This article is part of 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 11/14/2013. Please visit our Tracking Prem Watsa's Fairfax Financial Holdings Portfolio series to get an idea of his investment philosophy and the fund's moves in Q2 2013.
This quarter, Fairfax Financial's (OTCQB:FRFHF) US long portfolio decreased ~36% from $2.48B to $1.60B as he harvested gains from several of his larger positions. Although, there are 42 14F securities in the portfolio, it still is very concentrated - there are numerous minute positions and a few large stakes. The top five holdings represent just over 77% of the US long assets. The largest holding is BlackBerry followed by Resolute Forest Products accounting for 25.76% and 24.06% of the US long portfolio respectively.
Level 3 Communications Inc. (LVLT): LVLT was a large 10.25% of the US long portfolio position that was eliminated this quarter at prices between $20 and $27.50. The stock currently trades at $30.30. It was reduced by ~6.6% last 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 large stake disposal signifies a clear bearish bias.
Wal-Mart Stores Inc. (WMT): WMT was a small 0.66% position that was disposed of this quarter at prices between $72 and $79. The position was in the portfolio since 2009 and the stake was kept steady for the entire holding period. Watsa harvested gains from the position and has moved on.
Dell Inc. (DELL): DELL was a 4.81% of the US long portfolio position as of last quarter. It was reduced to an insignificantly small position this quarter at prices between $12.66 and $13.90. The stake was first acquired in 2007 immediately after Michael Dell's come back as CEO. The ~8.5M share position was purchased in the $20s price-range and was marginally increased over the years. DELL was taken private at $13.75 per share effective 10/29/2013, well below Watsa's average cost-basis.
Johnson & Johnson (JNJ): 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 was adjusted with the net effect that Watsa owned slightly more than 5.9M shares at a cost-basis of around $60 as of last quarter. Last quarter saw a minor trimming at prices between $81 and $89. This quarter, roughly half the stake was sold at prices between $85.86 and $94.39. The stock currently trades in the middle of that range at $89.37. Watsa is harvesting gains from this position.
Wells Fargo & Company (WFC) and U.S. Bancorp (USB): USB was 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 in Q1 2013 and kept steady last quarter. This quarter, the position was reduced to an insignificantly small stake at prices between $36 and $38. The stock currently trades at $38.31. WFC was a 2.20% of the US long portfolio stake that was purchased in the same timeframe as USB. His cost basis was very low and the position was almost sold-out this quarter at prices between $41 and $44.63. The stock currently trades at $43.54. Watsa liquidated large gains on these positions.
JNJ, WFC, and USB transactions demonstrate Watsa's trading style perfectly - generate long-term capital gains perpetually by liquidating profitable positions although other parts of the portfolio may be showing paper losses (BBRY, RFP, etc.).
Resolute Forest Products (RFP): RFP is the second-largest holding at 24.06% of the US long portfolio. 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 than the current quote of around $14.75. Last quarter, the stake was increased by ~17% at prices between $12.70 and $16.49 and this quarter saw a marginal increase. 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): BBRY is Watsa's largest position at 25.76% of the US long portfolio. The stake was first purchased in 2010 at around $50 for 2M shares. Since then, the position 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 $6.43. Watsa announced plans to take the company private in a $4.7B transaction ($10 per share) but the plans were abandoned this month. 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 $5.89. For investors attempting to follow Watsa, SD is a good option to consider.
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 below that range at $5.26. For investors attempting to follow Watsa, XCO is another good option to consider.
Overstock.com Inc. (OSTK): OSTK is a 3.61% of the US long portfolio position that was reduced by ~6% last 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 $26.50.
The 13F portfolio also has a 5.70% allocation in Level 3 Communications Notes, a small 0.78% allocation in 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 2.42%.
The spreadsheet below highlights changes to Watsa's US stock holdings in Q3 2013: