Analyzing Brett Horn

[Mystery Guest]

1 minute ago, Mystery Guest said:

The Moat is Hamblin Watsa. 

 

 

 

Long time Lurker 

[Haryana]

Brett Horn blares again

https://www.morningstar.com/company-reports/1221484-fairfax-earnings-tailwinds-remain-in-place

"

We think Fairfax’s first-quarter results were solid. Underwriting margins held at an attractive level, and tailwinds continue on the investing side. Book value per share, adjusted for dividends, increased 2% from year-end. We will maintain our CAD 1,180 fair value estimate and no-moat rating. We continue to see shares as overvalued. While Fairfax is performing well right now, its historical record is mixed, and we think the market is overly focused on the favorable near-term outlook.

"

 

[steph]

     The longer it lasts the more ridiculous he becomes. 

[SafetyinNumbers]

On 5/4/2024 at 4:30 AM, steph said:

     The longer it lasts the more ridiculous he becomes. 

Quants gonna quant 

[TwoCitiesCapital]

On 5/3/2024 at 8:23 PM, Haryana said:

Brett Horn blares again

https://www.morningstar.com/company-reports/1221484-fairfax-earnings-tailwinds-remain-in-place

"

We think Fairfax’s first-quarter results were solid. Underwriting margins held at an attractive level, and tailwinds continue on the investing side. Book value per share, adjusted for dividends, increased 2% from year-end. We will maintain our CAD 1,180 fair value estimate and no-moat rating. We continue to see shares as overvalued. While Fairfax is performing well right now, its historical record is mixed, and we think the market is overly focused on the favorable near-term outlook.

"

 

 

I think he's paying too much attention to the no-moat piece and maybe that's what is holding him back? 

 

Let's ignore the moat. Let's assume insurance, and every insurance company out there, is offering a commodity product. Fairfax is still exceptionally well positioned with low duration, little-to-no capital impact from rising rates, and investments/associates that are banging on all cylinders. The earnings power is almost as perfectly predictable as you could hope barring a catastrophe and it's extraordinarily high for the next 2-3 years.

 

Even if we assume no differentiation or skill of management, we know Fairfax will earn ~600 CAD/share over the next 3-4 years. Assuming no reinvestment and just adding to BV as retained earnings, you'd expect the stock price to go up $ for $ and that alone represents an 11-15% annualized return over the next 3-4 years without assuming compound returns OR a rerating of the stock.

 

So why does he assume an equity risk premium of 6-10% for Fairfax with such visibility into its earnings? 

 

[Crip1]

Guessing it's a combination of Inconsistency-Avoidance Tendency (#5 of Charlie Munger's Psychology of Human Misjudgment) and the fact that any indication akin to "I was wrong", no matter how refreshing it is in real life, is a resume-killer in the profession of Equity Analysis.

 

-Crip

[Parsad]

24 minutes ago, Crip1 said:

Guessing it's a combination of Inconsistency-Avoidance Tendency (#5 of Charlie Munger's Psychology of Human Misjudgment) and the fact that any indication akin to "I was wrong", no matter how refreshing it is in real life, is a resume-killer in the profession of Equity Analysis.

 

-Crip

 

+1!  Cheers!

[Viking]

On 4/12/2024 at 6:36 PM, Mystery Guest said:

The moat is Hamblin Watsa. 

@Mystery Guest , I think you might be on to something. Fairfax compounded book value at 18.4% for 38 straight years. That is a phenomenal track record. To call the company ‘no-moat’ is, of course, idiotic. Obviously, there is a moat hiding in there somewhere. 

 

[Haryana]

Brett blows his own Horn

https://www.morningstar.com/company-reports/1236218-fairfax-earnings-industry-tailwinds-lead-to-strong-quarter

"We think the near-term outlook for the company is bright, but we also believe that insurance is a highly competitive and inherently mean-reverting industry, and that current tailwinds will dissipate. We will maintain our CAD 1,180 fair value estimate for the no-moat company. We see shares as overvalued and think the market is overly focused on the company’s near-term prospects."

[Gamma78]

By his logic all insurance companies are no-moat. 

Yet the sector has not done badly long term. And some standouts (Chubb, Fairfax, Berkshire, Markel) have done spectacularly well. The lack of curiosity as to understand why that is is the marker that defines his lack of intellect. 

[SafetyinNumbers]

6 hours ago, Gamma78 said:

By his logic all insurance companies are no-moat. 

Yet the sector has not done badly long term. And some standouts (Chubb, Fairfax, Berkshire, Markel) have done spectacularly well. The lack of curiosity as to understand why that is is the marker that defines his lack of intellect. 

