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Prem Watsa Keeps on Buying: Citigroup; and Selling: Dell, CRESUD SA

William Ding

William Ding

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Prem Watsa was born in 1950 in Hyderabad, India but is currently living and trading from Canada. He is a CFA charter holder, an alumnus of The Hyderabad Public School, Begumpet, a graduate of the Indian Institute of Technology with a degree in Chemical Engineering and a holder of an MBA from the Richard Ivey School of Business of the University of Western Ontario. He is a member of the Advisory Board for the Richard Ivey School of Business. Currently owner of 41 stocks valued at $3,042 Million

In 1974, Watsa started to work as analyst for an insurance company in Toronto where his boss gave him a copy of Security Analysis by Benjamin Graham. In 1983, Watsa left his company to join GW Asset Management (Gardiner Watson) as Vice President of asset management. In 1984, Watsa met legendary value investor Francis Chou at GW. In 1984, Watsa founded Hamblin Watsa Investment Counsel Ltd, an asset management firm. In 1985, Prem Watsa borrowed money and took control of Markel Financial, a Canadian insurance company. He wanted to run an insurance company along the lines of Berkshire Hathaway. In 1987, Watsa re-organized Markel Financial Holdings Limited and re-named the company, Fairfax Financial Holdings Limited making him the CEO, which now has a market cap of approximately $8 billion, based in Toronto, Ontario.

Fairfax had total assets of approximately $31.7 billion, and its revenue for the prior twelve months was approximately $6.2 billion. Over the last 25 years, the company book value per share has compounded by 25% per year. Their general strategy is to “to purchase additional positions in outstanding companies with excellent long term track records which we contemplate holding for the long term.” He has been called the "Canadian Warren Buffett" by some because of his successful periods of investing in the past. Fairfax posted very strong results in 2007 and 2008 due to large gains in equity hedges and credit default swap positions that were taken based on Mr. Watsa’s correct reading of the economy ahead of the Great Recession. Also, Fairfax paid $174 million in upfront fees to protect $22 billion of its investment portfolio against the possibility of deflation over the next decade.

Prem Watsar has stated that he fears a deflationary environment, and as such has hedged appropriately against this risk with derivatives upon his portfolio and investment in high quality stable companies. Fairfax maintains a derivative portfolio of $597.4 million that hedges approximately 88.8% of their equity holdings. Fairfax manages a $2.54 billion portfolio with 55.27% of their holdings in the five stocks, and four of the consistent stocks includes Johnson & Johnson (JNJ), Dell Inc. (DELL), Frontier Communications (FTR), International Coal Group (ICO).

An investment plan that Watsar went through to turn the Toronto’s Hospital for Sick Children Foundation portfolio around was when it started with 80 % ($148.2 million) invested in equities. He then brought that percentage down slightly over the years and, in 2007, slashed it to 35 per cent, convinced the markets had peaked. Most of the remainder went into government bonds. By 2009, Mr. Watsa had piled back into equities, taking the percentage up to 75 per cent and putting much of the remainder into corporate bonds. With markets recovering, he has pulled back to a 50-50 weighting.

Here is a stock that Watsa keeps on buying: Citigroup Inc. (C).

Citigroup Inc.

Citigroup Inc., the global financial services company, has some two hundred million customer accounts and does business in more than hundred countries, providing consumers, corporations, governments, and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, and wealth management. Citigroup Inc. has a market cap of $110.43 billion; its shares were traded at around $38 with a P/E ratio of 12.2 and P/S ratio of 1.3. The dividend yield of Citigroup Inc. stocks is 0.1%.

Citigroup Inc. earned $3 billion, or 10 cents a share, compared with $4.4 billion, or 15 cents a share, in the first quarter of last year. RBC Capital recently initiated coverage on the sector with an underperform rating on both Goldman and Morgan Stanley. "In the more regulated post -financial crisis world, investment banking returns are under significant pressure. GS and MS are the least diversified and therefore the most impacted by regulation," the analysts wrote. "While the stocks have been de-rated year to date, we see this to be justified given the headwinds facing investment banking and see limited absolute upside," they said, adding that they preferred diversified players like JPMorgan Chase (JPM) and Citigroup(C).Citigroup is expected to see revenues falls by 9% even as earnings rise by 13%, according to Thomson Reuters analyst consensus estimates.

With the defeat in Congress of the Tester bill -- meant to delay the implementation of the Durbin Amendment's caps to the interchange fees large banks charge to merchants to process debit card purchases -- analysts are likely to begin lowering earnings estimates to take the expected declines in fee revenue into account.

Customer confidence still needs time to regain as well as recovering from hacked 360,000 customer information nearly a month ago.

CEO Vikram Pandit, pledged to earn nothing until federal bailout loans were repaid (Pandit earned a base salary of $1 in 2009.) However, with Citi back in the green in 2010, the CEO has seen his salary return to comparable levels to other banking leaders. Also, Citigroup hired Elinor Hoover as a vice chairman of Capital Markets Origination for the Americas; she will focus on "capital markets advice and execution to our largest and most important industrial and financial clients,"

Citigroup's (C) hopes of entering the fast-growing Chinese corporate bond market gained a boost after they received initial approval to underwrite company debt, sources said. Final approval from the Bank of China, which could come within two weeks, would mark a significant breakthrough for foreign banks, analysts said, with one describing the market as offering "huge growth potential."

