Francis Chou (Trades, Portfolio)'s Chou Associates and Prem Watsa (Trades, Portfolio)'s Fairfax Financial both own a significant stake in Resolute Forest Products (RFP, Financial).
According to each respective fund's 13F for the period ending Dec. 31, 2020, they owned 4.6 million and 31 million shares, respectively, at the end of last year. This was an 8.9% portfolio weight for Fairfax and a 23% portfolio weight for Chou.
Investors should note these figures are all based on 13F reports. These reports only provide a snapshot of an investor's portfolio at one point in time. What's more, they only detail U.S. equity investments. As such, there may be other, more significant holdings in each firm's portfolio that are either not equity holdings or are overseas investments.
A "disappointment" so far
Chou and Watsa are some of the most respected investors in the value community. That suggests they believe there's hidden value in this business, and it could be worth significantly more than the value the market is currently placing on it.
Indeed, for Chou, Resolute is the third-largest holding in his portfolio after Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) and Bausch Health (BHC, Financial). It is the fourth largest holding in Fairfax's portfolio.
Chou has been an investor in Resolute for eight years. He recently said that the investment had been a "disappointment" during this time. However, he also noted that the business appears to be chronically undervalued:
"It is quite comical to experience how a commodity stock can be hammered beyond all logical comprehension. Resolute paid a special dividend of $1.50 a share in 2018, and it was trading as low as $1.17 per share in April 2020. Back in March 2020, the company announced that it would buy back 15% of its common shares for $100 million. At the lowest year-to-date price of $1.17, the whole market capitalization would be approximately $99 million."
The stock has been rising recently on increasing lumber prices, which are allowing the business to generate higher cash flows. This is something Watsa highlighted in one of his recent investor letters:
"In 2020 Resolute allocated capital to shareholders by repurchasing 6.9 million shares, or 8% of outstanding, at an average price of $4.28 per share. 2021 looks like a promising year for Resolute as lumber prices remain high, pulp prices show signs of strengthening and Resolute's tissue business continues to develop. "
Watsa has also acknowledged that Resolute's performance has been pretty terrible. In a Fairfax 2019 annual shareholder letter, he stated that it had been a "very poor" investment.
Improving outlook for Resolute
After nearly a decade of poor returns for Chou and other holders of the stock, it looks as if 2021 could be the year Resolute finally comes good.
The stock is currently trading at 0.7 times its book value, which looks cheap. However, in a challenging lumber environment, one could argue that the business deserves to sell at a discount to book value.
With lumber prices rising as they have been, Resolute is on track to earn $190 million this year, according to Wall Street. Based on these estimates, the stock is dealing at a forward price-earnings ratio of 3.7.
We already know the company is willing to reward shareholders when it can. Last year's special dividend and share repurchases are evidence of that. With the firm set for bumper profits this year, shareholders could be in for high returns once again.
Even though the stock is up around 780% since its March low last year, a repeat of the $1.50 per share dividend would give a yield of 14% on the current stock price.
If management decides to return all of the company's $190 million estimated profits for 2021, considering the group's current market capitalization of $770 million, that would be a shareholder yield of 25%. After waiting nearly a decade, some of Resolute's investors may finally see a payoff this year.
Disclosure: The author owns no shares mentioned.
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