Analyzing Brett Horn

[Haryana]

 

With all due respect, Brett Horn has been a well acclaimed analyst at Morningstar for a long time.

https://www.morningstar.com/authors/708/brett-horn
"Horn holds a bachelor’s degree in business administration, with a concentration in finance, from the University of Wisconsin and a master’s degree in business administration from the University of Illinois. He also holds the Chartered Financial Analyst® designation. He ranked first in the business and industrial services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted."

 

Recently, however, Brett Horn has been a polarizing figure among the Fairfax investor community.

While most other analysts turned bullish on Fairfax, Brett has stood sturdy holding as a pillar of strength at the opposite pole.

He has been publishing one report per quarter on Fairfax (FFH), within a few days of quarterly results coming out.

 

This is what he said after 2023 Q1:
https://www.morningstar.com/stocks/fairfax-earnings-both-sides-business-show-strength
"Fairfax FFH reported a strong first quarter, with attractive results on both the underwriting and investment sides of the business. As a result, book value per share, adjusted for dividends, increased 7% from the year-end figure. However, we see nothing to alter our long-term view, and will maintain our CAD 730 per share fair value estimate for the no-moat company."

After reading this, it appeared that the fair value estimate is too low as it is in CAD. I was wondering how will he able to save face if the actual results are too far off. What kind of tricks will be used? That is what I was wondering at that time.

 

This is what he said after 2023 Q2:
https://www.morningstar.com/stocks/fairfax-financial-earnings-strong-underwriting-margins-partially-offset-by-investment-losses
"Fairfax Financial FFH reported a solid second quarter with relatively strong underwriting margins. However, this was partially offset by some investment losses. While the second quarter was weaker than the first quarter, Fairfax is having a good year so far, with book value per share up 11% since year-end, adjusted for dividends. We will maintain our CAD 790 fair value estimate for the no-moat company and see the shares as overvalued at the moment."

So he quietly changed that fair value estimate to an apparently strategic number of 790 from 730 while maintaining that the fair value estimate was being maintained!

I suppose in future he could change CAD 790 to USD 790 and still continue to "maintain" the fairness of estimate or Morningstar would simply assign a different analyst to cover Fairfax.

[MMM20]

This is one of my favorite things to rant about so let me apologize in advance. This isn't a comment about Brett Horn in particular - I don't know him, and maybe he's great. But what I strongly recommend is to look to the broker analysts as a gauge of popular sentiment (if even that) or to understand how brokers drum up business. Nothing more. It is not a coincidence that companies reliant on capital raising tend to get the widest coverage and the best ratings. But since the ostensible separation of research from investment banking (and the removal of skin in the game - analysts ability to actually buy stocks in their coverage universe - in the name of removing conflicts of interest), the job is basically a glorified sales job for trading volumes. And many of them, if they do get a real nugget of information or have an actual insight, share it behind closed doors with whichever client trades the most through their bank. In other words... I wouldn't think that hard about it. The analyst incentive is to not stand out in a bad way and keep making ~$1-2mm/year to keep their kids in fancy schools. Even if one is actually bearish, he/she almost certainly won't stick his/her neck out and risk embarrassment and losing that cushy gig. Sorry, I've done that job as a bright eyed and bushy tailed junior analyst and unfortunately saw how the sausage is made, so maybe I'm too cynical now. Maybe the general takeaway is to keep your expectations low and allow yourself be pleasantly surprised, but the clear and simple fact is that @Viking and others with real insight and skin in the game do a 10x better job than any broker analyst. Maybe this wasn't the case in Lee Cooperman's days at GS (though it was probably even sketchier then) but it is now. At the bare minimum, the pay and prestige aren't what they used to be. The real talent is elsewhere. Expect the sell side estimates to keep climbing higher as Fairfax executes.

 

Edited September 2, 2023 by MMM20

[Luke]

8 hours ago, Haryana said:

 

With all due respect, Brett Horn has been a well acclaimed analyst at Morningstar for a long time.

https://www.morningstar.com/authors/708/brett-horn
"Horn holds a bachelor’s degree in business administration, with a concentration in finance, from the University of Wisconsin and a master’s degree in business administration from the University of Illinois. He also holds the Chartered Financial Analyst® designation. He ranked first in the business and industrial services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted."

 

Recently, however, Brett Horn has been a polarizing figure among the Fairfax investor community.

While most other analysts turned bullish on Fairfax, Brett has stood sturdy holding as a pillar of strength at the opposite pole.

He has been publishing one report per quarter on Fairfax (FFH), within a few days of quarterly results coming out.

 

This is what he said after 2023 Q1:
https://www.morningstar.com/stocks/fairfax-earnings-both-sides-business-show-strength
"Fairfax FFH reported a strong first quarter, with attractive results on both the underwriting and investment sides of the business. As a result, book value per share, adjusted for dividends, increased 7% from the year-end figure. However, we see nothing to alter our long-term view, and will maintain our CAD 730 per share fair value estimate for the no-moat company."

After reading this, it appeared that the fair value estimate is too low as it is in CAD. I was wondering how will he able to save face if the actual results are too far off. What kind of tricks will be used? That is what I was wondering at that time.

 

This is what he said after 2023 Q2:
https://www.morningstar.com/stocks/fairfax-financial-earnings-strong-underwriting-margins-partially-offset-by-investment-losses
"Fairfax Financial FFH reported a solid second quarter with relatively strong underwriting margins. However, this was partially offset by some investment losses. While the second quarter was weaker than the first quarter, Fairfax is having a good year so far, with book value per share up 11% since year-end, adjusted for dividends. We will maintain our CAD 790 fair value estimate for the no-moat company and see the shares as overvalued at the moment."

So he quietly changed that fair value estimate to an apparently strategic number of 790 from 730 while maintaining that the fair value estimate was being maintained!

I suppose in future he could change CAD 790 to USD 790 and still continue to "maintain" the fairness of estimate or Morningstar would simply assign a different analyst to cover Fairfax.

Great Thread, love bitching about analysts and sleezy investors haha!

[Thrifty3000]

I believe Morningstar analysts are required to base their fair value estimates on a DCF analysis. If you look at Morningstar's historical table of FFH's Income Statement you can see that FFH has averaged EPS of around $35 per year for the last 10 years. If you simply capitalize $35 per share at a modest growth rate it's pretty easy to come up with a fair value in the neighborhood of $750 per share. He's clearly phoning it in on the analysis, but as long as he can defend his work to his boss (who cares less about Fairfax than he does), and as long as he keeps collecting that fat paycheck every couple of weeks, then bully for him.

 

The historical price to fair value chart shows he has largely gotten it right on Fairfax since 2016, and that he even held pretty strong during the covid scare, however, the price has recently made a statistically significant move outside of his fair value range, which should prompt him to dig deeper on this one.

 

[SafetyinNumbers]

My explanation of why Morningstar can’t understand Fairfax:

 

 

[UK]

Maybe not all, but most analyst reports are a joke, just ignore them and use them for information/entertainment purposes only. I know, since in my previous life many years ago, I also wrote some of these reports:). While doing this we were joking, that "paper could suffer anything". DCF gives you ability to get almost whatever outcome your want. Generaly they all suffer very much from recency bias, otherwise they are to optimistic. Only one Sell report was issued by the department I worked in a few years and then analyst who did this was forced to leave a job, at the insistence of client, who otherwise threatened to sever his relationship with a bank. I think we were allowed at the time, but I do not remember, anyone betting any of his/her money on the research produced. Despite of everything, most people involved (clients, general public etc) took everything quite seriously, which was very interesting and bizzare expierence for me:).

[SafetyinNumbers]

I was in equity research at UBS for a few years and continue to chat to friends who are analysts regularly. Everyone I worked with was smart and wanted to be right more than anything else. They are compensated by being right on stock performance, accuracy of estimates and most importantly client votes. The more commission a client pays, the more their votes matter. Clients also care about access to management, industry knowledge and other qualitative matters. They become industry experts because they talk to everyone in the ecosystem even though they may have never worked in the industry. That’s what gives them value to intrinsic value based investors. 
 

The advance of quants, passive and social value makes the analysts job a lot harder. Stocks can trade a lot further below and above intrinsic value for long periods of time because of passive, quant and social value flows which means anyone who sticks to valuing on intrinsic value alone can be wrong for long periods of time. That by definition makes the research less valuable for anyone approaching investing based on intrinsic value. Fortunately for them, hardly anyone approaches investing that way now. Most investors think the market is efficient and are narrative surfing. I wish I could do that. It looks like fun but I would lose all of my money without intrinsic value as a guide post. I still might.

 

Morningstar has a totally different business model. Their analysts as far as I can tell don’t talk to management or investors. How can they be experts on anything? They don’t even do the valuation themselves. A Morningstar quant model kicks it out based on the analyst estimates which he probably manipulates to kick out an acceptable result. It’s clear from his financial estimates that they have no relationship to a reasonable forecast for Fairfax earnings. A good analyst compares his estimates to consensus and explains the differences. I doubt Mr. Horn has even thought to compare his numbers to the 6 people who are supposed to be the experts let alone to Viking (an actual expert). Probably because it doesn’t matter as the only people reading his research are discount broker clients and there is no feedback mechanism. They are still getting paid. No one who uses the product gets a vote. 

[Haryana]

10 Top Performing Canadian Stocks in 2022

https://www.morningstar.ca/ca/news/230412/10-top-performing-canadian-stocks-in-2022.aspx

 

"

The second spot on the list for performance in Canada goes to Fairfax Financial Holdings (FFH), which senior equity analyst Brett Horn describes as an insurance business, “but is in some ways more of an investment fund.” The company is well known for its CEO, Prem Watsa’s bets and multi-billion-dollar windfall during the 2007-2008 financial crisis. “We think investors attracted to the stock due to a belief in Watsa’s ability to produce alpha on the investment side should consider his record over the past decade, which includes some big wins but also substantial losses and missed opportunities,” says Horn.

"

 

[Haryana]

"multi-billion-dollar windfall during the 2007-2008 financial crisis"

 

Use of the term "windfall" says it all about their attitude.

 

A windfall is when fruit falls itself down due to wind.
Not even the minimum skill to pick a fruit is required.
They potray Prem Watsa as gambler who had gotten lucky.

 

Brett said they are "having a good year".
So, the bet making Prem Watsa is having another lucky year of windfall!

 

[Parsad]

1 hour ago, Haryana said:

"multi-billion-dollar windfall during the 2007-2008 financial crisis"

 

Use of the term "windfall" says it all about their attitude.

 

A windfall is when fruit falls itself down due to wind.
Not even the minimum skill to pick a fruit is required.
They potray Prem Watsa as gambler who had gotten lucky.

 

Brett said they are "having a good year".
So, the bet making Prem Watsa is having another lucky year of windfall!

 

 

Ignore the twat!  He doesn't know what he's talking about. 

 

Buy when a stock is cheap, sell when it is dear!

 

The rest is just noise.  Cheers!

[SafetyinNumbers]

8 hours ago, Parsad said:

 

Ignore the twat!  He doesn't know what he's talking about. 

 

Buy when a stock is cheap, sell when it is dear!

 

The rest is just noise.  Cheers!

I think it’s an interesting example of how quants can’t analyze certain stocks because they don’t fit historical models. Perhaps lumpy 15s are more likely undervalued than ever as a result. 

[Haryana]

 

Analyzing an analyst could be an entertaining educational exercise.

 

Any analyst that stands his ground would be worth watching regardless of the ground they are standing on or the odds they are facing which in this case are the odds of Fairfax fair value over CAD 800.

 

Looking forward to future developments and of narratives.

 

[Xerxes]

[Luke]

17 minutes ago, Xerxes said:

Can you link the full article?

[Xerxes]

@Luca

unfortunately I don’t have access 

[Luke]

@Haryana Perhaps you?

[SafetyinNumbers]

Found it.

Morningstar-MKL9.23.pdf

[Thrifty3000]

Calling Travelers a superior insurance company - in that report - is disgraceful. Travelers has one of the most blatantly misleading annual reports I’ve ever seen (and I did my senior thesis in college on the fall of Enron). I’d be willing to bet morale at Travelers is materially suffering, given such weak and cowardly leadership.

 

Brett Horn is the epitome of professional negligence. Time to give him (and his boss) the axe, Morningstar!

[UK]

Oh boy:)

Edited October 5, 2023 by UK

[nwoodman]

1 hour ago, UK said:

Oh boy:)

Maybe that old quote should be written along the lines of "The analyst can remain irrational longer than the market becomes a weighing machine."

Edited October 5, 2023 by nwoodman

[SafetyinNumbers]

I don’t think he speaks to any actual investors in these names or risks any of his own capital so I wouldn’t expect the analysis to be any good but it doesn’t explain why his earnings estimates for Fairfax drop so precipitously while staying kind of flat for the other comps. Also, recall, he doesn’t set the target prices, a Morningstar computer does that based on his financial forecasts and moat assessment. 

[no_free_lunch]

Thanks for the link, I was actually looking at W R Berkley and Travelers recently, nice to see them together.  I wonder why they would peg FFH so far below book value? 

 

Regarding the valuation assignment, I think it's great to have a value that misaligns as that builds an environment of opportunity.

[jbwent63]

17 hours ago, Thrifty3000 said:

Calling Travelers a superior insurance company - in that report - is disgraceful. Travelers has one of the most blatantly misleading annual reports I’ve ever seen (and I did my senior thesis in college on the fall of Enron). I’d be willing to bet morale at Travelers is materially suffering, given such weak and cowardly leadership.

 

Brett Horn is the epitome of professional negligence. Time to give him (and his boss) the axe, Morningstar!

Never rating MKL at higher than 3 stars over the past few years is enough to cause me to dismiss this analyst's work. One star for FFH? Is he mixing currencies? FV in USD, price in CAD? Not credible. Pass.

Edited October 5, 2023 by jbwent63

[SafetyinNumbers]

It doesn’t matter if you don’t think he’s credible. His estimates influence quants and those who use quant screens (most active management) such that they can’t even consider Fairfax. In the long run, it doesn’t matter as long as Fairfax keeps executing which seems highly probable given the sources of earnings but it’s part of the reason why the market still hasn’t valued Fairfax in line with peers.

 

It also looks like he just cut his earnings estimates again.

[Xerxes]

All this negative comments on Brett Horn just tells me that you are not a forward looking investor as he is. (Sarcasm)