Fairfax Financial: Now Trading Well Below Book Value

Fairfax Financial (FFH) is a Canadian insurance company. The CEO is Prem Watsa, who many compare to Warren Buffett.

Prior to 2008, Prem Watsa was nervous about the state of the economy. As a result, FFH invested in credit default swaps. FFH was able to buy credit default swaps for approximately $270 million and sell them for over $2 billion. Nice trade!

FFH also shorted equity indices to hedge its equity positions. Once again, the company made huge money on these shorts.

At the end of 2008, FFH was no longer hedged, and therefore is long both stocks and bonds. With its huge investment gains, FFH invested $4 billion in tax-exempt bonds (at dirt cheap prices). Most of these bonds are insured by Berkshire Hathaway (BRK.A).

The company has a book value of around $280 per share (based on 12/31/2008 values). Yet the stock (as of 4/22/09) trades for under $240.

I have yet to find a CEO or a company that performed better in 2008. I am really not sure why FFH trades at its current level. Nevertheless, I believe this a great opportunity to purchase the shares.

Keep in mind that FFH is increasing its float, and increasing its investment portfolio. Prem Watsa and his investment team is making all the right moves. If you believe you are buying management when you purchase a stock, please take a look at this investment.

Disclosure: I own shares in FFH.

Comments

[bigtime99:]

And unlike Berkshire, whom Prem has modeled his company and investment style after, they pay a dividend. About 3% last year but jumps around depending on earnings. Very, very good company to long term hold in my opinion.

Apr 23 07:20 PM

[naidle:]

Fairfax is no longer hedged against market collapse as it was in October. This also explains why it fell off drastically in early March like the rest of the stock market.

They're heavily invested in JNJ, Wells Fargo and GE now so you better like those names if you want to consider FFH.

Apr 23 07:31 PM

[Dan Braem:]

Naidle - I think I mentioned that FFH is no longer hedged. I don't think Buffett or Watsa are experts at timing the exact bottom, so I think that needs to be considered. If memory serves me, JNJ is the biggest equity position at 500+ million and Kraft is the second biggest at 200+ million. Again, there was no hotter hand over the last 2 years (in terms of public companies) than Watsa.

The point I wanted to make with this article is you are getting this great manager and a great balance sheet for less than book value. As much as I admire Buffett, Watsa has a smaller company and can be a little more nimble. His trades on the CDS's, index shorts, US Treasuries, etc. have been spot on.

He is taking the cash from these trades and building the float - sort of following Buffett in the late 60's, early 70's.

Tough to find any criticism right now with FFH, although I like Naidle's point about knowing what equities they own.

Apr 23 11:27 PM

[ozcutty2:]

Certainly good value at current levels. Considering an investment, am i greedy to want it to fall below 200?

Apr 24 01:56 AM

[naidle:]

You did mention it but I felt it was an important tidbit worth repeating :)

He's an amazing manager for sure and I bet in a long enough game he wins every time.

I just wanted to point out the drastic increase to their stock value corresponded with the CD swaps.

On Apr 23 11:27 PM Dan Braem wrote:

> Naidle - I think I mentioned that FFH is no longer hedged. I don't
> think Buffett or Watsa are experts at timing the exact bottom, so
> I think that needs to be considered. If memory serves me, JNJ is
> the biggest equity position at 500+ million and Kraft is the second
> biggest at 200+ million. Again, there was no hotter hand over the
> last 2 years (in terms of public companies) than Watsa.
>
> The point I wanted to make with this article is you are getting this
> great manager and a great balance sheet for less than book value.
> As much as I admire Buffett, Watsa has a smaller company and can
> be a little more nimble. His trades on the CDS's, index shorts,
> US Treasuries, etc. have been spot on.
>
> He is taking the cash from these trades and building the float -
> sort of following Buffett in the late 60's, early 70's.
>
> Tough to find any criticism right now with FFH, although I like Naidle's
> point about knowing what equities they own.

Apr 24 11:54 AM

[and:]

why is it not moving recently given its stock holdings like wfc, jnj been going up with the uptrend? it just looks very strange to me and also given its low price-book... i understand there is so discount factor due to its earning results, written down some bad investments... but as this should have been discounted already 1 week after the earning release.... i m a new shareholder of ffh, is it always been so quiet and move all of a sudden due to its high per share price and hence illiquidity?

May 06 01:30 PM

[Dan Braem:]

Don't know why it isn't moving. I stand by my initial comments - buy this well below book and you should be ok. A good target is at $240.

I think more important than the stocks are the tax-exempt bonds. They should have increased in value substantially. I don't view this as an investment that you should worry about week after week.

This is a "buy and hold" (am I allowed to say that anymore). The only thing (IMO) that can really hurt this company is another hurricane season like 2008.


On May 06 01:30 PM and wrote:

> why is it not moving recently given its stock holdings like wfc,
> jnj been going up with the uptrend? it just looks very strange to
> me and also given its low price-book... i understand there is so
> discount factor due to its earning results, written down some bad
> investments... but as this should have been discounted already 1
> week after the earning release.... i m a new shareholder of ffh,
> is it always been so quiet and move all of a sudden due to its high
> per share price and hence illiquidity?

May 12 05:54 PM