Analyzing Brett Horn

[Tommm50]

To me "no moat" basically means nothing special, it can be easily replicated. How would Brett suppose to replicate the global reach, the market position in emerging economies, the diversity of industries, the expertise in bond investing, and longevity and loyalty of staff enjoyed by Fairfax?

[SafetyinNumbers]

1 hour ago, Tommm50 said:

To me "no moat" basically means nothing special, it can be easily replicated. How would Brett suppose to replicate the global reach, the market position in emerging economies, the diversity of industries, the expertise in bond investing, and longevity and loyalty of staff enjoyed by Fairfax?

The no moat stuff is nonsense but it’s the improbable earnings estimates that I really have trouble reconciling. 

[Haryana]

On 1/24/2024 at 9:04 PM, Haryana said:

The way the estimate value numbers have changed over last year seem like being done manually.

 

As if someone is making the numbers up strategically from their La-Z-Boy recliner to camouflage.

 

First, the number changed from 730 to 790, that is the maximum to go in 700s with just one digit.

 

Then, the number changed from 790 to 970, that is the maximum below 1000 exchanging a digit.

 

 

Now the number has changed from 970 to 1180 which again make it look like something around a 1000.

 

For this purpose, he had to make sure that the new number is under 1200 even if the math is senseless.

 

So he has moved the fair value from 730 to 1180 in steps where each step made to look like nothing big.

 

Because all the while he analyzed that the company was overvalued and management value destructive.

 

[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: brett.horn@morningstar.com
cc: OfficeQuestions@morningstar.com

 

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

 

Edited October 6 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 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 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)