Fairfax stock positions

[Viking]

The Mosaic Capital take private transaction closed Aug 6. Fairfax is partnering with Mark Yusishen. Here is a little more information on the new jockey pulled from the Endeavours Group web site. Bottom line, Fairfax is making yet another move to better position an underperforming holding by taking it private and partnering with what looks to be external management. Encouraging.

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Endeavours Group is a family-held private equity firm directed by Mark Yusishen. Since 1996 Endeavours Group has been engaged in acquisitions, now with operations across most of Canada and in parts of the USA.

 

Our deep knowledge across markets, with decades of combined experience, along with our diversified portfolio, provides for superior results. We enable growth through strategic initiatives focused on efficiency and optimization enhancing our performance.

 

Mark Yusishen - Managing partner | P.Eng | MBA

Mark Yusishen is the Managing Partner of Endeavours Group. Beginning in 1996, Mark has purchased several operating companies, many directly managed by him. He demonstrates a proven track record, moving companies toward higher achievements and growth potential. He has extensive experience in managing multiple plant companies with cross border operations. Mark is responsible for leading the group’s acquisition focus, while maintaining strategic growth initiatives for the existing Endeavours Group entities.

Mark has a wealth of knowledge in operations, including metal fabrication, woodworking and distribution, retail, commercial and industrial. By appointing a General Manager and Controller, typically from the original company, Mark maintains existing company relations while providing new opportunities for growth. His extensive operating knowledge provides a sound basis in assisting each General Manager to move the company forward.

Mark is highly experienced with a reputation for conducting business with integrity and efficiency. He holds an Engineering degree and a Masters of Business Administration.

 

https://www.endeavoursgroup.ca

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CPE News (6/28/2021) – Mosaic Capital Corporation (TSX–V: M) has entered into an arrangement agreement with 2356340 Alberta Inc. pursuant to which the 2356340 Alberta has agreed to acquire all of the outstanding common shares of Mosaic for $5.50 per share in cash for a consolidated enterprise value (inclusive of debt) of approximately $277.3 million. 2356340 Alberta is a newly formed private company owned by an entity controlled by Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) and MCC Holdings Ltd., a company controlled by Mark Yusishen.

[Viking]

Here is an update on Fairfax's equity holdings two months into Q3. It looks to me like their various holdings are up about US$130 million = $5/share (pre-tax) as of Aug 27. Let me know if you find any errors with my Excel file attached below  

 

Up: Stelco +$127 million; Atlas (shares + debs) +$63; basket of India investments +$60; CIB +$49; Resolute +$25; Dexterra +$23 

Down: Farmers Edge -$124 million; Blackberry (shares+debs) - $94; Eurobank -$88

 

I updated share counts for all holdings to match Q2 13F.

- Mastercraft, Booking Holdings and Graftech positions were reduced

- Liberty Trip Advisor position was increased (small position)

 

I added Farmers Edge, Boat Rocker and Atlas to my spreadsheet (consolidated equities?) 

I added new purchase Foran Mining shares (associates - equity accounted ?) and debentures

 

Commercial Industrial Bank (CIB) completed a 4 for 3 stock split Aug 24 (so share count increased by 33%). 

 

Other transactions closing in Q3 (not impacting my spreadsheet):

1.) Mosaic Capital taken private (with MCC Holdings/Mark Yushishen)

2.) Toys 'R Us: sold retail brand to Putnam Investments; now only own real estate 

3.) Eurolife ownership increased to 80% - 30% purchased from OMERS for $142.6 million

4.) Riverstone Europe sold to CVC for $700 million

5.) 14% Brit sold to OMERS for $375 million 

6.) Digit revaluation (upon approval from regulators)

Fairfax Equity Holdings Aug 27 2021.xlsx

Edited August 28, 2021 by Viking

[Viking]

Wondering posted the link to Francis Chou’s Q2 report. Given his close relationship with Fairfax (with some identical holdings) it is interesting to read Chou’s commentary. Below are his current thoughts on Resolute and EXCO Resource. Wondering said Chou reduced his position in Resolute and Blackberry. I wonder if Fairfax learnings are similar… http://choufunds.com/pdf/SEMI-AR 2021 EN.pdf

 

Resolute Forest Products Inc. (“RFP”)
As of June 30, 2021, the market price of RFP was US$12.20 per share, up 86.5% from the price of US$6.54 at year end 2020. In spite of that, RFP has been a huge disappointment since our initial purchase some eight years ago. It shows how tough it is to turn around a troubled company despite the best efforts of management. Having said that, it is quite comical to experience how a commodity stock can be hammered beyond all logical comprehension. RFP paid a special dividend of US$1.50 a share in 2018, and it was trading as low as US$1.17 per share in April 2020. Back in March 2020, the company announced that it would buy back 15% of its common shares for US$100 million. At the lowest price of US$1.17, the whole market capitalization would be approximately US$99 million. In other words, instead of buying back 15% of the company with US$100 million, it could repurchase 100% of the company. RFP shares have since recovered 942.7% to US$12.20 as at June 30, 2021.

