Prem Watsa (Trades, Portfolio) is often referred to as the Warren Buffett (Trades, Portfolio) of Canada. Since 1985, his holding company has produced 15% annual gains, and today, Fairfax Financial Holdings (FFH, Financial) is worth 14 billion Canadian dollars ($11.03 billion).
This is no way near as large as Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial). However, it is still impressive considering the fact that the Canadian investor started a lot later than the Oracle of Omaha.
The other factor that links these two investors is that Fairfax and Berkshire are both insurance holding companies. The investors have used their insurance businesses' resources to invest in the market and generate higher returns in the long run.
Fairfax's largest investment
According to Fairfax's latest 13F, which detailed the firm's equity positions at the end of 2020, the largest holding in the portfolio at the end of last year was Atlas Corp. (ATCO, Financial).
This position accounted for 48% of the $2.3 billion equity portfolio, according to the 13F, making it by far the largest investment. BlackBerry (BB, Financial) was the second largest investment at the end of last year with a 14% portfolio weight.
Atlas is an interesting investment. Watsa and his investment team began acquiring the stock in the first quarter of last year. Fairfax acquired just over 100 million shares in the company in the first three months of 2020, just before the Coronavirus pandemic rocked global markets.
The holding company didn't acquire this position in the open market. At the end of last year, its former largest position, Seaspan Corporation, announced a reorganization and merger whereby Atlas Corp. would become the new parent company of Seaspan, and the group would acquire APR, which Fairfax previously owned. APR is the world's largest lessor of mobile gas turbines. The deal was by way of an all-stock transaction valued at $750 million, including the assumption of debt.
A leading business
The combination of the two businesses made a lot of sense. Seaspan is a leading independent charter owner and operator of containerships with industry-leading ship management services. Seaspan's fleet consists of 119 containerships, including seven vessels the company has agreed to purchase, which have not yet been delivered. Meanwhile, APR owns rapidly deployable, large-scale power and fast-track mobile power units. The combined business brings together two asset-heavy enterprises with stable cash flows.
More importantly, the merger also bought together three incredibly astute capital allocators. As well as Watsa, David Sokol, who previously managed Berkshire Hathaway Energy, and Bing Chen, the CEO of Seaspan, now head the business. All three of these managers have an impressive track record of building companies and efficiently allocating capital to create value for investors.
Value investment
A bet on this company is a bet on the success of management. Right now, the stock is trading at a discount to its book value. It is trading at a price-to-tangible-book value of just 0.9.
What's more, it also offers a dividend yield of 3.8%. These metrics look incredibly attractive considering the quality of the management team and the level of financial resources that are behind the business.
Book value has increased at a compound annual rate of just under 12% over the past six years. If the business can replicate anything like that over the next six years, investors could be well rewarded by buying the stock at a discount to book today. In the meantime, there's that 3.8% dividend yield to reward investors while waiting for the value to come through.
Buying companies at a discount to book value with hard assets is a strategy that has fallen out of favor in recent years. This could be an opportunity to take advantage of Mr. Market's bipolar nature and buy a high-quality business with exceptional managers at a discount.
Disclosure: The author owns no share mentioned.
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