(GuruFocus, August 6, 2009) A couple of days ago, our columnist STOCKMANMARC had a piece on Markel Corp. (MKL, Financial) entitled “ A Smaller Version Of Berkshire Hathaway: Markel Corporation”. Talking about a smaller version Berkshire Hathaway, we should not forget about the company Investment Guru Prem Watsa chaired up in Canada, Fairfax Financial Holdings Ltd (FFH, Financial). The same business model at play here: an insurance operation generating cash (called “float”) and Investment Guru who work wonder on the cash. For Berkshire, the Guru is Warren Buffett; for Markel, it is Tom Gayner; for Fairfax, it is Prem Watsa.
Berkshire is reporting tomorrow and many of us are looking forward to it eagerly. Fairfax, however, has recently reported its quarterly result for the quarter ended on June 30, 2009. There are similarity and differences between the two firms. Prem Watsa profited handsomely during the housing crisis debacle by betting on the right side of the CDOs while Warren Buffett pretty much sat tight and did what he does the best: buying good companies at good prices. If anything, Warren Buffett even harmed himself a bit by selling some equity-index related put options. But since 4Q08, Prem Watsa took away the hedge on the equity exposures and was seen buying aggressively in the equity market. So once again, the two Gurus are aligned in their investment approach for the time and were seen going shoulder-to-shoulder in some investment deals.
It is a safe statement to say that a review of Fairfax results serves as preview of Berkshire. For the quarter end on June 30, 2009, Fairfax had a blockbust quarter indeed. Ne t earnings came in at $275.4 million ($15.65 per share), compared to net earnings of $27.6 million in the second quarter of 2008 ($0.84 per share). Primarily as a result of the second quarter net earnings and the increased market value of the company’s bond and common stock investments, book value increased to $315.91 per basic share at June 30, 2009 from $254.95 at March 31, 2009 and $278.28 at December 31, 2008.
Of course, Prem Watsa was happy, as he made this remark in the press release: “We are pleased that, in a difficult environment, we have maintained our disciplined underwriting standards, and our insurance and reinsurance operations have produced a consolidated combined ratio of 98.4% in the second quarter, As to our investments, our continuing focus on high quality common stocks reflects our view that these should provide excellent returns over the long term, though the volatility of the equity markets may result in lumpy quarterly or annual results.”
Book value increase is important for both Warren Buffett and Prem Watsa, as both use it to measure their prospective company’s success. And the measurement is so much tied to the equity market, the book values of the two companies could change dramatically from quarter to quarter. For the past quarter, all have been positive as the markets have been positive.
GuruFocus focuses on the investments of the two Gurus. For the past six month, Prem Watsa invested more into bond ($1431.6 Million) than in the stocks ($227.6 million). But the market value of the Common stock increased much faster than the bond.
(in US$ million).
GuruFocus has yet information on what stock he bought during the quarter yet, but we take comfort that Prem Watsa take a long view of the stocks he buys and he is confident the stocks he owned will be worth much more in five years.
In the conference call on July 31, 2009, after the earning release, Prem Watsa answer a question on the current market valuation level and whether he would re-impose the hedge on the equity portfolio :
So what are the “very high-quality companies, big companies, financially sound, dominant market positions that we bought at attractive prices” that Prem Watsa was talking about? Short of an update on the second trading activities, here are the top companies that he owned at the end of 1Q09.
1. Odyssey Re Holdings Corporation (ORH, Financial)
Odyssey Re Holdings Corporation is a leading U.S.-based underwriter of reinsurance providing a full range of property and casualty products on a worldwide basis. Odyssey Re Holdings Corp. has a market cap of $2.76 billion; its shares were traded at around $45.8 with a P/E ratio of 16.9 and P/S ratio of 0.9. The dividend yield of Odyssey Re Holdings Corp. stocks is 0.6%.
Prem Watsa owns 42,399,400 (70.43%) shares as of 03/31/2009, which accounts for 37.18% of the $4.33 billion portfolio of Fairfax Financial Holdings, Inc. This is a company Prem Watsa actually control more than 50%, so Fairfax needs to consolidate ORH’s book and ORH’s stock price change is not reflected in the Common Stock account in the balance sheet. However, if it would, it represents $333 million gain from March 31 through August 6, 2009.
2. Wells Fargo & Company (WFC, Financial)
Wells Fargo & Company is a diversified financial services company providing banking insurance investments mortgage and consumer finance services through stores its Internet site and other distribution channels across North America as well as internationally. Wells Fargo & Company has a market cap of $131.6 billion; its shares were traded at around $27.97 with a P/E ratio of 31.3 and P/S ratio of 2.5. The dividend yield of Wells Fargo & Company stocks is 0.8%. Wells Fargo & Company had an annual average earning growth of 10.8% over the past 10 years. GuruFocus rated Wells Fargo & Company the business predictability rank of 4-star.
Prem Watsa owns 20,028,700 shares as of 03/31/2009, an increase of 469.79% from the previous quarter. This position accounts for 6.59% of the $4.33 billion portfolio of Fairfax Financial Holdings, Inc.
WFC increased 96.4% since 1Q09 and contributed $275 million gain to Watsa’s portfolio.
3. U.S. Bancorp(USB, Financial)
U.S. Bancorp is a financial services holding company. U.S. Bancorp is the parent company of Firstar Bank and U.S. Bank. U.S. Bancorp has a market cap of $42.51 billion; its shares were traded at around $22.4 with a P/E ratio of 26.9 and P/S ratio of 2.3. The dividend yield of U.S. Bancorp stocks is 1%. U.S. Bancorp had an annual average earning growth of 13.4% over the past 10 years. GuruFocus rated U.S. Bancorp the business predictability rank of 3.5-star.
Prem Watsa owns 15,837,500 shares as of 03/31/2009, an increase of 179872% from the previous quarter. This position accounts for 5.35% of the $4.33 billion portfolio of Fairfax Financial Holdings, Inc..
USB increased 53.3% since 1Q09 and contributed $123 million gain to Watsa’s portfolio.
4. Magna International Inc. (MGA, Financial)
Magna International Inc. is an independent supplier of original equipment components assemblies modules and systems and related tooling for cars and light trucks. The Company designs develops and manufactures a diversified range of these products primarily for North American and European original equipment manufacturers. Magna International Inc. has a market cap of $5.41 billion; its shares were traded at around $48.31 with and P/S ratio of 0.2.
Prem Watsa owns 5,409,776 shares as of 03/31/2009, which accounts for 3.34% of the $4.33 billion portfolio of Fairfax Financial Holdings, Inc..
MGA increased 80% since 1Q09 and contributed $117 million gain to Watsa’s portfolio.
5. Dell Inc. (DELL, Financial)
Dell Inc. is a premier provider of products and services required for customers worldwide to build their information-technology and Internet infrastructures. Dell through its direct business model designs manufactures and customizes products and services to customer requirements and offers an extensive selection of software and peripherals. Dell Inc. has a market cap of $25.71 billion; its shares were traded at around $13.16 with a P/E ratio of 10.7 and P/S ratio of 0.4. Dell Inc. had an annual average earning growth of 10.7% over the past 10 years. GuruFocus rated Dell Inc. the business predictability rank of 3.5-star.
Prem Watsa owns 23,860,300 shares as of 03/31/2009, which accounts for 5.21% of the $4.33 billion portfolio of Fairfax Financial Holdings, Inc..
DELL increased 39.30% since 1Q09 and contributed $89 million gain to Watsa’s portfolio.
6. Kraft Foods Inc. (KFT, Financial)
Kraft Foods Inc. is the largest branded food and beverage company headquartered in the U.S. and the second largest in the world. Kraft Foods Inc. has a market cap of $41.77 billion; its shares were traded at around $28.36 with a P/E ratio of 14.9 and P/S ratio of 1. The dividend yield of Kraft Foods Inc. stocks is 4.1%.
Prem Watsa owns 9,949,871 shares as of 03/31/2009, which accounts for 5.12% of the $4.33 billion portfolio of Fairfax Financial Holdings, Inc..
KFT increased 27.5% since 1Q09 and contributed $61 million gain to Watsa’s portfolio.
7. Johnson & Johnson (JNJ, Financial)
Johnson & Johnson is engaged in the manufacture and sale of a broad range of products in the health care field in many countries of the world. The company's worldwide business is divided into three segments: Consumer; Pharmaceutical; and Professional. Johnson & Johnson has a market cap of $165.14 billion; its shares were traded at around $59.93 with a P/E ratio of 13.3 and P/S ratio of 2.6. The dividend yield of Johnson & Johnson stocks is 3.2%. Johnson & Johnson had an annual average earning growth of 12.5% over the past 10 years. GuruFocus rated Johnson & Johnson the business predictability rank of 4.5-star.