Rarely do we see such a depressed valuation but when it occurs, the most important thing is not to capitulate when the relevant facts and the investment rationale are strongly in our favor. Our goal is to buy companies at 60 cents on a dollar but if it falls to 10 cents on a dollar, we get more excited. If we had the room to buy more RFP, we would have ceratainly done so. These declines can really test our fortitude and our conviction on being a value manager but we felt that, in time, RFP would be trading closer to its intrinsic value. That was what happened during the first six months of 2021.

One bright spot for the company has been its lumber operations. The high prices for lumber should make up for the declines in its newsprint and specialty papers business segments. The COVID-19 pandemic has shifted management’s focus more towards its lumber/pulp/tissue operations and we believe that should generate greater cash flow in the future.

In general, our experience with a commodity business that has virtually no pricing power is to be cautious when management talks about investing in new equipment or upgrades that would significantly lower the cost structure compared to its competitors. That may be true for six months to a couple of years, but in time, competitors will have a new cost structure that is as competitive if not superior to the company. It is the same treadmill where hardly anyone in the industry can make a decent return on the assets invested in the company. The same story can be seen repeatedly in various commoditized industries. There is no sustainable long-term advantage in a mediocre business with no pricing power. It is important not to get seduced by discount to book value. If the company cannot generate a decent return on book value over a long period of time, that book value is not worth much.

EXCO Resources Inc. (“EXCO”)
In early July 2019, the company emerged from bankruptcy and the 1.75 lien term loans were converted into 28.38 equity shares for every US$1,000 in par value, after netting out certain adjustments. We received 1,518,570 shares of EXCO in the Fund. The equivalent price was US$9.51 per share of EXCO.

Looking back on this investment, we underestimated how long the price of natural gas would stay low for and how low it has been relative to the price of oil. Historically, there had been a strong relationship between the prices of oil and natural gas. Thinking about the two fuels in terms of energy equivalency, 6,000 cubic feet (6 mcf) of natural gas has the same amount of energy content as 1 barrel of oil. In the past, this 6 to 1 ratio guided the relationship between oil and natural gas prices but for the last few years the ratio between prices has gone up to as high as 50 to 1.

Long story short, it was not such a great idea to invest in the 1.75 lien term loans of EXCO.

 

Edited August 30, 2021 by Viking

[bearprowler6]

35 minutes ago, Viking said:

Wondering posted the link to Francis Chou’s Q2 report. Given his close relationship with Fairfax (with some identical holdings) it is interesting to read Chou’s commentary. Below are his current thoughts on Resolute and EXCO Resource. Wondering said Chou reduced his position in Resolute and Blackberry. I wonder if Fairfax learnings are similar… http://choufunds.com/pdf/SEMI-AR 2021 EN.pdf

 

Resolute Forest Products Inc. (“RFP”)
As of June 30, 2021, the market price of RFP was US$12.20 per share, up 86.5% from the price of US$6.54 at year end 2020. In spite of that, RFP has been a huge disappointment since our initial purchase some eight years ago. It shows how tough it is to turn around a troubled company despite the best efforts of management. Having said that, it is quite comical to experience how a commodity stock can be hammered beyond all logical comprehension. RFP paid a special dividend of US$1.50 a share in 2018, and it was trading as low as US$1.17 per share in April 2020. Back in March 2020, the company announced that it would buy back 15% of its common shares for US$100 million. At the lowest price of US$1.17, the whole market capitalization would be approximately US$99 million. In other words, instead of buying back 15% of the company with US$100 million, it could repurchase 100% of the company. RFP shares have since recovered 942.7% to US$12.20 as at June 30, 2021.

Rarely do we see such a depressed valuation but when it occurs, the most important thing is not to capitulate when the relevant facts and the investment rationale are strongly in our favor. Our goal is to buy companies at 60 cents on a dollar but if it falls to 10 cents on a dollar, we get more excited. If we had the room to buy more RFP, we would have ceratainly done so. These declines can really test our fortitude and our conviction on being a value manager but we felt that, in time, RFP would be trading closer to its intrinsic value. That was what happened during the first six months of 2021.

