Of Prem Watsa’s 42 stocks in his current portfolio, only three trade for a lower price than when he originally bought them. He added significantly to his holdings in each of these companies in the last quarter. Watsa is a value investor who purchases stocks of companies with excellent track records with the intent to hold for the long term. Watsa, founder and CEO of Fairfax Financial Holdings, has achieved a 154.6% 10-year cumulative return, compared to 16.4% for the S&P 500.
“We’re looking at this as balance-sheet recession, so there’s a lot of deleveraging taking place among individuals as well as businesses,” he said of the macro environment on a third-quarter Fairfax conference call.
Research In Motion (RIMM)
Research in Motion is the phone company whose flagship product, the Blackberry, has been losing market share to competitors and whose stock price dove over 70% in the last year. The company’s Blackberry handheld devices third-quarter sales declined 12% compared to the same period last year. The BlackBerry PlayBook tablet, which the company launched in the first half of the year, sold 200,000 units in the third quarter, and the company hopes to boost sales by launching a major software upgrade that will give it new capabilities and applications.
RIMM’s co-CEO is Mike Lazaridis, who built it from the ground up and serves with Jim Balsille, co-CEO, who joined the company in 1992. Both men have numerous honorary doctorates and decades of experience. Leon Cooperman, who recently bought 1.43 million RIMM shares, said in a statement that he was disappointed with management’s performance, but believes that, with their combined 10% stake in the company, they will “do the right thing.”
Prem Watsa has said that management was one of the reasons he invested. “These guys have taken the company from 0 to $20 billion, and in our experience, that's not easy to do. It's very competitive, and yes they have some challenges ahead of them, but the guys who have taken it from 0 to $20 billion will be able to figure their way through this,” he said in an interview with GuruFocus.
The company expects that growth in international markets compared to the second quarter of 2011, acceleration in the uptake of BlackBerry 7 smartphones, roll outs of the BlackBerry 7 into Latin America and parts of Asia, and the benefits of the Cost Optimization Program, will improve its earnings per share for the remainder of the fiscal year.
Level 3 Communications (LVLT)
Watsa has owned Level Three Communications since buying 1,467,400 shares at an average price of $52. He bought much more as the price traveled down to $16, and added 3,707,853 shares in the third quarter as it went back up to $29. As of the third quarter, he owns 12,937,560 shares of the company, making it the third largest holding in his portfolio.
Level 3 Communications is an international communications and information services company that operates one of the largest Internet backbones in the world, is one of the largest providers of wholesale dial-up service to ISPs in North America and is the primary provider of Internet connectivity for millions of broadband subscribers, through its cable and DSL partners.
From its website, it bases its business model on the principles of the Silicon Economicssm cycle: “create a global telecommunications network with the scale to reduce unit costs, stimulate demand with these lower costs, support that demand by scaling even more. Level 3 created a network that serves as a foundation for the communications services of the 21st century by providing, among other things, information transmission over a fiber optic network and media delivery over a content delivery network. And we've grown to support the end-to-end communications services that businesses and carriers rely on.”
Over the last three years the company’s revenue has been trailing down, recently declining from $3.8 billion in 2009 to $3.7 billion, and it has had one year of free cash flow (2009) in the last decade. Much of its capital it has spent on acquisitions. The company calls itself a “natural industry consolidator.” Since 2005, it has acquired WilTel, Progress Telecom, ICG, TelCove, Looking Glass Networks, Broadwing, the Content Delivery Network services business of SAVVIS Inc. and Servecast. It closed the acquisitions of Global Crossing Ltd. on Oct. 4, 2011, a company whose consolidated revenue was $697 million in the third quarter 2011.
Prem Watsa began accumulating Citigroup shares in the second quarter of 2010 and owns just 15,000 of them as of the third quarter 2011. He paid an average of $40 per share, and the current selling price is $25. Prior to the 2008 financial crisis, Citigroup shares often traded in the upper $400 range.
In the third quarter, the bank’s revenues remained flat year over year and increased 1% quarter over quarter, while diluted earnings per share increased 71% year over year and 13% quarter over quarter. An average deposit increase of 4% in Asia and 9% in Latin America helped drive Citicorp income, and most types of loans grew in all markets. It also increased its return on equity to 8.4% from 7.5% the prior quarter, and its return on assets to 0.8% from 0.7% the prior quarter.Loans 90 or more days past due as a % of EOP loans shrunk 18% year over year to 1.09%.
This quarter, the company has focused intently on managing risk related to eurozone countries, emerging markets and U.S. mortgage exposure. It also expects to begin returning capital in 2012 (it cut its dividend in 2010).
On Wednesday, Standard & Poor’s downgraded the credit ratings of 15 banks, including Citi, after revising its ratings criteria. Citi’s rating lowered from A to A-.