Prem Watsa increased his holding of AbitibiBowater (ABH, Financial) 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, Financial), 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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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, Financial), 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.
GuruFocus Real Time Picks alerts you for the stock purchases and sales that Gurus have made within the last two days. Follow your favorite Gurus closely with GuruFocus' Premium Membership! If you are not a Premium Member, we invite you for a 7-Day Free Trial.