One bright spot for the company has been its lumber operations. The high prices for lumber should make up for the declines in its newsprint and specialty papers business segments. The COVID-19 pandemic has shifted management’s focus more towards its lumber/pulp/tissue operations and we believe that should generate greater cash flow in the future.

In general, our experience with a commodity business that has virtually no pricing power is to be cautious when management talks about investing in new equipment or upgrades that would significantly lower the cost structure compared to its competitors. That may be true for six months to a couple of years, but in time, competitors will have a new cost structure that is as competitive if not superior to the company. It is the same treadmill where hardly anyone in the industry can make a decent return on the assets invested in the company. The same story can be seen repeatedly in various commoditized industries. There is no sustainable long-term advantage in a mediocre business with no pricing power. It is important not to get seduced by discount to book value. If the company cannot generate a decent return on book value over a long period of time, that book value is not worth much.

EXCO Resources Inc. (“EXCO”)
In early July 2019, the company emerged from bankruptcy and the 1.75 lien term loans were converted into 28.38 equity shares for every US$1,000 in par value, after netting out certain adjustments. We received 1,518,570 shares of EXCO in the Fund. The equivalent price was US$9.51 per share of EXCO.

Looking back on this investment, we underestimated how long the price of natural gas would stay low for and how low it has been relative to the price of oil. Historically, there had been a strong relationship between the prices of oil and natural gas. Thinking about the two fuels in terms of energy equivalency, 6,000 cubic feet (6 mcf) of natural gas has the same amount of energy content as 1 barrel of oil. In the past, this 6 to 1 ratio guided the relationship between oil and natural gas prices but for the last few years the ratio between prices has gone up to as high as 50 to 1.

Long story short, it was not such a great idea to invest in the 1.75 lien term loans of EXCO.

 

I am pleased that Chou appears to have seen the light regarding Resolute and Exco however it makes me wonder how it took him so long to realize what you hi-lighted from his Q2 letter.

 

Chou has been investing for the better part of 40 years. He has access to the best investing minds in the business and he only now realizes that commodity businesses do not make the best investments. Something does not seem right to me about this scenario.

 

Furthermore, Chou and the team from Hamblyn Watsa and any number of other so called value investors regularly go down to Omaha to learn from Buffett/Munger. Sadly it seems they listen to what Buffett/Munger say but do not hear the message. 

 

I honestly believe this is why the market refuses to re-rate Fairfax above book. Collectively the market simply does not believe Prem and his Hamblyn Watsa team has changed. And yes Prem has a big winner in Stelco and potentially in Atlas Corp but unless and until he deals with Blackberry, Resolute and Eurobank the market will not believe he has learned his lesson. In addition, unless and until the generational low in interest rates reverses Fairfax will not be rerated by the market. 

 

Sure a few investors on here essentially picked the bottom of the Covid low on Fairfax and have experienced a nice bounce in the share price until now however gains of similar magnitude could have been achieved by investing in any number of other stocks and in fact the return from several of those other stocks would have resulted in greater returns than from Fairfax. 

 

I remain skeptical that much if anything has changed at Fairfax despite all of the excellent posts on this board from many of Fairfax's most loyal followers including Viking and Sanjeev to name just a couple. 

 

 

 

 

 

[TwoCitiesCapital]

19 minutes ago, bearprowler6 said:

 

I remain skeptical that much if anything has changed at Fairfax despite all of the excellent posts on this board from many of Fairfax's most loyal followers including Viking and Sanjeev to name just a couple. 

 

 

 

 

 

 

What do you think HAS changed since 2018 until today? I mean, the vast bulk of these investment problems occurred pre-2018 and Fairfax still traded at 1.2x book. So why so low today?

 

The only thing I can see that is substantially different is interest rates. This suggests that the re-rating, or failure to do so, has nothing to do with Prem's reputation or how the market perceives him (because he isn't any different from 2018 Prem), but rather based on expectations for how much passive income the float can produce which has everything to do with interest rates. 

 

So just like this traded at 1.2x book in 2018 when people were most optimistic about rates, I expect it'll trade at 1.2x book value again when people are once again optimistic in interest rates and the 10-year is 2.5% - 3.0%. 

 

Until then, book value is compounding nicely and you're getting it all at a discount that will close when rates sustainably rise.

Edited August 30, 2021 by TwoCitiesCapital

[Parsad]

Sure a few investors on here essentially picked the bottom of the Covid low on Fairfax and have experienced a nice bounce in the share price until now however gains of similar magnitude could have been achieved by investing in any number of other stocks and in fact the return from several of those other stocks would have resulted in greater returns than from Fairfax. 