Quants don’t analyze these types of companies well because of the volatility in the earnings streams and because float looks like debt. He’s got to find a narrative to explain the valuation the computer spits out. Why he keeps his estimates so low is the real head scratcher. It’s probably a 10 year average or something like that.

[Haryana]

Choose one of the following: 

 

1. Corn Bread

 

2. Horn Brett 

 

[UK]

to: [email protected]
cc: [email protected]

 

For your feedback and thank you letters. Please be polite as much as possible:)

 

Edited October 6, 2024 by UK

[SafetyinNumbers]

Looks like Morningstar published again on Oct 10 and upped its estimates considerably boosting adjusted EPS estimates (which quants care about) and potentially the stock.

 

[Tommm50]

Love to see the narrative that accompanies it.

[Santayana]

Interesting, Schwab is no longer showing a Morningstar rating or reports for FRFHF.

[wondering]

The polar opposite analyst of Brett Horn appears to be National Bank's Jaeme Gloyn. New price target $2200 Cdn

 

"Fairfax Financial Holdings Ltd. (

FFH-T -1.16%decrease

 

) with an “outperform” rating and $2,200 target, up from $2,100. Average: $1,995.65.

 

Analyst: “While one of the strongest performers in our coverage year-to-date, up 44 per cent vs. the TSX Financials index up 20 per cent, we continue to see upside for FFH. With Q4-23 results FFH upgraded its annual operating income guidance by over 30 per cent to $4-billion, consisting of $2 billion from interest and dividend income, $1.2-billion in underwriting profit and $750-million from associates and non-insurance. Two quarters later, the conservatism in this guidance has become clear. As of Q2, run-rate interest and dividend income has already reached $2.2-billion, plus underwriting income and associates and non-insurance are tracking above guidance. Strong H1 results and deployment of excess capital to drive ROE accretion increase our confidence that operating ROE in the mid-teens is sustainable and a valuation re-rate is warranted.”

[Crip1]

1 hour ago, wondering said:

The polar opposite analyst of Brett Horn appears to be National Bank's Jaeme Gloyn. New price target $2200 Cdn

 

"Fairfax Financial Holdings Ltd. (

FFH-T -1.16%decrease

 

) with an “outperform” rating and $2,200 target, up from $2,100. Average: $1,995.65.

 

Analyst: “While one of the strongest performers in our coverage year-to-date, up 44 per cent vs. the TSX Financials index up 20 per cent, we continue to see upside for FFH. With Q4-23 results FFH upgraded its annual operating income guidance by over 30 per cent to $4-billion, consisting of $2 billion from interest and dividend income, $1.2-billion in underwriting profit and $750-million from associates and non-insurance. Two quarters later, the conservatism in this guidance has become clear. As of Q2, run-rate interest and dividend income has already reached $2.2-billion, plus underwriting income and associates and non-insurance are tracking above guidance. Strong H1 results and deployment of excess capital to drive ROE accretion increase our confidence that operating ROE in the mid-teens is sustainable and a valuation re-rate is warranted.”

 

Not disagreeing with the gist of what they are saying here, but the portion of the thesis referencing the fact that the stock has outperformed peer group YTD is, IMHO, meaningless in terms of whether or not it's a good investment now.

 

-Crip

[cwericb]

2 hours ago, Crip1 said:

 

Not disagreeing with the gist of what they are saying here, but the portion of the thesis referencing the fact that the stock has outperformed peer group YTD is, IMHO, meaningless in terms of whether or not it's a good investment now.

 

-Crip

 

I know what you mean, but perhaps not completely meaningless in this case.

 

Track record is important here as there are a lot of investors out there, that as soon as they hear "Fairfax" they think "Oh yeah, thats that Prem Watsa guy. Wasn't he the Blackberry guy? And wasn't there something about hedging a while back?"

 

I don't know how many times over the past few years I have seen this come up in discussions about Fairfax. So I kinda think that pointing out that FFH is outperforming its peers certainly doesn't hurt in this case.  JMHO

Edited October 30, 2024 by cwericb

[ourkid8]

58 minutes ago, cwericb said:

 

I know what you mean, but perhaps not completely meaningless in this case.

 

Track record is important here as there are a lot of investors out there, that as soon as they hear "Fairfax" they think "Oh yeah, thats that Prem Watsa guy. Wasn't he the Blackberry guy? And wasn't there something about hedging a while back?"

 

I don't know how many times over the past few years I have seen this come up in discussions about Fairfax. So I kinda think that pointing out that FFH is outperforming its peers certainly doesn't hurt in this case.  JMHO

 

As a long-term investor, I like the fact he is known as the blackberry/hedging guy.  It has kept the stock price suppressed and allowed Prem the repurchase a significant amount of the company at a great price.  

Edited October 30, 2024 by ourkid8

[Parsad]

45 minutes ago, cwericb said:

 

I know what you mean, but perhaps not completely meaningless in this case.