Prem Watsa owns 6,884,300 shares as of 03/31/2009, which accounts for 8.37% of the $4.33 billion portfolio of Fairfax Financial Holdings, Inc..
JNJ increased 14% since 1Q09 and contributed $51 million gain to Watsa’s portfolio.
8. Level 3 Communications (LVLT, Financial)
Level 3 Communications is an international communications and information services company. Level 3 Communications Inc. has a market cap of $2.03 billion; its shares were traded at around $1.25 with and P/S ratio of 0.5.
Prem Watsa owns 139,276,421 shares as of 03/31/2009, which accounts for 2.96% of the $4.33 billion portfolio of Fairfax Financial Holdings, Inc.
LVLT increased 35.9% since 1Q09 and contributed $40 million gain to Watsa’s portfolio.
Conclusion
After investing in and profiting from alternative investment vehicles such as CDO, Prem Watsa is back to the quarter in long equity. Not surprisingly, we see him investing in some of the companies that Warren Buffett invests. The past quarter has been a blessing for the both.
GuruFocus provides stock holding and trading activities, and investment insights of Investment Gurus such as Warren Buffett, more information is available to Premium Member. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.Â
Berkshire is reporting tomorrow and many of us are looking forward to it eagerly. Fairfax, however, has recently reported its quarterly result for the quarter ended on June 30, 2009. There are similarity and differences between the two firms. Prem Watsa profited handsomely during the housing crisis debacle by betting on the right side of the CDOs while Warren Buffett pretty much sat tight and did what he does the best: buying good companies at good prices. If anything, Warren Buffett even harmed himself a bit by selling some equity-index related put options. But since 4Q08, Prem Watsa took away the hedge on the equity exposures and was seen buying aggressively in the equity market. So once again, the two Gurus are aligned in their investment approach for the time and were seen going shoulder-to-shoulder in some investment deals.
It is a safe statement to say that a review of Fairfax results serves as preview of Berkshire. For the quarter end on June 30, 2009, Fairfax had a blockbust quarter indeed. Ne t earnings came in at $275.4 million ($15.65 per share), compared to net earnings of $27.6 million in the second quarter of 2008 ($0.84 per share). Primarily as a result of the second quarter net earnings and the increased market value of the company’s bond and common stock investments, book value increased to $315.91 per basic share at June 30, 2009 from $254.95 at March 31, 2009 and $278.28 at December 31, 2008.
Of course, Prem Watsa was happy, as he made this remark in the press release: “We are pleased that, in a difficult environment, we have maintained our disciplined underwriting standards, and our insurance and reinsurance operations have produced a consolidated combined ratio of 98.4% in the second quarter, As to our investments, our continuing focus on high quality common stocks reflects our view that these should provide excellent returns over the long term, though the volatility of the equity markets may result in lumpy quarterly or annual results.”
Book value increase is important for both Warren Buffett and Prem Watsa, as both use it to measure their prospective company’s success. And the measurement is so much tied to the equity market, the book values of the two companies could change dramatically from quarter to quarter. For the past quarter, all have been positive as the markets have been positive.
GuruFocus focuses on the investments of the two Gurus. For the past six month, Prem Watsa invested more into bond ($1431.6 Million) than in the stocks ($227.6 million). But the market value of the Common stock increased much faster than the bond.
| June 30, 2009 | December 31, 2008 | Increase (Decrease) | |
|---|---|---|---|
| Bonds | |||
| Costs | 9733.7 | 8302.1 | 1431.6 |
| Market Value | 9985.7 | 8425.8 | 1559.9 |
| Common Stocks | |||
| Costs | 4191.7 | 3964.1 | 227.6 |
| Market Value | 4616.3 | 3816.9 | 799.4 |
GuruFocus has yet information on what stock he bought during the quarter yet, but we take comfort that Prem Watsa take a long view of the stocks he buys and he is confident the stocks he owned will be worth much more in five years.
In the conference call on July 31, 2009, after the earning release, Prem Watsa answer a question on the current market valuation level and whether he would re-impose the hedge on the equity portfolio :
Question Just a question for you, what is your thinking in terms of stock market valuation at this time and also what is you thinking about hedging and whether you would consider re-hedging the stock market portfolio in the future?
Prem Watsa This is something we think about all the time and we like what we bought, we think they are very good values. We think four, five years from now -- like I said earlier, our shareholders and us would be happy with where the stocks have gone to, if they had chosen properly. But in the meantime there could be volatility, we made the point in our annual meeting that 80% of the economy is private in America and it is deleveraging, all individuals are saving and increasing savings rates and reducing consumption.
But, the government is providing a lot of stimulus and that has some impact, but in six months or a year, our concern is that that impact may wear off and then the economy might be in a more difficult state. So, this is something you just have to monitor and we monitor it.
Our companies though are very sound, broadly speaking we have a very significant, you know very high-quality companies, big companies, financially sound, dominant market positions that we bought at attractive prices. Some of the ones that where not that way, we have taken our lumps on it, we have had other than temporary impairment or mark-to-market losses that we have written off.
I think Greg in last year 2008, we wrote about a billion dollars and another 300 million in the first quarter -- the first half. So, we like -- our balance sheet is very strong and -- but as far as the hedging is concerned it is something we keep watching, we haven't hedged at this time.
So what are the “very high-quality companies, big companies, financially sound, dominant market positions that we bought at attractive prices” that Prem Watsa was talking about? Short of an update on the second trading activities, here are the top companies that he owned at the end of 1Q09.
| Ticker | 1Q09 Weighting | P/E | Yield (%) | Market Cap ($M) | Price Change Since 1Q09 | Contribution to Portfolio | Gains ($M) |
|---|---|---|---|---|---|---|---|
| ORH | 37.18% | 16.9 | 0.6 | 2757.3 | 20.70% | 7.7% | 333 |
| WFC | 6.59% | 31.3 | 0.8 | 131597 | 96.40% | 6.4% | 275 |
| USB | 5.35% | 26.9 | 1 | 42505.9 | 53.30% | 2.9% | 123 |
| MGA | 3.34% | 0 | 5405.2 | 80.90% | 2.7% | 117 | |
| DELL | 5.21% | 10.7 | 0 | 25714.4 | 39.30% | 2.0% | 89 |
| KFT | 5.12% | 14.9 | 4.1 | 41767 | 27.50% | 1.4% | 61 |
| JNJ | 8.37% | 13.3 | 3.2 | 165141 | 14% | 1.2% | 51 |
| LVLT | 2.96% | 0 | 2034.3 | 35.90% | 1.1% | 46 | |
| Total | 25.3% | 1095 |
1. Odyssey Re Holdings Corporation (ORH, Financial)
Odyssey Re Holdings Corporation is a leading U.S.-based underwriter of reinsurance providing a full range of property and casualty products on a worldwide basis. Odyssey Re Holdings Corp. has a market cap of $2.76 billion; its shares were traded at around $45.8 with a P/E ratio of 16.9 and P/S ratio of 0.9. The dividend yield of Odyssey Re Holdings Corp. stocks is 0.6%.
Prem Watsa owns 42,399,400 (70.43%) shares as of 03/31/2009, which accounts for 37.18% of the $4.33 billion portfolio of Fairfax Financial Holdings, Inc. This is a company Prem Watsa actually control more than 50%, so Fairfax needs to consolidate ORH’s book and ORH’s stock price change is not reflected in the Common Stock account in the balance sheet. However, if it would, it represents $333 million gain from March 31 through August 6, 2009.
2. Wells Fargo & Company (WFC, Financial)
Wells Fargo & Company is a diversified financial services company providing banking insurance investments mortgage and consumer finance services through stores its Internet site and other distribution channels across North America as well as internationally. Wells Fargo & Company has a market cap of $131.6 billion; its shares were traded at around $27.97 with a P/E ratio of 31.3 and P/S ratio of 2.5. The dividend yield of Wells Fargo & Company stocks is 0.8%. Wells Fargo & Company had an annual average earning growth of 10.8% over the past 10 years. GuruFocus rated Wells Fargo & Company the business predictability rank of 4-star.
Prem Watsa owns 20,028,700 shares as of 03/31/2009, an increase of 469.79% from the previous quarter. This position accounts for 6.59% of the $4.33 billion portfolio of Fairfax Financial Holdings, Inc.
WFC increased 96.4% since 1Q09 and contributed $275 million gain to Watsa’s portfolio.
3. U.S. Bancorp(USB, Financial)
U.S. Bancorp is a financial services holding company. U.S. Bancorp is the parent company of Firstar Bank and U.S. Bank. U.S. Bancorp has a market cap of $42.51 billion; its shares were traded at around $22.4 with a P/E ratio of 26.9 and P/S ratio of 2.3. The dividend yield of U.S. Bancorp stocks is 1%. U.S. Bancorp had an annual average earning growth of 13.4% over the past 10 years. GuruFocus rated U.S. Bancorp the business predictability rank of 3.5-star.
