The revival in stock markets over the past two months has been so powerful that nearly every major Canadian listing has participated – all but one, in fact.
Fairfax Financial Holdings Inc. is the only member of the S&P/TSX Composite Index to have declined since the market turned a corner in late March, which set off a 35-per-cent rally in the benchmark index.
The COVID-19 pandemic has not been kind to Fairfax. Insurers in general have fallen out of favour, partly over concerns about claims related to business interruption coverage. On top of it, long-term value bets on beaten-down companies, such as BlackBerry Ltd. and Stelco Holdings Inc., have dragged down Fairfax’s investment portfolio.
“Some shareholders are probably frustrated. The investment performance over the last seven or eight years hasn’t been the best,” said Colin Stewart, chief executive of JC Clark Ltd., an asset manager that has held Fairfax shares for several years.
Indeed, Fairfax shares, at $382.47 at Friday’s close on the TSX, are at levels seen 10 years ago after plummeting in recent months. And the stock is trading at a discount of around 34 per cent to the company’s reported book value as of March 31, the end of its first quarter, suggesting investors may be bracing for more bad news on the bottom line. Fairfax reported a first-quarter loss of US$1.26-billion, or US$47.38 a share.
The confluence of investor pessimism toward Fairfax has pushed the company’s valuation to negative extremes, Mr. Stewart said. “It’s a high-quality company, and it doesn’t deserve to trade at a massive discount.”
The Fairfax faithful still bank on the investing prowess of CEO Prem Watsa, who cemented his reputation as a gifted contrarian investor through the global financial crisis.
Fairfax raked in billions on market hedges that paid off when stocks crashed in 2008, then removed the hedges and rode the rebound in 2009.
Mr. Watsa’s style and approach invite endless comparisons to Berkshire Hathaway CEO Warren Buffett. Both built holding companies around the insurance business, using the premiums received to establish ambitious investment portfolios, often in distressed and undervalued companies.
In recent years, however, the deep-value investing approach has fallen dramatically out of fashion. The postfinancial-crisis bull market has generally been dominated by growth stocks, such as the U.S. tech giants.
Over the past decade, Berkshire Hathaway’s stock has underperformed at the S&P 500 index, leading some market observers to wonder whether Mr. Buffett has lost his touch. Similar questions are being asked about Mr. Watsa.
“I think Prem's track record in terms of allocating capital has certainly come into question,” said Jason del Vicario, a portfolio manager at HollisWealth. “The last 10 years, he hasn't had real home runs and he's been mired in a lot of these deep-value, troubled assets.”
Fairfax began accumulating stakes in the Greek financial sector in 2014, when the country was still grappling with a financial crisis. Athens-based Eurobank, which is down nearly 60 per cent year-to-date and hit a multiyear low in mid-May, is still one of Fairfax’s largest holdings.
The company is also the second-largest shareholder in former smartphone giant BlackBerry, which has failed to mount any decent turnaround, and in March, saw its shares hit their lowest level since the early 2000s.
And in November, 2018, Fairfax acquired a 14-per-cent stake in troubled steelmaker Stelco Inc. for $20.50 a share. That stock is now trading at just more than $7.
It also hasn’t helped Fairfax’s performance through the pandemic that it controls one of Canada’s largest restaurant chains, Recipe Unlimited Corp., as part of another rocky turnaround effort, as well as Toys “R” Us (Canada) Ltd.
But while Fairfax’s eclectic investment portfolio gets much of the attention, its core property and casualty (P&C) insurance business isn’t doing that badly.
Claims for property losses related to disasters, such as violent storms and wildfires, have steadily been on the rise in recent years, and the industry has only recently begun to adjust the price of its policies to match the risk.
“Companies are now finally saying they're not willing to underwrite that risk unless they get paid more for it,” Mr. Stewart said.
In an earnings call earlier this month, Mr. Watsa said the company expects to make a profit from underwriting in 2020.
The P&C industry is also gearing up for a fight over potential claims related to the pandemic. Insurance covering business interruption typically requires property damage and excludes claims related to things such as viral pandemics. But a number of U.S. state governors are pushing for changes that would require insurers to pay claims to businesses that have been forced to close.
“The whole U.S. industry will defend that right to the Supreme Court,” Mr. Watsa said on the call.
For whatever losses the pandemic inflicts, Fairfax has built up US$2.5-billion in cash and short-term securities, in part through a US$650-million bond offering in April. “It’s for safety, we’re in a storm, going through the storm, and we want to have a lot of cash in the holding company,” Mr. Watsa said.
As of right now, the market is not putting a whole lot of faith in the company. Fairfax shares are down by 40 per cent since the broad market selloff began in February, and that’s after a decent bump in the stock over the past two weeks.
But Fairfax’s performance tends to rebound well following negative periods, Mr. Watsa said. “We’ve gone through periods in the past … where we’ve sold below book value,” he said. “It won’t be there long.”
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