Prem Watsa's Top Undervalued Picks In Q3

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 |  Includes: BBRY, DELL, FTR, JNJ, LVLT, MDLZ, RFP, SD, USB, WFC
by: GuruFundPicks

Fund guru Prem Watsa, often called the “Canadian Warren Buffet” and the “Oracle of Ontario,” is founder, chairman and chief executive of Fairfax Financial Holdings (OTCPK:FRFHF), based in Toronto. He is probably also the richest investment guru you have never heard of. He is widely believed to have predicted the crash of 1987, the Japanese collapse of 1990, and the 2008 meltdown, from which he benefited by investing in credit default swaps, turning a $341 million bet into more than $2 billion. His net worth is estimated to be over $4 billion.

Founded in 1985 by Watsa, publicly traded Fairfax Financial Holdings Ltd., through its subsidiaries, is engaged in property and casualty insurance and re-insurance and investment management. Its subsidiary Hamblin Watsa Investment Counsel provides investment management to the insurance, reinsurance and runoff subsidiaries of Fairfax. Fairfax seeks to differentiate itself by combining disciplined underwriting with the investment of its assets on a total return basis, which Fairfax believes provides above-average returns over the long-term. The company has increased its book value by a compound growth rate of 24.7% over the last 25 years which ranks it among the top ten companies in the S&P 500.

Per the latest SEC 13-F filing for the September 2011 quarter, the fund holds a concentrated portfolio of 43 positions, and is over-weight technology (28% versus 16%), healthcare (17% versus 9%) and basic materials (14% versus 4%) sectors, and it is under-weight energy (2% versus 24%) and consumer (<1% versus 10%) sectors. Over 60 percent of the company’s assets are deployed in large cap companies, with the small and mid caps accounting for about 20% each. Furthermore, portfolio turnover is between 15%-25%, implying a holding period of about five years.

Based on a review of available SEC 13-F filings, we determined that Fairfax Financial is bullish on the following undervalued stocks (see table):

Research in Motion Ltd. (RIMM) is a Canadian manufacturer of BlackBerry handheld devices for the mobile communications market. Fairfax Financial added $66 million to their $161 million prior quarter position, and they hold an outsized 2.25% of the outstanding shares. RIMM is also undervalued, trading at less than 4 P/E on a trailing-twelve-month basis, and at 1.6 P/B, compared to the averages of 25.1 and 4.4 respectively for its peers in the communications equipment group. RIMM is down more than 85% below its all-time highs and is down more than two-thirds in 2011 after reporting several disappointing quarters as it faces stiff competition from both Apple Inc.’s (NASDAQ:AAPL) iPhone and mobile devices based on Google’s (NASDAQ:GOOG) Android operating system.

Besides Fairfax Financial, other major funds that accumulated RIMM shares in the September quarter include PRIMECAP Management that added 8 million shares and is the largest institutional holder of RIMM at 5.5% of the outstanding shares; PRIMECAP is a mega fund with over $60 billion in equity holdings. Other well known funds adding to their RIMM positions in the September quarter include Citigroup (3.15 million shares), Shumway Capital Partners (2.87 million shares) and BlackRock (1.39 million shares).

Dell Inc. (NASDAQ:DELL) provides desktop PCs, mobility products, servers and networking products to individuals, businesses and governments. Fairfax Financial holds $349 million or 1.24% of DELL, and at 17.6% it is the largest position in its portfolio. DELL is also undervalued, trading at 7 P/E on a TTM basis, and at 2.9 P/B, compared to the averages of 14.4 and 5.2 respectively for its peers in the personal computer industry.

Besides Fairfax Financial, other major funds that accumulated DELL shares in the September quarter include Fidelity Investments adding 14.6 million shares to their prior 19.9 million shares, and currently holding 1.9% of the outstanding shares; and Ameriprise Financial adding 8.4 million shares to their prior 5.5 million shares, and currently holding 0.8% of the outstanding shares.

Johnson & Johnson (NYSE:JNJ) develops health care products and provides related services to the consumer, pharmaceutical and medical markets. Fairfax Financial holds $337 million or 0.2% of JNJ, and at 17.0% it is the second largest position in its portfolio. JNJ is also undervalued, trading at 15.9 P/E on a TTM basis, and at 3.4 P/B, compared to the averages of 17.2 and 19.9 respectively for its peers among major drug manufacturers.

Besides Fairfax Financial, other major funds that accumulated JNJ shares in the September quarter include Goldman Sachs Group adding 8.3 million shares to their prior 0.5 million shares, and currently holding 0.3% of the outstanding shares; and PRIMECAP Management adding 4.6 million shares to their prior 6.9 million shares, and currently holding 0.4% of the outstanding shares.

Wells Fargo & Company (NYSE:WFC) is a diversified financial services holding company with 9,000 offices primarily in the U.S., and provides retail, commercial and corporate banking services. Fairfax Financial holds $114 million or 0.1% of WFC, and at 5.7% it is the sixth largest position in its portfolio. WFC is also undervalued, trading at 9.4 P/E on a TTM basis, and at 1.1 P/B, compared to the averages of 11.3 and 1.2 respectively for its peers among money center banks. Besides Fairfax Financial, other major funds that accumulated WFC shares in the September quarter include Paulson Management adding a new 23.8 million position; and Goldman Sachs Group adding 15.8 million shares to their prior 0.5 million shares.

US Bancorp (NYSE:USB) is a super-regional financial services holding company, providing various banking and financial services via 3,482 branches in 24 mid-western and western states. Fairfax Financial holds $113 million or 0.2% of USB, and at 5.7% it is the seventh largest position in its portfolio. USB is also undervalued, trading at 11.5 P/E on a TTM basis, and at 1.6 P/B, compared to the averages of 17.5 and 1.6 respectively for its peers among Midwest regional banks. Besides Fairfax Financial, other major funds that accumulated USB shares in the September quarter include Viking Global Investors adding 14.7 million shares to their prior 9.8 million share position; and Goldman Sachs Group adding 14.5 million shares to their prior 2.5 million share position.

Select stocks that Fairfax Financial is bearish on (see table) include packaged food manufacturer Kraft Foods Inc. (KFT) that they dropped from their portfolio during the quarter, and oil and gas exploration and production company Sandridge Energy Inc. (NYSE:SD) that they significantly cut from their portfolio during the September quarter.

Also, besides the undervalued stocks mentioned above, Fairfax Financial based on their holding large positions of the stocks in their portfolio at the end of the September quarter (see Table) is also bullish on integrated telecom services providers Level 3 Communications Inc. (NYSE:LVLT) and Frontier Communications (NASDAQ:FTR), and paper products manufacturer AbitibiBowater Inc. (ABH).

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Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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