 

I can't speak for others, but one is not connected to the other.  I bought some Fairfax during the lows of March/April 2020, but I loaded up on as much Macy's, Overstock.com, Biglari Holdings, Shake Shack, Cheesecake Factory, Bank of America, Atlas Co and Wells Fargo.  But most of those stocks rebounded 100% or more and became much closer to intrinsic value.  As I sold many of them, there were limited opportunities to put capital to work, even now...Fairfax is discounted far more to intrinsic value than many opportunities other than a handful of ideas in the recovering retail/travel/infrastructure sectors...so it has become a very large holding.  

 

As TwoCities stated...what has changed at Fairfax negatively between mid-2019 and mid-2021?  The only obvious difference is interest rates.  Insurance and investments are doing better than 2019...they've streamlined and simplified more of the businesses...they've monetized several others...many of their core holdings have increased in market value since then...book value per share is increasing very well.  So why would it be so unimaginable that markets would revalue Fairfax back to 1.1-1.2 times book...certainly not unfathomable, nor unrealistic.  Cheers! 

[bearprowler6]

I don't know why Fairfax is not being re-rated by the marketplace. Nor does anyone else. Low interest rates are clearly a factor however other factors I believe are also in play. No need to review the long list of possibilities at this time. 

 

As for what has changed between mid-2019 and mid-2021 --- my best guess (and that is all it is) is that the market place has simply got tired of Prem and his approach to the management of Fairfax. 

 

I continue to hold a smallish position in Fairfax and hope that it is re-rated much higher however I would not at all be surprised if it is not. 

 

As for the low interest rate environment we are in (which we all seem to agree has to some extent played a part on the valuation currently placed on Fairfax by the market), I do not believe we will see a significant upward movement in rates for a very very long time. If this view turns out to be correct than I believe it will also be a very long time before Fairfax is re-rated to the 1.1-1.2 times book value level by the market. 

 

 

[modiva]

59 minutes ago, bearprowler6 said:

As for the low interest rate environment we are in (which we all seem to agree has to some extent played a part on the valuation currently placed on Fairfax by the market)

 

The low interest rate environment doesn't explain the high P/B values of other similar companies.  For example, Markel trades at 1.3x book.  

 

The lack of trust in management also doesn't explain the low P/B of Fairfax as it was trading at 1.2x book in 2018.  Unless some big unfavorable incidents happened or uncovered after 2019 which doesn't appear to be the case.  

 

So it's hard to explain.  But it's also hard to explain why so many stocks trade at significant discount to their intrinsic values.  Sooner or later the market will re-rate as long as Fairfax continues to learn and executes to its stated goal of 15% book value growth every year.  And the patient investor will win.  

 

 

Edited August 30, 2021 by modiva

[omagh]

39 minutes ago, bearprowler6 said:

I don't know why Fairfax is not being re-rated by the marketplace. Nor does anyone else. Low interest rates are clearly a factor however other factors I believe are also in play. No need to review the long list of possibilities at this time. 

 

As for what has changed between mid-2019 and mid-2021 --- my best guess (and that is all it is) is that the market place has simply got tired of Prem and his approach to the management of Fairfax. 

 

I continue to hold a smallish position in Fairfax and hope that it is re-rated much higher however I would not at all be surprised if it is not. 

 

As for the low interest rate environment we are in (which we all seem to agree has to some extent played a part on the valuation currently placed on Fairfax by the market), I do not believe we will see a significant upward movement in rates for a very very long time. If this view turns out to be correct than I believe it will also be a very long time before Fairfax is re-rated to the 1.1-1.2 times book value level by the market. 

 

 

 

Analysts struggle to value FFH using EPS (bottom graph) because of the extreme variability quarter-by-quarter and year-over-year.  If the EPS line was consistently at $70 share, FFH would be well above $700/share.  In reality, it could revert to the mean and land above $700/share, but your guess is as good as the analysts.  From the squiggles on the chart, it looks like we're in an up-phase, but who the heck knows?! 

 

Would you rather have FFH at its current discount or BABA at its current discount?

[glider3834]

Are interest rates the 'silver bullet' explanation for Fairfax's share price underperformance? Yes they are a contributor but they are not the primary driver IMO.

 

Interest rates affect all insurers including Fairfax's peers, yet Fairfax's share price performance over the last 5 years has still substantially underperformed against these insurance peers. 

