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Name your best 3 undervalued equities in Canada or U.S.


Hawks
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Leaving aside the U.S. financial equities which certainly look undervalued and have had a lot of play on this Board, am looking for additional undervalued equities in other sectors with significant upside.

I nominate the following:

ata.to (automation niche, debt free, cash on hand for future acquisitions and drag from solar energy sidestep now essentially complete)

spls (beaten down gorilla in its field, corporate business solid, brick and mortar type stock)

emc (data storage business growing significantly, recent acquisitions soon to payoff, possible takeover target).

Disclosure: I own all 3.

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Packer- thank you for your reply. Will check those discussions on your 3.

Question: have looked at BK a number of times but not bought. A number of lawsuits against it are my concern.  But many "value investor" big names are on board for sure. Do you have any opinion or insight on it?  Do you own it?

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RIM (I know it's been talked about enough); esp. at current prices. I like it cause I like the chances for BB10 personally; the company seems pretty undervalued (old but pretty good breakdown of the financials: http://www.portfolio14.com/2012/04/research-in-motion-is-absurdly-cheap.html), & of course MR. WATSA owns 9.9% and is on the board of directors (probably the biggest reason I invested).

 

DL - Danier Leather. Looked into it a while ago. It seems like a stable leather retailer (fully vertically integrated). Largest vertically integrated Leather-only products retailer in the Canadian market. Current selling under BV (but it has been for a while now)... The issue is that there doesn't really seem to be any catalyst for growth (and I don't understand retailers well enough).

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In addition to SD, my second undervalued equity I would have to say is our beloved Fairfax.  At book value, its an absolute steal!!! Where else are you able to buy a company who are arguably the best capital allocators around? ( debt and equities).

 

I see tons of individuals really analyzing LUK and hell, I did the same but I could not pass the quality test. Why look at buying a second tier company when you can buy Fairfax at book? We all have to remember, insurance operations will drastically improve in the mid to long term and we will be writing profitable business. My only concern is Prem's purchases of non insurance businesses.  (Thomas cook, sporting life etc...) let's hope he can move up the quality scale as Buffet.

 

S

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FFH at book is no steal. its slightly below intrinsic value but given its current investment position, how can you justify a higher than book multiple? They do not have great underlying businesses so all you really have is the hope that Watsa's council pulls something out of the hat in terms of unexpected or above average returns. 

 

Interest rates are at a low so insurers aren't going to do as well plus other insurers that are better are selling at or just a few notches above book.

 

FFH looks to be dead money for the near term.

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FFH at book is no steal. its slightly below intrinsic value but given its current investment position, how can you justify a higher than book multiple? They do not have great underlying businesses so all you really have is the hope that Watsa's council pulls something out of the hat in terms of unexpected or above average returns. 

 

Interest rates are at a low so insurers aren't going to do as well plus other insurers that are better are selling at or just a few notches above book.

 

FFH looks to be dead money for the near term.

 

+1

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FFH at book is no steal. its slightly below intrinsic value but given its current investment position, how can you justify a higher than book multiple? They do not have great underlying businesses so all you really have is the hope that Watsa's council pulls something out of the hat in terms of unexpected or above average returns. 

 

Interest rates are at a low so insurers aren't going to do as well plus other insurers that are better are selling at or just a few notches above book.

 

FFH looks to be dead money for the near term.

 

I guess the distinction is, most of us are buying for the long term and not the "near term" as you indicate.  Once everyone agrees it is not dead money in the "near term", what will the multiple be then?  At that point, you may wish to have bought at book value when everyone didn't like it.  Additionally, you get some protection if things do sour or deflation hits, or even if their value plays work out.

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FFH at book is no steal. its slightly below intrinsic value but given its current investment position, how can you justify a higher than book multiple? They do not have great underlying businesses so all you really have is the hope that Watsa's council pulls something out of the hat in terms of unexpected or above average returns. 

 

Interest rates are at a low so insurers aren't going to do as well plus other insurers that are better are selling at or just a few notches above book.

 

FFH looks to be dead money for the near term.

 

“We brought the discipline of our investment style into our insurance operations. It doesn’t make sense to us, as value-oriented long term investors, to pay more for a stock or bond than a price on which, in our estimation based on its value, we should earn a good return over time. The same principle holds true for underwriting. The insurance industry as we all know is very cyclical. We focus on avoiding writing business where we are not being properly compensated for assuming the potential liability. If pricing is weak and the business cannot be written profitably, we simply decline to write the business. Similarly, in a hard market where pricing is strong and profitable, we will focus on greatly expanding the amount of business written. Management of our companies understand clearly that they will be measured only on the profitability of their underwriting. As value investors, we focus on preserving capital and not paying too much for assets. That value philosophy drives our approach to the insurance business as well. I think this focus on disciplined underwriting is very powerful and not all that common in the property and casualty industry. We judge our insurance companies by their profitability, not by the volume of business they write. Effectively, this is the same performance standard we use in judging our portfolio returns at Hamblin Watsa.”

