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Holly LaFon
Holly LaFon
Articles (10163)  | Author's Website |

Prem Watsa's Key Portfolio Holdings On Sale for the Brave

With this week’s pummeling of Eurobank Ergasias (OTCPK:EGFEY), the stock joins several other big positions in Prem Watsa (Trades, Portfolio)’s portfolio that have faced setbacks and are trading at half his purchase price or more.

Equities accounted for $500 million of $1.3 billion in total unrealized losses in Watsa’s portfolio in the second quarter, as the market price of several of his key positions slid. A net $677 million in portfolio losses drove an $8.87 net loss per share at his investment vehicle, Fairfax Financial Holdings (TSX:FFH), according to a research note by RBC Capital Markets analyst Mark Dwelle, CFA.

But Watsa often bets on companies where he foresees outsized, long-term gains will outweigh near-term pain. “It remains our view that these portfolio losses are primarily temporary,” Dwelle said, “particularly within the bond portfolio where the composition is almost entirely treasuries and municipals.”

Investors interested in the stocks can buy them at lower prices than Watsa paid.

Greece

Watsa’s investments in Greek assets, which he has called “very manageable,” totaled $809 million in debt and equities at quarter-end and represented around $200 million to $300 million of his $500 million in unrealized equity losses.

The largest of his Greek investments is a stake in Eurobank, the nation’s third-largest bank, for which Watsa paid €400 million as part of a €1.33 billion group investment with managers including Wilbur Ross (Trades, Portfolio) in April 2014.

Watsa paid 31 euro cents per share for Eurobank, getting it for less than the institution’s then-book value of 37 euro cents per share. By June 26 this year, shares had traded down to 14 euro cents each.

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Eurobank shares have continued their descent in the third quarter, trading down to 5 euro cents – a one-year low – on Tuesday after a 44% plunge since the start of August. At this price, investors can buy shares of the bank for about 84% less than Watsa paid and at a wider discount to book value, which stood at 15.37 euro cents at first quarter-end.

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Troubled Greece could receive its third bailout if a vote goes through on Wednesday to approve around $95 billion in rescue funds. EU finance members said in an Aug. 14 statement they plan to complete an assessment and a recapitalization of the financial system by year-end.

The €25 billion currently earmarked for the Greek banking sector would be enough to recapitalize it unless they cease counting deferred tax assets as core capital, according to a July 24 statement from Fitch Ratings.

“The inflow of up to EUR25bn of new capital is significant - almost 88% of current equity in the system - but whether this will be enough depends, in part, on whether the banks' existing capital can absorb the potentially significant losses likely to be uncovered once the ECB completes a review of the country's largest banks after the summer,” the report said.

Speaking to Greek officials in May, Watsa said: “I am optimistic for Greece. In a year from now, the environment will be different. In the new environment, the economy will recover significantly. Greece has numerous advantages.”

BlackBerry Ltd. (BBRY)

Watsa also captured the bulk of his shares of his largest holding, BlackBerry Ltd., at a significant discount to book value, paying around $7 and $15 on average for his largest purchases of the stock in 2012, when book value for the once preponderant smartphone maker was $19.27.

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After tumbling 86% in the past year, BlackBerry trades around $7.58 Tuesday, slightly above book value of $6.64. The price represents a 55% discount to the $17 per share on average Watsa paid for his 46,699,700 total shares, or 8.8% stake, he holds of BlackBerry.

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Watsa discussed the company in his 2014 annual letter, say he expects the company to play a large role in the futuristic Internet of Things:

Regarding our investment in BlackBerry, it is now a little more than a year since John Chen became Executive Chairman and CEO. Although the company had just lost $1 billion when he joined, he immediately set an objective of cash flow breakeven for fiscal 2015 (ending February), and he achieved that objective by the third quarter. Cash in the holding company exceeds $3 billion as he monetized real estate assets and tax loss carry forwards. He has flawlessly introduced two magnificent new products, the Passport, which I use, and the BlackBerry Classic, but he has said the future of BlackBerry would be in the Internet of Things. The Internet of Things is a system that connects data generators (devices that could monitor useful information) with people who want to track the data (data consumers). BlackBerry’s QNX subsidiary, which dominates automobile infotainment systems, plans to play a major role in the development of the Internet of Things.

He continued:

I have learned that the tech world is very difficult to predict and things change very quickly. Yesterday’s hit can be today’s dog, but with the right leadership, things can also change very quickly for the positive. We continue to be excited to be long term shareholders of BlackBerry and have no intention of supporting a takeover of BlackBerry.

BlackBerry reported $658 million in revenue for the quarter ended May 30, down from $966 million in the same quarter last year. Earnings increased to $68 million, or a 10 cent loss per diluted share, from $23 million, or 37 cents loss per share. Cash on its balance sheet totaled $3.32 billion at quarter-end, a $50 million increase for the quarter, with debt of $1.25 billion.

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Resolute Forest Products Inc. (NYSE:RFP)

At $9.93 per share Tuesday afternoon, Watsa’s second-largest holding, Resolute Forest Products, trades at a 50% discount to his average purchase price of $19.83 per share. Watsa’s average purchase price also represented a discount to the company’s annual book value since 2003, and Tuesday’s price remains less than half of its most recent book value of $22.50.

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In total, Watsa holds 29,048,190 shares of the company, taking up 23.9% of his portfolio and 31.8% of shares outstanding.

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Resolute Forest Products’ shares have declined 43% year to date. The company, which makes forestry products such as newsprint and market pulp, operates facilities in the U.S., Canada and South Korea, and does business in about 80 countries.

In the second quarter ended June 30, Resolute reported $926 million in sales, a decline from $1.09 billion in the same period last year, and a net loss of $4 million, or 4 cents per diluted share, compared to a net loss of $2 million, or 2 cents per diluted share. The company attributed the declines to cyclical headwinds in its market pulp and wood products business, and weakness in paper grades such as newsprint.

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Together with Watsa, value gurus owned about half of Resolute Forest Products shares at second quarter-end. Francis Chou (Trades, Portfolio) had a 4.47% stake, and Donald Smith (Trades, Portfolio) held a 9.52% stake.

See more of Prem Watsa (Trades, Portfolio)'s stocks at his portfolio here. Not a Premium Member of GuruFocus? Try it free for 7 days here.

About the author:

Holly LaFon
I'm a financial journalist with a Master of Science in journalism from Medill at Northwestern University.

Visit Holly LaFon's Website


Rating: 5.0/5 (3 votes)

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Comments

cjtplus
Cjtplus - 5 years ago    Report SPAM

Hi! Good article. Thank You. Eurobank stock keeps declining being today the ADR at 0.02x. in US and 0.04 Euros the EUROB:AT in Athenas. Do you know why the difference?

September 23 seems they will report earnings and I hope then we will be able to dimensionate the damage.

What really attract me of this stock is to know that qualified US investors with a lot of skin into the game are already in - having paid 18x what is today's stock price -.

Why?

1) They are US investors which will make the Greek authorities to play fairly with them to avoid the potential loss of "investment appeal" for Grece.

2) They know what they are doing because their prior experience rescuing troubled assets and the close success of the Chipre case

3) They alredy paper lose 18 times what they invested in fresh funds.

Very interesting Varoufakis post here:

http://yanisvaroufakis.eu/2014/05/04/eurobank-another-scandal-re-packaged-as-part-of-the-greek-success-story/

Please leave your comment:



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