Prem Watsa‘s Fairfax Financial Holdings recently filed its 13F form with the SEC for the reporting period of March 31. Despite weak performances from International Business Machines Corp. (NYSE:IBM) and BlackBerry Ltd (NASDAQ:BBRY), the holding company continues to, well, ‘hold’ them among its top three picks, which represented nearly 76% of its exposure to US-traded equities. The investor’s third holding, which we’ll also discuss in this article, is Resolute Forest Products Inc (NYSE:RFP).
The Toronto, Canada-based holding company Fairfax was founded in 1985 by Prem Watsa, a Canadian of Indian descent, who’s achieved the nickname “Canada’s Warren Buffett“. He has often been compared to the legendary investor owing to the value-oriented investment strategies that he ascribes to. Apart from the above likeness with Buffett, he is also known within investment circles for his performance between 2008 and 2009. His holding company didn’t just sail through the financial crises, it made a ton of money during that time owing to its fat book of credit default swaps (CDS) on 25 to 30 companies, who were mostly mortgage lenders and bond insurers. Excluding dividends, Fairfax’s book value per share increased by 60% during the time when huge chunks of equity were being wiped out from Wall Street. The market value of Fairfax’s equity portfolio stood at $1.42 billion at the end of the first quarter, with the technology sector contributing 45%. The holding company had a turnover ratio of 18.6% for the quarter, signaling relatively little changes in its holdings during the period.
Most investors don’t have enough time to do in-depth analysis on each stock that they want to include in their portfolios. Professional investors like Prem Watsa on the other hand spend weeks conducting due diligence on each company and spend millions obtaining information and paying the salaries of Ivy League-educated analysts. That’s why we have always believed that imitating the stock picks of hedge funds and billionaires is an excellent short cut we can take. It doesn’t cost an arm and a leg either. We analyzed the historical stock picks of these investors and our research revealed that the small-cap picks of hedge funds performed better than the market and their large-cap picks. A portfolio of the 15 most popular small-caps among several hedge funds outperformed the S&P 500 Total Return Index by 95 basis points per month between 1999 and 2012. The exceptional results of this strategy got even better in the forward tests we have been conducting since the end of August 2012. The most popular small-cap stocks among hedge funds beat the market by more than 80 percentage points since then, returning over 139% (see the details here).
Coming back to Fairfax’s portfolio, Resolute Forest Products Inc (NYSE:RFP) climbed to the top spot from the second position it held during the previous reporting period, despite the fact that no additional purchases were made. The $1.18 billion representative of the basic materials sector has depreciated by 28.56% so far this year, however most of this slide occurred has occurred during the second quarter, after Resolute Forest Products Inc (NYSE:RFP) dropped a bombshell on its investors in the form of its financial results for the first quarter. The company’s net loss per share of $0.32 was substantially unfavorable compared to the estimates of $0.09 in earning per share, while revenues of $920 million were $140 million short of expectations. Headwinds faced by Resolute Forest Products Inc (NYSE:RFP) included the low prices prevalent in the market of pulp and wood products driven by the shrinking global newsprint market. On top of that, the company registered an increase of $15 million in its pension and OPEB expenses relating to the amortization of its 2014 increase in pension liabilities. Faifax held some 29.04 million shares of Resolute Forest Products Inc (NYSE:RFP) valued at $500.72 million. Two other prominent stockholders of the company are Michael Johnston’s Steelhead Partners and Francis Chou‘s Chou Associates Management.
Considering another abysmal performance in the form of a 5.53% decline year-to-date in its second-largest holding, BlackBerry Ltd (NASDAQ:BBRY), Watsa’s belief in value investing is possibly being put to the test, at least as far as his top picks are concerned. After acquiring an additional 45,000 shares, the holding company held nearly 46.70 million shares of BlackBerry Ltd (NASDAQ:BBRY) valued at $416.51 million. The stake represented nearly 30% of the fund’s portfolio value. BlackBerry Ltd (NASDAQ:BBRY) has been in Fairfax’s portfolio since the third quarter of 2010. The Waterloo-based company’s CEO John Chen, who took the reins in November 2013 has been trying to steer Blackberry back to its past position of prominence, but with a different business model. The company is charging in on the Internet of Things (IoT)’ space, with a focus on security. It was recently announced that BlackBerry Ltd (NASDAQ:BBRY)’s subsidiary, Certicom, won a contract to use its security certificates in about 104 million smart meters and energy management devices in the U.K. The IoT security space is largely untapped according to a report by Hewlett-Packard, which claims that 80% of IoT home devices have serious security flaws. Just this week, Cowen raised the price target of BlackBerry Ltd (NASDAQ:BBRY) to $11 from $10, while keeping its ‘Market Perform’ rating. D E Shaw, founded by David Shaw is the second largest shareholder of BlackBerry Ltd (NASDAQ:BBRY) among the funds we track, with some 5.59 million shares.
Fairfax’s holding in International Business Machines Corp. (NYSE:IBM) doesn’t exactly paint a rosy picture either. The stock hit its 52-week low this year, but has rebounded since then and is up by nearly 8% year-to-date. Despite first quarter revenues of $19.59 billion missing the estimates by $140 million and derspite registering a drop in revenue for the 12th consecutive quarter, International Business Machines Corp. (NYSE:IBM)’s $2.91 EPS for the quarter was $0.09 ahead of expectations. Ginni Rometty, IBM’s CEO noted that excluding the foreign exchange headwinds and losses from business segments that the company has or plans to divest, the revenues were actually flat. Warren Buffett is very hopeful of the eventual recovery of International Business Machines Corp. (NYSE:IBM) and has only continued to increase the stake his holding company, Berkshire Hathaway, has in IBM during the slump in its stock price. Recently the company also partnered with Apple and Japan Post Group to deliver iPads with IBM-developed apps to Japanese senior citizens in order to better connect them with services, healthcare, and the community.
Disclosure: None
