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 02/14/2014. Please visit our Tracking Prem Watsa's Fairfax Financial Holdings Portfolio series to get an idea of his investment philosophy and our previous update highlighting the fund's moves during Q3 2013.
This quarter, Fairfax Financial's (OTCQB:FRFHF) US long portfolio decreased ~18% from $1.60B to $1.31B as he harvested gains from a couple of his large positions. Although, there are 42 14F securities in the portfolio, it still is very concentrated - a few large stakes and numerous minute positions. The top five holdings represent just over 92% of the US long assets. The largest holding is Resolute Forest Products followed by BlackBerry accounting for 35.59% and 29.52% of the US long portfolio, respectively.
Dell Inc. (DELL): DELL was a 4.81% of the US long portfolio position as of Q2 2013. It was reduced to an insignificantly small position last quarter at prices between $12.66 and $13.90. The stake was first acquired in 2007 immediately after Michael Dell's comeback 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, thus eliminating his remaining stake.
Kennedy-Wilson Holdings (KW): KW is a very small 0.68% of the US long portfolio position established this quarter at prices between $18 and $22.25. The stock currently trades at $24.51.
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 Q2 2013. Last quarter, roughly half the stake was sold at prices between $85.86 and $94.39 and most of the remaining stake was eliminated this quarter at prices between $85.61 and $95.63. The stock currently trades at $92.76. Watsa harvested long-term gains from this position.
The rest of the portfolio remained steady this quarter:
Resolute Forest Products (RFP): RFP is the largest holding at 35.59% 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 $19.78. In Q2 2013, the stake was increased by ~17% at prices between $12.70 and $16.49 and last quarter saw a marginal increase. For investors attempting to follow Watsa, RFP is a good option to consider. The stock is on a roll so far this year having returned ~24% in less than two months.
BlackBerry Inc. (BBRY): BBRY is Watsa's second-largest position at 29.52% 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 $8.98. Watsa announced a $4.7B going-private transaction last quarter, but the plans were later abandoned. Instead, he went for a cash infusion of $1B through convertible debentures ($10 conversion price earning 6% interest) - Watsa financed $500M of that transaction and the remaining was funded by a consortium of other investment funds - the implied dilution takes his ownership up to 17.7% of the business. For investors attempting to follow Watsa, BBRY is a good option to consider.
SandRidge Energy (SD): SD is a 15.06% 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 $6.41. For investors attempting to follow Watsa, SD is a good option to consider.
Overstock.com Inc. (OSTK): OSTK is a 7.51% of the US long portfolio position that was reduced by ~6% in Q2 2013 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 $18.62.
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 $5.04. In January 2014, XCO had a rights offering (one new share at $5 for every four shares of XCO held) and Watsa increased his stake from 10.81M shares to 17.54M shares as a result - Prem Watsa along with Wilbur Ross agreed to backstop the offering thereby acquiring more shares than what he would have received by exercising the right. Watsa now controls 6.4% of the business. For investors attempting to follow Watsa, XCO is a good option to consider.
The 13F portfolio also has 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 each) that add up to a total allocation of 2.76%. It had a 5.70% allocation in Level 3 Communicates Notes as of last quarter but that is no longer present this quarter - Watsa either sold the position or has chosen not to disclose it anymore, as it is not a 13F security.
The spreadsheet below highlights changes to Watsa's US stock holdings in Q4 2013: