Prem Watsa Top Holdings: Wells Fargo & Company, Dell Inc., General Electric Company, Johnson & Johnson, U.S. Bancorp

Prem Watsa Top Holdings: WFC, DELL, GE, JNJ, USB

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Nov 19, 2009
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(GuruFocus, November 18, 2009) Property and casualty insurer Fairfax Financial Holdings Ltd. (FFH) turned in another decent quarter. Quarterly income was US$562.4-million, up from US$467.6-million a year ago, while revenue increased to US$2.21 billion from US$2.16 billion. Book value increased to $372.


FFH in many ways resembles Buffett’s Berkshire: both companies invest the cash generated by the insurance operation to increase their own book value. The insurance business is a very competitive business; at the end of the day, if the insurance operation can breakeven, you are doing a good job. Buffett takes prides in his managers of the insurance subsidiaries such as GEICO and General Re for providing him capital that is of negative cost in long term. Short term performance of insurance is everybody’s guess.


The weapons for success for BRK and FFH are the super investors at the helm of the companies: Warren Buffett and Prem Watsa, respectively. Buffett has record of return over 20% for four decades and Prem Watsa pulled off something equally spectacular: FFH began in 1985, 24 years ago, with US$30 million in assets and about US$7.5 million of shareholders’ capital. Today, coincidentally, the company has US$30 billion in assets and US$7.5 billion in shareholders’ equity. That’s up 1,000 times. Per share book value has grown from US$1.50 to US$372. FFH stock price has gone from C$3.25 to between C$375 and $390 a share.


Not a small deed.


Prem Watsa made about $2 billion by betting against the financials in 2007 and 2008. The trade profit solidified the company’s balance sheet tremendously. In 2009, Prem Watsa’s most visible investment initiative is to consolidate his home base – insurance operation.


At the turn of the year, Prem Watsa spent Canadian $686 million to acquire the 36.9% of the shares of the Canadian insurance company Northbridge Financial Corporation that FFH did not own.


Then in September to October, 2009, FFH completed the tender offer for the 27.4% of US insurance company Odyssey Re (ORH) at $65 per share, an exercise cost FFH about $1.05 billion.


Both Northbridge and Odyssey were partially sold to the public to raise more capitals for the holding company FFH. Now Prem Watsa uses the profit from the last two years to take the two companies private.


In a sense, Not only Prem Watsa is more flexible in making trading profit than Buffett, he is also more creative in buying and selling his operating companies. Being smaller does have advantages.


At the end of last year, Prem Watsa stated to use the stock market weakness to establish a portfolio that will last forever. Now that market has run up more than 60% from its March 2009 lows, what does he has to say about the investment opportunities?


Recently, he granted an interview to Canada’s Nationalpost.com during which he stated:
“We like the stocks that we have such as Johnson & Johnson, Wells Fargo. Our thinking is that the stronger get stronger and good management will prevail. Look at the commercial/industrial mortgage problem. There are 100 regional banks in this and say they all go bankrupt. That means there’s opportunities for strong banks like Wells Fargo who can buy regional or smaller banks for cheap.”
In other words, Prem Watsa is in for the high quality blue chips stock.


Here are his top positions as of September 30, 2009:


No. 1: Odyssey Re Holdings Corp. (ORH), Weightings: 41.42% - 42,399,400 Shares

Odyssey Re Holdings Corporation is a leading U.S.-based underwriter of reinsurance providing a full range of property and casualty products on a worldwide basis. Reinsurance is a form of insurance that indemnifies insurance companies for all or part of the loss they may incur under insurance contracts they have written. They operate through a global network of branch offices enabling them to construct a balanced portfolio of risks with the potential for superior returns.


As we just discussed, Prem Watsa took the entire company off the trading floor. The company has ceased to be traded.


No. 2: Wells Fargo & Company (WFC, Financial), Weightings: 8.48% - 20,028,700 Shares

Wells Fargo & Company is a diversified financial services company providing banking, insurance, investments, mortgage and consumer finance services through stores, its Internet site and other distribution channels across North America as well as internationally. (Company Press Release) Wells Fargo & Company has a market cap of $134.82 billion; its shares were traded at around $28.86 with a P/E ratio of 30.1 and P/S ratio of 2.5. The dividend yield of Wells Fargo & Company stocks is 0.7%. Wells Fargo & Company had an annual average earning growth of 10.8% over the past 10 years. GuruFocus rated Wells Fargo & Company the business predictability rank of 4-star.


No. 3: Dell Inc. (DELL, Financial), Weightings: 7.98% - 34,763,489 Shares

Dell Inc. is a premier provider of products and services required for customers worldwide to build their information-technology and Internet infrastructures. Dell, through its direct business model, designs, manufactures and customizes products and services to customer requirements, and offers an extensive selection of software and peripherals. Dell Inc. has a market cap of $31.41 billion; its shares were traded at around $16.06 with a P/E ratio of 14.1 and P/S ratio of 0.5. Dell Inc. had an annual average earning growth of 10.7% over the past 10 years. GuruFocus rated Dell Inc. the business predictability rank of 3.5-star.


No. 4: General Electric Company (GE, Financial), Weightings: 6.57% - 26,597,770 Shares

General Electric is one of the largest and most diversified industrial corporations in the world. GE is engaged in developing, manufacturing and marketing a wide variety of products for the generation, transmission, distribution, control and utilization of electricity. Some of GE's products include major appliances; lighting products; industrial automation products; medical diagnostic imaging equipment; motors; electrical distribution and control equipment; locomotives; power generation and delivery products. General Electric Company has a market cap of $170.99 billion; its shares were traded at around $16.09 with a P/E ratio of 13.3 and P/S ratio of 0.9. The dividend yield of General Electric Company stocks is 2.5%. General Electric Company had an annual average earning growth of 12.7% over the past 10 years. GuruFocus rated General Electric Company the business predictability rank of 3.5-star.


No. 5: Johnson & Johnson (JNJ, Financial), Weightings: 6.31% - 6,884,300 Shares

Johnson & Johnson is engaged in the manufacture and sale of a broad range of products in the health care field in many countries of the world. The company's worldwide business is divided into three segments: Consumer; Pharmaceutical; and Professional. Johnson & Johnson has a market cap of $171.74 billion; its shares were traded at around $62.32 with a P/E ratio of 13.7 and P/S ratio of 2.7. The dividend yield of Johnson & Johnson stocks is 3.2%. Johnson & Johnson had an annual average earning growth of 12.5% over the past 10 years. GuruFocus rated Johnson & Johnson the business predictability rank of 4.5-star.


No. 6: U.S. Bancorp (USB, Financial), Weightings: 5.22% - 15,870,900 Shares

U.S. Bancorp is a financial services holding company. They operate full-service branch offices and ATMs, and provides a comprehensive line of banking, brokerage, insurance, investment, mortgage, trust and payment services products to consumers, businesses and institutions. U.S. Bancorp is the parent company of Firstar Bank and U.S. Bank. U.s. Bancorp has a market cap of $45.14 billion; its shares were traded at around $23.61 with a P/E ratio of 29.2 and P/S ratio of 2.3. The dividend yield of U.s. Bancorp stocks is 0.9%. U.s. Bancorp had an annual average earning growth of 13.4% over the past 10 years. GuruFocus rated U.s. Bancorp the business predictability rank of 3.5-star.


Conclusion


Operating in a volatile insurance industry, Prem Watsa is looking for stable companies to invest his money in. He found these high quality companies to invest in.


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