finally...been waiting for this for the last 2 weeks

[oldye]

I think 2012 is just about right, but at some point you slap a 18x P/E on it and you have a 52$ stock, just a rough guess but should be an adequate return.   

[Cardboard]

First of all, I have learned at my own expense that "normalized earnings" are among the most dangerous words in the investment world. The stock market rarely if ever pays for normalized earnings. Instead it pays a multiple against immediate, tangible earnings.

 

Second, 18 times earnings on Wells Fargo in 2012 is like assuming that we are going into another debt binge in just 3 years from now. This won't happen. High growth, shadow banking system, securitization, that is all history. By that time, I suspect that bank survivors such as Wells Fargo will be slow growers trading at around 12 times earnings. If you go back in history during periods where banks were growing slowly, you will find that this multiple is actually agressive.

 

So, it is a $48 stock at best in 2012. Discount that by 10% and it is worth 36$ today. So not a huge amount of upside short term for a company that pays little dividend, has the government in its affairs and is likely to post depressing earnings reports with write-offs over the next little while.

 

If Prem bought close to the low and is selling now. He is doing the right thing for Fairfax shareholders. He will likely find better bargains with more certainty, more upside.

 

Cardboard   

[Partner24]

I wonder why we should need to second guess what Fairfax is buying and selling (and when they should buy or sell some of their specific holdings). They have a track record that a lot of investors must envy....a lot! I have nothing against criticizing some investments when they might show permanent capital loss or criticizing their overall portfolio, but to second guess if they sell a holding, but furthermore expect some stuff from it publicaly is a little bit too far in my opinion.

 

We should try our best to give them a bat, sit on our chair and watch their batting average.

[FFHWatcher]

I agree with Partner24 and just let FFH make investment decisions and try not to spend too much time suggesting what we think Prem, Brian, Francis, etc.  should be doing with the investment portfolio and shareholders money.  I say, so far, so good for the first 25 years or so.

 

Back to Wells.  I am certainly no analyst but my comment is regarding human nature and patience.  I would have a tough time earning a 100% return on my investment in a few months (call it lucky or easy money) and then waiting 3+ years for the next 100%.  Don't get me wrong, 3 year x 100% rate of return is extraordinary.  I am only commenting on human nature and perhaps our inner greed.

[oldye]

Just for the record, I think you guys are right and they probably reduced their position, JNJ is very attractive at these price levels.  But if they didn't they'll probably end up with satisfactory results.  At the AGM, Prem said that they wouldn't hesitate to lighten up if a position quickly doubled. 

[Uccmal]

It's partly FFH's style.  They buy very low and sell low.  I recall Russel Metals (RUS).  They bought in the low snlge digits and sold around 8-9 a share after a tripling.  I bought around 8-9 and learned later that FFH had owned Russel.  I sold most in the 20s and still hold a tiny bit. 

 

When I bought Russel was at PE=6; and P/Yld = 6%

 

When I bought Sino (no connection to FFH- credit dfCannuck) I paid 3-4 x earnings and sold at about 9 x earnings roughly for a triple.

 

FFH right now is at a PE of 6 and a P/B of 0.85.  If it follows Russel and Sino up it should at least double in the next few months, perhaps even triple. 

[alertmeipp]

they should have just restart the share buyback.

they will earn 20% guarantee!

 

 

 

[Uccmal]

Alert, I suspect they are keeping holding company cash at levels as high as possible right now.

 

By my estimate there is no reason the equity portfolio shouldn't return 100% over a relatively short period of time, depending on purchase prices which I was not apprised of (say 6 months to 2 years). 

[Uccmal]

One thing that seems evident today is that this is very much a Canadian story.  2 hours open in NY and only 8000 shares traded.  Canadians must be the bulk of the buyers and sellers even in NY - purely anecdotal based on today being a holiday here. 

[watsa_is_a_randian_hero]

yeah, talking about that same thing with guys at work today.  I'm in chicago, but work with a few guys originally from toronto.

[Guest swf83]

That $20 pullback last week in FFH proved to be a great buying opportunity. Will look to buy on ANY similar weakness again.

[FlyingArrow]

That $20 pullback last week in FFH proved to be a great buying opportunity. Will look to buy on ANY similar weakness again.

 

If you are a long term FFH investor and planning to accumulate over time you will find that Mr. Market will give you many, many opportunities to bulk up on pullbacks. Very thinly traded and volatile stock. That works in our favour. The leaps Al and I bought a couple of days ago are up about 25% in a few days. Go figure.

[Guest swf83]

Taking profits on those LEAPS or hanging on to them?

