Fairfax Financial Holdings Limited (USA) (FFH)

Fairfax just had a good quarter. It has seen a big rise in book value which is not yet reflected in the share price, and any additional appreciation in its equity holdings will increase book value still more. Odyssey Re is putting up good numbers. A link to a transcript of the most recent conference call is available here:

http://seekingalpha.com/article/170221-fairfax-financial-holdings-limited-q3-2009-earnings-call-transcript?source=yahoo&page=-1

We follow Prem Watsa and Fairfax on our blog at the Three Dollar Hedge Fund: http://threedollarhedgefundblogspot.com

1/18 in Multi-line Insurance -(87.4@A+/A-)

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.

well hedged against bear market, housing decline

Good insurance underwriting and excellent investing come together to make this an excellent long run growth engine. The insurance market is hardening and future investment returns, although bumpy in the short term, should look very good. I expect book value per share growth of around 10-15% and a future price to book higher than current 0.90x.

The next bubble around the corner, you need someone to spot it.

This is a bandwagon pick on my part. No original due diligence on my part but I'm favoring established value investors with strong cash generating engines under their butts in this environment.

Ability to profit from foreseen situations that bamboozle others

Underwriting performance restored, tons of float, great investment team

A riskier Buffett like operation with low price to book.

low p/e

Watsa

Comparitive financials to Berkshire, large increase of investments while the market was down, large gains in the future.

Leave a legacy not debt.

Excellent investment management

Bought Fairfax based on a profile of their Chairman being described as the Buffet of Canada. Bought at time when Farifaxe's business was rocky. It has proven to be a good investment.

Amassed a number of stocks at bargain basement prices such as USB, DELL, ICO, USG, etc etc.
Trading below book value - 315(last Quarter) + 20%.

If compared to BRK, this should be trading at $491+

Going by the book value or earnings (low P/E) this is a fantastic value fo rthe money.

Extremely cheap at these levels. Unlike the other BRK wanna-be's (BAM, LUK, and others). FFH actually has shareholder VALUE. With share buybacks, 3+% rising dividend (6% payout ratio), below book value, 1/2 price to sales, and trades for less than 5 times trailing earnings. This is a Buffet play for sure. This Toronto insurance company is a great asset allocator and has a fantastic CEO, Prem Watsa. Some refer to him as the Canadian Warren Buffet. He was one of the few investors that bet against the housing bubble. He made billions by buying credit default swaps that would rise in value as other companies creditworthiness deteriorated. FFH continues operations expanding globally, with subsidiaries in Asia and central Europe. With a 23% average return over the last few years (yes, even in 2008!!), this is definitely a buy and hold stock at these levels.

What can I say? Great CEO who predicted this crisis. Can't go wrong. Warren Buffet of the North