Prem Watsa (Trades, Portfolio) is a well-known investor who runs the Canada-based financial conglomerate Fairfax Financial Holdings (TSX:FFH), which buys whole businesses and uses some of its money to buy common stocks in a similar model to Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A)(BRK.B).
While Watsa has, like Buffett, grown the book value of his company at a torrid rate (18.7% since its 1985 inception), he departs from him in some ways in his approach to stocks. While Buffett seeks mostly great companies at fair prices, Watsa has invested in some beaten-up and broken-down securities in recent years. For instance, he bought stock in BlackBerry (BB), whose once-popular cell phone fell precipitously from grace, at distressed prices. He also bought into Greek financials like Eurobank (ATH:EUROB, Financial) during their crisis point. In a private equity investment, he purchased Toys “R” Us and Babies “R” Us out of bankruptcy last year.
Watsa’s portfolio he discloses to the SEC is familiar to many investors. As his top holdings he has: BlackBerry Ltd. at 26.13%, Seaspan Corp. (SSW, Financial) and Resolute Forest Products Inc. (RFP, Financial). In his annual letter, released Tuesday, Watsa discussed three other stocks in his investment portfolio that are listed outside the U.S.: Eurobank, Commercial International Bank (Egypt) (OTCPK:CIBEY, Financial) and Stelco Holdings Inc. (TSX:STLC, Financial).
Eurobank (ATH:EUROB, Financial)
As Watsa noted in his letter, Eurobank shares sank 36.5% in 2018. He started the position in April 2014, joining a group that included Wilbur Ross (Trades, Portfolio), Brookfield Asset Management and others to invest 1.33 million into the bank at a price of 30 euro cents per share. The bank’s price has risen as high as 1.17 euros over the past three years, but closed Tuesday at 62 euro cents.
Following the bank’s merger with Grivalia Properties, slated for regulatory approval on April 15, Watsa’s Fairfax, which owns 18.23% of Eurobank and 51.43% of Grivalia, will own 32.93% of the combined company, making him its largest shareholder. His cost for the combined investment is 94 euro cents per share, but he remained confident in seeing eventual upside, saying in the letter he expects “to do very well over time on our Eurobank investment under Fokion and George’s leadership.”
“In 2018, Fokion Karavias (CEO of Eurobank) and George Chryssikos (CEO of Grivalia) came up with a bold scheme to put Eurobank’s non-performing loan problems behind it,” Watsa said. “By dividending out A7 billion of non-performing loans to Eurobank shareholders in a structured transaction and merging with Grivalia for shares, Eurobank will become the strongest and best capitalized bank in Greece … the bank expects earnings in 2020 to be 15 Euro cents per share.”
After posting losses from 2010 to 2015, Eurobank again turned a profit in 2016 with 11 cents per share. In 2017, it declined to 5 cents per share. The bank also announced in its annual results that it planned to reduce its non-performing exposures (loans more than 90 days past-due or which the debt is unlikely to pay) to 16% in 2019 from 37% in 2018.
Commercial International Bank (Egypt) (OTCPK:CIBEY, Financial)
Commercial International Bank CIB Egypt is the largest private-sector bank in Egypt, and Watsa owns 7% of the company. In his letter, he called it “one of the world’s best banks, with an unmatched 20-year track record.”
Nonetheless, the stock’s price slid 4.2% in 2018. Watsa purchased the shares in 2014 at 22 Egyptian pounds from private-equity firm Actis, which was exiting its investment. Watsa watched the price run up 220% to 70 Egyptian pounds but, due to the Egyptian pound’s 2016 devaluation, he has only a 30% gain in U.S. dollars. CIB shares traded Monday at 70.99 Egyptian pounds after gaining 19% since the start of the year.
In his letter, Watsa commended the bank’s 25% average annual return on equity and 21% annual compounded growth in earnings per share over the past 20 years. For 2018, the bank posted revenues of 20.38 billion Egyptian pounds, a 37% year-over-year increase. Net income grew 27% to 9.58 Egyptian pounds. Its tier capital totaled 35.6 billion Egyptian pounds, equal to 19% of its risk-weighted assets. In a release, CIB management attributed the growth to an increased currency deposit base and foreign currency lending, as well as “nimble management of its balance sheet.”
The bank boasts 500 of Egypt’s largest corporations as clients, in addition to smaller businesses, households and high net-worth individuals.
Stelco Holdings Inc. (TSX:STLC, Financial)
Stelco, a holding Fairfax started in 2018, is a Canada-based steel maker with a $1.58 billion market cap founded more than a century ago.
It went bankrupt in 2007 and was purchased by U.S. Steel before filing for bankruptcy again in 2014. The company then emerged from bankruptcy in 2017 when it was purchased by Bedrock Industries Group. Watsa attributed some of his enthusiasm for the investment to the involvement of Bedrock Industries and its management.
“With Alan Goldberg on the Board (Lindsay Goldberg controls 46.4% of Stelco through its ownership interest in Bedrock Industries, its partnership vehicle with Alan Kestenbaum), we expect Stelco to do very well over the long term,” Watsa wrote. “Stelco has no debt, is the lowest cost steel producer in North America and is selling at less than 5x earnings. We are happy to be partners with the two Alans!”
Watsa purchased 12.2 million shares of the company, a 13.7% stake, in 2018 at 20.50 Canadian dollars per share. In 2018, the share price plunged 34.2%, though it rose 8.7% year to date to 17.76 Canadian dollars Wednesday.
In the fourth quarter, the company reported a 43% year-over-year increase in revenue to $648 million. Net income also jumped 575% from the previous year to $108 million. With %100 million in cash flow generated, Stelco opted to declare a $100 million, $1.13 per share, special cash dividend, in addition to its regular quarterly dividend of 10 cents per share.
See Prem Watsa (Trades, Portfolio)’s other holdings at his portfolio here.
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