 

 

 

 

 

 

 

 

The flip side of lower interest rates is a lower discount rate, lower funding costs and higher equity valuations. Fairfax in Dec-20 had around 27% of its portfolio invested in equities, which is higher than most of P&C insurers. So in theory lower interest rates should result in better equity performance for Fairfax and compensate for the lost performance on the fixed income side. 

 

However, Covid, a short/hedging strategy and a concentrated positioning in equity holdings that have underperformed in recent years ,  have all hurt Fairfax's equity performance and lowered book value growth (see table below showing book value growth 2015-2020 from AR 2020). We are on the recovery track from covid now, the short/hedging strategy has gone and Fairfax's concentrated position performance this year have been outstanding this due to their pro cyclical, economic recovery exposure. In short, Fairfax's equity performance has greatly improved.

 

On the fixed income side, Fairfax is staying mostly short duration & high quality(treasuries) - basically a very conservative stance because they want to be prepared to take full advantage of higher interest rates. They could very easily increase their interest income if they wanted to by raising their corporate bond exposure, but then they would be a lot more vulnerable to higher interest rates. 

 

If we are looking for a 'silver bullet' theory for Fairfax's share price underperformance, IMO it is not low interest rates, its lack of book value growth. 

 

They key point I want to make is that there is a strong correlation between Fairfax's book value growth and share price performance over the last 35 years - see below. Now there have been times when share price growth has exceeded book value growth & vica versa - but there is a strong correlation between the two regardless.

 

 

In 2020 AR prem notes that 'we think our intrinsic value far exceeds our book value.' This also makes intuitive sense when you consider that valuation gap between the fair value of their non-insurance businesses and their carrying value. So price to book as a valuation measure for Fairfax needs to modified to allow for this IMO as Fairfax is no longer a pure insurance business.

 

A limitation in using price to book as a valuation measure can be seen with their Fairfax India stake. Fairfax India market price is $14.51 and Fairfax is carrying this position at around $9.66. But Fairfax India's book value is around $20 per share. Fairfax India have been compounding their book value at around 11% p.a, so a price to book closer to 1x would be justified. If Fairfax was to consolidate this investment then its carrying value would double - so accounting is playing its part in obscuring the value of the underlying investment. So I would argue the intrinsic value of Fairfax India stake far exceeds its carrying value on Fairfax's books - which supports Prem's point above.

 

 

 

 

 

 

 

 

 

 

 

Edited August 30, 2021 by glider3834

[Spekulatius]

Interest rates are a significant factor that prevent rerating. A second factor is Prem’s volatile performance (to put it kindly) track record, him exerting pretty much total control over FFH ( Running it like a Family business) and the increasing complexity.

 

I think the last point (increasing complexity) isn’t much talked about, but it is an imortant factor, especially when overall performance is so so. FFH simply is an insurance an investment conglomerate where the sum of parts would be worth more than the whole entity.

Edited August 30, 2021 by Spekulatius

[modiva]

7 minutes ago, glider3834 said:

In 2020 AR prem notes that 'we think our intrinsic value far exceeds our book value.' This also makes intuitive sense when you consider that valuation gap between the fair value of their non-insurance businesses and their carrying value. So price to book as a valuation measure for Fairfax needs to modified to allow for this IMO as Fairfax is no longer a pure insurance business.

 

A limitation in using price to book as a valuation measure can be seen with their Fairfax India stake. Fairfax India market price is $14.51 and Fairfax is carrying this position at around $9.66. But Fairfax India's book value is around $20 per share. Fairfax India have been compounding their book value at around 11% p.a, so a price to book closer to 1x would be justified. If Fairfax was to consolidate this investment then its carrying value would double - so accounting is playing its part in obscuring the value of the underlying investment. So I would argue the intrinsic value of Fairfax India stake far exceeds its book value - which supports Prem's point above.

 

This is very helpful.  Accounting for the significant discounted book value,  what is the fair P/B value of Fairfax?  I.5x? 2x?

[glider3834]

2 minutes ago, Spekulatius said:

Interest rates are a significant factor that prevent rerating. A second factor is Prem’s volatile performance (to put it kindly) track record, him exerting pretty much total control over FFH ( Running it like a Family business) and the increasing complexity.

 

I think the last point (increasing complexity) isn’t much talked about, but it is an imortant factor, especially when overall performance is so so. FFH simply is an insurance an investment conglomerate where the sum of parts would be worth more than the whole entity.

I agree spekulatius that complexity is playing its part, Prem & Co are working harder on that front through better communication (look at Ar 2020 breakdown on their portfolio) as well as monetising assets which are otherwise hidden on their balance sheet. 

