Fairfax Financial Holdings recently disclosed its portfolio updates for the third quarter of 2020, which ended on Sept. 30.
Led by founder and Chairman Prem Watsa (Trades, Portfolio), Fairfax takes an investing approach that has its roots in Benjamin Graham and David Dodd's "Security Analysis" as well as the insurance float of Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A) (BRK.B). The firm is focusing on growing mark‑to‑market book value per share over the long term "by running Fairfax and its subsidiaries for the long term benefit of customers, employees, shareholders and the communities where we operate – at the expense of short term profits if necessary." It also emphasizes maintaining strong financing for downside protection.
Based on its investing principles, the firm's top three new buys for the third quarter were GrafTech International Ltd (EAF, Financial), Crown Castle International Corp. (CCI, Financial) and Immunomedics Inc. (IMMU, Financial).
GrafTech International
The firm bought 852,628 shares of GrafTech International, impacting the equity portfolio by 0.33%. Shares traded for an average price of $6.98 during the quarter.
Based in Parma, Ohio, GrafTech is a manufacturing and engineering company involved in the production of graphite electrodes and petroleum coke for use in the production of electric arc furnace steel and other metals.
On Nov. 13, shares of GrafTech traded around $7.79 for a market cap of $2.08 billion and a price-earnings ratio of 4.41. According to the Peter Lynch chart, the stock is trading below its intrinsic value.
The company has a financial strength rating of 4 out of 10 and a profitability rating of 5 out of 10. The cash-debt ratio of 0.1 is lower than 91% of industry peers, but the Altman Z-Score of 2.19 indicates the company has only a low risk of bankruptcy in the next two years. The operating margin and net margin have improved over recent years to their respective values of 47.18% and 32.84%.
Crown Castle International
The firm also established a new holding of 4,000 shares in Crown Castle International, impacting the equity portfolio by 0.04%. During the quarter, shares traded for an average price of $165.04.
Crown Castle is a real estate investment trust based in Houston. It is the largest owner of shared communications infrastructure in the U.S. with over 40,000 cell towers and close to 80,000 route miles of fiber supporting small cells and fiber solutions.
On Nov. 13, shares of Crown Castle traded around $168.01 for a market cap of $72.46 billion and a price-to-funds from operation ratio of 33.86. According to the GuruFocus value chart, the stock is modestly overvalued.
The company has a financial strength rating of 3 out of 10 and a profitability rating of 7 out of 10. The cash-debt ratio of 0.01 is below the industry median of 0.08, and the Altman Z-Score of 1.42 indicates the company could face liquidity issues in the near future. The three-year revenue growth rate is 6.2%, while the three-year Ebitda growth rate is 8.7%.
Immunomedics
The firm invested in 8,500 shares of Immunomedics, impacting the equity portfolio by 0.04%. Shares traded for an average price of $50.24 during the quarter.
Immunomedics is a biotechnology company that focuses on antibody-drug conjugates for cancer treatment. On Oct. 23, months after Trodelvy became its first Food and Drug Administration-approved treatment, Immunomedics was acquired by Gilead Sciences (GILD) in an all-cash transaction valued at approximately $21 billion.
On Nov. 13, shares of Gilead (which Immunomedics is now a part of) traded around $60.59 for a market cap of $75.95 billion and a price-earnings ratio of 62.46. Due to the acquisition, Immunomedics saw a sharp increase up to the purchase price as investors sought to profit from the special situation.
Gilead has a financial strength rating of 5 out of 10 and a profitability rating of 8 out of 10. The cash-debt ratio of 0.82 and Altman Z-Score of 2.3 show that the company is not likely to face bankruptcy in the near future. For the most recent quarter, the company's return on invested capital exceeded its weighted average cost of capital, indicating overall profitability, though that has not always been the case in recent years.
Portfolio overview
As of the quarter's end, the firm held 60 common stock positions valued at a total of $1.77 billion. During the quarter, the firm established five new positions, sold out of four holdings and added to or reduced several other holdings for a turnover rate of 1%.
The top holdings were Atlas Corp. (ATCO) with 50.15% of the equity portfolio, BlackBerry Ltd. (BB) with 12.07% and Kennedy-Wilson Holdings Inc. (KW) with 10.91%.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Portfolio updates reflect only common stock positions as per the regulatory filings for the quarter in question and may not include changes made after the quarter ended.
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