 

Track record is important here as there are a lot of investors out there, that as soon as they hear "Fairfax" they think "Oh yeah, thats that Prem Watsa guy. Wasn't he the Blackberry guy? And wasn't there something about hedging a while back?"

 

I don't know how many times over the past few years I have seen this come up in discussions about Fairfax. So I kinda think that pointing out that FFH is outperforming its peers certainly doesn't hurt in this case.  JMHO

 

The main thing is that Prem's target of 15% ROE for Fairfax is all but guaranteed into 2025/2026.  Now what happens thereafter will be based on investment opportunities, underwriting and continuing to make good risk/reward decisions.  Cheers!

[maplevalue]

5 hours ago, ourkid8 said:

 

As a long-term investor, I like the fact he is known as the blackberry/hedging guy.  It has kept the stock price suppressed and allowed Prem the repurchase a significant amount of the company at a great price.  

 

Reminds me of part of the reason Philip Morris performed so well (best performing stock 1926-2021) was federal + state lawsuits -> stock to be depressed for a decade despite it still "churn[ed] out cash and pa[id] dividends". Meant the returns from reinvesting the dividends became very large.

 

Stocks for the Long Run 6th Edition (pg 163)

[Xerxes]

4 hours ago, maplevalue said:

 

Reminds me of part of the reason Philip Morris performed so well (best performing stock 1926-2021) was federal + state lawsuits -> stock to be depressed for a decade despite it still "churn[ed] out cash and pa[id] dividends". Meant the returns from reinvesting the dividends became very large.

 

Stocks for the Long Run 6th Edition (pg 163)

 

I always have a problem with books and analysts talking about long term return with dividends re-invested. 
 

If the discussion is about company point of view, the return should always be measured without dividend re-invested. 
 

Why ? For the simple fact that the corporation CHOSE to give out cash dividend in place of share repurchase. So the return has to be measured with that capital allocation decision in mind. 
 

Wether the investor chooses to DRIP or not (it does not and should not taint nor improve corporation’ long term return)

 

when was the last time one heard about analysts talking about a bad performing stock’ long term return WITH its cash dividend re-invested back into that sub-performing company. They always say “at least there was the cash dividends”, while everyone takes is for granted that the cash-dividends were not DRIPed. 
 

 

 

 

Edited October 31, 2024 by Xerxes

[Munger_Disciple]

16 minutes ago, Xerxes said:

 

I always have a problem with books and analysts talking about long term return with dividends re-invested. 
 

If the discussion is about company point of view, the return should always be measured without dividend re-invested. 
 

Why ? For the simple fact that the corporation CHOSE to give out cash dividend in place of share repurchase. So the return has to be measured with that capital allocation decision in mind. 
 

Wether the investor chooses to DRIP or not (it does not and should not taint nor improve corporation’ long term return)

 

when was the last time one heard about analysts talking about a bad performing stock’ long term return WITH its cash dividend re-invested back into that sub-performing company. They always say “at least there was the cash dividends”, while everyone takes is for granted that the cash-dividends were not DRIPed. 
 

 

 

 

 

The main problem with showing returns with dividend reinvestment is that most such calculations don't take into account the tax leakage from dividends. Most people incur taxes in the range of 20%-35% with federal and state taxes in the US. So the after-tax returns tend to be lower. 

For this reason, stock buybacks tend to be far superior but a large part of the investor base for tobacco companies want dividends so it shall be primarily dividends with a smaller buyback thrown in.  

Edited October 31, 2024 by Munger_Disciple

[Crip1]

7 hours ago, Munger_Disciple said:

 

The main problem with showing returns with dividend reinvestment is that most such calculations don't take into account the tax leakage from dividends. Most people incur taxes in the range of 20%-35% with federal and state taxes in the US. So the after-tax returns tend to be lower. 

For this reason, stock buybacks tend to be far superior but a large part of the investor base for tobacco companies want dividends so it shall be primarily dividends with a smaller buyback thrown in.  

Well, I respectfully disagree about excluding dividends. Let's look at this example: Two companies were both priced $100 a share 4 years ago, and both are currently priced at $200 a share. Company A paid a 2.5% dividend while company B did not pay any dividend. Clearly company A had a better return than company B. Because of this, it does make sense to incorporate dividends into investment returns.

 

That said, not only is the point regarding taxation spot on, it makes return nearly impossible to calculate due everyone's unique tax situation. Candidly, I don't have a holistic calculation in mind, but assuming dividends are reinvested and conservatively assuming a 35% tax rate on those dividends would give a reasonable ballpark figure. 

 

Folks posting here tend to have longer time horizons than most, and those longer time horizons make reinvested dividends substantially more valuable than it does for short-term traders.

 

-Crip