How Come No One is Talking About Resolute?

[Parsad]

How come no one is talking about Fairfax's stake in Resolute Forest Products?  The one that everyone was hacking apart 2-3 years ago, and now sits at nearly $20 per share as lumber prices soar!  Up $5 a share since the end of Q1 and up over 300% since the end of 2019. 

Owning 40% of a $1.5B lumber company sounds pretty good right now...alongside a 40% stake in a rapidly growing $3.3B shipping company...10% of a $6.5B telecommunications company...30% of one of Greece's largest banks valued at nearly $3B...some pretty interesting large stake turnarounds that are taking hold for Fairfax. 

Combine that with a very hard insurance market, tons of dry powder and soon to be $1.3B in holding company cash after paying off the revolver...looking like $700 CDN at the end of the year looks reasonable.  Especially if India's 2nd wave drop takes significant hold and the Indian economy starts churning again over the next few months.    Cheers!

[RichardGibbons]

Well, there was a conversation about it a couple months ago, but the consensus seemed to be that Fairfax would be insane if it doesn't dump the entire position at $12.

It's also noteworthy that pulp has started increasing as well, though not to the degree lumber has.

I've had some Resolute calls since $11, because this situation seems like what options were designed for:

1. It's unlikely to be a position that I'd want to hold for a decade.
2. If lumber stays up for a while, the stock should increase and the options' leverage makes me lots of money.
3. If lumber plummets, I lose much less money than I would if I had a comparable position in shares.

Edited May 27, 2021 by RichardGibbons

[Xerxes]

We have been talking about it. Complaining about for about 5 years and now less complaining but more talking about it, but mostly eager to see how FFH will monetize this largely illiquid position.

For reference, the RFP share price is back where it was couple of years ago. But it took a once-in-a-hundred years event to bring it back there. That says a lot. Whether this is cyclical or secular, I declare myself largely clueless on the matter. 

Few facts from RFP:

- Net pension liability of $1.44 billion (I hope the asset side of their pension is not funded by lumber)

- Net debt at $449 million

- OK - cash flow from ops moves from -$49 million in Q1 2020 to +$125 million to $100 million and finally to $158 million in Q4 2020. From Q1 last year to the last quarter in 2020. Total $334 million. Knock out $150 million for capex etc = free cash for $170 million (if lumber prices hold!). Flip it against market cap of $1.5 billion that gives a cash flow yield of 10%. Knock out 3% because you were catching the wave up. That brings it down to 7% cash flow yield, which is not bad, but has a pile of debt + large (net) pension liability. 

Fine, if one feel adventurous, one can hold 20% of the company and monetize the other 20% into the cycle. But the rationale question to ask is the following given all i mentioned above, and the fact that FFH already took an impairment few years ago, based on THEIR OWN assessment, why keep a big position.

I am ok with the rest of your note. But disagree on a RFP thesis play that relied on a once-in-a-hundred years event to bring it back where it was.

EDIT: Lastly, 71 million outstanding share of which 30 million are owned by FFH. With a million shares exchanging hands on a daily basis, it will be a long and painful unwind. Specially if the price rallies are on thing volumes.

 

Incidentally, if you have strong views on Atlas, i would like to hear those, i find the company interesting. Is that a roll-up play for you, an undervaluation of the equity. Or just surfing the wave of the global GDP bounce back (which really can be played with any other asset and with lower risk).

Edited May 27, 2021 by Xerxes

[RichardGibbons]

Further to the options strategy, I'm not sure about regulatory limits on Fairfax, but one thing they might want to consider is converting their long position into synthetic calls. (i.e. buy some puts).

Edit: Actually, no. Now that I think about it, they have such a big position, they probably couldn't put on such a massive hedge without demolishing the stock price (as the option writer would likely hedge their short puts by shorting shares.)

Edited May 27, 2021 by RichardGibbons

[Gregmal]

I kind of agree with Xerxes. Getting it "right" after 5-10 years of sitting on big losses isnt getting it right in my book. A good friend once said to me(this is a high level exec at a small cap company, not a market wizard) "everyones right in the stock market if you hold long enough"...The goal is to maximize IRR. Given they got a mulligan here, take it and run and hope to move on to something else that maybe they do a better job with. I mean they already had a huge whiff on BB. Dont make the same mistake twice. 

