This article is first in a series that provides an ongoing analysis of the changes made to Prem Watsa's US stock portfolio on a quarterly basis. It is based on Watsa's regulatory 13F Form filed on 08/15/2013. Prem Watsa is the Chairman and CEO of Fairfax Financial Holdings (FRFHF), an insurance and investment company he founded in 1985. The business is structured in the same mold as Warren Buffett's Berkshire Hathaway and performance is comparable as well, although over a somewhat shorter timeframe - per the EOY 2012 letter to shareholders, the Book Value of Fairfax grew at a Compounded Annual Growth Rate (CAGR) of 23% and the share price increased at a CAGR of 19% over the last 27 years. The similarities are so striking that he is often referred to as "Canadian Warren Buffett". Watsa's investment style is strictly value-oriented with the goal of establishing positions at the point of maximum pessimism. He also shoots to realize long-term capital gains perpetually even though other parts of his portfolio may be showing unrealized capital losses - thorough research allows him to hold on to positions that show losses for many years as the focus is on the single-minded pursuit to wait until the value is recognized. He has made several contrarian bets over the years, the latest of which is insuring against the possibility of deflation in the United States. Also, it is important to realize that his 13F equity portfolio is completely hedged as of EOY 2012.
This quarter, Watsa's US long portfolio decreased ~7.5% from $2.68B to $2.48B. Although, there are 41 14F securities in the portfolio, it is still very concentrated - there are numerous minute positions and a few large stakes. The top five holdings represent just over 74% of the US long assets. The largest holding is BlackBerry (BBRY) followed by Johnson & Johnson (JNJ) accounting for 21.80% and 20.45% of the US long portfolio respectively.
Novadaq Technologies Inc. (NVDQ): NVDQ was a very small 0.87% of the US long portfolio position eliminated this quarter at prices between $9.91 and $14.76. The original stake was established in Q1 2012 at around $5 and was increased by ~15% over the next several quarters before the stake disposal this quarter. The stock currently trades at $13.45. Watsa harvested long-term capital gains from this position.
Johnson & Johnson: JNJ is a long-term position that has been in the portfolio since 2007. The original stake was 5.9M shares purchased at an average cost-basis of $62.29. Since then, the position has been adjusted but the net effect is that Watsa currently owns slightly more than 5.9M shares at a cost-basis of around $60. This quarter, the position was trimmed slightly at prices between $81 and $89. The stock currently trades just outside that range at $89.37. Watsa is very bullish on JNJ.
Level 3 Communications Inc. (LVLT): LVLT is a 10.25% of the US long portfolio position that was reduced by ~6.6% this quarter at prices between $19.34 and $24. The position was first established in Q4 2008 and increased by ~50% in Q3 2011 at prices between $22 and $39 (adjusted for the 1 for 15 stock-split in October 2011). The stock currently trades near the low-end of that range at $22.53.
Overstock.com Inc. (OSTK): OSTK is a 3.61% of the US long portfolio position that was reduced by ~6% this quarter at prices between $11.46 and $28.20. The original stake was purchased in Q4 2008 at prices between $9 and $17 and had since been kept steady. The stock currently trades at $29.61. Watsa appears to be harvesting long-term capital gains from this position.
Resolute Forest Products (RFP): RFP is the largest US long portfolio holding at 15.34%. The stake was first established in Q4 2010 when it was named Abitibi Bowater and the position has since been more than doubled. Watsa's average cost-basis on RFP is much higher. This quarter, the stake was increased by ~17% and prices between $12.70 and $16.49. The stock currently trades near the low-end of that range at $13. For investors attempting to follow Watsa, RFP is a very good option to consider.
The rest of the portfolio remained steady this quarter:
BlackBerry Inc. : BBRY is Watsa's largest position at 21.80% of the US long portfolio. The position was first purchased in 2010 at around $50 for 2M shares. Since then, the stake was aggressively built up to the current position of almost 52M shares (~10% of the business). His average cost-basis is around $17 and the stock currently trades at around $10.50. Watsa continues to be very bullish on BBRY, despite the drop in price. For investors attempting to follow Watsa, BBRY is a good option to consider.
SandRidge Energy (SD): SD is a 6.38% of the US long portfolio stake first purchased in Q4 2008. The bulk of the position was acquired in Q4 2012 at prices between $5.19 and $7.38. The stock currently trades near the low end of that range at $5.21. For investors attempting to follow Watsa, SD is a good option to consider.
Dell Inc. (DELL): DELL is a 4.81% of the US long portfolio position first acquired in 2007 immediately after Michael Dell's comeback as CEO. The ~8.5M share stake was purchased in the $20s price-range and has been marginally increased over the years. DELL currently trades at $13.82, well below Watsa's cost-basis.
US Bancorp (USB): USB is a 4.23% of the US long portfolio stake that has been in the portfolio since Q4 2008. A huge 15.9M share position was built in Q1 2009 at prices between $8.82 and $25. The bulk of that stake was disposed of over multiple quarters in 2010 at much higher prices. The remaining position was marginally reduced last quarter and kept steady this quarter. The current stake is still sizable and indicates a bullish bias.
Exco Resources (XCO): XCO is a 2.87% of the US long portfolio stake first purchased in Q1 2012. The bulk of the current position was purchased in Q4 2012 at prices between $6.77 and $8.93. The stock currently trades in the middle of that range at $7.54.
The 13F portfolio also has a 3.51% allocation to Level 3 Communications Notes, a small 0.50% allocation to Intel Corporation (INTC) convertible bonds (cusip:458140AD2, 2.95%, 12/2035, 31.53 strike), and numerous minute positions (less than 0.5% of the US long portfolio) that add up to a total allocation of 1.71%.
The spreadsheet below highlights changes to Watsa's US stock holdings in Q2 2013: