Prem Watsa's $500 Million Bet On Blackberry

How Prem Watsa became one of Canada's most successful investors and an analysis of his current equity portfolio revealing a huge bet on one stock.


Prem Watsa's Early Years

Prem Watsa left India with 8 Rupees and a dream … now he’s one of Canada’s most successful investors and has been nicknamed “the Warren Buffet of the North”. Don’t be alarmed if you’ve never heard of him, Watsa seems to steer clear of the limelight and financial media, and instead focuses on his company and various board and university positions.

Watsa was born on August 5, 1950, and grew up in Hyderabad, India. He attended the prestigious Indian Institute of Technology in 1971 where he earned a bachelor’s degree in chemical engineering. Seeing opportunity abroad, Watsa joined his brother in Canada in 1972 with 8 Rupees to his name and a $600 draft towards his first year of tuition. After a year and half of applying, Watsa was admitted to the University of Western Ontario in London, where he completed an MBA at what would later become the Richard Ivey School of Business.

In 1974 Watsa took his first job at an insurance company named Confederation Life. He’d spend 10 years there, learning security analysis from the Director of Research, John Watson, and building up a network of contacts and high net worth individuals that he would later leverage. In 1985, Watsa and four partners took the leap and bought a struggling Canadian trucking insurance company called Markel Financial for $5 million, and by 1987 they had renamed it Fairfax Financial. This is where the real story starts.

Today, Fairfax Financial (TSX: FFH) has a market capitalization north of $19 billion CAD and a business similar to Buffett's Berkshire Hathaway in many ways. Fairfax currently operates through several subsidiaries engaged in property, casualty, life insurance and reinsurance, investment management, and insurance claims management.


Betting Against the U.S. Housing Market

Like his more famous contemporaries featured in the “Big Short”, Watsa profited from the greatest trade in a generation by being short the U.S. housing market in 2007-2008.

As of Q3' 2007, Fairfax and its subsidiaries owned an enormous credit default swap (CDS) book of around $18.5 billion notional on about 25 to 30 companies, the majority of which were bond insurers and mortgage lenders. In the housing bubble and financial crisis years of 2008-2009, Fairfax was as one of the few companies that were able to grow through outstanding investment returns, increasing its equity base from $4.1 billion to $7.4 billion, resulting in an increase in book value per share of 61% (not including dividends). This was far more than any company in the financial industry.

As of the last twelve months, Fairfax has generated revenue of over $16 billion and operates globally through local subsidiaries. Below, I take a closer look at the company's direct investments in public equities.


Fairfax Financial's Latest Form 13F Filing

On November 14th, 2017, Prem Watsa's firm Fairfax Financial filed their quarterly Form 13F regulatory filing. I reviewed the 13F filing to review holdings in Fairfax Financial's large portfolio.

Fairfax Financial's stock portfolio totals nearly $1.2 billion according to the latest filing. The list value of stock holdings is up 8.2% when compared to the last quarter. As a benchmark, the S&P 500 was up 3.9% over the same period.

Quarter-over-Quarter Turnover (QoQ Turnover) measures the level of trading activity in a portfolio. Fairfax Financial's QoQ Turnover for the latest quarter was 6.9%, so the firm likely has high conviction in these holdings as indicated by the low turnover ratio. This is another indication that Prem Watsa's investing strategy is similar to that of Warren Buffett's.


Fairfax Financial's Largest Holdings

The Ideas section of finbox.io tracks top investors and trending investment themes. You can get the latest data on the holdings discussed below at the Prem Watsa page. The following table summarizes his firm's largest holdings reported in the last filing:

Fairfax Financial Largest Holdings
Ticker Name Holding ($mil) % Of Portfolio
BB BLACKBERRY LTD $521.7 42.7%
KW KENNEDY-WILSON H... $228.0 18.7%
RFP RESOLUTE FST PRO... $152.7 12.5%
IPI INTREPID POTASH INC $72.5 5.9%
USG U S G CORP $50.0 4.1%
IBM INTL BUSINESS MA... $40.8 3.3%
JNJ JOHNSON & JOHNSON $19.7 1.6%

The seven positions above represent 88.8% of the fund's total portfolio. It was interesting to see Blackberry make up such a significant portion of the portfolio. In June 2008, shares of Blackberry traded above $144 per share and now only trade at $10.65 as of December 14th, 2017.

However, digging back into prior 13F filings revealed that Fairfax Financial first disclosed its Blackberry position in Q3 2013 when the stock was trading around $8 per share. The stock has since appreciated netting a paper profit of 33% on the position.


Fairfax Financial's 7 Largest Purchases

I also used finbox.io to find Fairfax Financial's largest buys last quarter. Here's the list of the biggest stock purchases determined by comparing the last two filings:

Fairfax Financial 7 Largest Purchases
Ticker Name Purchased ($mil) % Of Portfolio
ALR ALERE INC $18.6 1.5%
CBI CHICAGO BRIDGE &... $14.3 1.2%
CRAY CRAY INC $4.9 0.4%
AGX ARGAN INC $4.1 0.3%
RPXC RPX CORP $4. 0.3%
NWPX NORTHWEST PIPE CO $3.4 0.3%
PGH PENGROWTH ENERGY... $3.2 0.3%

Fairfax Financial's 3 Biggest Sells

Here's the list of biggest position reductions determined by comparing the last two filings:

Fairfax Financial 7 Biggest Sells
Ticker Name Sold ($mil) % Of Portfolio
IBM INTL BUSINESS MA... $55.2 3.3%
USB US BANCORP DEL $20.6 0.1%
LUK LEUCADIA NATL CORP $5.0 0.2%

Fairfax Financial's Most Undervalued Holdings

To determine which stocks are trading below their intrinsic value, aka "fair value" I used the finbox.io Fair Value estimates. I also wanted to blend in some indication of which stocks might be ready to make a move up soon because they're popular with Wall Street analysts.

I calculated an average using the finbox.io fair value upside and analyst upside to create a blended upside which I then used to rank the most undervalued holdings.

Here are the top 7 stocks based on my calculations:

Fairfax Financial Most Undervalued Holdings
Ticker Name Upside (finbox.io) Upside (Analyst Target) Blend Upside
AGX ARGAN INC 73.0% 27.3% 50.1%
AP AMPCO-PITTSBURGH... 28.8% 63.4% 46.1%
LRN K12 INC 42.0% 36.3% 39.1%
KLIC KULICKE & SOFFA ... 24.7% 38.5% 31.6%
NWPX NORTHWEST PIPE CO 18.2% 41.0% 29.6%
GLBL TERRAFORM GLOBAL INC -7.9% 57.6% 24.9%
ARCH ARCH COAL INC 33.3% 10.3% 21.8%

Managers with more than $100 million in qualifying assets under management are required to disclose their holdings to the SEC each quarter via 13F filings. Qualifying assets include long positions in U.S. equities and ADRs, call/put options, and convertible debt securities. Shorts, cash positions, foreign investments and other assets are not included. It is important to note that these filings are due 45 days after the quarter end date. Therefore, Fairfax Financial's holdings above represent positions held as of September 30th and not necessarily reflective of the fund's current stock holdings.

However, most can agree that with thousands of stocks traded on U.S. exchanges, doing thorough research on each one is nearly impossible for smaller investors. Leveraging the resources of the largest hedge funds on Wall Street can be a powerful way to narrow down the list.


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As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.


Author: Matt Hogan

Expertise: Valuation, financial statement analysis

Matt Hogan is a co-founder of finbox.io. His expertise is in investment decision making. Prior to finbox.io, Matt worked for an investment banking group providing fairness opinions in connection to stock acquisitions. He spent much of his time building valuation models to help clients determine an asset’s fair value. He believes that these same valuation models should be used by all investors before buying or selling a stock.

His work is frequently published at InvestorPlace, Benzinga, ValueWalk, AAII, Barron's, Seeking Alpha and investing.com.

Matt can be reached at matt@finbox.io.

Matt Hogan, finbox.io byline

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