Fairfax stock positions

[nwoodman]

1 hour ago, Viking said:

Once a year I find it is useful/interesting to rank Fairfax's equity holdings by size. Learnings?

1.) each year, for the past 5 years, the overall quality of the collection of holdings has been steadily improving. This is very subjective. Some, like Eurobank, keep getting better (management doing what its supposed to do). Others, like Resolute, got lucky and stumbled into a bull market in lumber (they did buy two lumber mills at the bottom of the cycle so it was not all luck). Most of the resource plays look very well positioned (this was a very different picture 5 years ago). Atlas continues to execute its aggressive growth business model. New add Grivalia Hospitality looks solid. Other new adds like BAC, OXY and CVX are solid. More money is going to private equity (ShawKwei and more recently JAB) where there is a proven, successful, long term track record. Fairfax continues to grow ownership in existing holdings (Fairfax India, Stelco, Recipe). I could go on. Bottom line, i like the progression we are seeing over the past 5 years to an overall higher quality group of holdings. This bodes well for future returns from the equity portfolio.

2.) there is concentration at the top: top 3 positions = 30% (top 10 positions = 55%)

- but this is a little misleading as Fairfax India, BDT and ShawKwei are very diversified.

3.) after the top 10 positions you really have a lot of diversification. Well over 40 positions represent the remaining 45%. 

4.) there is also a lot of diversification of the holdings by:

- region: US/Canada, India, Greece, Asia

- sector: financials, commodities, hospitality, etc

- 13% managed by private equity funds (BDT, ShawKwei etc) and JAB will take this higher.

5.) Big changes year over year?

- Resolute will be coming off the list; monetization of a top 5 holding at a premium price is a big deal.

- Recipe take private roughly doubled its size.

- Given how far out of the money they are I did not include the Blackberry debentures in the Blackberry total (my subconscious just wanted to get BB out of the top 10 .

- BAC, OXY and CVX were sizable adds in Q2; has more been added in Q3? (In the 2008 bear market Fairfax loaded up with purchases like these… quality US big cap. Will they do the same thing over the next year?)

—————

EA: equity accounted; MM: mark-to-market; CE: consolidated equity

 

 

Thanks @Viking,  there may be a bit of a currency tail wind for a portion of those holdings if the USD normalises.  It strikes me that even the Recipe buyout may look sensible in that light.

 

Blackberry so far down the list only produces a slight grimace now, rather than the stomach cramps it used to

 

I am also dying to have that EXCO black box prised open at some point

[Viking]

Fairfax has certainly hit the ball out of the park with its commodity holdings. They currently total around $1.9 billion = 12.5% of total equity holdings of about $15 billion. The holdings are very diversified and certainly look well positioned to deliver significant value to Fairfax in the coming years (they stand a good chance of hitting Fairfax’s 15% return hurdle rate).

- Resolute ($600 million): Selling Resolute for +$600 million (plus $180 million CVA) in a bear market was brilliant. It will be interesting to see where they redeploy the funds when the deal closes in 1H 2023.

- Stelco ($384 million): this has also turned into a home run investment. Given all the share buybacks, Fairfax has increased its ownership the past 18 months from 14% to almost 24%. And Kestenbaum is still sitting on some crazy amount of cash ($800 or $900 million?). Another great asset to own. I expect steel to do well as we get to the other side of the economy in another year or so. Like Exco, with Fairfax now owning >20%, this is now an Equity Accounted holding. 
- Foran Mining ($140 million): Fairfax owns 23% of Foran, which is developing a copper mine in Canada that should begin production in a couple of years right when sales of EV’s should be taking off… and a shortage of copper develops. Most analysts are forecasting much higher prices for copper looking out a couple of years. This investment will be one to watch moving forward as it has the potential to be a another big winner for Fairfax.

- Altius Minerals ($106 million): Fairfax owns 14% of this diversified royalty company with exposure to potash, iron, copper etc. Quality company… chug, chug, chug.

