Fairfax Financial Holdings Limited (USA) (FFH)

The company's been battered by a short campaign, bad acquisitions, and hurricanes. Yet the company's run by some people who have both integrity and stellar long-term value investing records. The company has been simplifying its structure and reducing leverage. Seems like a no-brainer at a price to book of 0.65.

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.

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

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

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.

Smart management with exceptional capital allocation skills. The profits they are currently making on credit default swaps will give them a lot of capital to deploy while the buying is good, which should reap benefits for many years to come.

The company is in a great position with their CDS position. Check out the recent SeekingAlpha article for some backstory. http://seekingalpha.com/article/80311-fairfax-financial-anatomy-of-a-hatchet-job?source=yahoo. It’s written by someone long the stock critiquing an unfavorable article about FFH, so take that into account. Given that, the long term record of the management team makes me comfortable with the long term prospects of the business. A great value at this price.

P/S below 1. 12 month RS above 80, 6 month RS above 80, 3 month RS above 80, EPS QTR VS QTR above 20. Year VS Year above 20. Institutional ownership Increased in last year. So we have a bargain stock for more room to grow.

Selling close to book value (probably a little under book value). So you are getting proven, high quality management for free. They call this a mini-Berkshire for a reason, it has superior management and they know how to make great investments.

Insurance company with great managment, has a great track record for sucssful underwriting,and investing. In the near term all insurance companies are distressed due to an over competetive enviroment and recently unprdictable weather patterns ( ie. Hurrincane katrina, Crazy wild fires every where, and 100 year flood in hte midwwest.) In closing this might be the right time to buy this company because after dust clears the companies that loaded on the risk will be out of buisness and FFH will be writng buisness for much higher premiums, and it's investments continue to perform well, and oh yeah I almost forgot to say they like to repurchase and retire shares every year.

Do your own homework. Don't listen to me, pick up a book or an annual report or a shareholder letter and try using it for more than a doorstop or firestarter. If you want a prompt however, try this:

Insurance. Watsa. 20 year CAGR in excess of 20%. Called the housing bubble and credit collapse and profited on the order of $1billion from it- so much so that declared a special one time divy (in addition to the regular one) in 1Q 2008. If you like MKL you should love this one- used to be MKL's Canadian subsidiary until Prem took over. Now he thrashes MKL on CAGR. Will be interesting to see how One Markel and specialized insurance lines stack up to FFH and superior investing acumen with global reach and superior operating lines over the next 10 years.

Pabrai just upped his stake by 50%.

The low P/E speaks out the company's success in the last 3 yrs. This company gets $7 billion cash, $2 billion debt, so it has tons of cash ready to deploy now, to buy all those solid energy, tech and drug company stocks. What a successful foresight strategy with perfect timing!

Great insurance holding play.
$3b market cap.

This is an undervalued company that I wish I bought in the $80 price range.

Market is near the bottom. Good future earnings.

PICKIS BY ROBERT2CAB53@YAHOO.COM
WORLD MONEY ON WALL STREET.COM

Ability to profit from foreseen situations that bamboozle others

Great investment management. We are entering a hard market for insurance. Should do well over the long term and has $1.5B in cash.

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