Prem Watsa owns 100,000 shares of C, as of Mar. 31, 2011, which accounts for 0.01% of his equity portfolio. He added his positions in the Dec. 31, 2010 quarter by 16.67%, again in the Mar. 31, 2011 quarter by 42.86%. Watsa first bought shares in mid-2010 and only slightly increased his position since then until the slightly larger increase in position last quarter.

Here are two stocks Watsa keeps on selling:

Dell Inc. (DELL)

Dell Inc. is a premier provider of products and services required for customers worldwide to build their information-technology and Internet infrastructures, and supplier of PCs in the U.S. and the #2 supplier globally behind HP (international revenue is roughly one-half of the total). Dell Inc. has a market cap of $30.49 billion; its shares were traded at around $15.99 with a P/E ratio of 8.6 and P/S ratio of 0.5. Dell Inc. had an annual average earnings growth of 4.2% over the past 10 years.

Revenue from large enterprise customers rose 25% from $14.3 billion in 2009 to $17.8 billion in 2010, while total revenue rose 16% to $61.5 billion during the same period. Dell's growth and earnings have been challenged by lower-cost notebook alternatives and tablets. While Dell seems unlikely to regain neither its former business model nor its innovator position in the computer industry, the company has smart, shareholder-friendly management that appears unlikely to mis-allocate large amounts of capital.

Some people beside Watsa are also losing confidence in DELL such as Hedge Fund Maverick Capital, headed by Tiger Cub and Star Manager Lee Ainslie manages $9.2 billion and invests mainly in U.S. the public equity markets selling out of their $260 million position in Dell Inc.

Dell is beefing up its storage solution portfolio in several high growth areas. In particular it added new scalable network-attached storage (NAS) and unified storage capabilities to its EqualLogic product family as well as new Fibre Channel additions to its Compellent and PowerVault families. In the past year, Dell has made a number of acquisitions in the storage sector – Compellent, Exanet and Ocarina Networks and is targeting the fast growing market for big data in the face of stiff competition from players like EMC (NYSE:EMC), NetApp (NASDAQ:NTAP), HP (NYSE:HPQ) and IBM (NYSE:IBM). Dell's disk storage market share (of GB) should increase slightly going forward from 9.5% in 2010 to ~11% by the end of our forecast period. However, a faster growth in Dell's share as a result of addition of NAS capabilities to its storage product line would result in an upside to our near $20 Trefis price estimate for Dell.

Dell is launching Google's Android based tablet in China later this summer before introducing it the U.S. markets. The stock closed at $15.47 on Friday, up $2.3 or 17.51% in the last 90 trading days.

Prem Watsa owns 22,693,489 shares of DELL, valued as $329 million as of Mar. 31, 2011, which accounts for 10.83% of his equity portfolio. Prem Watsa reduced his positions in the Dec. 31, 2010 quarter by 0.5%, again in the Mar. 31, 2011 quarter by 0.04%. Watsa have held at least 10 million shares position for more than the last 5 years and has only been increasing up until the peak in 34,763,489 shares in mid-2009, in which he has been selling ever since. By only selling 8,900 shares last quarter compared to the hundreds of thousands and millions of shares sold at a time before, Watsa seems to keep his 22,693,489 shares position for the time being.

CRESUD SA-ADR

CRESUD SA-ADR is involved in the Agriculture Industry. This agricultural company, based in Argentina, produces staple crops such as wheat, corn and soybean and engages in cattle ranching throughout Latin America. Cresud also leases some of its farms to third parties and provides commodity brokerage services. Cresud S.a.c.i.f. Y A. has a market cap of $774.9 million; its shares were traded at around $15.45 with a P/E ratio of 25.8 and P/S ratio of 1.5. The dividend yield of Cresud S.a.c.i.f. Y A. stocks is 2.1%.

The stock is currently stuck in a downtrend, trading -10.63% below its SMA20, -13.12% below its SMA50, -14.98% below its SMA200, and losing 13.14% over the last week. Its stock ticker has tumbled to $14.68 in recent weeks, 28% above its 52-week low of $11.45 a share. The P/E ratio is a still a bit inflated at 23.68, but the company pays out a dividend of $0.33 per share for an attractive 2.10% yield. The stock has gained 48.34% over the last year.

Investor interest in South American agriculture companies is growing, seeing such stocks as versatile and stable investments during this period of economic uncertainty. Firms like Cresud, controlling dozens of farms, represent investment in tangible assets like land and produce a good that is steady in value internationally. For his part, Pabrai slightly decreased his fund’s holdings of Cresud in Q1 2011 when the stock was valued closer to its 52-week peak. Back during the March earnings announcement, Cresud had reported a 23% increase in sales and operating income and, despite the recent drop in stock price, had a positive outlook for demand and yield at the end of the year.

The world grain inventories were already depleted from truly terrible weather in 2010. A world food shortage is looming, buy agricultural stocks are a trend.

Prem Watsa owns 892,708 shares of CRESY, valued as $16 million as of Mar. 31, 2011, which accounts for 0.53% of his equity portfolio. Prem Watsa reduced his positions in the Dec. 31, 2010 quarter by 49.01%, again in the Mar. 31, 2011 quarter by 15.92%. Watsa had about a 2 million share position on this stock for 2 years from the end of 2008 to the end of 2010, until he started to sell to less than 50% of that position now; it seems Watsa’s patience might be gone.

To see more about Prem Watsa please go check out his Undervalued Stocks, Top Growth Companies, and High Yield stocks.


Rating: 3.3/5 (14 votes)

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