JNJ, RIMM, WFC, USB: Prem Watsa’s Top Stock Picks From Q3

Fairfax Financial recently filed its 3Q 13F with the SEC, which reveals the holdings of hedge funds and other notable investors. Prem Watsa is the founder of Fairfax and also holds an MBA from the University of Western Ontario. Fairfax has managed to increase its book value almost 25% annually since 1985. In Fairfax’s recent 13F filing, Watsa showed a broad interest in various industries, while one major theme was Fairfax’s selloff of a couple big banks during the quarter.

Prem Watsa

Johnson & Johnson (NYSE:JNJ) remained Fairfax’s top holding at the end of 3Q. Johnson & Johnson makes up over 20% of the firm’s 13F holdings. The global pharma company expects solid revenue growth, up 8% in 2013 from 2012. In part, Johnson & Johnson’s recent acquisition of Synthes will assist with its global reach and add around $0.15 to EPS in 2013. We like Johnson & Johnson’s prospects, and believe investors are over-discounting next year’s earnings—where Johnson & Johnson currently trades at 23x trailing earnings, but only 13x forward earnings .

Research In Motion Ltd (NYSE:RIMM) saw quite the increase in Watsa’s portfolio during 3Q, a boost of over 90% from 2Q, in terms of total shares invested. Research In Motion now makes up almost 20% of the firm’s holdings. RIMM remains down almost 20% year to date despite strong price performance of late on the hopes that the phone maker’s newest mobile operating system, Blackberry 10, can save the company. We remain cautious however, and note that the upcoming holiday season will likely see the iPhone 5 continue to take market share from the Blackberry line. The Blackberry maker’s P/E of 6x suggests it is very cheap, but it very well could be a value trap.

Resolute Forest Products Inc (NYSE:RFP) was only a minor increase for Fairfax during 3Q, by about 3%; the stock now sits as Fairfax’s fourth largest 13F holding. Resolute is a global forest products company that offers newsprint, commercial printing papers and wood products. We believe there are better investments in the forest and paper industry given Resolute trades at 40x earnings and has an expected five-year EPS CAGR of 5%. Major paper competitor Domtar trades at only 13x earnings. Check out our other thoughts on whether you should buy this little-known paper company.

U.S. Bancorp (NYSE:USB) is Fairfax’s fifth largest holding and saw a 30% decline in share ownership from 2Q. U.S. Bancorp is the fifth largest U.S. bank by assets, with net interest income expected to rise 6% in 2012. U.S. Bancorp has some of the best credit quality and best loan growth in the industry. Another notable decrease for Fairfax was Wells Fargo & Company (NYSE:WFC) - of about 40% - now making up the 9th spot in the fund’s 13F. Wells Fargo expects much less net interest income growth in 2012 of only 1%, but the bank’s mortgage loan segment has been carrying its financials. Loan growth over the next year is expected to fall however, as low rates continue to pressure Wells Fargo’s net interest margin.

Both U.S. Bancorp and Wells Fargo trade at the high end of the industry on a P/B basis, at 2.9x and 1.2x, respectively. They both also trade close to $33 a share, but Wells’s book value is much more in line at $27, while U.S. Bancorp’s recent book value has been valued close to $18. We believe these banks are a couple of the best bets in the industry, but feel they may have seen too much of a run-up lately – making their valuation unattractive. Wells Fargo remains one of the top ten financial stocks owned by hedge funds.

Johnson & Johnson is a solid dividend-paying pharma company that trades with a 3.5% yield. We would rather wait on the sidelines and not follow Fairfax into a turnaround bet on RIMM, or on the paper company Resolute. We also see the downsizing of the big bank stocks as worth noting, given their valuation relative to other financials. Check out all of Fairfax’s top holdings.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!