Prem Watsa (Trades, Portfolio) founded the Toronto-based Fairfax Financial Holdings Limited (TSX:FFH, Financial) in 1985, which is engaged in property and casualty insurance, as well as reinsurance and investment management. Watsa was born in India, originally trained as a chemical engineer but took a chance to move to London, Ontario, where his brother lived. There, Watsa earned an MBA at Western University and then worked for a decade in the investment department at a now defunct Canadian insurance company before forming Fairfax. Today, Fairfax manages about $1.46 billion in assets.
In GuruFocus’ 2011 interview with Watsa, the investor cited John Templeton, the renowned value-oriented contrarian investor, as his mentor. While Watsa tends to be neutral rather than investing long or short, he said the most valuable lesson he learned from Templeton was to be flexible. Since then, he has often been referred to as the “Canadian Warren Buffett (Trades, Portfolio).” While there are certainly similarities between the two — both made their fortunes in insurance and draw relatively modest salaries — Buffett tends to avoid risk and companies in trouble, unlike Watsa. The investor is known for a contrarian style and often invests in distressed stocks, most recently exemplified by his decision to take a large stake in Blackberry Ltd. (BBRY, Financial), formerly known as Research in Motion.
Here are Watsa’s top five holdings as of June 30:
1. Resolute Forest Products (RFP, Financial)
Watsa owns more than 29 million shares of Resolute Forest Products, which comprises 33.3% of his portfolio and 30.71% of shares outstanding. Watsa has held a stake in the firm since June 2012.
The company provides newsprint, commercial printing papers, market pulp, and wood products. Resolute Forest owns and operates paper mills and wood facilities in the U.S., Canada and South Korea. Wood products are available for both residential and industrial construction and renovation.
Resolute Forest’s revenue and net income saw a spike in 2009 and 2011, respectively. However, its revenue per share has been in decline for the past five years, reporting at $47.11 in December 2013.
The company’s ROE and ROA are both in the negative, at -21.56% and -10.91% in 2013, respectively. In the past nine years, Resolute Forest’s returns were positive only from 2010 to 2012. GuruFocus rates the company’s profitability and growth as 3/10.
2. Blackberry (BBRY, Financial)
Watsa holds more than 46.5 million shares of Blackberry, the Canadian maker of cell phones and telecommunication devices, which accounts for 32.7% of his portfolio and 8.85% of shares outstanding.
Watsa and his firm led a team of investors who together pumped about $1 billion into Blackberry, which has struggled to compete against the likes of Samsung and Apple (AAPL, Financial), despite once holding a large share of the cell phone market and was the preferred choice of business professionals.
Blackberry’s current Altman Z-score is -0.36, which puts the company squarely in the distress zone and implies an 80% chance of bankruptcy in the next two years.
The company’s stock price has yet to see a significant improvement since Watsa committed to turning Blackberry around.
3. SandRidge Energy (SD, Financial)
Watsa’s third-largest holding is SandRidge Energy, a Texas-based natural gas and oil company that focuses on exploration, development and production activities. Watsa holds more than 32 million shares of the company, comprising 15.9% of his portfolio and 6.57% of shares outstanding.
SandRidge was embattled in controversy last year when investors convinced the board to fire CEO Tom Ward, arguing he had mismanaged the company and destroyed shareholder value. However, Watsa has maintained his current number of shares since December 2012.
GuruFocus rates SandRidge’s financial strength as 4/10. Its cash-to-debt ratio is 0.29, and equity-to-assets is 0.24. The company’s revenue reached a peak in 2013 but has declined since, along with net income.
4. EXCO Resources (XCO, Financial)
EXCO Resources is another natural gas and oil company in Texas but focuses on shale resources plays. Watsa owns about 17.5 million shares of EXCO, accounting for 7.1% of his portfolio and 6.43% of shares outstanding. He has held these shares since March.
On Sept. 11, EXCO declared a third-quarter cash dividend of $0.05 per share to be paid on Sept. 30. EXCO’s stock price reached a new 10-year low on Sept. 22 closing at $3.94.
Last July, EXCO announced it was acquiring underdeveloped oil and gas assets in the Eagle Ford and Haynesville formations from Chesapeake Energy (CHK, Financial) for about $1 billion.
The company’s P/S ratio is 1.43, which is close to its three-year low of 1.38. Its P/B ratio is 2.83, close to its two-year low of 2.72.
5. Overstock.com (OSTK, Financial)
Watsa holds more than 3 million shares of Overstock.com, comprising 3.4% of his portfolio and 13.28% of shares outstanding.
Overstock.com is an online retailer specializing in clearance and discount brand name and non-brand name products of a wide variety. It also operates an online auctions business, as well as sites to list and buy cars and real estate.
Overstock may be undervalued by as much as 65% according to GuruFocus’ DCF calculator; however, because of the company’s business unpredictability, this may not be accurate.
The company holds no debt, and gross profit increased by 20% to $258 million year over year, to reach a 10-year high.