 

Fairfax also has a pretty sizeable exposure to energy:

 

- Exco ($195 million carrying value Dec 31). @nwoodman yes, it will be very interesting to see what EXCO resources can deliver as they work off their nat gas hedges. Fairfax’s share of profits for Exco was $44 million in Q3. Great asset to own in the current environment.

- Limited partnerships/private equity funds - investment funds managed by third party fund managers:($252.1 - oil and gas extraction- at Dec 31, 2021). @glider3834 mentioned this investment in the past. 
- Ensign Energy Services ($59 million): Fairfax owns 13% of this oil and gas services company. Certainly looks well positioned. 

- Big Oil: OXY ($62 million) and CVX ($57 million): Fairfax was a big buyer in Q2. Will be interesting to see if they added more in Q3. 

Edited November 11, 2022 by Viking

[UK]

11 hours ago, Viking said:

Fairfax has certainly hit the ball out of the park with its commodity holdings. They currently total around $1.9 billion = 12.5% of total equity holdings of about $15 billion. The holdings are very diversified and certainly look well positioned to deliver significant value to Fairfax in the coming years (they stand a good chance of hitting Fairfax’s 15% return hurdle rate).

- Resolute ($600 million): Selling Resolute for +$600 million (plus $180 million CVA) in a bear market was brilliant. It will be interesting to see where they redeploy the funds when the deal closes in 1H 2023.

- Stelco ($384 million): this has also turned into a home run investment. Given all the share buybacks, Fairfax has increased its ownership the past 18 months from 14% to almost 24%. And Kestenbaum is still sitting on some crazy amount of cash ($800 or $900 million?). Another great asset to own. I expect steel to do well as we get to the other side of the economy in another year or so. Like Exco, with Fairfax now owning >20%, this is now an Equity Accounted holding. 
- Foran Mining ($140 million): Fairfax owns 23% of Foran, which is developing a copper mine in Canada that should begin production in a couple of years right when sales of EV’s should be taking off… and a shortage of copper develops. Most analysts are forecasting much higher prices for copper looking out a couple of years. This investment will be one to watch moving forward as it has the potential to be a another big winner for Fairfax.

- Altius Minerals ($106 million): Fairfax owns 14% of this diversified royalty company with exposure to potash, iron, copper etc. Quality company… chug, chug, chug.

 

Fairfax also has a pretty sizeable exposure to energy:

 

- Exco ($195 million carrying value Dec 31). @nwoodman yes, it will be very interesting to see what EXCO resources can deliver as they work off their nat gas hedges. Fairfax’s share of profits for Exco was $44 million in Q3. Great asset to own in the current environment.

- Limited partnerships/private equity funds - investment funds managed by third party fund managers:($252.1 - oil and gas extraction- at Dec 31, 2021). @glider3834 mentioned this investment in the past. 
- Ensign Energy Services ($59 million): Fairfax owns 13% of this oil and gas services company. Certainly looks well positioned. 

- Big Oil: OXY ($62 million) and CVX ($57 million): Fairfax was a big buyer in Q2. Will be interesting to see if they added more in Q3. 

 

Viking, thank you for all you work and info on FFH!

[nwoodman]

Decent bump in the MU position

 

https://www.dataroma.com/m/holdings.php?m=FFH

[RetroRanger]

Yeah Micron becoming very significant. I am still mad about myself because i did not pull the trigger at 48$ ( was sooo close ...)

 

[Luca]

Micron is also 5% of my Portfolio, i like it! 

[MMM20]

What’s the deal with the BB bond position? Is that actually new or just the convert showing up? Thx.

[glider3834]

2 hours ago, MMM20 said:

What’s the deal with the BB bond position? Is that actually new or just the convert showing up? Thx.

they haven't converted them, the strike is $6 , matures Nov-23

https://www.globenewswire.com/news-release/2020/09/02/2087633/0/en/Fairfax-Announces-Acquisition-of-1-75-Convertible-Debentures-of-BlackBerry-Limited-After-Redemption-of-Existing-Convertible-Debentures.html

 

 

 

[TwoCitiesCapital]

1 hour ago, glider3834 said:

they haven't converted them, the strike is $6 , matures Nov-23

https://www.globenewswire.com/news-release/2020/09/02/2087633/0/en/Fairfax-Announces-Acquisition-of-1-75-Convertible-Debentures-of-BlackBerry-Limited-After-Redemption-of-Existing-Convertible-Debentures.html

 

 

 

 And could've sold at $10-15 SMDH

[glider3834]

works out as a US$33M or so dividend for Fairfax 

 

https://investors.stelco.com/news/news-details/2022/Stelco-Holdings-Inc.-Reports-Third-Quarter-2022-Results-and-Announces-a-3-per-Share-Special-Dividend-and-a-40-Increase-of-its-Regular-Quarterly-Dividend-to-0.42-per-Share/default.aspx

[Xerxes]

1 hour ago, glider3834 said:

works out as a US$33M or so dividend for Fairfax 

 

https://investors.stelco.com/news/news-details/2022/Stelco-Holdings-Inc.-Reports-Third-Quarter-2022-Results-and-Announces-a-3-per-Share-Special-Dividend-and-a-40-Increase-of-its-Regular-Quarterly-Dividend-to-0.42-per-Share/default.aspx

 

Yes ! Yes ! Yes 1

[Viking]

2 hours ago, glider3834 said:

works out as a US$33M or so dividend for Fairfax 

 

https://investors.stelco.com/news/news-details/2022/Stelco-Holdings-Inc.-Reports-Third-Quarter-2022-Results-and-Announces-a-3-per-Share-Special-Dividend-and-a-40-Increase-of-its-Regular-Quarterly-Dividend-to-0.42-per-Share/default.aspx

 

Yes, great news. Kestenbaum first took out every share he could at about C$35. Share count at Stelco at the end of 2020 was 88.7 million. Now it is 55.13 million = decrease of 33.57 million or 38%. With a much lower share count, now Kestenbaum starts with the special dividend. Smart capital allocation. One way to evaluate the quality of Fairfax’s equity portfolio is to look at the performance of the largest individual equity holdings and their management teams over the past couple of years. Kestenbaum/Stelco would get an A+ from me.
—————

Looks like the special dividend is about what Stelco earned in Q3. Not too shabby. And perhaps we see more. 

- Adjusted Net Income* of $163 million and Adjusted Net Income* per share of $2.40, down 74% from Q3 2021 and 54% from Q2 2022

—————

special dividend

55.13 million share outstanding x C$3 = C$166 million total cost.

regular quarterly dividend

55.13 million share outstanding x C$0.42 = C$23 million/quarter total cost.

—————
Fairfax owns 13 million shares of Stelco

13 x $3.42 = C44 million = US$33.5 million. 
 

I think Kestenbaum is the second largest shareholder at Stelco. Cha ching!

Edited November 16, 2022 by Viking

[Xerxes]

[petec]

On 11/16/2022 at 2:03 AM, Viking said:

I think Kestenbaum is the second largest shareholder at Stelco. Cha ching!

 

Yes he is. My guess is they take this private together at some point a la Atlas.

[glider3834]

https://www.ekathimerini.com/economy/1199226/eurobank-to-buy-additional-13-4-stake-in-cypriot-hellenic-bank/

[Viking]

2 hours ago, glider3834 said:

https://www.ekathimerini.com/economy/1199226/eurobank-to-buy-additional-13-4-stake-in-cypriot-hellenic-bank/

This purchase builds on Eurobank’s initial investment in Hellenic Bank last year and now makes Eurobank the largest shareholder of the second largest bank in Cypress. Eurobank also has its own operations in Cypress.

 

It is clear Eurobank has aspirations to grow in size. One strategy it is executing is to slowly build out its presence into adjacent countries. Chug, chug, chug.

 

My guess is Eurobanks’s strong financial position is going to allow them ample opportunity to continue to expand over time. In a weak environment, the strong get stronger. The stellar work the past 5 years of the management team at Eurobank is beginning to really shine through. 

 

Here is another article discussing the acquisition in a little more detail:

- https://cyprus-mail.com/2022/12/01/eurobank-to-become-hellenic-bank-majority-shareholder/

Eurobank on Thursday said that it has increased its stake in Hellenic Bank to 26 per cent, having now made an agreement for the acquisition of a 13.4 per cent share that currently belongs to video game company Wargaming, with the agreement pending regulatory approval.

 

Following the acquisition, Eurobank has now become Hellenic Bank’s majority shareholder, further expanding the bank’s involvement in the Cypriot banking sector. Eurobank also operates its own wholly-owned subsidiary on the island.

[TwoCitiesCapital]

9 hours ago, Viking said:

This purchase builds on Eurobank’s initial investment in Hellenic Bank last year and now makes Eurobank the largest shareholder of the second largest bank in Cypress. Eurobank also has its own operations in Cypress.

 

It is clear Eurobank has aspirations to grow in size. One strategy it is executing is to slowly build out its presence into adjacent countries. Chug, chug, chug.

 

My guess is Eurobanks’s strong financial position is going to allow them ample opportunity to continue to expand over time. In a weak environment, the strong get stronger. The stellar work the past 5 years of the management team at Eurobank is beginning to really shine through. 

 

Here is another article discussing the acquisition in a little more detail:

- https://cyprus-mail.com/2022/12/01/eurobank-to-become-hellenic-bank-majority-shareholder/

Eurobank on Thursday said that it has increased its stake in Hellenic Bank to 26 per cent, having now made an agreement for the acquisition of a 13.4 per cent share that currently belongs to video game company Wargaming, with the agreement pending regulatory approval.

 

Following the acquisition, Eurobank has now become Hellenic Bank’s majority shareholder, further expanding the bank’s involvement in the Cypriot banking sector. Eurobank also operates its own wholly-owned subsidiary on the island.

 

Is it typical to make such large investments in competitors in European banking? Or is this signalling a full take out and consolidation with their Cypriot subsidiary at some point? 

[petec]

On 12/2/2022 at 3:33 PM, TwoCitiesCapital said:

 

Is it typical to make such large investments in competitors in European banking? Or is this signalling a full take out and consolidation with their Cypriot subsidiary at some point? 

 

The latter, I suspect. 

[petec]

On 12/2/2022 at 5:45 AM, Viking said:

Eurobank also has its own operations in Cypress.

 

Cyprus. Cypress is a tree

[Viking]

As of today, it looks to me like Fairfax is set to report Net Gains on Investments of around $2 billion in Q4 = $450 (equities) + $1,300 (pet insurance) + $250 (bonds). Over the first 9 months of 2022, Fairfax had booked a $2.3 billion loss in the 'Net gains (losses) on investments' line item. If Fairfax comes in around $2 billion in Q4 they would reverse most of the YTD loss. That would be amazing, given we have just had bear markets in both bond and stock markets. Importantly, the investment portfolio at Fairfax looks well positioned and should deliver better than average returns moving forward. 

----------

As of Dec 9, Fairfax is sitting on about $1.14 billion in gains on its equity holdings (that I track... I attached my Excel spreadsheet below).

 

Here is the split by 'bucket':

1.) mark to market = +$450 million (incudes TRS, warrants etc)

2.) associates = +$500 million

3.) consolidated = +$190 million

 

Big movers?

- Eurobank =      +$299

- FFH TRS =       +$226

- Fairfax India = +$181

- Atlas =             +$180

- Quess =           - $109

- Stelco =           +$105

Fairfax Equity Holdings Dec 9 2022.xlsx

Edited December 12, 2022 by Viking

[steph]

Dear Viking, I just would like to thank you for all the work you do and for sharing it with us. Very much appreciated!

[StubbleJumper]

12 hours ago, Viking said:

As of today, it looks to me like Fairfax is set to report Net Gains on Investments of around $2 billion in Q4 = $450 (equities) + $1,300 (pet insurance) + $250 (bonds). Over the first 9 months of 2022, Fairfax had booked a $2.3 billion loss in the 'Net gains (losses) on investments' line item. If Fairfax comes in around $2 billion in Q4 they would reverse most of the YTD loss.

 

 

 

What is your methodology for estimating the M2M bond gains of $250m?  Treasury rates for 5-yr and 10-yr treasuries are definitely lower since Sept 30, but the shorter term rates such as the 1-yr and 2-yr have edged up a shade.  I haven't attempted any arithmetic on the fixed income port, but my mental model was that from Q3 to Q4 it would be roughly a wash.  My logic for that was the basic notion that dV/dy would likely be slightly negative because shorter treasury rates have edged higher, but that would likely be more or less offset by dV/dt being slightly positive.  

 

In any case, the M2M change for the fixed income port is pretty irrelevant when the bonds are intended to be held to maturity, but as you noted, it could make a bit of a difference for the EPS number that gets reported, and sometimes the market reacts favourably to a higher headline number (even if the earnings quality is dubious).

 

 

SJ

[modiva]

10 hours ago, steph said:

Dear Viking, I just would like to thank you for all the work you do and for sharing it with us. Very much appreciated!

Thank you Viking! I benefit from your generous sharing of your work. 

[Xerxes]

5 hours ago, StubbleJumper said:

My logic for that was the basic notion that dV/dy would likely be slightly negative because shorter treasury rates have edged higher, but that would likely be more or less offset by dV/dt being slightly positive.  

 

Ahhhh not Calculus 2.

I vowed decades ago before God to not re-open the Calculus books.

 

[Viking]

4 hours ago, StubbleJumper said:

 

 

 

What is your methodology for estimating the M2M bond gains of $250m?  Treasury rates for 5-yr and 10-yr treasuries are definitely lower since Sept 30, but the shorter term rates such as the 1-yr and 2-yr have edged up a shade.  I haven't attempted any arithmetic on the fixed income port, but my mental model was that from Q3 to Q4 it would be roughly a wash.  My logic for that was the basic notion that dV/dy would likely be slightly negative because shorter treasury rates have edged higher, but that would likely be more or less offset by dV/dt being slightly positive.  

 

In any case, the M2M change for the fixed income port is pretty irrelevant when the bonds are intended to be held to maturity, but as you noted, it could make a bit of a difference for the EPS number that gets reported, and sometimes the market reacts favourably to a higher headline number (even if the earnings quality is dubious).

 

SJ

 

@StubbleJumper great question. When Fairfax reported Q3 I was surprised the net loss from bonds was only $240 million (after hedge). It was $150 million lower than Q2 - even though the absolute interest rate moves in Q3 were larger than Q2 across the curve. So I wonder if we are not now seeing - as bonds held shrink in duration and get closer to maturity - a small unwind each quarter in the unrealized loss bucket. Which is what Fairfax told us would happen (the unrealized $1 billion loss in bonds would reverse as they are held to maturity).  

 

After doing more of a deep dive this morning I think my $250 million number for bond gains in Q4 is too high. I was overestimating the gains (further out on the curve) versus the losses (on the shorter end). My new guess is something closer to zero. 

 

Fairfax will see gains in Q4 from their longer term bond holdings. In Q3 they were very aggressive adding $4.1 billion with a 3-5 year duration. Their total bond exposure of 3 years and longer went from $2.5 billion to $6.9 billion = + $4.4 billion. My guess is Fairfax likely continued to add bonds of 3 year or more duration in Oct and Nov. Yields on longer term treasuries peaked around Nov 7. If Fairfax continued to be aggressive adding to duration in Q4 then the gains from falling bond yields will be even larger in Q4. 

 

 

 

Offsetting the gains on longer term bonds will be unrealized losses on shorter duration bonds as short term rates continue to march higher.

 

The bottom line, Fairfax's bond portfolio is in very good shape and they are positioned very well for the current environment (lots of unknowns). My guess is big unrealized bond losses are a thing of the past. And now Fairfax shareholders will enjoy much higher interest and dividend income.

 

So it was 9 months of pain (and $1.1 billion net loss on their bond portfolio). Moving forward, Fairfax shareholders will now reap the gain of higher interest rates.