Fairfax 2021

[bearprowler6]

Apparently BB is making the rounds on various YOLO places, e.g., WSB, TikTok.  (This is what I hear anyway)

 

Ok, wow...  I did some searching and found this.  Absolutely bizarre.  Don't click the link if you're epileptic.  ;D  There's more, this is just the first one I clicked...

 

 

 

Holy Christ.  I am absolutely gobsmacked to see a thread like that.  Will FFH's BB investment be rescued by the sudden appearance of a collection of "greater fools?"  I guess if you have a choice between being good or being lucky, you'd be well advised to choose the latter...

 

 

SJ

 

So which one of you planted this thread in Reddit  8)

 

 

It wasn't me.  But, now that you mention it, I am considering the possibility of starting a new thread on this new outfit that I heard of which is likely to skyrocket.  It's called the Resolute Forest Products Information Technology Systems corp (you would rightly refer to it as RF-Pits).  They have an innovative product called e-paper which will be used by all electric car companies and is already in heavy use at Apple and Amazon...

 

 

SJ

 

This could explain the move up in Blackberry:

 

https://www.docketbird.com/court-cases/BlackBerry-Limited-v-Facebook-Inc-et-al/cacd-2:2018-cv-01844

 

Typically a court action of this nature occurs before a settlement between the parties is announced. In this case the settlement would involved FB paying an amount to BB for damages without admitting blame or responsibility.

 

In any case, it seems that BB is posed to continuing ripping higher today based on trading in the pre-market. Another 20%+ day here we come! Maybe Prem has finally learned how to play the game?

[Xerxes]

 

FFH will not outperform as a multi-bagger on an absolute sense even if there is a huge pivot to value, but may outperform on relative sense if all fancy stuff start to deflate a bit.

 

Xerxes this comment intrigued me.  I actually think many of Fairfax's investments could do 2-3x or more from these levels.  Very rudimentary analysis on my behalf but Iam estimating FFH could be trading at $USD1000/share in 2025.  The caveat as always is that they have to do sensible not "clever" things.  Guess it also depends what we call a multi-bagger,  in this day and age the expectation is set by Tesla so 20% compounding is pretty mediocre  ;)

 

“What gets us into trouble is not what we don't know. It's what we know for sure that just ain't so.” Mark Twain

 

cheers

nwoodman

 

Multi-bagger for me is more than triple.

in this environment, you need at least two bags when you come to the party.

[Xerxes]

https://www.fool.ca/2021/01/14/blackberry-stock-could-be-on-the-verge-of-a-parabolic-move/

or articles with headlines like this "BlackBerry Stock Could Be on the Verge of a Parabolic Move!"

[KFS]

I really can't believe it has come to this (lol), but the link below seems like an easy way to monitor the WSB subreddit sentiment of a stock like BB and others.  Scroll down the page a bit and click on "BB" and you will see the graph showing the recent explosion of comment volume and positive sentiment.

 

https://www.swaggystocks.com/dashboard/wallstreetbets/ticker-sentiment

[StevieV]

If my quick math is correct, Fairfax's BB position is up roughly $400 million YTD (equity and convertible).  We'll see where things go.

 

[Viking]

Regarding BB, the spike in price clearly ‘efficient market theory’ at work :-)

 

Now if it keeps going higher is there something Fairfax can do to take advantage?

[StubbleJumper]

Regarding BB, the spike in price clearly ‘efficient market theory’ at work :-)

 

Now if it keeps going higher is there something Fairfax can do to take advantage?

 

 

Resign from BB's board of directors, and then begin to trim the BB position as the stock price rises?  I know, I know, it's a crazy idea!

 

 

SJ

[Viking]

Regarding BB, the spike in price clearly ‘efficient market theory’ at work :-)

 

Now if it keeps going higher is there something Fairfax can do to take advantage?

 

 

Resign from BB's board of directors, and then begin to trim the BB position as the stock price rises?  I know, I know, it's a crazy idea!

 

 

SJ

 

If BB continues even higher is there anything FFH could do in the options market to lock in a certain price. Giving them some time to exit the whole investment? I know, i know... no more derivative bets! :-)

[StubbleJumper]

Regarding BB, the spike in price clearly ‘efficient market theory’ at work :-)

 

Now if it keeps going higher is there something Fairfax can do to take advantage?

 

 

Resign from BB's board of directors, and then begin to trim the BB position as the stock price rises?  I know, I know, it's a crazy idea!

 

 

SJ

 

If BB continues even higher is there anything FFH could do in the options market to lock in a certain price. Giving them some time to exit the whole investment? I know, i know... no more derivative bets! :-)

 

 

I don't mind the idea of managing BB's stock price risk using derivatives -- as long as you choose a hedge ratio between 0% and 100% that's risk management, not speculation like some of the recent derivative debacles.  Prem's seat on the board of directors might be the problem with that.  Insiders are supposed to report their transactions.

 

 

SJ

[obtuse_investor]

There was a disturbance in the space time continuum when that BB rip happened. Bloomberg caught it.

[petec]

Yea, the monster block trades over the last several days has me thinking buybacks may be back in a big way. I would've expected them to only ratchet up after closing the Riverstone sale but apparently not

 

I'm not sure I follow this logic. In my experience blocks tend to happen when there is a big seller, not a big buyer. You might be right but my guess is a couple of big holders sold through 2020, pressuring the shares to the valuation levels that got us all excited, and we are seeing the last few trades now. Hence the blocks, and the fact that the share price is rising as overall selling pressure eases. Just a guess.

[petec]

 

FFH will not outperform as a multi-bagger on an absolute sense even if there is a huge pivot to value, but may outperform on relative sense if all fancy stuff start to deflate a bit.

 

Xerxes this comment intrigued me.  I actually think many of Fairfax's investments could do 2-3x or more from these levels.  Very rudimentary analysis on my behalf but Iam estimating FFH could be trading at $USD1000/share in 2025.  The caveat as always is that they have to do sensible not "clever" things.  Guess it also depends what we call a multi-bagger,  in this day and age the expectation is set by Tesla so 20% compounding is pretty mediocre  ;)

 

“What gets us into trouble is not what we don't know. It's what we know for sure that just ain't so.” Mark Twain

 

cheers

nwoodman

 

Not disagreeing, but what's your back of the envelope route to $1000? And which currency are you talking, USD?

[nwoodman]

 

FFH will not outperform as a multi-bagger on an absolute sense even if there is a huge pivot to value, but may outperform on relative sense if all fancy stuff start to deflate a bit.

 

Xerxes this comment intrigued me.  I actually think many of Fairfax's investments could do 2-3x or more from these levels.  Very rudimentary analysis on my behalf but Iam estimating FFH could be trading at $USD1000/share in 2025.  The caveat as always is that they have to do sensible not "clever" things.  Guess it also depends what we call a multi-bagger,  in this day and age the expectation is set by Tesla so 20% compounding is pretty mediocre  ;)

 

“What gets us into trouble is not what we don't know. It's what we know for sure that just ain't so.” Mark Twain

 

cheers

nwoodman

 

Not disagreeing, but what's your back of the envelope route to $1000? And which currency are you talking, USD?

 

USD450*1.14^4*1.4 P/B=>USD 1000. 

 

Basic Thesis: Underlying compounding in book translating to P/B expansion.  Similar to most I expect.  Underlying assets as pointed out by Viking (brilliant spreadsheet) and others are mostly moving in the right direction so I think book is greatly depressed. 

 

The thing that has really changed in my thesis is that Prem is starting to invest more in “roll your own”.  Digit being the perfect example, I would argue Atlas is another even though it is well established but new management is everything.    I much prefer him spying an early opportunity and providing a bit of mentorship and capital to grow something special.  Much better in my opinion to the “turn around that never does approach”.  Either way I think people do really enjoy working with him, this is half the battle.

 

Cheers

nwoodman

 

[petec]

USD450*1.14^4*1.4 P/B=>USD 1000. 

 

Basic Thesis: Underlying compounding in book translating to P/B expansion.  Similar to most I expect.  Underlying assets as pointed out by Viking (brilliant spreadsheet) and others are mostly moving in the right direction so I think book is greatly depressed. 

 

The thing that has really changed in my thesis is that Prem is starting to invest more in “roll your own”.  Digit being the perfect example, I would argue Atlas is another even though it is well established but new management is everything.    I much prefer him spying an early opportunity and providing a bit of mentorship and capital to grow something special.  Much better in my opinion to the “turn around that never does approach”.  Either way I think people do really enjoy working with him, this is half the battle.

 

Cheers

nwoodman

 

Thanks. I think that's broadly sensible as a "semi-bull" case. Certainly the capital that's been "created" in the last 6 months is very useful in a hard market and could kick-start something special. And I think we could see several of the big investments liquidated at a premium to their carrying values over the next 5 years. EDIT: the major coutnerargument is lower rates on float but I tend to think this ought to be offset by higher gearing as float grows in a hard market, and lower discount rates for equity leading (all else equal) to a higher p/bv.

 

I totally agree re: people enjoy working with him and that's half the battle. In fact probably the main thing that has kept me in this dog for the last decade is his ability to attract talent. It's astonishing to think that Digit, started only three years ago, is now a meaningful part of the market cap of Fairfax.

 

That said this focus on "roll your own" is not new. Most notably Fairfax did it with ICICI Lombard and First Capital, now both sold. I would argue they basically also did it with Recipe, FIH, and FAH. They have a long record of starting companies and building platforms.

