Fairfax Financial Holdings Limited (USA) (FFH)

ACPdiddy (96.98) Submitted: 6/21/08 1:19 PM : Start Price: $273.00 FFH Score: 46.44

When I made this call, FFH was around $270 and I was picking up a well managed insurance business at book value. This is a business that's grown its book value at a Warren Buffet-like 20+% per year since its inception in the '80's. Since I made my call things have improved a lot for FFH while its stock price has dropped over 10%.

First the good news. FFH made some very good bets on credit derivatives which gave them incredible earnings for last year and Q1 '08. Based on those numbers google finance lists their current P/E as 2.65. These derivatives were basically bets against banks and mortgage bond insurers, so that explains why they paid off so well through Q1 of this year. But they still had $700 million worth of that bet open at the end of the last quarter, and financials are continuing to get slaughtered this quarter. I don't know exactly how well the bet will pay off this quarter, but according to this article:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aZFL_bKzqxYU&refer=home

the MBIA bet had a 22% gain on June 20th alone. So safe to say they'll be posting some great numbers again next month.

Now why has the stock price dropped? Hard to say for sure, but they're probably getting dragged down to some extent just for being in the financial sector. Plus, the NYTimes ran a very badly reported article last month implying that FFH might not be in as good shape as it seems to be. Whitney Tilson effectively refutes the NYTimes article here:

http://seekingalpha.com/article/80311-fairfax-financial-anatomy-of-a-hatchet-job?source=wildcard

So now you have a chance to buy this rock-solid insurer for less than its rapidly expanding book value. Do your research, but I don't think you'll regret it.

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