[bearprowler6]

1 hour ago, modiva said:

 

So it's hard to explain.  But it's also hard to explain why so many stocks trade at significant discount to their intrinsic values.  Sooner or later the market will re-rate as long as Fairfax continues to learn and executes to its stated goal of 15% book value growth every year.  And the patient investor will win.  

 

 

Prem has not hit his 15% book value growth target in over a decade so I would not count on that happening going forward on a consistent basis despite all the good things that apparently are on the horizon for the company. 

[glider3834]

54 minutes ago, modiva said:

 

This is very helpful.  Accounting for the significant discounted book value,  what is the fair P/B value of Fairfax?  I.5x? 2x?

My view is 1.1 to 1.2 x BV so taking the mid-point - I am sitting on a fair value of around 1.15 x BV (noting that Fairfax's median P/B over the last 5 years was around 1.09) 

 

My assumptions here are

- Fairfax can achieve a double digit avg compounded return on book at least in the 10-15% range (mid-point 12.5%) over time &

- Fairfax's book value per share understates fair value ( for example - market value of non-insurance investments exceed carrying value by around US$29 at 30 Jun-21)

 

Now if interest rates were to increase in a measured way, allowing higher fixed income returns possibly Fairfax could trade at even higher price/book levels as it has done historically but I am not assuming this will happen - it would just be a bonus.

Edited August 31, 2021 by glider3834

[bearprowler6]

1 hour ago, omagh said:

 

Analysts struggle to value FFH using EPS (bottom graph) because of the extreme variability quarter-by-quarter and year-over-year.  If the EPS line was consistently at $70 share, FFH would be well above $700/share.  In reality, it could revert to the mean and land above $700/share, but your guess is as good as the analysts.  From the squiggles on the chart, it looks like we're in an up-phase, but who the heck knows?! 

 

Would you rather have FFH at its current discount or BABA at its current discount?

I have a policy not to invest in Chinese based companies so despite the compelling opportunity that BABA appears to offer at the present time; I simply stay away. I put this hard policy into place since I do not trust the business environment in China given the lack of respect for western rule of law.  

 

BTW----I have visited China numerous times over the last 15+ years and traveled extensively throughout the country on numerous occasions. My wife is Chinese and we regularly speak with and get updates on the business and political environment from her friends and family (as recently as Saturday night). The comments that I have received from them especially over the last few years have only reinforced the "no China" investment policy that I already had in place. 

 

So given the choice you offered to me I would have to select Fairfax over BABA however even just thinking that is nearly killing me.

 

 

Edited August 30, 2021 by bearprowler6

[glider3834]

1 minute ago, bearprowler6 said:

I have a policy not to invest in Chinese based companies so despite the compelling that BABA appears to present at the present time I simply stay away. I put this hard policy into place since I do not trust the business environment in China given the lack of respect for western rule of law.  

 

BTW----I have visited China numerous times over the last 15+ years and traveledl extensively throughout the country on numerous occasions. My wife is Chinese and we regularly speak with and get updates on the business and political environment from her friends and family (as recently as Saturday night). The comments that I have received from them especially over the last few years have only reinforced the "no China" investment policy that I already had in place. 

 

 

thanks bearprowler6 interesting insights - well if any country was to benefit from foreign investment shifts resulting from China's regulatory mis-steps it would be India & Fairfax is long India.

 

https://economictimes.indiatimes.com/tech/startups/more-fuel-for-indian-startups-as-global-capital-shifts-from-china/articleshow/85547173.cms

[Viking]

My post below is not meant to depress anyone  I think Fairfax is getting closer to the point where it will be re-rated by Mr Market; it will likely take another year or even two (assuming no major mis-steps by management). Look how long it took the big US banks and even a company like Apple. It took investors many years to come to understand that the old narrative was no longer valid. 
——————————————-

So why is Mr Market not giving Fairfax its average price to BV multiple from the past 10 years or so (is it 1.1 or 1.2 x BV)? I am going to steal a few ideas from those who have posted above  
 

1.) capitulation from long standing shareholders. My guess is this is still playing out.

 

Fairfax HAS BEEN a complete dog. Its stock traded at US$440 in April of 2014. That is where shares are trading today. That is 7.5 years of very poor performance. In a big bull market.
 

Since 2014 the stock has traded close to US$600 three different time. And it has traded over US$525 for extended periods of time. LOTS of investors bought shares at much higher prices than where it is trading today. 

 

The drop last year to US$250 was likely the final straw for many long standing shareholders. Make the pain stop kind of thing. Permanently scarred (psychologically speaking). 
 

