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Summary

  • Prem Watsa's US long portfolio increased marginally from $1.43B to $1.46B this quarter.
  • Fairfax Financial's largest five positions are BlackBerry, Resolute Forest Products, SandRidge Energy, EXCO Resources, and Overstock. They together account for 92% of the US long assets.
  • Watsa is negative on equities overall, and the portfolio is hedged.

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 08/13/2014. 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 Q1 2014.

This quarter, Watsa's US long portfolio increased marginally from $1.43B to $1.46B. It should be noted that Fairfax Financial Holdings (OTCQB:FRFHF) has a negative view on equities overall, and his stock portfolio is hedged. Although there are 42 13F 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 top-two holdings are Resolute Forest Products and BlackBerry, and they account for about one-third of the entire portfolio each.

Stake Disposals:

None.

New Stakes:

None.

Stake Decreases:

None.

Stake Increases:

None.

Kept Steady:

BlackBerry Inc. (NASDAQ:BBRY): BBRY is Watsa's second-largest position at 32.67% 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 $9.37. In Q4 2013, Fairfax co-sponsored a cash infusion of $1B through convertible debentures ($10 conversion price earning 6% interest) - they financed $500M of that transaction, and the remaining was funded by a consortium of other investment funds - the implied dilution takes their ownership up to ~16.5% of the business. Last quarter saw a ~10% stake decrease in the 13F position, and this quarter, the position was kept steady.

Resolute Forest Products (NYSE:RFP): RFP is the largest holding at 33.31% 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 $16.79. In Q2 2013, the stake was increased by ~17% at prices between $12.70 and $16.49. Since then, the position has remained relatively steady. 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 a 15.87% 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 $5.27. For investors attempting to follow Watsa, SD is a good option to consider.

EXCO Resources (NYSE:XCO): XCO is a 7.06% 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. 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 his rights. The stock currently trades below the low-end of those ranges at $4.36. Watsa now controls 6.4% of the business. For investors attempting to follow Watsa, XCO is a good option to consider.

Overstock.com, Inc. (NASDAQ:OSTK): OSTK is a 3.43% of the US long portfolio position that was kept steady this quarter. The original stake was purchased in Q4 2008 at prices between $9 and $17, and had since been kept relatively steady. The stock currently trades just outside that range at $17.23.

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 in Q4 2013 at prices between $85.61 and $95.63. The stock currently trades at around $102. Watsa harvested long-term gains from this position, and the remaining stake stands at 0.61% of the portfolio.

Kennedy-Wilson Holdings (NYSE:KW): KW is a very small 0.73% of the US long portfolio position established in Q4 2013 at prices between $18 and $22.25. The stock currently trades outside that range at $25.32.

Baldwin & Lyons Inc. (NASDAQ:BWINB), BCE Inc. (NYSE:BCE), & Cresud (NASDAQ:CRESY): These are very small (less than ~1%) positions that were kept steady this quarter.

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 3.14%.

The spreadsheet below highlights changes to Watsa's US stock holdings in Q2 2014:

(click to enlarge)

Disclosure: The author is long BBRY, INTC, SD, XCO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has 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.

Source: Tracking Prem Watsa's Fairfax Financial Holdings Portfolio - Q2 2014 Update