Analyzing Brett Horn

[SafetyinNumbers]

32 minutes ago, Viking said:

 

@73 Reds , Morningstar's 'analysis' of Fairfax is a head scratcher for me.

Morningstar is a quant screen and when thought of in that way it makes total sense. Brett could help increase the target price by having realistic estimates beyond the next two years and by increasing his view on the quality of the moat but he covers 20+ other companies and some of them screen well. The target price is calculated by Morningstar’s model so that’s why his estimates and moat assessment are important.
 

As a big data exercise it makes total sense but to an idiosyncratic investor it’s nonsense.

[Mystery Guest]

Brent Horn and the like 

 

Quite Frankly I used to look for these lukewarm receptions to solid reports as a sign my undervalued thesis was correct, and yet I still had more time to add to my position...  It has been a profitable directional indicator a few times. 

Brent Horn is telling me what his audience still wants to hear from him.  On the flip side things are about to get very ugly once everyone is singing the praises of the CEO... and there is no dissenting opinion.  Why have they not closed out the swaps .... We are not there yet.   

[TwoCitiesCapital]

18 hours ago, Hoodlum said:

I am beginning to think his analysis is AI generated. 

 

Maybe not AI generated. I'd expect AI would do a better job!

 

I'm guessing he has some flawed model that he  just plugs numbers into without any sort of critical thought as to whether the output makes any sense. 

 

I mean, for f*cks sake, the interest income alone would make his price target only 10-12x of earnings w/o considering ANY addition from equities, minority interests, or insurance contributing....

 

In what world does $1,290 CAD make any sense?!?!? 

Edited February 16 by TwoCitiesCapital

[Santayana]

3 hours ago, TwoCitiesCapital said:

In what world does $1,290 CAD make any sense?!?!? 

To come up with that price he has to be projecting massive destruction of value somewhere else given the interest income situation.  And he actually admits that the insurance and investment legs are both doing well.  It doesn't make sense.

[Crip1]

Consistency bias:

 

Even when it acts against our best interest our tendency is to be consistent with our prior commitments, ideas, thoughts, words, and actions. As a byproduct of confirmation bias, we rarely seek disconfirming evidence of what we believe. This, after all, makes it easier to maintain our positive self-image.

 

-Crip

[Hoodlum]

On 2/16/2025 at 3:10 PM, TwoCitiesCapital said:

 

Maybe not AI generated. I'd expect AI would do a better job!

 

I'm guessing he has some flawed model that he  just plugs numbers into without any sort of critical thought as to whether the output makes any sense. 

 

I mean, for f*cks sake, the interest income alone would make his price target only 10-12x of earnings w/o considering ANY addition from equities, minority interests, or insurance contributing....

 

In what world does $1,290 CAD make any sense?!?!? 

I still think AI is behind it.  They can’t seem to make up their mind if Fairfax or Constellation is among the top 3 overvalued Canadian companies.  I can’t understand how any investor would rely on their analysis. 

 

https://www.morningstar.ca/ca/news/261728/top-3-overvalued-canadian-stocks-.aspx

 

[TwoCitiesCapital]

54 minutes ago, Hoodlum said:

I still think AI is behind it.  They can’t seem to make up their mind if Fairfax or Constellation is among the top 3 overvalued Canadian companies.  I can’t understand how any investor would rely on their analysis. 

 

https://www.morningstar.ca/ca/news/261728/top-3-overvalued-canadian-stocks-.aspx

 

 

The crazy thing is, this should be illustrative of why it's NOT overvalued. The other two companies - you could argue surging commoditt prices may normalize and shares/earnings will follow. 

 

For an insurance co? A huge chunk of those earnings are guaranteed for the next 4-years. It's not like Fairfax's balance sheet is dependent on gold prices....

 

You see this chart and it's immediately clear one of these things isn't like the others with just one follow up question of "what is driving these rallies?"

Edited March 5 by TwoCitiesCapital

[dartmonkey]

2 hours ago, TwoCitiesCapital said:

The other two companies - you could argue surging commoditt prices may normalize and shares/earnings will follow. 

 

For an insurance co? A huge chunk of those earnings are guaranteed for the next 4-years. It's not like Fairfax's balance sheet is dependent on gold prices....

 

You see this chart and it's immediately clear one of these things isn't like the others with just one follow up question of "what is driving these rallies?"

 

His basic idea is that Fairfax invests in high risk equity bets that sometimes work and often don't work. Recent bets have worked, but going forward, investors are at risk of having another bad 10-year run like the one we lived through starting about 15 years ago. Call it the long Blackberry/short tech era.

 

It's not a crazy idea, or it wouldn't be, if Fairfax had not in the meantime developed excellent underwriting, expanded premium volume from savvy acquisitions and repurchases from financing partners like OMERS, huge streams of fixed income earnings locked in for several years, and 2 great insurance startups in Digit and Ki. And on the equity investment side, if there had been just one or two high-risk bets like Stelco and Resolute that worked out, you might worry about the others, but with Eurobank, the Fairfax swaps, Orla Mining, the Bangalore airport, Thomas Cook India, etc. etc., it's looking more like Farifax has the Midas touch than just beginner's luck. 

 

It's good for Fairfax's repurchases, though, the longer this Fairfax=Blackberry pessimism persists, and it's good for entertainment value! I can just imagine how Horn feels, after every one of his justifications for a low share price keep falling, one after the other. Maybe the next one will be the index inclusion. Or the Ki or the Bangalore Airport IPO? Or higher income from corporate bonds, if we get a market swoon? 

[Maverick47]

This will be an interesting case study in how long confirmation bias can exist in a given individual.  What will be fascinating will be to watch over time as more and more evidence arrives disconfirming the belief that Fairfax is a “relatively poor underwriter”with volatile investment results.

 

Since an investment analyst is supposed to rely on an interpretation of facts, it’s already funny to see his comments begrudgingly noting that “underwriting performance recently has improved” and that tailwinds for the industry and peers with regards to interest rates should result in unusually strong profitability in the near future….all while still maintaining that the shares are overvalued.

 

Early in my career I was an underwriter, and I can attest to the fact that strong underwriting is culture driven…part of the DNA of an organization.  It takes a lot of organization-wide effort to improve underwriting, and once improvement starts to appear, I can’t think of any reason why a rational management would then want to recommend backsliding.

Underwriting improvement then is generally a positive sign for the future of the insurance company…and the longer the disciplined underwriting is maintained, the less likely it is to simply be a metric that an analyst can expect will revert back to prior poor experience.

 

I hated seeing the Blackberry investment and the macro bets against a rising stock market as much as any other shareholder, but it’s been years since either can be seen to be a driver of investment results.  Now by contrast, I am tremendously heartened by the outperformance in fixed income relative to peers that Fairfax engineered while navigating the rising interest rate environment, and any of the larger investments of Fairfax that I look at (Eurobank, the Total Return Swap, Fairfax India/Bangalore Airport) continue to have room to run before they even approach a fair intrinsic value.

 

Until the evidence becomes so overwhelming that Morningstar changes their opinion, I will appreciate the extent to which they might influence the price levels such that I can continue to add to my position below a fair market value.  It’s just a rare confluence of events that leads to a quality company selling for an extended period of time below my estimate of a fair market value, and I plan to continue taking advantage of the opportunity to buy shares with a margin of safety.

 

 

 

 

Edited March 5 by Maverick47

[Viking]

2 hours ago, dartmonkey said:

 

His basic idea is that Fairfax invests in high risk equity bets that sometimes work and often don't work. Recent bets have worked, but going forward, investors are at risk of having another bad 10-year run like the one we lived through starting about 15 years ago. Call it the long Blackberry/short tech era.

 

It's not a crazy idea, or it wouldn't be, if Fairfax had not in the meantime developed excellent underwriting, expanded premium volume from savvy acquisitions and repurchases from financing partners like OMERS, huge streams of fixed income earnings locked in for several years, and 2 great insurance startups in Digit and Ki. And on the equity investment side, if there had been just one or two high-risk bets like Stelco and Resolute that worked out, you might worry about the others, but with Eurobank, the Fairfax swaps, Orla Mining, the Bangalore airport, Thomas Cook India, etc. etc., it's looking more like Farifax has the Midas touch than just beginner's luck. 

 

It's good for Fairfax's repurchases, though, the longer this Fairfax=Blackberry pessimism persists, and it's good for entertainment value! I can just imagine how Horn feels, after every one of his justifications for a low share price keep falling, one after the other. Maybe the next one will be the index inclusion. Or the Ki or the Bangalore Airport IPO? Or higher income from corporate bonds, if we get a market swoon? 

@dartmonkey , here is my guess. ‘His (Brett’s/Morningstar’s) basic idea is’ ignore Fairfax’s insurance business today. Ignore Fairfax’s investment management business today. Ignore the decisions the senior management team have made over the past 5 years. So, ignore the fundamentals and earnings prospects for Fairfax as they exist today. 
 

Instead, focus on Fairfax as it existed 10 years ago - its insurance business then. It’s investment management business then. And the decisions the senior management team were making then (equity hedges, Blackberry etc). Based solely on what we saw from Fairfax 10 years ago (fundamentals and prospects), Brett/Morningstar thinks the fair value for the stock today is C$1,290.
 

I think I understand HOW he got his fair value estimate. But is that really the best way to value ANY COMPANY? I’ll let you answer that question on your own (that is called a 1 foot hurdle by Mr. Buffett). 

Edited March 6 by Viking

[allycat18]

It looks like Brett is at it again. Morningstar rates Fairfax as the 3rd most overvalued stock on the tse. The guy just refuses to change his stance. How long can he keep it up?

[dartmonkey]

Right, we discussed this a few days ago. Seems like the answer is, indefinitely!

 

Fairfax made about $2.4b in net earnings APART from investment gains last year (underwriting, interest income, share of earnings of associates), so it is at about 13 times earnings even without its investment gains (or 9 times earnings if you include the investment gains. On the thesis that they will never pick good equity investments or make any money from them except by luck, they're still cheap, half of Intact's multiple. And Fairfax's might occasionally make a gain on investment too...