Prem Watsa, Winter 2011

 

Frank,

I agree with your concern about the “near term”. But I do not agree, when you say that they do not have great underlying businesses… If the business model described above by Mr. Watsa isn’t great, well then I don’t know what great means!

 

giofranchi

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BRK has great underlying businesses. GEICO, sees, furniture mart, dairy queen etc. List of great businesses goes on and on, but nobody/or most (generalizing) is screaming about FFH because of its underlying business. People like this stock because its Prem Watsa and his amazing historical returns on the investment portfolio. Take that away and you got an average insurance operation(s).

 

FFH's underlying business (not investment portfolio) is mainly insurance from what I know. Given what I have seen, their insurance ops are not world class. I look at their combined ratios and they appear to be "average" though I did not go into all of the subs to see their peers. But I have seen combined ratios north of 100% more times than I would like.

 

Let me ask you, if you got the investment team at another insurance operation (SLF, MFC, GWO) operating at the healm of FFH would you still be bullish on FFH? of course not.

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BRK has great underlying businesses. GEICO, sees, furniture mart, dairy queen etc. List of great businesses goes on and on, but nobody/or most (generalizing) is screaming about FFH because of its underlying business. People like this stock because its Prem Watsa and his amazing historical returns on the investment portfolio. Take that away and you got an average insurance operation(s).

 

 

So essentially you're saying it's basically a large closed end equity fund, with the leverage coming from insurance float?

 

Also, if rates stay suppressed for a long time (possible), all that time is wasted when you could have bought things like GOOG.

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Let me ask you, if you got the investment team at another insurance operation (SLF, MFC, GWO) operating at the healm of FFH would you still be bullish on FFH? of course not.

 

Well of course not, but I guess I don't get your point.  The insurance lets them use the float, and we get that management at the cost of book, so that seems like a win to me. 

 

Re the underwriting, it is my understanding that a great deal of the >100% combined ratios have come from underwriting made prior to acquisition.  I'm hoping to see those come down in the future for current operations. 

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BRK has great underlying businesses. GEICO, sees, furniture mart, dairy queen etc. List of great businesses goes on and on, but nobody/or most (generalizing) is screaming about FFH because of its underlying business. People like this stock because its Prem Watsa and his amazing historical returns on the investment portfolio. Take that away and you got an average insurance operation(s).

 

FFH's underlying business (not investment portfolio) is mainly insurance from what I know. Given what I have seen, their insurance ops are not world class. I look at their combined ratios and they appear to be "average" though I did not go into all of the subs to see their peers. But I have seen combined ratios north of 100% more times than I would like.

 

Let me ask you, if you got the investment team at another insurance operation (SLF, MFC, GWO) operating at the healm of FFH would you still be bullish on FFH? of course not.

 

Wouldn't this same line of thinking have ruled out BRK in the 70s?

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BRK has great underlying businesses. GEICO, sees, furniture mart, dairy queen etc. List of great businesses goes on and on, but nobody/or most (generalizing) is screaming about FFH because of its underlying business. People like this stock because its Prem Watsa and his amazing historical returns on the investment portfolio. Take that away and you got an average insurance operation(s).

 

FFH's underlying business (not investment portfolio) is mainly insurance from what I know. Given what I have seen, their insurance ops are not world class. I look at their combined ratios and they appear to be "average" though I did not go into all of the subs to see their peers. But I have seen combined ratios north of 100% more times than I would like.

 

Let me ask you, if you got the investment team at another insurance operation (SLF, MFC, GWO) operating at the healm of FFH would you still be bullish on FFH? of course not.

 

 

Well, of course you are right… as far as history is concerned! But, paraphrasing Mr. Buffett, if history were all there is about investing, librarians would be the richest people on earth. Past results are very important, far from me saying the contrary! But, they are not everything. You must also judge the business model, the management, and the price. Only then you can make a bet on the future! And I like what I see in FFH: I believe the opportunities to markedly improve their underwriting performance are there and will be exploited.

Frank, do you really think you would be able to buy one of the best capital allocator out there at book value, if it were also the best underwriter?! No way, right? Think of it this way: on the underwriting front they have much room to “surprise” the market. And I see all the necessary premises in place, to achieve that: a great underwriting philosophy, a disciplined management, and troubles inherited from the past (see, for instance, Crum & Forster) that are constantly, albeit slowly, fading away.

 

giofranchi

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