Prem Watsa’s Fairfax Financial Holdings Portfolio – Q2 2022 Update (TSX:FFH:CA)

This article is part of a series that provides an ongoing analysis of the changes made to Prem Watsa’s 13F portfolio on a quarterly basis. It is based on Watsa’s regulatory 13F Form filed on 8/15/2022. Please visit our Tracking Prem Watsa’s Fairfax Financial Holdings Portfolio series to get an idea of his investment philosophy and our previous update for the fund’s moves during Q1 2022.

This quarter, Watsa’s 13F portfolio value decreased ~6% from $3.01B to $2.84B. There are 70 securities in the portfolio, but it is concentrated among a few large stakes. The focus of this article is on the larger (greater than 0.5% of the portfolio each) equity holdings. The top three positions are Atlas Corp., Resolute Forest Products, and Kennedy-Wilson. Together, they account for ~70% of the entire 13F portfolio.

Note 1: Fairfax Financial’s (OTCPK:FRFHF) 13F holdings only represent a small portion of their overall investment portfolio. The total size as of Q2 2022 was ~$52B of which ~$9.7B was in cash and short-term positions. The bond allocation went up from ~$14B to ~$25.6B during the year. FRFHF currently trades at ~$468 compared to Book Value (Q2 2022) of ~$588 per share. The equity portfolio was 100% hedged starting from around 2003 but those were removed in Q4 2016.

Note 2: Prominent equity allocations not in the 13F report include investments in Greece and India (OTCPK:FFXDF). Greek allocation primarily consists of a ~32% ownership of Eurobank (OTCPK:EGFEY) (OTCPK:EGFEF). Other prominent stakes include 28.3% of Thomas Cook India, 54% of Bangalore International Airport Limited, and 31% of Quess Corp Limited.

Stake Increases:

Atlas Corp. (ATCO) previously Seaspan Corp: ATCO is currently the largest 13F stake at 47.20% of the portfolio. It came about from exercising 38.46M in warrants in July 2018 and the same amount in January 2019 at $6.50 per share. The increase this quarter is from the early exercise of 25M 7-year warrants that had a strike price of $8.05. The stock currently trades at $14.05. They have a 46.6% ownership stake in the business.

Note 1: On August 4th, Atlas Corp received a “take private” proposal from a consortium that includes Fairfax at $14.45 per share.

Note 2: In January 2019, Fairfax added $500M more in a structure like the first tranche made in March 2018 (debt + warrants converted early). Total investment is $1B consisting of $500M each in equity (38.46M warrants * 2 converted at $6.50 per share) and debt. The early conversion of warrants in July 2019 resulted in Fairfax also getting 25M in 7-year warrants exercisable at $8.05 per share.

Chevron Corp. (CVX): The 1.60% of the portfolio CVX stake was doubled during the quarter at prices between ~$142 and ~$181. The stock is now at ~$155.

Micron Technology (MU): MU is a 1.35% portfolio position that saw a ~60% stake increase in Q1 2019 at prices between $31 and $44. The position was increased by ~115% in Q1 2020 at prices between $34.50 and $60. The stock currently trades at $49.66. There was a marginal increase this quarter.

Alphabet Inc. (GOOGL): GOOG is a 1.29% stake purchased in Q1 2020 at prices between ~$53 and ~$76 and it now goes for ~$101. There was a ~22% stake increase in Q4 2020 at prices between ~$71 and ~$91. This quarter saw a marginal further increase.

Alibaba Group Holding (BABA): BABA is a 1.17% of the portfolio position established in Q4 2021 at prices between ~$112 and ~$178. This quarter saw a stake doubling at prices between ~$81 and ~$120. The stock currently trades at $80.71.

Stake Decreases:

Crescent Capital BDC (CCAP): CCAP is a 1.21% of the portfolio stake purchased in Q1 2020 at prices between $6.21 and $17.10 and the stock currently trades at $17.05. Last three quarters have seen selling.

Note: Their ownership stake in the business is ~7.2%.

Kept Steady:

Resolute Forest Products (RFP): The large (top three) RFP stake is now at ~14% of the portfolio. The position was first established in Q4 2010 when it was named Abitibi Bowater and the stake has since been more than doubled. Over the years, their net investment in RFP was $745M ($24.39 per share) and the current value is ~$620M ($20.30 per share). Their ownership stake is just under ~39% of the business.

Note: On 7/6/2022, Paper Excellence Group agreed to acquire Resolute Forest Products for $20.50 per share and one CVR (not tradeable) tied to potential duty refunds of $500M. Resolute to become a subsidiary of Domtar which was acquired by Paper Excellence Group last year.

Kennedy-Wilson Holdings (KW): KW stake is a large (top three) ~9% of the 13F portfolio position. Q4 2016 saw a ~40% increase at prices between $20 and $23 and that was followed with an ~8% increase in Q1 2018. KW currently trades at $16.36.

Note 1: They also have a 13M share stake in the warrants (7-year term, $23 strike) that they received as part of a $300M investment in perpetual preferred stock (4.5% dividend) made this February.

Note 2: The original 2010 stake was from a private placement for Kennedy-Wilson convertible preferred stock. The total investment from that point thru Q3 2016 was $645M. Since then, they have invested another ~$85M. By EOY 2015, they had already received distributions of $625M and so the net investment was ~$105M. That is compared to current market value of ~$246M.

BlackBerry Ltd. (BB): BB is Watsa’s fourth-largest position at ~9% of the portfolio. The stake was first purchased in 2010 at around $50 for 2M shares. The position was aggressively built up to 46.7M shares in the following years. Their net cost on a fully converted basis is ~$10 per share and the stock currently trades at $5.24. There has only been very minor activity in the last nine years.

Note: In Q4 2013, Fairfax co-sponsored a cash-infusion of $1B through convertible debentures ($10 conversion price earning 6% interest) – they financed $500M of that transaction and the remaining was funded by a consortium of other investment funds. In Q3 2016, those shares were redeemed, and new ones issued ($605M in 3.75% debentures convertible at $10 due 11/13/2020) to the same entities in a private placement. On 9/2/2020, those were redeemed, and new ones issued ($330M in 1.75% debentures convertible at $6 due 11/13/2023). Assuming full conversion of these debentures, Fairfax would beneficially own ~16.4% of the business (~102M shares).

H&R Block (HRB): HRB is a small 1.39% of the portfolio position established in Q1 2021 at prices between ~$15.50 and ~$22. Q3 2021 saw a ~45% stake increase at prices between $23.35 and $26.30. The stock is now at ~$44.

Franklin Resources (BEN): The 0.82% BEN position was established in Q1 2020 at prices between $15.30 and $26.25 and it is now at $23.71.

Bank of Nova Scotia (BNS): BNS is a small 0.51% of the portfolio position established in Q4 2018 at prices between $49 and $60 and the stock currently trades at $51.82.

General Motors (GM): GM is a small 0.42% position. Q3 2018 saw a huge ~370% stake increase at prices between $33.50 and $40. The stock is now at $37.38.

General Electric (GE): GE was a minutely small stake as of Q1 2018. Q2 2018 saw a ~160% stake increase at prices between ~$102 and ~$122 and that was followed with a one-third further increase next quarter at prices between ~$90 and ~$114. Q4 2018 saw another ~30% increase at prices between ~$54 and ~$110. The stock currently trades at $65.36, and the stake is at 0.39%.

Helmerich & Payne (HP), Merck & Company (MRK), and Pfizer Inc. (PFE): These very small (less than ~1% of the portfolio each) stakes were kept steady this quarter.

The spreadsheet below highlights changes to Watsa’s 13F stock holdings in Q2 2022: