By Andrew Samuels
The “Canadian Buffett” or “Oracle of Ontario” Prem Watsa, of Fairfax Financial (OTC:FRFHF), purchased the following four stocks during the third quarter. In this article, I provide actionable analysis on these four stocks. As always, use my research as a starting point for your own due diligence.
Research In Motion Ltd. (RIMM)—Currently, Prem Watsa holds 11,798,300 shares of RIMM, a full 11.68% of his total portfolio. He added 3,425,000 shares during the third quarter of 2011 at an average price of $26.71 per share. Although the stock has been purchased by several major investors and gurus, the stock continues to underperform. RIMM is trading around $17.50. The price to earnings ratio of 3.17 is particularly appealing, especially given the $5.48 earnings per share. However, the stock has taken a beating by the market and the company will need to reinvent itself to remain competitive with Apple Inc. (AAPL) and Google (GOOG).
The technical indicators are bearish, with the stock closing below both the 10 and 50-day exponential moving average. Furthermore, the MACD is below the 9-day exponential moving average, another bearish indicator. Despite this, the stock may have reached a bottom and would be worth following over the next several weeks. A positive convergence of the MACD with the 9-day exponential moving average may indicate a change in the market sentiment and a reason to invest. Until then, I would hold on RIMM.
The New York Times Company Co (NYT)—During the third quarter Watsa added 10,000 shares of NYT, bringing his total to 35,000 shares. He purchased the shares at an average price of $8.00 per share. The stock is currently trading around $6.50. Although a well-known company, NYT has struggled along with the rest of the print media industry. The stock is trading a dollar above its 52 week low of $5.50.
The company was not profitable in the past year and has a quarterly revenue growth (year over year) of -3.10%. While the unimpressive shrinkage is not unique to NYT, as fellow competitor Gannett Co. (GCI) has also struggled recently, NYT has little to indicate it as a buy. NYT appears to be a sinking ship, especially compared to competitor News Corp. (NWS). NWS offers a dividend of $0.19 at a yield of 1.20%, but more importantly has been growing. NWS posted a quarterly revenue growth (year over year) of 7.20%.
A technical analysis of NYT exposes further bearish trends as the stock has closed below both its 10 and 50-day exponential moving averages. Furthermore, the stock broke its recent support point of $6.60 over the last week, another bearish indicator. Likewise, the negative fundamentals, the absence of a dividend, and the negative technical signals lead me away from this stock.
Citigroup Inc. (C)--- The Oracle of Ontario added 5,000 shares of Citigroup during the third quarter, bringing his total share ownership to 15,000 shares. He purchased the shares at an average price of $40.00, but the stock is currently trading around $25. A look into the fundamentals reveals a pretty healthy company. Between the second and third quarters, the company increased their cash base and paid down their long-term debt from $504,765,000,000 to $482,675,000. The price to book ratio of 0.41 indicates that the stock is valued at less then half of their book value. C does offer a dividend of $0.04 and a yield of 0.20%, but these figures are far lower than competitors Bank of America (BAC) at 1.80% yield and JP Morgan Chase & Co (JPM) at 3.50% yield. Furthermore, the company did recently suffer a credit downgrade from Standard and Poor and this could have a significant negative affect on the market’s perception of the stock.
A technical analysis reveals more of the same, with the stock closing below both the 10 and 50-day exponential moving averages. However, the stock appears MACD appears close to converging on the 9-day moving average, and if it does there could be a positive break upwards. Citigroup is worth watching over the next several months due to its healthy fundamentals, but the negative technical indicators and larger macro trends lead me against purchasing C.
AbitibiBowater Inc. (ABH)--- During the third quarter Watsa purchased 100 additional shares of ABH, bringing his total to 17,503,704 shares. ABH represents nearly 12.8% of his total portfolio. The average cost per share when Watsa purchased the stock was about $27, while the current price is around $15.50.
The company was recently rebranded as Resolute Forest Products and is traded under the ticker ABH in the NYSE. ABH is trading near its 52 week low of 13.70. The price to earnings ratio of 0.43 is far below the industry average of 7.31. The company has posted a 2.70% quarterly revenue growth with an EPS of 34.53. The gross margin of 25.01% indicates that the company is effectively managing its assets and has more cash to spend on business operations. Similarly, the company has used less debt to finance its business operations, which provides it with stability in this volatile economic climate. Furthermore, the price to book ratio of .40 and price to sales ratio of .30 indicate that the market undervalues the stock by a little over half of its actual value.
A technical analysis reveals both some bearish and bullish trends. While the stock is trading below its 10 and 50-day exponential moving average, the stock has converged with its MACD. Depending on the market’s reaction and performance this week it could experience a positive movement. Furthermore, the stock recently filled an earlier downward gap. The stock has experienced support around the $15.25 mark and could breakaway upwards. The positive fundamentals and mixed technical analysis lead me to indicate the stock as a soft buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.