Fairfax Financial (FFH.TO)

(Trying to be conservative on his Top Picks this time.) Trading at a reasonable multiple and close to its BV. Prem Watsa has been really good at executing both on an organic growth, but also managing its portfolio. The portfolio is one that is really hedged and structurally set up to perform well in rough markets. Dividend yield of 2.09%.

A little bit of a black box. What they have really tried to do over time has been to break even on the insurance, take all of the funds and invest in various things. It really gets priced off of book value, so the investment side is big and that is why it has dipped, because all of the public investments are down.

You would expect this would be holding up a little better in this turmoil because Prem Watsa had some Put options on the market that was created on a sort of private large basis. What bothers him is that it has really broken down. There is something going on and he doesn’t know what it is. Be very cautious at this point. It is a very complicated company.

Has a lot of respect for Prem Watsa, a truly great investor and has created a great company with this. Has probably done better on the investment side of the equation than on the underwriting side. Long-term this is a fairly good investment, but is controversial right now, as he has come to the market and asked them to lock in his voting control of around 41%. That has been diluted over the years from 85%. Because his control has slipped, he has had to come to the market time and time again to raise capital. As long as there is a sunset clause on that control block, it is probably all right. He does not like to see control blocks that can go generation to generation. If you can ever buy the stock at close to Book Value, it is a very good buy.

Has had a wonderful run up. They have done some accretive acquisitions and the market likes what it is seeing. With this you have some downside protection if Mr. Watsa thinks the market is looking toppy. It is one that you can stick in your bottom drawer for the next 5-20 years, and you will end up doing pretty well.

The one thing you know you are getting with this company is a pretty sharp financial operator running the show. You are also effectively buying downside protection on the economy. He understands they have $10 billion in Puts on the CPI, so they are betting on a low or negative inflation.

This is safe and boring. A steady Eddie that tends to grow year-over-year at a single digit. It just doesn’t have enough to get him excited. ROE on an average year is typically single digit, which is not enough growth for him.

He doesn’t own the stock, because he can’t tell what the earnings are going to be. Calls it a “black box”. He tends not to own these types of companies.

The asset value within the company is very strong. He sees no reason for anything to change.

Has done really well and is up 45% since last year. Management is being very cautious about where it is in terms of valuation and is keeping a really strong balance sheet. Have some plays in place to take advantage of downward movements. If you are going to be in any financial stock, this is one that you can feel safe with.

Has always wanted to own this, but there is a bit of a liquidity issue with it. It might be a little bit above trend right now. $600 is where he would expect it to come off to a little bit. If it got into the $600 range, that would be interesting.

This can be somewhat volatile. It is basically an insurance business with a high dependence on what they earn on the investment side of the equation. Recently announced an acquisition of an insurer and reinsurer in the UK, which long-term has an exceptional combined ratio of about 96%, which means their underwriting is positive. In the last month it has come up from $600-$650, so it can be quite volatile. He would buy it at a lower Price to Book than what it is today.

Very well-run business. For a long time people bought this because of Prem Watsa and the team’s investment acumen. In the last few years, they have seen a turnaround in some of their insurance businesses and their combined ratios have been coming down. Have also been making some acquisitions in the insurance space. He likes this one. This would be more of a defensive equity to own in your portfolio.

2021 bond paying 6.4% per annum. Fairfax is one of those unique credits in the bond market. It is BBB, so it is still an investment great company. This is a great one to look at. It has had a pretty good run, but offers a pretty decent little spread over Canada bonds right now.

Prem Watsa has taken some aggressive, non-insurance positions in this, and they have worked out well and the stock has moved up nicely. His FMV is about 25% higher than the present price. It is going to run into some technical resistance at around $625-$630. There is still value here.