Prem Watsa (Trades, Portfolio), the leader of Fairfax Financial Holdings, disclosed he established two positions and sold out of two others when he released his third-quarter portfolio this week.
Known as “Canada’s Warren Buffett (Trades, Portfolio),” Watsa’s investment strategy mimics the practices of the Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) CEO in that his insurance conglomerate purchases entire companies as well as invests its float in publicly traded companies
During the quarter, Watsa started positions in Rockwell Collins Inc. (COL, Financial) and Radisys Corp. (RSYS, Financial) and exited his International Business Machines Corp. (IBM, Financial) and iRobot Corp. (IRBT, Financial) holdings.
Rockwell Collins
Watsa invested in 7,500 shares of Rockwell Collins for an average price of $137.69 per share, dedicating 0.06% of the equity portfolio to the position.
The Iowa-based aerospace and defense company has a market cap of $21.46 billion; its shares were trading around $131.63 on Wednesday with a price-earnings ratio of 21.62, a price-book ratio of 3.18 and a price-sales ratio of 2.53.
The Peter Lynch chart below shows the stock is trading above its fair value, suggesting it is overpriced.
GuruFocus rated Rockwell Collins’ financial strength 5 out of 10. Although the company has issued roughly $2.7 billion in new long-term debt over the last several years, it is at a manageable level due to sufficient interest coverage. The Altman Z-Score of 2.3, however, indicates it is experiencing some financial pressure.
The company’s profitability and growth scored a 7 out of 10 rating, boosted by an operating margin that outperforms competitors, a moderate Piotroski F-Score of 4, which implies conditions are stable, and a business predictability rank of three out of five stars. According to GuruFocus, companies with this rank not only have consistent revenue and earnings growth, but typically see their stock prices gain an average of 8.2% per year.
Of the gurus invested in Rockwell Collins, George Soros (Trades, Portfolio) has the largest holding with 0.39% of outstanding shares. Jeremy Grantham (Trades, Portfolio), John Paulson (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Pioneer Investments (Trades, Portfolio), Leucadia National (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and PRIMECAP Management (Trades, Portfolio) are also shareholders.
Radisys
The guru picked up 65,000 shares of Radisys for an average price of $1.55 per share, allocating 0.01% of the equity portfolio to the holding.
The technology company, which is headquartered in Oregon, has a $60.62 million market cap; its shares were trading around $1.52 on Wednesday with a forward price-earnings ratio of 30.21 and a price-sales ratio of 0.54.
According to the median price-sales chart, the stock is trading slightly below its historical value.
As a result of issuing new long-term debt, poor earnings quality and an Altman Z-Score of -7.4, which indicates the company is at risk of going bankrupt, Radisys’ financial strength was rated 3 out of 10 by GuruFocus.
The company’s profitability and growth fared even worse, scoring a 1 out of 10 rating as a result of declining margins, poor returns and a low Piotroski F-Score of 3, which implies operations are inefficient. Despite seeing a decline in revenue per share over the last five years, the company does have a one-star business predictability rank. GuruFocus says companies with this rank typically see their stock prices gain an average of 1.1% per year.
With 8.02% of outstanding shares, Simons’ firm is the company’s largest guru shareholder. Watsa holds 0.16%.
IBM
The investor sold his 265,700 remaining shares of IBM for an average price of $146.07 per share, impacting the portfolio by -2.98%. GuruFocus estimates the firm lost 18% on the investment since establishing a position in the second quarter of 2013.
The New York-based technology company has a market cap of $109.89 billion; its shares were trading around $120.86 on Wednesday with a price-earnings ratio of 19.33, a price-book ratio of 5.58 and a price-sales ratio of 1.39.
Based on the Peter Lynch chart, the stock appears to be overpriced.
IBM’s financial strength was rated 6 out of 10. Although the company has issued roughly $7.7 billion in new long-term debt over the last several years, it is at a manageable level due to good interest coverage. In addition, the Altman Z-Score of 3.56 indicates the company is in good financial standing.
The company’s profitability and growth scored a 5 out of 10 rating. While the operating and net margins are declining, they still outperform industry peers. IBM is also supported by a moderate Piotrsoki F-Score of 5. The one-star business predictability rank is on watch as a result of a decline in revenue per share over the last five years.
Pioneer is the company’s largest guru shareholder with 0.23% of outstanding shares. Other guru investors include Barrow, Hanley, Mewhinney & Strauss, Simons, Joel Greenblatt (Trades, Portfolio), Robert Bruce (Trades, Portfolio), Dodge & Cox, Mairs and Power (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Robert Olstein (Trades, Portfolio) and John Buckingham (Trades, Portfolio).
iRobot
Watsa divested of 15,000 shares of iRobot for an average price of $94.11 per share, impacting the equity portfolio by -0.09%. According to GuruFocus, Fairfax has gained an estimated 25% on the investment since establishing it in the first quarter.
The Massachusetts-based technology company, which is known for its Roomba vacuum cleaners, has a $2.46 billion market cap; its shares were trading around $88.50 on Wednesday with a price-earnings ratio of 37.50, a price-book ratio of 4.81 and a price-sales ratio of 2.46.
The Peter Lynch chart suggests the stock is overpriced.
GuruFocus rated iRobot’s financial strength 9 out of 10, boosted by good interest coverage and no debt. The high Altman Z-Score of 11.96 indicates the company is financially sound.
The company’s profitability and growth scored an 8 out of 10 rating. In addition to having an expanding operating margin and good returns, iRobot is supported by a moderate Piotroski F-Score of 6 and a three-star business predictability rank, driven by good earnings and revenue growth.
With 15.03% of outstanding shares, Primecap is the company’s largest guru shareholder. Pioneer and Hotchkis & Wiley also own the stock.
Portfolio composition and performance
Watsa’s $1.71 billion equity portfolio, which is composed of 33 stocks, is largely invested in the technology sector, followed by smaller holdings in the basic materials and industrials sectors.
Since its inception in 1986, Fairfax Financial has achieved 19.4% compound annual growth in book value through 2017.
Disclosure: No positions
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