Canada's most renowned value investor believes the market's infatuation with Twitter and Facebook will "end in tears," but sounded a new note of optimism about the outlook for battered BlackBerry Ltd.
Prem Watsa, chief executive officer of Fairfax Financial Holdings Ltd., has invested hundreds of millions in the smartphone maker and indicated it is on track to stanch its financial bleeding within a year.
Mr. Watsa said John Chen, BlackBerry's new president, has made many changes in his first five months at the company and has set a target of stemming the business's losses over the next few quarters. "He said that he would break even, cash-wise, by … February, 2015," Mr. Watsa told an auditorium of investors at Fairfax's annual general meeting in Toronto on Wednesday.
Mr. Watsa is famously contrarian and is known for buying into distressed companies and other risky situations. He has generated spectacular profits from some of his bets, such as a large position in credit default swaps that soared in value after the U.S. housing market collapsed.
But the jury is still out on his BlackBerry stake. The smartphone maker's stock is now trading at $8.66 a share, a far cry from the $137.90 it reached in 2008, when its products dominated the smartphone market. BlackBerry lost $5.9-billion (U.S.) in its most recent fiscal year.
Fairfax led a consortium of investors last year in an effort to take BlackBerry private, but the group later abandoned the plan and invested $1.25-billion in BlackBerry convertible debt. Fairfax also owns nearly 11 per cent of the company's stock
On Wednesday, Mr. Watsa reminded shareholders of the big profits that Fairfax has generated from its investment in Bank of Ireland. Fairfax was part of a consortium that put $1.5-billion into the bank when the lender was on the verge of being nationalized in 2011. The value of the investment has since risen dramatically, and by the time Fairfax began to pare its stake in March, it had become one of the company's greatest investing triumphs.
Mr. Watsa credits much of that success to the bank's CEO, Richie Boucher, who showed that "companies are so sensitive to the person running it." In similar fashion, Mr. Chen, who previously turned around the struggling software compay Sybase, is the "big plus" of Fairfax's investment in BlackBerry now, Mr. Watsa said.
"We had dinner last night in a group and John Chen said he's looking forward," Mr. Watsa said. "I told people about the Bank of Ireland … the one company we had put money in that had $1-billion in unrealized gains, and he said he'd like to beat that."
Mr. Watsa's optimism about BlackBerry's outlook is in stark contrast to his pessimism about the market in general. He said there is a big disconnect between the buoyant stock market and the real economy.
He points out that while U.S. and European central banks have pumped billions in stimulus into the market, economic growth has been less than robust – particularly in the United States. He is also worried about high levels of debt in the U.S., and the impending deleveraging hanging over the country, as well as in Europe.
He suggested that both regions face the threat of deflation – a state in which prices keep falling, thereby depressing the motivation for consumers to spend and for companies to invest. Japan has been mired in a slow growth, deflationary economy for more than a decade. "We remind you that it took five years after the stock market crash in 1990 before Japan saw deflation – and this deflation continued for most of the following 19 years," Mr. Watsa wrote in a recent note to shareholders.
Among other red flags for Fairfax are Chinese real estate prices, which constitute a "monstrous bubble" in the eyes of the company, and the market's love affair with technology stocks.
Mr. Watsa said soaring stock prices for companies such as Netflix, Facebook and Twitter are being driven by "extraordinary speculation" that will end badly for investors, much as the previous tech boom burned investors between 1999 and 2000.
In response, Fairfax has hedged its stock portfolio against losses. In 2013, the cost of those hedges wiped out realized gains on its stock portfolio of $1.3-billion.
"We made a ton of dough in the common stock markets, but it's hidden because of the hedging position that we took to protect ourselves from unexpected consequences," Mr. Watsa said.
The crew of long-term-focused value investors that follow Mr. Watsa appear to be content with that position.
Many of the company's shareholders who approached microphones to ask questions about Mr. Watsa's views expressed gratitude for their long-term returns, and some praised his focus on preserving their capital.
Fairfax's stock has returned 19 per cent on average in the 28 years that Mr. Watsa has been running the company.