[Viking]

I think there is a good chance Fairfax could trade over US$600 in 2021. With shares currently trading at $382 that would give investors a close to 60% return.

 

How? At Sept 30, 2020 BV was US $442. By Q3, 2021 there is a good chance BV could be over $500. As earnings, BV and sentiment in the company improves we could see a 1.2 x multiple (hardly expensive) = shares at US $600. Not a crazy number.

 

In Q4 we know their equity positions increased in value by over $1.4 billion. (Yes, a majority of the positions are not mark to market.) In the last 2 weeks Blackberry is up another $300 million. It looks like their stake in Digit may be worth $400 million more. Their other equity holdings are continuing to increase in value in Q1. We could see their equity holdings jump $2.5 billion in 6 months (i am lumping Digit in here). That is $90/share (yes, i understand this number is messed up given how the equities are accounted for; i put it out there more to provide some magnitude). Bottom line, this would be very good for shareholders were it to play out.

 

The insurance business is in a hard market. There is a lag between price increases and higher earnings. 2021 should be the start price increases flowing through to earnings. RBC is forecasting that when this inflection point happens the market multiple will increase. This will provide a double benefit for shareholders of higher earnings and higher multiple from Mr Market.

 

Earnings from associates should also become a tailwind in 2H 2021 as the economic recovery takes hold.

 

Fairfax is highly motivated to monetize assets; they have said this repeatedly. Unfortunately the pandemic slowed sales in 2020. They have a slew of companies they could monetize... the challenge is we do not know the company, the timing or size/impact. The key here will be a continuation of the risk-on environment in financial markets. Fairfax could generate $500 million or more in proceeds in 2021 from selling off stakes in AGT, Farmers Edge, Peak Performance (Bauer), Toy’s R Us (real estate) etc.

 

Fairfax also owns a few lottery tickets. A Blackberry sale? Digit IPO? Atlas could easily trade much higher than $11/share. US$ weakness; strength in EM could jack Indian investments.

 

Stock buybacks: if Fairfax is successful with asset monetizations (the odds look good right now) there should be ample $ to grow insurance co’s in hard market AND to also buy back a material amount of stock. Watch the stock pop on news of a large stock buyback.

 

Management credibility: Another opportunity for Fairfax is what management does in the coming year. If their words and actions instil confidence in investors then this should support multiple expansion.

 

Will they pull another rabbit out of the hat? Fairfax also has a history every few years of doing something creative and unexpected that is good for shareholders. Recent examples are First Capital and Riverstone UK sales. With FFH shares this cheap my guess is they are highly motivated to find some $ to take out a significant number of shares :-)

 

Bottom line, the company has a large number of significant tailwinds as we begin 2021. The key is a continuation of the current risk-on sentiment and shift to cyclicals/EM. If it continues into 2021 and Fairfax is able to monetize a few investments then shareholders could see a very solid return on their shares. We will see :-)

 

PS: there are also lots of risks... like the virus mutating into a more deadly strain... like the Tesla stock bubble popping, taking the stock market averages down 30-40%... like a double dip recession hitting in 2H 2021 (instead of expected recovery)... like hard market coming to a screeching halt... like Fairfax management doing something very dumb... management at the large equity holdings doing something dumb (Atlas, Blackberry, Eurobank)... reserving issues rearing their ugly head...

[petec]

The nice thing about $600 is that 1.2x isn't even that rich.

 

It's amusing to note that if Digit goes up 12x - and in unicorn world anything less would surely be considered a failure - Fairfax's stake will be worth its entire market cap  ::) ::)

 

The only thing I would note is that they have not yet monetised a single investment. They've rearranged them, but so far they've always been paid in shares not cash. The only thing they've received cash for is selling subsidiaries.

[StubbleJumper]

I vaguely recall that the average cost [of FFH's BB shares] is in the $17's. I think they disclosed this a few years ago. If you convert the bond at $6 you get something like $12.

 

 

In six short weeks the prospects for BB's share price has drastically changed.  This morning it is trading at US$11.23, which takes FFH's BB position perilously close to break-even.  There's nothing particularly magical about breaking even, but it is emotionally satisfying...even if it does end up taking 10 or 11 years!

 

 

SJ

[petec]

I know the share price has changed. Do you really think the prospects have changed?

[StubbleJumper]

I know the share price has changed. Do you really think the prospects have changed?

 

 

Business prospects?  No.  BB is still a dog.

 

Share-price prospects have changed now that BB YOLO seems to be a thing.  There is now at least a reasonable prospect that FFH can find a way to exit the BB position without incurring a permanent loss of (our) capital.

 

 

SJ

[ourkid8]

I totally disagree, take a look at BB Ivy and it's prospects are huge!!! As I have mentioned many times, BB's issue is execution as they are all in the hot segments of the market. (EV, Data security, working from home etc...)

 

I know the share price has changed. Do you really think the prospects have changed?

[Viking]

I totally disagree, take a look at BB Ivey and it's prospects are huge!!! As I have mentioned many times, BB's issue is execution as they are all in the hot segments of the market. (EV, Data security, working from home etc...)

 

I know the share price has changed. Do you really think the prospects have changed?

 

So Blackberry shares traded at US$6.63 on Dec 31. Today they are trading at $11.75 = $5.12 increase.

- Fairfax owns 46.7 million shares = $239 million increase.

- Fairfax also owns debentures ($6 conversion) or 55 million more shares = $282 million increase.

- total increase = $514 million / 26.5 million shares = about $19/share pretax

- this is a mark to market position

 

I agree, Blackberry looks to be in all the right segments. It is surprising to me that someone has not tried to take it out just to get the technology and/or people. Or perhaps Chen does have the right plan and he just needs another year or two for the results to start to come through (and justifying a much higher share price).

 

In terms of where BB is trading, look at all the other companies in the segments they compete... are they not all trading at nosebleed levels? It does make some sense on a relative basis.

[petec]

I totally disagree, take a look at BB Ivey and it's prospects are huge!!! As I have mentioned many times, BB's issue is execution as they are all in the hot segments of the market. (EV, Data security, working from home etc...)

 

 

Well quite. Hence my question. It's always had significant opportunities.

[ourkid8]

The big issue has been execution and that's where BB has been very weak.  2020 was supposed to be their breakout year but that is now pushed to this year due to Covid.  Remember, BB teamed up with Amazon on BB Ivey so if it truly becomes the game changer which a lot of individuals are expecting, I can definitely see Amazon taking them out once it is proven and becomes embedded in vehicles in 2023.  Also, Don't forget to look at John Chen's contract, it was recently extended to 2023 and he needs to get this stock in the USD$20-30 range to really make a killing.  Everything is slowly playing out for an exit in 2023 IMO. 

 

I totally disagree, take a look at BB Ivey and it's prospects are huge!!! As I have mentioned many times, BB's issue is execution as they are all in the hot segments of the market. (EV, Data security, working from home etc...)

 

I know the share price has changed. Do you really think the prospects have changed?

 

So Blackberry shares traded at US$6.63 on Dec 31. Today they are trading at $11.75 = $5.12 increase.

- Fairfax owns 46.7 million shares = $239 million increase.

- Fairfax also owns debentures ($6 conversion) or 55 million more shares = $282 million increase.

- total increase = $514 million / 26.5 million shares = about $19/share pretax

- this is a mark to market position

 

I agree, Blackberry looks to be in all the right segments. It is surprising to me that someone has not tried to take it out just to get the technology and/or people. Or perhaps Chen does have the right plan and he just needs another year or two for the results to start to come through (and justifying a much higher share price).

[ourkid8]

The difference with BB Ivy is that it is a co-venture with a proven player in Amazon.  They are not just using AWS services but also Amazon developers and amazon is going to put a lot of resources behind this venture.  How I see it playing out, Tesla is like the dominant EV closed player (Similar to Apple) but BB Ivy will be like Android playstore allowing numerous EV players to share data, accelerate their AI learning, create apps between themselves etc... and BB will be the gatekeeper. 

 

I totally disagree, take a look at BB Ivey and it's prospects are huge!!! As I have mentioned many times, BB's issue is execution as they are all in the hot segments of the market. (EV, Data security, working from home etc...)

 

 

Well quite. Hence my question. It's always had significant opportunities.

[StubbleJumper]

The difference with BB Ivy is that it is a co-venture with a proven player in Amazon.  They are not just using AWS services but also Amazon developers and amazon is going to put a lot of resources behind this venture.  How I see it playing out, Tesla is like the dominant EV closed player (Similar to Apple) but BB Ivy will be like Android playstore allowing numerous EV players to share data, accelerate their AI learning, create apps between themselves etc... and BB will be the gatekeeper. 

 

I totally disagree, take a look at BB Ivey and it's prospects are huge!!! As I have mentioned many times, BB's issue is execution as they are all in the hot segments of the market. (EV, Data security, working from home etc...)

 

 

Well quite. Hence my question. It's always had significant opportunities.

 

 

Okay.  So, how does BB make money from this, and how much? 

 

As a starting point, after a FFH debenture conversion, BB would have about 600m shares outstanding.  To justify the current share price, they'd need something like $1/sh EPS, or at least $1/sh of cash from ops, so call it roughly $600m annually.  They currently are on target for about $40m of cash from ops, which is actually an improvement over previous years.

 

It's great to partner with other successful companies, but it needs to eventually flow down to the bottom line.  The fact that they've generated bugger-all in terms of cash from ops over recent years is their problem.

 

 

SJ