Canadian billionaire and businessman Prem Watsa (Trades, Portfolio) is often compared to the Oracle of Omaha, Warren Buffett (Trades, Portfolio).
There are plenty of similarities between the two investors. Both try to buy undervalued stocks and both own insurance businesses. Watsa founded Fairfax Financial Holdings in 1985 and remains its chairman and CEO. Like Buffett's Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), Fairfax has grown to be a global force in insurance, and Watsa has made use of the company's balance sheet to invest in his favorite stocks.
The top holding in Fairfax's portfolio at the end of the first quarter of 2020 was Atlas Corp (ATCO, Financial). Watsa snapped up just over 100 million shares of this business during the first three months of 2020, giving it a 53% portfolio weight.
What's interesting about this new position is the fact that it is managed by a former Buffett lieutenant.
David Sokol's comeback
Formerly known as Seaspan, Atlas is managed by David Sokol ( the Chairman) and Bing Chen (the CEO). Sokol was, at one point, speculated to be a successor of Buffett at Berkshire.
Sokol was the director of MidAmerican Energy Holdings from 1991. He built the business into one of the largest energy companies in the United States. Berkshire acquired the company in 1999, and it was renamed Berkshire Hathaway Energy in 2014. Sokol served as CEO of the company until 2008. He also served as a director at a range of other Berkshire businesses, including Johns Manville and NetJets.
Reports suggested that Sokol was behind Buffett and Charlie Munger (Trades, Portfolio)'s interest in the Chinese car manufacturer BYD (HKSE:01211). He was a non-executive director of the company from August 2009 to April 2011.
However, the relationship between Buffett and Sokol changed drastically in March 2011 when it came to light that Sokol purchased 96,060 shares of Lubrizol a few days before presenting the company as an acquisition target to Buffett and Berkshire's board. Sokol resigned at the end of March that year, and Buffett wrote in a letter soon after: "Neither Dave nor I feel his Lubrizol purchases were in any way unlawful. He has told me that they were not a factor in his decision to resign." However, he later admitted that he found Sokol's deals "inexplicable" and "inexcusable."
Betting on growth
It's interesting to me that Watsa would invest so much of his company's equity with Sokol following this debacle, but it looks as if he's betting that the businessman can repeat the success he had at mid-American. In Fairfax's 2019 annual shareholder letter, Watsa stated:
"We expect that the recently renamed Atlas Corp. (formerly Seaspan) will continue to be a significant driver of shareholder value over the long term. With the addition of APR, Atlas Corp. has become a holding company that we fully expect David and Bing will continue to build into a compounding machine (think Mid-American 2.0)...
At year end, Atlas Corp. shares were selling at $14.21 per share, approximately 8.5x earnings, with a dividend yield of approximately 3.5%. Please remember that Mid-American, under David Sokol, compounded earnings at more than 20% over a 20-year period. Including the APR transaction, we have invested $760 million in common shares of Atlas Corp. (cost per share $7.57), and we hold 25 million warrants exercisable at $8.05 and $500 million of 5.5% debt."
Since the end of 2019, shares in the company have slumped by around 50%. With Watsa financing the business, this could be a good opportunity to invest alongside this legendary financier and Sokol, the highly successful capital allocator who was once one of Buffett's most trusted and powerful managers.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Why See's Candies Changed Buffett's Investment Style for Good
- Warren Buffett, Mrs. B and the Circle of Competence
- Warren Buffett on the Advantage of Size
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