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Prem Watsa Buys More ABH as Stock Price Falls

April 20, 2012 | About:
Holly LaFon

Holly LaFon

248 followers
Prem Watsa increased his holding of AbitibiBowater (ABH) by 5.47% using his averaging down technique that has helped his firm, Fairfax Financial Holdings, return 23.4% annually since inception.

Averaging down means buying more shares of a company as its price goes lower. Prem has done it in many other instances, including with International Coal (ICO), from which he earned $342.1 million. Most investors do the opposite and sell as a stock’s price falls due to fear, often robbing them of potential gains if the stock turns around.

In the case of AbitibiBowater, a global forest products company, Prem bought 3,774,059 shares initially in the first quarter of 2011 at an average price of $27. Then, when the price dropped to about $25, he bought 495,328 more shares, and added 100 more when the price fell to $17. His latest purchase of 957,085 shares on April 17 occurred at about $13.50 per share, according to GuruFocus Real Time Picks.

The key to averaging down is knowing that the business whose stock is cratering is a good one whose value will eventually be recognized by the market again. AbitibiBowater emerged from bankruptcy in 2010. Since that time, its price has fallen about 50%. The company's revenue increased from $4.75 billion to $4.76 billion in 2011, EBITDA increased from $333 million to $418 million, and free cash flow swung from a loss of $42 million to a gain of $101 million.

Prem clearly has confidence in the stock as in his 2011 shareholder letter he listed it as one of the poorest performers in his common stock portfolio and still purchased more. “As we review our common stock portfolios, we believe these stock price declines are predominantly fluctuations and will be reversed over time,” he wrote.

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Rating: 3.4/5 (10 votes)

Comments

kfh227
Kfh227 premium member - 2 years ago


I have spare cash and I have ABH. maybe this is a good reminder that I should be conisdering averaging down.

Thanks!

Hard to gauge the comapny. They've changed alot over the past few years. It is a housing turnaround play and a housing turnaround is inevitable. It is simply a matter of when. I boguth in the $19s and a second time right around $15. $13 might be jumping the dollar cost average gun. But mayb e at $12?
softdude2000
Softdude2000 - 2 years ago
Latest annual report says 38% commercial printing paper, 38% newsprint, 14% market pulp and 10% wood products. I dont see how 80% is related to housing market at all. This is 80% paper industry related. am I missing something? This is not related to housing recovery.

superguru
Superguru - 2 years ago
This would be an interesting stock to research. Watsa and Chou are in it.

It is funny, since I became value investor 5 years back, I seem to buy the most hated stocks (but hopefully strong companies) and then wait 3 years for people to like them again and then sell. Funny part is that it seems to actually work. But requires lot of conviction and thick skin.

kfh227 - is there any research you did that you can share on ABH?

Or was it just a speculative play following Watsa (like I did with SD)?
superguru
Superguru - 2 years ago
ABH - Went through restructuring and bankruptcy couple of years back. Changed their name from AbitibiBowater to Resolute forest products. Classic value play on low p/b value. Looks like growth might come from wood products (only 10% of revenue now) if housing rebounds.

I usually avoid investments in longer term declining industries. But looks like many value investors are attracted towards such plays. Why would that be?
kfh227
Kfh227 premium member - 2 years ago
All,

When I first bought, this comapny was as transparent as mud. Seems today that things are a little easier to gauge. I did some research (read an analyst presentation) and the shareholder friendliness today is apparent.

My history:

This started with Prem Watsa buying. It made me see the comapny for hte first time. Read the annual reports and looked over the numbers. Nothing screamed at me buy. At $19, I was thinking it was fairly valued. Prem apparently disagrees since he was paying more. That always makes me happy knowing I bought in for less than someone like Prem did.

I looked over the numbers (the total equity is insane relative to market cap) and everything looked good at the time. What pushed me over the edge is that it looked like they were paying down debt and this is indeed the case. In a few years, they could have zero debt not that I would care for it to get that low. Some debt is OK. Debt relative to FCF is finally at a comfortable level.

This stock could tank if a recession hits worldwide. The thing is, ABH is building a safety net in their debt elimination so they should handle any recession that may come.

Surprisingly, the stock keeps falling as I type. If this gets into the single digits, I'll have a hard time not buying more. Might even look into options for leverage. I do that soemtime when stocks get irrationally cheap. Far ABH, that would be like $5 or $6 per share.

kfh227
Kfh227 premium member - 2 years ago
Regarding breakdown of market segments and housing related comment.

I view housing as being a big issue. People in that industry are unemployed morethan other industries. Manufacturers I think are the second most unemployed.

Real estate is obviously depressed.

Newspapers make most of their money from help wanted ads and real estate ads. There is a sort of multiplier effect here. If housing improves, real esate advert spedning will icnrease and more help wanted ads will appear. The overall economy will pick up. More coupons will be printed. More cardboard produced to ship things. More wood to build homes.

The housing market is what is holding back the economy. When new home construction finally takes off again, companies like ABH will sell exponentially more product. It's because all of the supporting industries for housing, secondary industries for housing and trickle down effects will lift the tides everywhere. A 1% improvement in unemployment due to housing will not result in jsut a 1% increase in sales for ABH. It will be much greater than that.

pravchaw
Pravchaw premium member - 2 years ago
btw - i read somewhere that chou and watsa bought the debt of the company when it was being restructured in 2010 - most of the shares they have came from conversion of debt to equity. watsa has continued to buy more.

the company is hightly leveraged to the economy - so cash flow should improve strongly going forward. While unattractive industry - the shares are cheap at 0.3 p/b and debt/equity of 0.2. If it can make money now hopefully it will print money when the economy improves. If the economy goes into recession we could of course buy it for $5.

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