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 05/14/2014. 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 Q4 2013.
This quarter, Watsa's US long portfolio increased ~9% from $1.31B to $1.43B. It should be noted that Fairfax Financials (OTCPK:FRFHF) has a negative view on equities overall and his stock portfolio is hedged. 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 (NYSE:RFP) followed by BlackBerry (NASDAQ:BBRY) accounting for 40.88% and 26.42% of the US long portfolio respectively.
BlackBerry Inc.: BBRY is Watsa's second-largest position at 26.42% 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 46.65M shares (~9% of the business). His average cost-basis is around $17 and the stock currently trades at $7.33. Watsa announced a $4.7B going-private transaction in Q3 2013 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 ~16.5% of the business. This quarter saw a ~10% stake decrease in the 13F position.
Exco Resources (NYSE:XCO): XCO is 6.89% 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 $5.29. 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.
Resolute Forest Products: RFP is the largest holding at 40.88% 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 $15.73. In Q2 2013, the stake was increased by ~17% at prices between $12.70 and $16.49 and Q3 2013 saw a marginal increase. For investors attempting to follow Watsa, RFP is a good option to consider. The stock spiked ~25% in the beginning of the year but has since retreated.
SandRidge Energy (NYSE:SD): SD is 13.99% 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 middle of that range at $6.83. For investors attempting to follow Watsa, SD is a good option to consider.
Overstock.com Inc. (NASDAQ:OSTK): OSTK is 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 $15.51.
Johnson & Johnson (NYSE: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. In Q3 2013, roughly half the stake was sold at prices between $85.86 and $94.39 and most of the remaining stake was eliminated last quarter at prices between $85.61 and $95.63. The stock currently trades at $101. Watsa harvested long-term gains from this position and the remaining stake stands at 0.58% of the portfolio.
Kennedy-Wilson Holdings (NYSE:KW): KW is a very small 0.68% of the US long portfolio position established last quarter at prices between $18 and $22.25. The stock currently trades just outside that range at $23.57.
The 13F portfolio also has Intel Corporation (NASDAQ: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 3.61%.
The spreadsheet below highlights changes to Watsa's US stock holdings in Q1 2014:
Disclosure: I am long BBRY, SD, XCO, INTC, RFP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.