[Parsad]

27 minutes ago, Xerxes said:

 

EDIT: Lastly, 71 million outstanding share of which 30 million are owned by FFH. With a million shares exchanging hands on a daily basis, it will be a long and painful unwind. Specially if the price rallies are on thing volumes.

 

Incidentally, if you have strong views on Atlas, i would like to hear those, i find the company interesting. Is that a roll-up play for you, an undervaluation of the equity. Or just surfing the wave of the global GDP bounce back (which really can be played with any other asset and with lower risk).

I think they'll monetize a significant portion of the shares as lumber peaks towards the end of the summer...maybe at $25-28 per share.  Might even get taken out by a larger international player.

In terms of Atlas, I've owned it since under $8 for about 3 years.  Essentially doubled my holdings during the March 2020 collapse of the market.  Sold half in my taxable accounts around $14, and am holding the rest.  I've been watching and following Sokol since he left Berkshire.  I think he's extremely talented at understanding distressed scalable, high capex businesses that are normally cyclical, and then converting them into consistently, cash flowing businesses that have reduced operating risk compared to their peers.  Atlas has become the fastest growing shipping lessor with long-term guaranteed contracts, flexible supportive financing...and they will slowly diversify into a handful of consistently cash flowing businesses that dominate their respective space.  He's also very good at finding talent.

Cheers! 

[Viking]

Yes, Resolute has been an absolute beast for Fairfax over the past year. I don’t follow the company super close but it looks like it is slowly pivoting its business, driven by lumber in 2018 and again by lumber in 2021. The purchase on the 3 lumber mills from Conifex in late 1999 looked like a mistake when covid hit in March/April on 2020 but looks well timed now. There is also a chance someone might take the paper/newsprint (shitty) businesses of its hands... we can only hope. They are also sitting on over $200 million in softwood lumber duty payments that may be returned to them if the US / Canada can come to an agreement. For me, there are much better positioned companies in the forestry segment for people who want to invest new money. Resolute has certainly improved its financial position and business over the past 5 years but not so much that i would want to own it over any of the other big Canadian players like West Fraser, Interfor or even Canfor. 

[petec]

3.3bn EV. Highest est on the street $900m ebitda in peak year.

Highest est FCF $430m vs 1.3bn market cap. 

Both estimates *way* above where reasonable long term estimates lie.

Pulp and lumber prices already seem to have rolled over unless I’m looking at the wrong things.

Can’t say it excites me.

Parsad, what makes you confident they can sell, and in particular time the sale well, given the liquidity issue?

[StubbleJumper]

Yes, I would say that we've been talking about Resolute a fair bit, and the discussion of the lumber market dynamics has been unprecedented on this site.  The conversation seems to have boiled down to two competing views.  One view is that this is just a temporary lumber price spike and FFH should divest RFP at the top-ish of the lumber cycle (ie, find a sucker to buy the whole company while the stock is high), while the other view is that this will be a longer-term price increase and FFH should hold its shares to milk the cash cow.  I guess we could spill a bit more ink about which of those views is correct, but I'm not sure that would be helpful.

Sanj, for FFH shareholders, it's worth celebrating that the RFP and BB positions have risen from the dead, but it's really not cause for patting Prem on the back when you consider the time-value-of-money.  Some enterprising board member might wish to do some forensic research to construct a little spreadsheet that tracks RFP and BB share/note purchases, dividends and current market value which would enable the calculation of an IRR.  But, I don't think we even need that sort of spreadsheet to tell us that we have not gotten a 8% or 10% return on either of those stocks for the period that FFH has been holding.

Seaspan, on the other hand, is one where you might want to praise FFH management because I am guessing that the IRR calculation would be favourable.

 

SJ

[gfp]

9 hours ago, Parsad said:

I think they'll monetize a significant portion of the shares as lumber peaks towards the end of the summer...maybe at $25-28 per share.  Might even get taken out by a larger international player.

In terms of Atlas, I've owned it since under $8 for about 3 years.  Essentially doubled my holdings during the March 2020 collapse of the market.  Sold half in my taxable accounts around $14, and am holding the rest.  I've been watching and following Sokol since he left Berkshire.  I think he's extremely talented at understanding distressed scalable, high capex businesses that are normally cyclical, and then converting them into consistently, cash flowing businesses that have reduced operating risk compared to their peers.  Atlas has become the fastest growing shipping lessor with long-term guaranteed contracts, flexible supportive financing...and they will slowly diversify into a handful of consistently cash flowing businesses that dominate their respective space.  He's also very good at finding talent.

Cheers! 

Sanjeev, do we know what David Sokol's actual economic exposure to Atlas shares is?  I haven't seen where he owns a substantial personal investment but maybe I am missing shares held by other entities like Teton or his family members.  I assume his net worth is around a Billion dollars if not higher by now.  He left Berkshire very wealthy and a lot of time has passed.

[bluedevil]

Sokol was given at least 1 million shares of Atlas around when he took on Chairman role.  May have received further since then.

Parsad, I agree with your view on Atlas.  It has been fun to watch the progress that has been made since Sokol took over -- the company has systematically improved every aspect of its business in that time frame - board, management, safety; financing; counterparty risk; and so on.   I own shares separately, but also happy that FFH is a 40% shareholder.

It seems to me the market has not given the company sufficient credit for the progress.  The post-pandemic runup in prices and the newbuilds have essentially locked in a very large sum of future cash flow and greatly mitigated the big risks the company had -- potential revenue drop as most charters were going to run off in 2022-2024 and were going to be exposed to market rates; and large concentration with a couple of customers.  

It seems to me there's a lot of momentum now.  The company has 12 b in contracted cash flow; the counterparties are stronger; the company has scale and good operating management, and we have a potential call option in terms of Sokol growing a business in an area where he has a tremendous record - power. 

 

[petec]

16 minutes ago, bluedevil said:

Sokol was given at least 1 million shares of Atlas around when he took on Chairman role.  May have received further since then.

Parsad, I agree with your view on Atlas.  It has been fun to watch the progress that has been made since Sokol took over -- the company has systematically improved every aspect of its business in that time frame - board, management, safety; financing; counterparty risk; and so on.   I own shares separately, but also happy that FFH is a 40% shareholder.

It seems to me the market has not given the company sufficient credit for the progress.  The post-pandemic runup in prices and the newbuilds have essentially locked in a very large sum of future cash flow and greatly mitigated the big risks the company had -- potential revenue drop as most charters were going to run off in 2022-2024 and were going to be exposed to market rates; and large concentration with a couple of customers.  

It seems to me there's a lot of momentum now.  The company has 12 b in contracted cash flow; the counterparties are stronger; the company has scale and good operating management, and we have a potential call option in terms of Sokol growing a business in an area where he has a tremendous record - power. 

 

+1, and I would add that there might be a good chunk more revenue backlog added as Seaspan contracts its small/short term ships onto 3-5y contracts at current levels. This was discussed on the last call and gives them the opportunity to raise finance against these new contracts to finance the newbuilds. 

[gfp]

So I did find this as the last Form 4 from Sokol on this.  Don't think he needs to file Form 4 any longer.  He had over 3 million shares of SeaSpan and some dividends were automatically reinvesting

https://www.sec.gov/Archives/edgar/data/0001097496/000122520817015852/xslF345X03/doc4.xml

Edit: Sokol currently owns 2.425 million shares of ATCO and the Sokol Family Foundation owns 1.76 million of those shares.  So he has been gifting shares or transferring / selling shares.  He was given a grand of 1 million shares to become chairman and must have purchased some shares in the open market.  I was under the impression previously that he had been given shares, the investment was not material to his net worth (it still isn't), and that he had never purchased any SSW/ATCO shares with his own capital.  It does appear that he bought shares at some point unless I am missing a stock split.

Edited May 27, 2021 by gfp

[Crip1]

13 hours ago, StubbleJumper said:

Yes, I would say that we've been talking about Resolute a fair bit, and the discussion of the lumber market dynamics has been unprecedented on this site.  The conversation seems to have boiled down to two competing views.  One view is that this is just a temporary lumber price spike and FFH should divest RFP at the top-ish of the lumber cycle (ie, find a sucker to buy the whole company while the stock is high), while the other view is that this will be a longer-term price increase and FFH should hold its shares to milk the cash cow.  I guess we could spill a bit more ink about which of those views is correct, but I'm not sure that would be helpful.

Sanj, for FFH shareholders, it's worth celebrating that the RFP and BB positions have risen from the dead, but it's really not cause for patting Prem on the back when you consider the time-value-of-money.  Some enterprising board member might wish to do some forensic research to construct a little spreadsheet that tracks RFP and BB share/note purchases, dividends and current market value which would enable the calculation of an IRR.  But, I don't think we even need that sort of spreadsheet to tell us that we have not gotten a 8% or 10% return on either of those stocks for the period that FFH has been holding.

Seaspan, on the other hand, is one where you might want to praise FFH management because I am guessing that the IRR calculation would be favourable.

 

SJ

Concur in full. The share price of RFP is obviously good news. Couple that with an economist I read who thinks that this is a longer term (2 years or so, if not more) play on lumber pricing since additional capacity is not terribly easy to bring in line, and there looks to still be more upside than down side in the short term.

That said, even if Fairfax can sell out of BB and RFP at prices more elevated than what we’re seeing now, the net impact on Fairfax will still be noticeably worse than if they would have purchased a basket of stocks whose returns were in line with the S&P.

 

-Crip

[Pedro]

I see Stelco and Resolute as strategic investments for a vertically integrated P&C insurer. When your insurerd property burns or crashes, its always good to know own part of the suppliy chain to fix them. I'm fine if their acquired for a higher price or end up as  long term holds that hopefully end up paying consistent dividends. The entry price for resolute was not great but the future is bright now at least. 

I continue to see BB out of the circle of competance and rationalized as a patriotic CDN investement. Happy to cut that off whenever they can and move on.  Expensive lesson in poor position sizing. 

[omagh]

On 5/26/2021 at 11:14 PM, Parsad said:

How come no one is talking about Fairfax's stake in Resolute Forest Products?  The one that everyone was hacking apart 2-3 years ago, and now sits at nearly $20 per share as lumber prices soar!  Up $5 a share since the end of Q1 and up over 300% since the end of 2019. 

Owning 40% of a $1.5B lumber company sounds pretty good right now...alongside a 40% stake in a rapidly growing $3.3B shipping company...10% of a $6.5B telecommunications company...30% of one of Greece's largest banks valued at nearly $3B...some pretty interesting large stake turnarounds that are taking hold for Fairfax. 

Combine that with a very hard insurance market, tons of dry powder and soon to be $1.3B in holding company cash after paying off the revolver...looking like $700 CDN at the end of the year looks reasonable.  Especially if India's 2nd wave drop takes significant hold and the Indian economy starts churning again over the next few months.    Cheers!

@Parsad RFP is a cyclical, capital-intensive business, so it's ultimately a trade unless Fairfax round-trips on this investment like they just did with BB.  Assume 35% goes to govt in capital gains taxes.  It's hard to get excited about an investment that's still underwater and you get to keep 2/3's of the capital gain.  Fairfax investment team has been really bad over the last ten years and really have only had 1 large winner in the last 20 years -- which they had to pay 1/3 cap gains on.

Imagine that they had actually stuck to their pronouncements back in 2010 that they were going to be buy-and-hold investors in blue-chip franchises like JNJ and AXP -- no cap gains, multiples of original purchase, dividends.  Imagine further if FFH cut their debt load and had the financial strength to execute when others need cash instead of having to sell assets to raise capital, often at inopportune times.  I walked out on Fairfax long ago and made multiples more with the proceeds than remaining with Fairfax.

https://seekingalpha.com/article/4429197-tracking-prem-watsas-fairfax-financial-holdings-portfolio-minus-minus-q1-2021-update

• Resolute Forest Products (RFP The large (top three) RFP stake is now at ~12% of the portfolio. The position was first established in Q4 2010 when it was named Abitibi Bowater and the stake has since been more than doubled. Over the years, their net investment in RFP was $745M ($24.39 per share) and the current value is ~$455M ($14.89 per share) – in the books, the carrying value listed is ~$134M as they wrote down losses. Their ownership stake is just under 25% of the business.

[Xerxes]

On 5/28/2021 at 1:24 PM, Pedro said:

I see Stelco and Resolute as strategic investments for a vertically integrated P&C insurer. When your insurerd property burns or crashes, its always good to know own part of the suppliy chain to fix them. I'm fine if their acquired for a higher price or end up as  long term holds that hopefully end up paying consistent dividends. The entry price for resolute was not great but the future is bright now at least. 

I continue to see BB out of the circle of competance and rationalized as a patriotic CDN investement. Happy to cut that off whenever they can and move on.  Expensive lesson in poor position sizing. 

Pedro, FFH is a right-hand-side-balance sheet investor. (i.e. financial investor) when it comes to most of its non-insurance subsidiaries or holdings. Don't count on any strategic synergies. Resolute is not a Buffett-like investment where one can take a high-note and declare oneself long-term investor with infinite horizon and then sleep on it for a decade.

 

Edited May 30, 2021 by Xerxes

[Xerxes]

On 5/29/2021 at 11:33 AM, omagh said:

 Fairfax investment team has been really bad over the last ten years and really have only had 1 large winner in the last 20 years -- which they had to pay 1/3 cap gains on.

Imagine that they had actually stuck to their pronouncements back in 2010 that they were going to be buy-and-hold investors in blue-chip franchises like JNJ and AXP -- no cap gains, multiples of original purchase, dividends.  Imagine further if FFH cut their debt load and had the financial strength to execute when others need cash instead of having to sell assets to raise capital, often at inopportune times.  

Indeed,

Excerpt from the 2012 letter "Long treasuries have outperformed common stocks over the last 20 years as rates have declined from 7.4% in 1991 to 2.9% in 2011. This will not be repeated in the next ten years. The game is over for long treasuries (almost!). Even if the rates go to zero, long treasuries can provide a compound annual return of only 6% in the next ten years compared to twice that by stocks, if we assume no change in P/E multiples and historical earnings growth. If P/E ratios revert back to their mean, shares of companies like Johnson & Johnson can provide compound growth rates of 20%+ in the next decade. We have already sold half our long treasury position at a yield to maturity of 3.0% (realizing a gain of $271 million) and we expect to sell the remaining soon. In time, we will remove our equity hedges as the risks that we see get discounted in common stock prices. The major risks we see are in the next three years, as we expect common stocks to do very well in the next decade"

My conspiracy theory is that, in 2012-2013, they had no choice but to sell out their Four Horsemen (Wells Fargo, J&J, Bancorp and a fourth one if there is one) to fund closing the losing shorts. Kind of like a long-short position that was unwound. It is possible that if they were not constrained by the losing shorts, they would have kept those higher quality entities, instead of climbing down the quality ladder.

Excerpt from the 2013 letter "

A summary of our 2013 realized and unrealized gains (losses) is shown in the table below:

Realized Unrealized Gains Gains Net Gains (Losses) 1,324.2

(Losses) (Losses) Equity and equity-related investments (1,350.7)

The table above shows the realized gains (losses) for the year and, separately, the unrealized fluctuations in common stock, bond and CPI-linked derivative prices. With IFRS accounting, these fluctuations, although unrealized, flow into the income statement and balance sheet, necessarily producing lumpy results (the real results can only be seen over the long term). This table is updated for you in every quarterly report and we discuss it every year in our Annual Report. In 2013, with common stock prices going up significantly, we sold over $2 billion of our common stock holdings, realizing $1.3 billion in gains, offset by the realized loss on our hedges as we reduced our hedges proportionately. Net net, we realized $29 million in gains from the sale of common stocks and bonds and we had unrealized investment losses of $1,593 million (including almost $1 billion from bonds and $0.5 billion from common stocks), for a net loss of $1,564 million on our investments. Our defensive hedges of our common stock portfolio cost us approximately $2 billion in 2013 because of rising markets – a significant portion unrealized of course, in the sense that we continue to be hedged. Given our concern about financial markets and the excellent returns we achieved on our long term investments, we reluctantly decided to sell our long term holdings of Wells Fargo (a gain of 125%), Johnson & Johnson (a gain of 47%) and U.S. Bancorp (a gain of 135%)."

 

[glider3834]

Am I correct in saying that around 5.7 million shares of RFP were included in the investment portfolio with the Riverstone Barbados sale?

- 30.5 million RFP shares reported on FFH's 13F as at 31 Dec-20.

- 24.8 million RFP shares reported in FFH 's 2020 Annual report, as Riverstone Barbados is equity accounted for so its investment portfolio (including RFP I gather) is no longer consolidated

It appears Fairfax have entered into an agreement to purchase certain Riverstone Barbados investments from CVC at a fixed price of $1.2 billion before the end of 2022 and this is based on the 31 Dec;19 prices for these investments (RFP price at 31 Dec-19 was $4.10 versus $16.87 on28 May-21) . Prem said Fairfax has the 'opportunity' to purchase these investments, so it sounds more like a call option arrangement but not sure.

It would be great to get more clarity on this - what investments are included in this $1.2 billion amount (would that include these RFP shares)? is it a 'call option' or are they required to purchase?

 

 

 

 

 

 

[omagh]

On 5/30/2021 at 8:12 PM, Xerxes said:

Indeed,

Excerpt from the 2012 letter "Long treasuries have outperformed common stocks over the last 20 years as rates have declined from 7.4% in 1991 to 2.9% in 2011. This will not be repeated in the next ten years. The game is over for long treasuries (almost!). Even if the rates go to zero, long treasuries can provide a compound annual return of only 6% in the next ten years compared to twice that by stocks, if we assume no change in P/E multiples and historical earnings growth. If P/E ratios revert back to their mean, shares of companies like Johnson & Johnson can provide compound growth rates of 20%+ in the next decade. We have already sold half our long treasury position at a yield to maturity of 3.0% (realizing a gain of $271 million) and we expect to sell the remaining soon. In time, we will remove our equity hedges as the risks that we see get discounted in common stock prices. The major risks we see are in the next three years, as we expect common stocks to do very well in the next decade"

My conspiracy theory is that, in 2012-2013, they had no choice but to sell out their Four Horsemen (Wells Fargo, J&J, Bancorp and a fourth one if there is one) to fund closing the losing shorts. Kind of like a long-short position that was unwound. It is possible that if they were not constrained by the losing shorts, they would have kept those higher quality entities, instead of climbing down the quality ladder.

Excerpt from the 2013 letter "

A summary of our 2013 realized and unrealized gains (losses) is shown in the table below:

Realized Unrealized Gains Gains Net Gains (Losses) 1,324.2

(Losses) (Losses) Equity and equity-related investments (1,350.7)

The table above shows the realized gains (losses) for the year and, separately, the unrealized fluctuations in common stock, bond and CPI-linked derivative prices. With IFRS accounting, these fluctuations, although unrealized, flow into the income statement and balance sheet, necessarily producing lumpy results (the real results can only be seen over the long term). This table is updated for you in every quarterly report and we discuss it every year in our Annual Report. In 2013, with common stock prices going up significantly, we sold over $2 billion of our common stock holdings, realizing $1.3 billion in gains, offset by the realized loss on our hedges as we reduced our hedges proportionately. Net net, we realized $29 million in gains from the sale of common stocks and bonds and we had unrealized investment losses of $1,593 million (including almost $1 billion from bonds and $0.5 billion from common stocks), for a net loss of $1,564 million on our investments. Our defensive hedges of our common stock portfolio cost us approximately $2 billion in 2013 because of rising markets – a significant portion unrealized of course, in the sense that we continue to be hedged. Given our concern about financial markets and the excellent returns we achieved on our long term investments, we reluctantly decided to sell our long term holdings of Wells Fargo (a gain of 125%), Johnson & Johnson (a gain of 47%) and U.S. Bancorp (a gain of 135%)."

 

@Xerces...FFH has so much under their control, yet they put themselves into forced outs continuously.  It's capital structure, portfolio structure, and lack of overall financial strength.  Thanks for the catch -- it was WFC and not AXP that they held way back then. 

Those excerpts from the 2012 and 2013 letters exactly nail the problem at FFH where they incur portfolio risk that is obvious to outsiders.  It's like someone driving a car without a seatbelt and having their mother claim to the press "Who could possibly have foreseen this tragic accident?" (!hand up!)

The 2013 letter was a turning point for me personally as the investment team showed how they couldn't be trusted.  I exited after the annual meeting run-up.  The cash pulled is worth multiples more.

The speculators hanging around today in FFH are looking for mean reversion to some premium to book value.  Good luck to them.

[glider3834]

On 6/6/2021 at 5:50 AM, omagh said:

@Xerces...FFH has so much under their control, yet they put themselves into forced outs continuously.  It's capital structure, portfolio structure, and lack of overall financial strength.  Thanks for the catch -- it was WFC and not AXP that they held way back then. 

Those excerpts from the 2012 and 2013 letters exactly nail the problem at FFH where they incur portfolio risk that is obvious to outsiders.  It's like someone driving a car without a seatbelt and having their mother claim to the press "Who could possibly have foreseen this tragic accident?" (!hand up!)

The 2013 letter was a turning point for me personally as the investment team showed how they couldn't be trusted.  I exited after the annual meeting run-up.  The cash pulled is worth multiples more.