[Mungerville]

Viking,

 

Did you get a hold of that ORH filing?

[Viking]

Mungerville, no, I do not have anything for ORH. Any idea where to go to find the info?

[watsa_is_a_randian_hero]

For ORH someones gotta go to the NAIC & sign up for a free trial (you get 5 free downloads).  Please post to here once downloaded.

 

Thanks

[Guest kawikaho]

First of all, I have learned at my own expense that "normalized earnings" are among the most dangerous words in the investment world. The stock market rarely if ever pays for normalized earnings. Instead it pays a multiple against immediate, tangible earnings.

 

Second, 18 times earnings on Wells Fargo in 2012 is like assuming that we are going into another debt binge in just 3 years from now. This won't happen. High growth, shadow banking system, securitization, that is all history. By that time, I suspect that bank survivors such as Wells Fargo will be slow growers trading at around 12 times earnings. If you go back in history during periods where banks were growing slowly, you will find that this multiple is actually agressive.

 

So, it is a $48 stock at best in 2012. Discount that by 10% and it is worth 36$ today. So not a huge amount of upside short term for a company that pays little dividend, has the government in its affairs and is likely to post depressing earnings reports with write-offs over the next little while.

 

If Prem bought close to the low and is selling now. He is doing the right thing for Fairfax shareholders. He will likely find better bargains with more certainty, more upside.

 

Cardboard   

 

I agree.  It's also valued at 100 billion dollars.  At the height of bank valuations, I believe Citigroup was valued at 250 billion.  At the time, it had almost 4x the asset base of WFC (although, I believe with the acquisition of Wachovia, WFC asset base has now doubled).  I think WFC could go to 180 billion market cap by 2014.  I'm a buyer under 20.

[marginofsafety]

Here is ORH's Q1 Report to the NAIC. The Investment Schedule starts on page 28 and shows the changes for the quarter.

 

[returnonmycapital]

Has anyone done a comparison of FFH/ORH Canadian equity/corporate bond holdings? My understanding is that ORH should have less exposure to Canadian investments and therefore a better rate of return on investments since Q1 (in local currency). But does anyone know this for sure?

[Viking]

return, I have been asking the same question... here is the math/reasoning I am using:

 

1.) FFH said they were sitting on $900 million pretax ($30/share after tax & minority interest) in gains from all investments as of April 24.

- all ORH said was that they were sitting on material mark to market gains

2.) I estimate that ORH investments represent about 40% of total FFH investments

- this leads me to extrapolate that they were sitting on about $900x.40=$360 million

- after tax = $360 - 35% = 234 / 60 million shares = $3.90 after tax (very rough)

3.) thanks to margin of safety's ORH NAIC filings we know in Q1 ORH purchased:

- 7.6 million WFC shares at $18.41 (46% of total new FFH purchases)

- 6.86 million USB shares at $16.66 (43% of total new FFH purchases)

- 478 thousand BNI shares at $63.01 (61% of total new FFH purchases)

- 654 thousand LUK shares at $17.31 (65% of total new FFH purchases)

- given that WFC (and USB to a lesser extent) has been the key driver of the unrealized gains since March 31, it is safe to assume that the ORH equity portfolio is ourperforming FFH since March 31

4.)  regarding the bond portfolio, my guess is ORH is also outperforming FFH as FFH has Canadian govt bonds (Northbridge) which have likely performed better than US treasuries but not nearly as well as US minicipals or corporates (majority of ORH bond portfolio).

5.) since April 24, the FFH equity portfolio has appreciated roughly 5%

 

Wrap it all up and FFH is likely up quarter to date more than the $900 million they reported (mark to market April 24). I think it is a reasonable assumption that ORH is up something more than $4.00 after tax per share. Factor in Q2 operating earnings and this gives me a current book value of $43.80 + $4.00 + $.70 = $48.50. With the stock currently trading about $38.5 then PB = 0.79

 

Yes, the equity portfolio could fall precipitously so one has to take all this stuff with a grain of salt. However, it is relevant and important because if ORH was sitting on $4.00 in unrealized losses (putting BV = $40.50) then I would feel differently about the margin of safety of buying at todays price ($38.50 or PB = 0.95) all things being equal.

[watsa_is_a_randian_hero]

Can someone email me the Q1 ORH NAIC filing? (brianmweber@gmail.com)

[Guest JackRiver]

What's up Brian Weber?

 

Yours

 

Jack River

[Viking]

watsa-is.., I just e-mailed you the PDF file...

[Mungerville]

Nice summary Viking. 

[watsa_is_a_randian_hero]

watsa-is.., I just e-mailed you the PDF file...

 

Thanks.