Prem Watsa owns 15,837,500 shares as of 03/31/2009, an increase of 179872% from the previous quarter. This position accounts for 5.35% of the $4.33 billion portfolio of Fairfax Financial Holdings, Inc..
USB increased 53.3% since 1Q09 and contributed $123 million gain to Watsa’s portfolio.
4. Magna International Inc. (MGA, Financial)
Magna International Inc. is an independent supplier of original equipment components assemblies modules and systems and related tooling for cars and light trucks. The Company designs develops and manufactures a diversified range of these products primarily for North American and European original equipment manufacturers. Magna International Inc. has a market cap of $5.41 billion; its shares were traded at around $48.31 with and P/S ratio of 0.2.
Prem Watsa owns 5,409,776 shares as of 03/31/2009, which accounts for 3.34% of the $4.33 billion portfolio of Fairfax Financial Holdings, Inc..
MGA increased 80% since 1Q09 and contributed $117 million gain to Watsa’s portfolio.
5. Dell Inc. (DELL, Financial)
Dell Inc. is a premier provider of products and services required for customers worldwide to build their information-technology and Internet infrastructures. Dell through its direct business model designs manufactures and customizes products and services to customer requirements and offers an extensive selection of software and peripherals. Dell Inc. has a market cap of $25.71 billion; its shares were traded at around $13.16 with a P/E ratio of 10.7 and P/S ratio of 0.4. Dell Inc. had an annual average earning growth of 10.7% over the past 10 years. GuruFocus rated Dell Inc. the business predictability rank of 3.5-star.
Prem Watsa owns 23,860,300 shares as of 03/31/2009, which accounts for 5.21% of the $4.33 billion portfolio of Fairfax Financial Holdings, Inc..
DELL increased 39.30% since 1Q09 and contributed $89 million gain to Watsa’s portfolio.
6. Kraft Foods Inc. (KFT, Financial)
Kraft Foods Inc. is the largest branded food and beverage company headquartered in the U.S. and the second largest in the world. Kraft Foods Inc. has a market cap of $41.77 billion; its shares were traded at around $28.36 with a P/E ratio of 14.9 and P/S ratio of 1. The dividend yield of Kraft Foods Inc. stocks is 4.1%.
Prem Watsa owns 9,949,871 shares as of 03/31/2009, which accounts for 5.12% of the $4.33 billion portfolio of Fairfax Financial Holdings, Inc..
KFT increased 27.5% since 1Q09 and contributed $61 million gain to Watsa’s portfolio.
7. Johnson & Johnson (JNJ, Financial)
Johnson & Johnson is engaged in the manufacture and sale of a broad range of products in the health care field in many countries of the world. The company's worldwide business is divided into three segments: Consumer; Pharmaceutical; and Professional. Johnson & Johnson has a market cap of $165.14 billion; its shares were traded at around $59.93 with a P/E ratio of 13.3 and P/S ratio of 2.6. The dividend yield of Johnson & Johnson stocks is 3.2%. Johnson & Johnson had an annual average earning growth of 12.5% over the past 10 years. GuruFocus rated Johnson & Johnson the business predictability rank of 4.5-star.
Prem Watsa owns 6,884,300 shares as of 03/31/2009, which accounts for 8.37% of the $4.33 billion portfolio of Fairfax Financial Holdings, Inc..
JNJ increased 14% since 1Q09 and contributed $51 million gain to Watsa’s portfolio.
8. Level 3 Communications (LVLT, Financial)
Level 3 Communications is an international communications and information services company. Level 3 Communications Inc. has a market cap of $2.03 billion; its shares were traded at around $1.25 with and P/S ratio of 0.5.
Prem Watsa owns 139,276,421 shares as of 03/31/2009, which accounts for 2.96% of the $4.33 billion portfolio of Fairfax Financial Holdings, Inc.
LVLT increased 35.9% since 1Q09 and contributed $40 million gain to Watsa’s portfolio.
Conclusion
After investing in and profiting from alternative investment vehicles such as CDO, Prem Watsa is back to the quarter in long equity. Not surprisingly, we see him investing in some of the companies that Warren Buffett invests. The past quarter has been a blessing for the both.
GuruFocus provides stock holding and trading activities, and investment insights of Investment Gurus such as Warren Buffett, more information is available to Premium Member. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.Â