This creates supply (as shares are sold). Many of these former investors are never coming back.

2.) lack of BV growth (thank you Glider).

 

3.) lack of demand. Daily share volume, especially in the US is often pretty light. What new investor is going to buy this dog of an insurance company after looking at its price chart and book value growth over the past 7.5 years? Especially in volume? Fairfax has been the definition of career killing stock. 
 

Who else is going to buy the stock? Certainly not the large swath of value investors who have bought the company in the past (see 1. above). The stock is not listed on the NYSE so it is only thinly traded in the US. Canada is a pretty small market on its own. 

 

4.) Fairfax is not a ‘normal’ insurer with its focus on equities and owning companies. (The ‘complexity’ argument - but on steroids because of the kind of equities/companies Fairfax has invested in over the past 10 years.) - thank you Spek.

 

- Investment analysts only want to look at underwriting and interest and dividend income and largely ignore equity investments. I have read RBC’s research reports on Fairfax for years and they refuse to provide any analysis of Fairfax’s non-bond holdings. What really cracked me up is they just called Fairfax stock the best buy in their insurance coverage universe in NA. The reason? The big discount to BV - with little discussion about what was driving the spike in BV - the spike in equity holdings. 
 

Both Berkshire and Markel go through periods where their valuations also get penalized by Mr Market. And, yes, Fairfax’s holdings are quite different.

 

5.) Fairfax has its quirks (thank you Spek)

- Prem’s unique communication style

- Prem’s control stake; past decisions regarding family members

 

When times are bad (like they were the past 7 years) these quirks are magnified.

 

6.) low interest rates (thank you Glider)
 

Given how its bond (and ST holdings) portfolio is constructed (1.5 year average duration) lower interest rates push interest income even lower as bonds mature and are reinvested. 

Edited August 31, 2021 by Viking

[Parsad]

15 minutes ago, Viking said:

My post below is not meant to depress anyone  I think Fairfax is getting closer to the point where it will be re-rated by Mr Market; it will likely take another year or even two (assuming no major mis-steps by management). Look how long it took the big US banks and even a company like Apple. It took investors many years to come to understand that the old narrative was no longer valid. 
——————————————-

So why is Mr Market not giving Fairfax its average price to BV multiple from the past 10 years or so (is it 1.1 or 1.2 x BV)? I am going to steal a few ideas from those who have posted above  
 

1.) capitulation from long standing shareholders. My guess is this is still playing out.

 

Fairfax HAS BEEN a complete dog. Its stock traded at US$440 in April of 2014. That is where shares are trading today. That is 7.5 years of very poor performance. In a big bull market.
 

Since 2014 the stock has traded close to US$600 three different time. And it has traded over US$525 for extended periods of time. LOTS of investors bought shares at much higher prices than where it is trading today. 

 

The drop last year to US$250 was likely the final straw for many long standing shareholders. Make the pain stop kind of thing. Permanently scarred (psychologically speaking). 
 

This creates supply (as shares are sold). Many of these former investors are never coming back.

2.) lack of BV growth (thank you Glider).

 

3.) lack of demand. Daily share volume, especially in the US is often pretty light. What new investor is going to buy this dog of an insurance company after looking at its price chart and book value growth over the past 7.5 years? Especially in volume? Fairfax has been the definition of career killing stock. 
 

Who else is going to buy the stock? Certainly not the large swath of value investors who have bought the company in the past (see 1. above). The stock is not listed on the NYSE so it is only thinly traded in the US. Canada is a pretty small market on its own. 

 

4.) Fairfax is not a ‘normal’ insurer with its focus on equities and owning companies. (The ‘complexity’ argument - but on steroids because of the kind of equities/companies Fairfax has invested in over the past 10 years.) - thank you Spek.

 

- Investment analysts only want to look at underwriting and interest and dividend income and largely ignore equity investments. I have read RBC’s research reports on Fairfax for years and they refuse to provide any analysis of Fairfax’s non-bond holdings. What really cracked me up is they just called Fairfax stock the best buy in their insurance coverage universe in NA. The reason? The big discount to BV - with little discussion about what was driving the spike in BV - the spike in equity holdings. 
 

Both Berkshire and Markel go through periods where their valuations also get penalized by Mr Market. And, yes, Fairfax’s holdings are quite different.

 

5.) Fairfax has its quirks (thank you Spek)

- Prem’s unique communication style

- Prem’s control stake; past decisions regarding family members

 

When times are bad (like they were the past 7 years) these quirks are magnified.

