Fairfax 2024

[Thrifty3000]

3 hours ago, Mystery Guest said:

This is Brilliant... trading price is only relevant to the question; can I capture a bigger revenue stream with my hard earned dollar than my current position   

 

Aww shucks... Thanks!

[Mystery Guest]

3 hours ago, Thrifty3000 said:

 

Aww shucks... Thanks!

last night at a bar b Q i sat next to an 82 year old retiree who has his entire portfolio on a spreadsheet on his phone ... "see this the dip 97, my broker wanted me to sell ...I told him buy ! and had to convince him ... "  you make your money buying on the dips ... you can explain this to everybody who needs to know ...but only some of them get it ... 

[Parsad]

6 hours ago, Mystery Guest said:

This is Brilliant... trading price is only relevant to the question; can I capture a bigger revenue stream with my hard earned dollar than my current position   

 

+1!  This is exactly the way to look at investing.  Never fall in love with a security...it comes down to the income it is generating for you.  Markets are there to serve you, not the investor being beholden to markets!  Cheers!

[Maverick47]

On 8/3/2024 at 2:04 PM, Viking said:

Over the past 6.5 years, the size and profitability of Fairfax has increased dramatically. Fairfax has also been aggressively buying back a significant number of shares at a very low valuation. As a result, Fairfax shareholders now own 20% more of Fairfax’s much larger and much more profitable P/C insurance/investment operation. 

Thanks, @Viking, for pointing out the magnitude of the share count reduction.  At 20.1%, it is becoming material.  On a per share basis, each remaining share that we own now owns more than 20% more of the company’s earnings than we would have owned had the share count remain unchanged.  
 

All else being equal, the estimated increase in the portion of the company’s earnings controlled by surviving shares can be calculated as (1/(1-share count reduction)) -1.

 

Assuming a 20% share count reduction, the estimated increase in per share earnings would be (1/0.8) -1 = 25%.

 

A 10% reduction would lead to only an 11.1% increase.

 

Just for fun, let’s examine a Henry Singleton Teledyne share count reduction of 88%:

 

That produces an increase in per share earnings of (1/0.12) -1 = 733%.

 

I’m gaining an appreciation for capital allocators who choose to opportunistically buy back their own company’s shares when they sell for below intrinsic value, because that just makes the above estimates higher!

[Parsad]

On 8/2/2024 at 8:35 AM, dartmonkey said:

Yes the Fibrek case was neither fair nor friendly. But you don't have to take my word for it. Large shareholders sued Fairfax, took the matter to court and won. The Court found that the take over price was neither fair, nor friendly, nor legal. 

 

 

 

Yes and no. The initial ruling did double the share price, from $1 to $1.99, and found much to criticize with Resolute and Fairfax. But the case was appealed, and much of the appeal was allowed, with sale price adjusted down closer to the original $1 offered, from $1.99 to $1.597. The appeal judge found that the judge of the appealed ruling had committed numerous errors, for instance not considering the fact that the $1 price already included a premium, and ignoring the fact that a large majority of minority shareholders had accepted the $1 offered. The appeal judge also found that much of the criticism of the purchaser (Resolute) and the shareholders with which it had signed lock-up agreements (Fairfax) was unfounded.

 

Ruling here: https://courdappelduquebec.ca/en/judgments/details/fixation-des-actions-de-fibrek-inc/

 

Excerpt: Appeal from a judgment of the Superior Court fixing the fair value of the shares under s. 190(15) of the Canada Business Corporations Act (R.S.C. 1985, c. C-44). Allowed in part.

 

In the context of a hostile take-over bid, the application was filed after certain shareholders exercised their right to dissent pursuant to s. 190 of the Canada Business Corporations Act. To determine the fair value of the shares, the trial judge used as a starting point the value of a bid competing with the accepted take-over bid ($1.40), to which he added $0.27 to account for synergies arising from the transaction and $0.40 representing the added value of a lucrative Hydro-Québec contract. The judge then subtracted $0.08 per share for environmental liabilities identified after the assets were taken over, for a final value of $1.99 per share. In addition to contesting this value on appeal, the purchaser of the majority of Fibrek Holding Inc.’s common shares argues that the judge erred in adding the additional indemnity under art. 1619 of the Civil Code of Québec (S.Q. 1991, c. 64) to the amount payable.

 

The judge committed certain palpable and overriding errors. First, he should not have disregarded the value of the purchaser’s offer as a starting point for the analysis. Without being the sole relevant factor, market value is a reliable indicator of the fair value of shares. The purchaser’s offer, however, included a premium over the price at which the shares were trading on the market. Further, a large majority of the shareholders, holding 115 million shares, had accepted it. Also, the judge’s criticism of the conduct of the purchaser and the shareholders with whom it had signed hard lock-up agreements for 46% of the outstanding shares was unfounded, although it is true that this made it practically impossible to put a competing bid over the 50% approval mark.

The judge also committed a reviewable error by using a competing bid as the starting price. Indeed, it was nearly impossible for such an offer to materialize, given the conditions attached to it. Moreover, in the context where both the purchaser’s offer and the competing bid included consideration payable in shares, he ought to have taken into account the significant drop in the value of those shares on the valuation date, which he failed to do. He also committed many errors by adding the value of the synergies arising from the transaction to the competing bid, namely because that led him to conduct a hypothetical auction rather than use objective evidence. Although the added premium for the Hydro-Québec contract was somewhat speculative, there is no reason to intervene in this respect on appeal. In conclusion, by updating the purchaser’s offer as at the valuation date, by adding the value of the Hydro-Québec contract and subtracting the environmental liabilities, the Court fixes the value at $1.5973 per share. 

 

 

It is a good thing for Fairfax shareholders that making 'fair and friendly' offers does not extend to offering a price so high that no minority shareholders object to it. 

+1!  Cheers!

[benchmark]

5 hours ago, Parsad said:

 

+1!  This is exactly the way to look at investing.  Never fall in love with a security...it comes down to the income it is generating for you.  Markets are there to serve you, not the investor being beholden to markets!  Cheers!

I agree in principle. However, in practice, the tax implication on the capital gains have made me twiddle my thumbs  

[Parsad]

3 hours ago, benchmark said:

I agree in principle. However, in practice, the tax implication on the capital gains have made me twiddle my thumbs  

 

I agree with you as well.  The potential tax implications have to be included in the decision if the assets are in a taxable account.  Cheers!

[Kizion]

17 hours ago, Mystery Guest said:

This is Brilliant... trading price is only relevant to the question; can I capture a bigger revenue stream with my hard earned dollar than my current position   

 

Do I oversimplify by concluding that you just look at P/E ratio (and it's potential to evolve positively)? 

Edited August 6, 2024 by Kizion

[Mystery Guest]

2 hours ago, Kizion said:

 

Do I oversimplify by concluding that you just look at P/E ratio (and it's potential to evolve positively)? 

yes and NO ... it's a good starting screen... you could do ok buying the dogs of the index.

'you don't have to put a man on the scales to know he's fat' 

 

you are looking for a good business that has consistent high earnings ... you are looking to buy these earnings at a low price, the lower your cost basis the more explosive the long term compounding. 

 

you can simplify Fairfax based on their own objective:

 OBJECTIVES: 1) We expect to compound our mark-to-market book value per share over the long term by 15% annually by running Fairfax and its subsidiaries for the long term benefit of customers, employees, shareholders and the communities where we operate – at the expense of short term profits if necessary.

 

If you accept that they will meet this objective in some way or other over a long period.

 

your goal would to be buy shares at or under book value baking that return into your portfolio.

 

if you buy your shares at .75 of book ... you are theoretically capturing a 20% return on your 

investment...   

 

...and hang on as long as that objective continues to be met in a reasonable manner

 

 

Edited August 6, 2024 by Mystery Guest

[Hoodlum]

It is interesting that BRK is back to Thurs closing level, while Fairfax is still down 5% from then.  Not sure why the gap is increasing.

Edited August 7, 2024 by Hoodlum

[SafetyinNumbers]

3 minutes ago, Hoodlum said:

It is interesting that BRK is back to Thurs closing level, while Fairfax is still down 5% from then.  Not sure why the gap is increasing.

BRK has better shareholders 

[MMM20]

14 minutes ago, Hoodlum said:

It is interesting that BRK is back to Thurs closing level, while Fairfax is still down 5% from then.  Not sure why the gap is increasing.

It’s statistical noise - but also isn’t Fairfax still restricted in buying back stock until today or tomorrow?

[SafetyinNumbers]

14 minutes ago, MMM20 said:

It’s statistical noise - but also isn’t Fairfax still restricted in buying back stock until today or tomorrow?

No, they have an automated plan and are maxed out at ~8200 shares a day unless they use the weekly block exemption. Most institutions have to sell as a % of volume so it’s hard for the block exemption to be used.

[Hektor]

46 minutes ago, SafetyinNumbers said:

BRK has better shareholders 

[Junior R]

Plus fairfax does have muddywaters lol

[Junior R]

crazy drop lol

[UK]

2 hours ago, SafetyinNumbers said:

BRK has better shareholders 

 

But it seems this dip is only FFH related, because I do not see many insurance stocks in the red. Perhaps it is just some kind of noise.

[backtothebeach]

U.S. bond yields are down quite a bit since the end of Q2. Does anyone have a quick estimate of the effect on Fairfax' bond portfolio and book value?

 

Treasury yields:

Date	06/28/2024	08/06/2024
1 Mo	5.47	5.50
2 Mo	5.47	5.43
3 Mo	5.48	5.34
4 Mo	5.45	5.18
6 Mo	5.33	5.00
1 Yr	5.09	4.46
2 Yr	4.71	3.99
3 Yr	4.52	3.76
5 Yr	4.33	3.73
7 Yr	4.33	3.79
10 Yr	4.36	3.90
20 Yr	4.61	4.28
30 Yr	4.51	4.18

[hardcorevalue]

Good short term but pretty bad long term if we are headed lower on rates.

They probably should have locked in for a bit longer in hindsight

[MMM20]

37 minutes ago, hardcorevalue said:

Good short term but pretty bad long term if we are headed lower on rates.

Isn’t that only true if credit (and equity) spreads widen out? Unless it also gets cheaper for new supply to come on and soften insurance, the fair multiple (discount rate) for FFH might go much higher (lower)! It’s a long duration business even if not priced like it!

 

Edited August 7, 2024 by MMM20

[hardcorevalue]

I think there were a lot of people that were long Fairfax for higher rates. That trade is dead now and then you have Prem go buy a mediocre Canadian mattress chain right before a potential recession. I think there are some flashbacks to previous rough times and people aren’t waiting around to find out. I’m a long term bull on rates going on higher so I’m ok with it but a bond portfolio matched to their liabilities would have worked out a bit better with rates falling. 

[SafetyinNumbers]

2 hours ago, UK said:

 

But it seems this dip is only FFH related, because I do not see many insurance stocks in the red. Perhaps it is just some kind of noise.

I think there are a few marginal traders that owned it for higher for longer and now they think that’s over so they are selling. They aren’t projecting where book value will be in five years or how understated estimates might be given low expectations for the equity portfolio or how well FFH is positioned to be opportunistic in market volatility.

Edited August 7, 2024 by SafetyinNumbers

[Parsad]

51 minutes ago, hardcorevalue said:

I think there were a lot of people that were long Fairfax for higher rates. That trade is dead now and then you have Prem go buy a mediocre Canadian mattress chain right before a potential recession. I think there are some flashbacks to previous rough times and people aren’t waiting around to find out. I’m a long term bull on rates going on higher so I’m ok with it but a bond portfolio matched to their liabilities would have worked out a bit better with rates falling. 

 

You guys are fretting over a minor blip that has nothing to do with Sleep Country.  I've been adding to my FFH holdings...first time since 2020!

 

Cheers!

 

[gfp]

5 minutes ago, Parsad said:

 

You guys are fretting over a minor blip that has nothing to do with Sleep Country.  I've been adding to my FFH holdings...first time since 2020!

 

Cheers!

 

 

been just following it down

 

[hardcorevalue]

Ha don’t count me out.

 

I’ve been adding too!