Fairfax Quarterly Results!

[StubbleJumper]

 

The equity hedge has perhaps been a bust over the past quarter, but am I alone in thinking that the S&P500 is fully valued at 900-1000?  It makes me feel good to see the index up at 1200, but I mentally give my portfolio a haircut when I look at my brokerage statement.

 

I don't try to put current or near-term values on indexes, but when I look at the 13 or so companies I own shares of, I feel like almost all of them are still a bit undervalued based on current earnings, and think their earnings will be hire a few years from now than they are now.

 

 

Well, that's exactly what FFH does.  They try to find undervalued securities.  But if the broad market starts to decline, there's a tendency for everything to drop (but perhaps by differing magnitudes...however, when things get silly, they often get really silly).  The hedges enable FFH to continue to seek out undervalued equities while ignoring the frothiness of the broader market.

[Crip1]

 

The equity hedge has perhaps been a bust over the past quarter, but am I alone in thinking that the S&P500 is fully valued at 900-1000?  It makes me feel good to see the index up at 1200, but I mentally give my portfolio a haircut when I look at my brokerage statement.

 

I don't try to put current or near-term values on indexes, but when I look at the 13 or so companies I own shares of, I feel like almost all of them are still a bit undervalued based on current earnings, and think their earnings will be hire a few years from now than they are now.

 

 

Well, that's exactly what FFH does.  They try to find undervalued securities.  But if the broad market starts to decline, there's a tendency for everything to drop (but perhaps by differing magnitudes...however, when things get silly, they often get really silly).  The hedges enable FFH to continue to seek out undervalued equities while ignoring the frothiness of the broader market.

 

Assuming Sanj is correct, FFH has hedged 91% of their equity holdings. The tendency is to either call that hedging a “bet” as commonly done by our friends in the media (because financial media understands the betting concept) or look at this in relation to quarterly earnings (i.e. “The hedge saved their quarter”, or “Without the hedge, they would have made $X”). A third way to look at it is to say that Fairfax’s near total hedge means that FFH’s equity position will now return their relative equity outperformance compared to that of the overall market, eliminating the “noise” from their returns. Looking at this long-term, in which are we more confident?: The 5 year return of the FFH Equity portfolio or the 5 year return of the FFH Equity portfolio over and above the overall market. Personally, I am more confident in the latter. So, the hedge, while it WILL LOSE MONEY periodically makes sense from that perspective.

 

Additionally, the hedge also protects FFH against a financial storm (pick your duration…10 year, 50 year, 100 year, etc). And…I’m good with this too. Consider at the end of 2009 that Equities were more than 50% of FFH’s book…a 20% decline in the overall market would have cost FFH 10% of their BV all other things being equal, which would have less than desirable effect on their D/E. This way, if there is a 20% decline in the overall market, the FFH BV would decline by 1% all other things being equal, plus or minus the FFH portfolio performance compared to the overall market. In the business where financial strength is paramount, this strikes me as a good strategy. Of course, it is and will be frustrating to see that hedge impair earnings (as it has thusfar in Q4), but the bigger picture is important here. Risk cannot be eliminated, but it is vital to minimize it to any extent possible, quarterly results not withstanding.

 

-Crip

 

[StubbleJumper]

Just looking at Toronto price this morning, FFH is trading pretty much bang-on with their reported Sept 30 book value.  Tack on half a quarter of earnings plus some undervaluation of a few assets, and you might conclude that it is actually trading at .90-.95 x book.

 

Looking better and better all the time!

 

SJ

[Myth465]

I dont know FFH is growing Goodwill at a steady clip by buying insurers over book. Right now I ignore GW due to ICIC but depending on what they do they may no longer offset.

[T-bone1]

Just looking at Toronto price this morning, FFH is trading pretty much bang-on with their reported Sept 30 book value.  Tack on half a quarter of earnings plus some undervaluation of a few assets, and you might conclude that it is actually trading at .90-.95 x book.

 

Looking better and better all the time!

 

SJ

 

I think FFH is very cheap at these prices, but I would bet that their California bonds have declined this quarter, so I wouldn't bet on a book value gain since the last report.

[ourkid8]

At what point do you think FFH will start to aggressively repurchase stock? I can see them slowly repurchasing stock at the current book value but what would it need to drop by for FFH to aggressively start repurchasing stock... .80 -.85x book?   Based on the NCIB they are able to purchase 10% of the float and it would be nice to see a large reduction in the public float.  

 

Just looking at Toronto price this morning, FFH is trading pretty much bang-on with their reported Sept 30 book value.  Tack on half a quarter of earnings plus some undervaluation of a few assets, and you might conclude that it is actually trading at .90-.95 x book.

 

Looking better and better all the time!

 

SJ

[omagh]

75% of book:

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=2164" data-ipsquote-contentclass="forums_Topic" 17622#msg17622

 

-O

 

At what point do you think FFH will start to aggressively repurchase stock? I can see them slowly repurchasing stock at the current book value but what would it need to drop by for FFH to aggressively start repurchasing stock... .80 -.85x book?   Based on the NCIB they are able to purchase 10% of the float and it would be nice to see a large reduction in the public float.  

 

Just looking at Toronto price this morning, FFH is trading pretty much bang-on with their reported Sept 30 book value.  Tack on half a quarter of earnings plus some undervaluation of a few assets, and you might conclude that it is actually trading at .90-.95 x book.

 

Looking better and better all the time!

 

SJ

[Uccmal]

At an average daily trade of 30000 shares cdn+Us and being only able to buy 25% of that - 7500 shares it will take a generation for FFh to meaningfully reduce the share count.  So I wouldnt' get too hung up on the possibility.  I dont think Prem gives a hill of beans about share buybacks.  He is in company building mode these days.  Far more lucrative to build up the Polish, Indian, African, Brazilian, and Mideast subs.

[ourkid8]

FFH also has the ability to buy block purchases but I agree with you, it would take time to significantly reduce the share count. 

 

I have to respectfully disagree with you as Prem knows repurchasing shares is another way of creating shareholder value (Only if you are buying the shares below book) at the same time continuining to build the subs you mentioned below.  If it is an option of either building the subs OR share repurchases then I agree, he should focus on building the business and not care about share repurchases but FFH does throw off a significant amount of cash and they are lucky to be able to do both!

 

 

At an average daily trade of 30000 shares cdn+Us and being only able to buy 25% of that - 7500 shares it will take a generation for FFh to meaningfully reduce the share count.  So I wouldnt' get too hung up on the possibility.  I dont think Prem gives a hill of beans about share buybacks.  He is in company building mode these days.  Far more lucrative to build up the Polish, Indian, African, Brazilian, and Mideast subs.

[StubbleJumper]

The 10-year treasury is up to 3.5% today, which is about 100bps since the end of Q3 (most of the increase over the past month!).  That might be a bit of a hit to book value this quarter. 

 

At least it provides slightly better re-investment prospects for FFH.

 

 

SJ