 

6.) low interest rates (thank you Glider)
 

Given how its bond (and ST holdings) portfolio is constructed (1.5 year average duration) lower interest rates push interest income even lower as bonds mature and are reinvested. 

 

All of the things you pointed out are what makes companies like Fairfax terrific cyclical investments where you can take advantage of deep discounts by Mr. Market.  This used to happen all the time when Patrick Byrne was CEO of Overstock.com.  I probably will never get the opportunity to make money on Overstock.com with the same discounts that I used to get now that Jonathan Johnston is running it.  Cheers!

[Xerxes]

Only if Buffett was weird like that (or more often), we could catch BRK at substantial discount now and then.

Last time he was weird was in 1999-2000 (before I was following any of this) and he was weird again in 2020.

 

Weird defined as being against the whatever is common wisdom at the time for whatever reason.

Edited August 31, 2021 by Xerxes

[cwericb]

I’m just an East Coast country bumpkin but here are my ‘Seven Simple Steps for Fairfax” to elevate share price:

 

1) Build luxurious office suite in basement at 95 Wellington St W from which Prem can run Fairfax.
2) Ensure basement door firmly locked.
3) Hire top level PR firm to show the world how successful Fairfax really is today.
4) Ensure no media access to basement.
5) Replace Fairfax website with one not designed by a nine year old in DOS.
6) Check basement door remains locked.
7) When SP reaches 1.5 book, allow media to photo Prem, but only PR personnel allow to speak.
 
I know this is blasphemy, but that’s okay, I’m probably working on a record for the “ignore’ list.

[Viking]

Atlas closed today over $15 and at new 52 week high and 6 year high. Perhaps more investors are believing their transformation is for real; especially the revenue and earnings projections for the next 4 years. 
 

This investment is shaping up to be one of Fairfax’s best non-insurance single company investments ever. Stelco also has been hitting new all time highs. Nice to see a couple of their largest most recent new equity purchases performing so well.

———————————

Fairfax owns 99.9 million shares (incl Riverstone holdings) with a carrying value of $10/share at Dec 31  2020 (and cost of $7.57). They also own 25 million warrants ($8.05 exercise price). With shares trading at $15 this = a gain (from cost) of about $900 million (94%) in about 3 years time. And we are in the early innings with this investment  (As part of the Q2 Senior Notes redemption Fairfax also has 1.0 million five-year warrants to purchase an equal number of Atlas common shares at $13.71 per share.). 

———————————

2020AR: Atlas (formerly Seaspan) was purchased by us in July 2018 at $61⁄2 per share through the exercise of warrants which we acquired in February 2018. We exercised additional warrants in January 2019, sold APR Energy to Atlas in exchange for 18 million shares at $11.10 per share, and had our cumulative share of earnings of $209 million less dividends of $81 million, increasing our carrying value to $10 per share at the end of December 2020. At that time, Atlas was trading at $11 per share, resulting in an unrealized gain of $79 million which will only be reflected in our balance sheet at the time of sale, even though it is very much there at the end of 2020. Atlas is currently trading at about $13.75 per share.

 

2019AR: Including the APR transaction, we have invested $760 million in common shares of Atlas Corp. (cost per share $7.57), and we hold 25 million warrants exercisable at $8.05

 

Edited August 31, 2021 by Viking

[Xerxes]

I should say that i had invested all of Alibaba divestment dollars when i sold in Spring '21 into Atlas.

There was a time when I dreaded anything remotely related to the Baltic Index, but somehow it feels clearer now. 

[nwoodman]

On 8/28/2021 at 3:05 PM, Viking said:

Let me know if you find any errors with my Excel file attached below  

The latest 13/D shows Fairfax now owns 130,932,826 shares of ATCO common.   A net change of 31.7m. So the warrants were converted and then some?

 

Atlas Corp. Investor Relations - SEC Filings (atlascorporation.com) 25 August 2021

 

Thanks again Viking for all your work on this
 

Cheers

nwoodman

Edited September 1, 2021 by nwoodman

[glider3834]

3 hours ago, nwoodman said:

The latest 13/D shows Fairfax now owns 130,932,826 shares of ATCO common.   A net change of 31.7m. So the warrants were converted and then some?

 

Atlas Corp. Investor Relations - SEC Filings (atlascorporation.com) 25 August 2021

 

Cheers

nwoodman

Would make sense to exercise the original 25 mil warrants with exercise price of $8.05 - so cost around $201 mil and shares trading at around $15 so now worth $375 mil plus they will now be able to scoop up a $12.5 mil div approx on those shares.

 

 

 

Edited September 1, 2021 by glider3834