this is contrary to other insurance companies). Brian Bradstreet is the best bond guy in the world…in fact no one is close! I have said this repeatedly since 2003. In order to grow the insurance units they had to pay very close attention to capital levels. They defaulted to take the gain add capital=grow. Now that they have grown  premiums from 2015-$8b, 2018-$15b, $28b today! The size of investment portfolio is now $49b. They were holding at least 30% to 50% cash for most of the last two decades except when Bradstreet made big bets usually on long term treasuries and corporates which made ridiculous gains. 
Markets did not like the lumpy interest income because it did not fit their spread sheets. Now they are in position to buy 3 year treasuries and have 4% income with little to zero risk…the rest of the industry does not have the cash they are stuck in huge hole from bond losses mark to market. This discipline will separate Fairfax in this cycle. They have been waiting for this….

We are in a hard market so the Subs need all the capital they can get to take advantage of it…when it softens and premiums come down they will dividend cash to the holding company. 

 

 

+1

 

4-5x forward normalized operating income starting point for valuation

+ ongoing hard market as competitors retrench from bond portfolio losses

+ extending massive cash/bond portfolio duration

+ monetizing "hidden" assets like recent pet insurance sale

+ anything good on the public stock portfolio, which is small vs the total pie and overanalyzed

+ any bonus from Digit IPO etc

+ massive negative cost float-based leverage

+ demonstrated willingness to buy back big slugs of stock below intrinsic value

+ potential for +50% (or *any*) multiple expansion after a long enough stretch of good execution

 

= lollapalooza returns for FFH shareholders over the next few years

 

missing anything? considering going uncomfortably big again

 

 

Edited September 15, 2022 by MMM20

[SafetyinNumbers]

Does anyone else wish there was a listed options for FFH on the Montreal Exchange?

 

Apparently, the MX has a monthly listings meeting so maybe if they get enough requests they will list eventually list them so I sent them an email. If anyone else wants to it’s: 

 

info-mx@tmx.com

 

I also asked a few of my brokers to request FFH listed options. I figure it doesn’t hurt to have a few participants also request listed options. I’m not sure if any of them will want to make a market though.

[StubbleJumper]

Yes, it is times like this that it would be nice if we still had access to LEAPS for FFH.  There's probably not as much money in it now as there was back in 2003/2004 when guys like @ERICOPOLY made 60 or 80 bags, but a little non-recourse leverage today would still juice the returns nicely.

 

 

SJ

[MMM20]

13 minutes ago, StubbleJumper said:

Yes, it is times like this that it would be nice if we still had access to LEAPS for FFH.  There's probably not as much money in it now as there was back in 2003/2004 when guys like @ERICOPOLY made 60 or 80 bags, but a little non-recourse leverage today would still juice the returns nicely.

 

 

SJ

 

More interesting to make 3-5x (IMHO) on a massive low impairment risk position anyway.

 

Edited September 15, 2022 by MMM20

[ERICOPOLY]

6 minutes ago, MMM20 said:

 

More interesting to make 3-5x (IMHO) on a massive low impairment risk position anyway.

 

 

It was fairly low impairment risk.  The stock was already compressed heading into the summer of 2006 and there was little decay risk to hold it for 3-4 months when it did not expire until January 2008.   The game was to see how the summer 2006 hurricane season played out.