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Forced Selling of Fairfax Financial

November 30, 2012 | About:
There appears to have been some forced selling of Fairfax Financial’s common stock recently, which may present an interesting buying opportunity.

On Nov. 14, 2012, MSCI announced that Fairfax Financial Holdings would be deleted from the MSCI Canada Index. See announcement here. This change would take place “as of the close of Nov. 30, 2012.”

On the morning of Thursday, Nov. 15, 2012, the shares of Fairfax Financial Holdings dropped significantly. An article from Reuters Canada (Fairfax shares hit three-year low on MSCI index deletion) described the situation as follows:

TORONTO (Reuters) - Fairfax Financial Holdings Ltd (FFH.TO: Quote) shares dropped as much as 9.6 percent to a three-year low on Thursday after the stock was unexpectedly deleted from the MSCI Canada index.

Just before midday, the company's shares were down C$11.20, or 3 percent, at C$359.37 on the Toronto Stock Exchange after earlier falling as low as C$335.00, their lowest level since August 2009. Trading volume of 153,000 shares was about nine times the normal level.

MSCI, a global index provider, dropped Fairfax late on Wednesday from its Canadian index, which includes about 100 large and mid-cap Canadian-traded companies. Removal from the index means the shares will not be included in funds that mirror the index.

CIBC analyst Paul Holden said this could mean the removal of investment covering about 250,000 shares out of a total of about 20 million shares outstanding.

He said the removal from the index had not been expected.

Fairfax, which is run by Canadian investment guru Prem Watsa, is one of Canada's largest property and casualty insurers. The stock remains on the Toronto Stock Exchange's benchmark S&P/TSX composite index .GSPTSE.

($1 equals $1 Canadian) (Reporting by Cameron French; Editing by Peter Galloway)
A couple of notes about this article:

  • The removal of Fairfax Financial from the index “had not been expected.”
  • Index funds mirroring the MSCI Canada index are being forced to sell Fairfax Financial shares without regard to the underlying business fundamentals. According to CIBC analyst Paul Holden, about 250,000 shares might need to be sold in order for funds to mirror the index.
Below are graphs from Yahoo Finance that show the trading that has occurred in Fairfax Financial’s common shares subsequent to this announcement.

FFH shares traded on the Toronto Stock Exchange:

962137167.jpg

FRFHF shares traded in the OTC Markets:


1386738934.jpg

One other item makes Fairfax Financial shares interesting right now. On Sept. 24, 2012, Fairfax Financial issued a press release in which it announced its intention to make a normal course issuer bid for its subordinate voting shares (common shares). Below is the text of that press release.

TORONTO, ONTARIO--(Marketwire - Sept. 24, 2012) - Fairfax Financial Holdings Limited ("Fairfax") (TSX:FFH)(TSX:FFH.U) announces that it intends to make a Normal Course Issuer Bid, subject to regulatory approval, for up to 800,000 of its subordinate voting shares through the facilities of the Toronto Stock Exchange (the "TSX"). Purchases will be made in accordance with the rules and policies of the TSX and shares purchased will be cancelled. As at September 21, 2012, Fairfax had 19,865,689 outstanding subordinate voting shares and the maximum number of shares to be purchased under the bid represents approximately 5% of the public float of 16,738,504 subordinate voting shares of Fairfax. The average daily trading volume of the subordinate voting shares of Fairfax on the TSX for the six months ended August 31, 2012, calculated in accordance with the rules of the TSX for the purposes of the bid, is 17,101 shares. In accordance with the rules of the TSX, 25% of that average daily trading volume (4,275) represents Fairfax's daily limit (excluding permitted block purchases) for purchases under the bid made through the facilities of the TSX. This bid will commence September 26, 2012 and may extend until September 25, 2013.

From time to time, when Fairfax does not possess material nonpublic information about itself or its securities, it may, in accordance with the requirements of applicable securities laws and the TSX, enter into a pre-defined plan with its broker to allow for the purchase of its subordinate voting shares under the bid at times when it ordinarily would not be active in the market due to its own internal trading blackout periods.

Fairfax is making this Normal Course Issuer Bid because it believes that in appropriate circumstances its subordinate voting shares represent an attractive investment opportunity and that consequently purchases under the bid will enhance the value of the shares held by the remaining shareholders.

Fairfax has purchased 70,116 of its subordinate voting shares during the last twelve months at a weighted average price per share of Cdn. $401.20.

Fairfax Financial Holdings Limited is a financial services holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and investment management.
Here are 1) links to two articles from The Science of Hitting that provide some background on Fairfax Financial, and 2) some book value per share information from the Fairfax Financial third quarter 2012 report.

  • From the Q3 2012 report from Fairfax Financial: “Common shareholders’ equity at September 30, 2012, was $7,328.3 or $360.49 per basic share (excluding the unrecorded $445.8 excess of fair value over the carrying value of equity accounted investments) compared to $364.55 per basic share (excluding the unrecorded $347.5 excess of fair value over the carrying value of equity accounted investments) at December 31, 2011, representing a decrease per basic share in the first nine months of 2012 of 1.1% (without adjustment for the $10.00 per common share dividend paid in the first quarter of 2012, or an increase of 1.7% adjusted to include that dividend). During the first nine months of 2012, the number of basic shares decreased as a result of the repurchase of 47,275 subordinate voting shares for treasury (for use in the company’s restricted share awards). At September 30, 2012, there were 20,328,521 common shares effectively outstanding.”
Disclosure: Long FRFHF

About the author:

Value Study
I am a student and practitioner of value investing. I enjoy learning about value investing principles/strategies/techniques and I strive to implement best practices in my personal investing.

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Rating: 3.9/5 (18 votes)

Comments

superguru
Superguru - 1 year ago
awesome news, What is its book value?

what would be good price to nibble and good price to back the truck in your opinion?
Kiko81780
Kiko81780 - 1 year ago


Any specific reason why they were removed from the index?
Value Study
Value Study - 1 year ago
Superguru:

The September 30, 2012 book value is shown in the article. Regarding good prices to nibble and back up the truck...I'll leave that up to you.

Kiko81780:

I emailed MSCI and asked them why Fairfax Financial was removed from the index. They sent an email reply stating that the information I requested was only available to subscribing clients (and I'm not a subscribing client).

My best guess is that Fairfax Financial did not meet the minimum liquidity requirement.

Please leave your comment:


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