The speculators hanging around today in FFH are looking for mean reversion to some premium to book value.  Good luck to them.

they are not shorting anymore - so going forward this is a non-issue

 

Sale of Riverstone Barbados (still pending approval) will further strengthen their capital position & they are focused on this.

 

Agree that Fairfax needs exit strategies for some of these more cyclical businesses that are enjoying potentially cyclical peak pricing like Resolute Forest Products or Stelco or which are enjoying WSB reddit popularity like Blackberry, this will be important to how well Fairfax performs this year.

 

Over time I would like to see more secular growth Alphabet Inc (GOOG) type investments in their equity portfolio (large tech platforms high returns on capital & highly cash generative) at the right price of course!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[petec]

15 hours ago, glider3834 said:

Over time I would like to see more secular growth Alphabet Inc (GOOG) type investments in their equity portfolio (large tech platforms high returns on capital & highly cash generative) at the right price of course!

Out of interest, why not just do this yourself? 

 

Part of the reason I own Fairfax is they generate ideas that I probably wouldn't (and have access to private opportunities that I don't). I'd be livid if they bought "obvious" megacaps like Alphabet and just sat there sucking their thumbs, unless they carefully articulated (not their strength) a divergent view.

 

Separately, as I have argued elsewhere, we need to be careful about lazily assuming that Stelco and RFP should be sold just because their stocks have gone up. I don't follow Resolute closely, but there is a decent chance that Stelco will generate so much free cash flow over the next 12 months that its enterprise value will actually have gone down over the last few months. If so, it would be quite reasonable to hold on, so long as you think the cash will be allocated effectively (management has a record of special dividends).

 

[Xerxes]

Agreed

Folks shouldn't be in FFH or for that matter any other "asset manager", if they expect the "asset allocator" to be on the same wave length as them.

If folks want a conglomerate-like entity with large exposure to large technology cap, the S&P500 fits the bill with a 25% exposure to those names and 75% exposure to 495 companies.

 

I own ONEX, and like them to do whatever they do, in their own weird way. Same as my ownership of IAC or FFH or BRK or BAM. The only one I am missing is BX.

I am ok with FFH changing their 'investment philosophy' but they have to get to that conclusion on their own, not because I wanted to be. For instance, i don't like Markel's broad equity exposure, so I am not in it.

 

That said, we allowed to be uber-critical. LOL

[petec]

Exactly. I want to be able to vent my frustrations, but I don’t want them to listen to me!

[Viking]

In process of doing the deep dive on lumber i will understand if Fairfax does not sell Resolute at current prices. There is a good chance that lumber prices are going to stay higher than expected for a couple of years. Not US $1,200. But also not $250. If prices average US $500 or higher then Resolute will make very good money. The current price spike was caused by insatiable demand. (The short lived price spike in 2018 was driven by sharp contraction in supply - forest fires in BC combined with severe issues with rail delivery). Supply will increase a little each of the next couple of years. But if housing starts in the US come in at 1,600 (annualized) or higher the next couple of years then lumber prices will likely do very well. We will see crazy volatility with lumber prices so hang on to your hat as the ride will be wild; it would not surprise me to see stock prices of lumber companies swing 20 or 30% in any given month. (The silver lining about steep stock price declines is all lumber companies are swimming in cash - that they do not know what to do with - and so would be aggressive buyers of their stock on any big decline from current levels.)
 

Resolute has also hit the ball out of the park the last 18 months when it comes to capital allocation. They purchased 3 sawmills in the US south in late 2019 for US $185 million at the bottom of the cycle. My guess is these 3 mills will generate more than $185 million in EBITDA for Resolute by end of 2021 since acquisition (so over the past 24 months). Compared to 8 years ago paper is now a much smaller part of Resolute’s total business. I think they also reduced shares outstanding over the past year by 8 or 10% at an average cost of something like $5/share (i’ll check later tonight when i get home). Total debt has come down. And the pension obligation is slowly being addressed. During the last price spike in lumber they also paid a special distribution to shareholders.
 

Resolute has its warts. I much prefer WFG or IFP to get exposure to lumber/OSB (pure plays with cleaner balance sheets and no legacy issues like pension). However, Resolute is a much different company today than it was 8 years ago; much better positioned especially given the current demand / supply imbalance in lumber and strength in commodity markets in general.

Edited June 7, 2021 by Viking