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Prem Watsa's Fairfax Axes GrafTech, Adds to Top Holding

Fairfax Financial Holdings releases 2nd-quarter portfolio updates

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Margaret Moran
Aug 18, 2021

Summary

  • The firm’s biggest sells were MasterCraft and GrafTech.
  • Its top buys were the Vanguard S&P 500 ETF and Atlas.
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Fairfax Financial Holdings recently disclosed its portfolio updates for the second quarter of 2021, which ended on June 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, Financial) (BRK.B, Financial). The firm focuses 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 biggest trades for the quarter were sales of the majority of its investment in MasterCraft Boat Holdings Inc. (

MCFT, Financial) and its entire common stock position in GrafTech International Ltd. (EAF, Financial). Its top buys were the Vanguard S&P 500 ETF (VOO, Financial) and Atlas Corp. (ATCO, Financial).

MasterCraft Boat Holdings

The firm cut its investment in MasterCraft Boat (

MCFT, Financial) by 1,358,446 shares, or 80.52%, leaving a remaining stake of 328,699 shares. The trade had a -1.26% impact on the equity portfolio. During the quarter, shares traded for an average price of $27.91.

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MasterCraft designs, manufactures and sells recreational powerboats worldwide under the MasterCraft, NauticStar, Crest and Aviara brand names. The Vonore, Tennessee-based company offers products in a variety of price ranges.

On Aug. 18, shares of MasterCraft traded around $24.16 for a market cap of $459.74 million. According to the GuruFocus Value chart, the stock is fairly valued.

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The company has a financial strength rating of 5 out of 10 and a profitability rating of 7 out of 10. While the cash-debt ratio of 0.32 is lower than 65% of industry peers, the Piotroski F-Score of 7 out of 9 indicates a very healthy financial situation. The return on invested capital is typically higher than the weighted average cost of capital, meaning the company is creating value as it grows.

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GrafTech International

Fairfax sold out of its 840,123-share stake in GrafTech International (

EAF, Financial), impacting the equity portfolio by -0.36%. Shares traded for an average price of $12.55 during the quarter.

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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 Aug. 18, shares of GrafTech traded around $10.70 for a market cap of $2.87 billion. According to the GF Value chart, the stock is modestly overvalued.

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The company has a financial strength rating of 3 out of 10 and a profitability rating of 5 out of 10. Although the cash-debt ratio of 0.09 is underperforming 92% of other companies in the industry, the Altman Z-Score of 2.51 indicates the company is not likely at risk of bankruptcy in the near future. The company has a three-year revenue per share growth rate of 35.9% and a three-year Ebitda per share growth rate of 99.5%.

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Vanguard S&P 500 ETF

The firm established a new holding worth 11,313 shares in the Vanguard S&P 500 ETF (

VOO, Financial), impacting the equity portfolio by 0.14%. During the quarter, shares traded for an average price of $382.30.

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The Vanguard S&P 500 ETF is an exchange-traded fund that tracks the performance of the S&P 500.

On Aug. 18, the Vanguard S&P 500 ETF traded around $403.84 per share after a gain of 31% over the past year.

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Atlas

Fairfax added 120,455 shares, or 0.12%, to its top holding Atlas (

ATCO, Financial), bringing the total investment up to 99,932,826 shares. The trade had a 0.06% impact on the equity portfolio. Shares traded for an average price of $13.88 during the quarter.

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Atlas is a global asset management company based in Hong Kong. It primarily seeks long-term returns across high-quality infrastructure assets in the maritime, energy and other infrastructure sectors. Its main portfolio companies are Seaspan Corp. and APR Energy Ltd.

On Aug. 18, shares of Atlas traded around $14.21 for a market cap of $3.51 billion. According to the Peter Lynch chart, the stock is trading above both its intrinsic value and its median historical valuation.

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The company has a financial strength rating of 3 out of 10 and a profitability rating of 6 out of 10. The interest coverage ratio of 3.2 and Altman Z-Score of 0.58 indicate the company could have trouble meeting its debt repayment obligations in the next couple of years. The ROIC is typically higher than the WACC, meaning the company is creating value for shareholders.

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Portfolio overview

As of the quarter’s end, the firm held 59 common stock positions valued at a total of $3.11 billion. During the quarter, the firm established 11 new positions, sold out of nine holdings and added to or reduced several other holdings for a turnover of 1%.

The top holdings were Atlas with 45.79% of the equity portfolio, BlackBerry Ltd. (

BB, Financial) with 18.37% and Resolute Forest Products Inc. (RFP, Financial) with 11.99%. In terms of sector weighting, the firm was most invested in financial services, distantly followed by technology and basic materials.

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Disclosures

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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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