Fairfax 2020

[bearprowler6]

bearprowler, good post - even if I disagree with some of it.

Could you clarify what you mean when you say that Eurobank, Resolute, and Stelco are impaired? That statement has a different meaning depending on whether you're starting with current share prices, or carrying values, or purchase prices - hence the question. If you feel you have a clear handle on the value of any of these business I'd be interested to know.

Thanks Petec. Disagreeing about investment valuations is what makes a market!

Let me start with a few comments on Eurobank....Prem's thesis was that it was very cheap relative to book value. Perhaps the cheapest bank on the planet. He never seemed to say much beyond that. Fairfax now owns something like 40% (I did not look up the exact percentage so apologies if this is off somewhat) of this company. How many recaps of this company did Fairfax participate in? Clearly the original thesis was wrong and Prem and team were unwilling to throw in the towel. I believe this was due to ego and also position sizing being too large. both of these raise other issues that seem to repeat at Fairfax. The most recent "recap" involving the merger with Grivalia seemed promising but now Eurobank owns real estate that is no doubt deeply affected by Covid. My bet is that further real estate write downs will be needed which will negatively impact BV in my view. Furthermore, I believe that unfortunately the Greek economy will be severely impacted by Covid. I believe that something like 20% of the economy is derived from tourism. This will impact many of Eurobank's clients in my view resulting in additional loan losses further impacting BV. The ultra low interest rates, which I believe are here for a very long time, were never good for Eurobank (or any other bank for that matter) and now seem to be here for the long haul. Sure the political climate in Greece is better now but given the hardship that Greece will likely experience as a result of Covid its not something (stable political environment) that I think we can count on going forward.

I think the shares need to triple to get back to where they were trading at the beginning of the year. A tall if not impossible task if you ask me. Given the current backdrop economic backdrop we are all facing I would suggest that owing Greek banks is the last place I would want to be invested in especially in the size that Fairfax has.

The attached article may be of interest:

https://www.ekathimerini.com/252538/gallery/ekathimerini/business/the-cost-of-coronavirus-greek-tourism-slump-threatens-a-decade-of-hard-won-gains

I would be pleased to provide you with my thoughts on Resolute and Stelco (I live about 20 kms from Stelco's head office so I know this one well) if you want to contact me in a PM.

[TwoCitiesCapital]

When is this going to stop?

Just after the last potential seller throws in the towel!

Low interest rates (all else equal) mean less income from float. So yes, bad.

Covid 19 has two impacts:
1) big recession means less demand for insurance.
2) potentially higher claims although Fairfax don't think they are badly affected.

But who knows why the stock is getting (even) cheaper today. Might be Powell's comments, might be because Eurobank is down 10%, or it might just be because there are more sellers than buyers today.

Bryggen, I am sorry you are experiencing this pain however a few of us on here (myself included) attempted to warn shareholders and those considering becoming shareholders to stay away from owning the shares of this company. Before I write anything further please understand that there are a few on here that will continue to strongly advocate for investing in Fairfax. They will cite the "undervalued" nature of their major equity holdings, the fixed income yield pick up during the bottom in mid-March, the long term track record of Prem and team, the hardening market, the vastly improved underwriting results and of course the fair and friendly culture. In my view, none of these reasons is sufficient to overcome the many deficiencies that have existed at Fairfax for several years and which are now being exposed for what they are. For every positive point put forward by those who still believe and advocate for investing in Fairfax's shares are equal and in my view more compelling reasons for not doing so.

The company is now swimming in debt, it never had a strong capital structure however it is now simply awful. Its long term holdings in Eurobank, Resolute Forest, Stelco to name just a few are likely impaired beyond repair. I fear a similar fate for Recipe and the myriad of its private holdings in the retail space. These were low margin businesses at the best of times and that was before any additional costs that Covid will impose on all retail establishments. Fairfax Africa and India have been so very disappointing for shareholders in those companies as well as for shareholders of Fairfax who have watched their seed capital into these entities melt away. Furthermore, the low interest rates will hamper all insurance companies going forward. God help any existing shareholders if we have an active hurricane season this year.

You now have a decision to make. Continue to hold and believe in the long term value of Fairfax (that was hard for me to write) or sell your shares now and redeploy the proceeds into other more compelling opportunities. The choice is yours. I have made mine!

Thanks for your honest input. Not reassuring, but I would rather honesty.

I am now curious to hear from the others on it

Bry

He hit the nail on the head for the bull argument.

I've been saying for awhile that it was hard for me to see how Fairfax could generate a reasonable return with interest rates and equity markets where they were at. I sold most of my position in mid-2018 for prices around $550-575/share. The argument was interest rates were too low and equity markets to high for them to make a reasonable return for me as a shareholder. 

I'd argue that this is the first time Fairfax has been attractive since - primarily because what is currently lacking in rates can be more than made up in spread products like corporate bonds, municipals, and equity products and build a conservative portfolio yielding 3-4% fairly easily. 4% on their investment portfolio alone is enough to make shares attractive @ $250/share. You get the positive returns from underwriting and any appreciation in subsidiaries/equity accounted investments for free.

I've started repurchasing the shares I sold in 2018 here.

[petec]

bearprowler, good post - even if I disagree with some of it.

Could you clarify what you mean when you say that Eurobank, Resolute, and Stelco are impaired? That statement has a different meaning depending on whether you're starting with current share prices, or carrying values, or purchase prices - hence the question. If you feel you have a clear handle on the value of any of these business I'd be interested to know.

Thanks Petec. Disagreeing about investment valuations is what makes a market!

Let me start with a few comments on Eurobank....Prem's thesis was that it was very cheap relative to book value. Perhaps the cheapest bank on the planet. He never seemed to say much beyond that. Fairfax now owns something like 40% (I did not look up the exact percentage so apologies if this is off somewhat) of this company. How many recaps of this company did Fairfax participate in? Clearly the original thesis was wrong and Prem and team were unwilling to throw in the towel. I believe this was due to ego and also position sizing being too large. both of these raise other issues that seem to repeat at Fairfax. The most recent "recap" involving the merger with Grivalia seemed promising but now Eurobank owns real estate that is no doubt deeply affected by Covid. My bet is that further real estate write downs will be needed which will negatively impact BV in my view. Furthermore, I believe that unfortunately the Greek economy will be severely impacted by Covid. I believe that something like 20% of the economy is derived from tourism. This will impact many of Eurobank's clients in my view resulting in additional loan losses further impacting BV. The ultra low interest rates, which I believe are here for a very long time, were never good for Eurobank (or any other bank for that matter) and now seem to be here for the long haul. Sure the political climate in Greece is better now but given the hardship that Greece will likely experience as a result of Covid its not something (stable political environment) that I think we can count on going forward.

I think the shares need to triple to get back to where they were trading at the beginning of the year. A tall if not impossible task if you ask me. Given the current backdrop economic backdrop we are all facing I would suggest that owing Greek banks is the last place I would want to be invested in especially in the size that Fairfax has.

The attached article may be of interest:

https://www.ekathimerini.com/252538/gallery/ekathimerini/business/the-cost-of-coronavirus-greek-tourism-slump-threatens-a-decade-of-hard-won-gains

I would be pleased to provide you with my thoughts on Resolute and Stelco (I live about 20 kms from Stelco's head office so I know this one well) if you want to contact me in a PM.

Thanks. FWIW they have 31% of Eurobank - very difficult to exit given liquidity. But I am less bearish about your other points:
1) BV will be E1.35 once the current set of transactions (spinoff of NPLs and sale of servicer) complete.
2) Greece has suffered 10 years of depression. Residential real estate prices are down 40%. Half of loans went bad. Covid will not help, but it may be that the damage to the loan book has already been done.
3) Provisions + collateral cover 100% of NPLs.
4) NPL exposure will be down to very manageable levels post-spin.
5) Greece's banking system has been cut down from something like 25 to 4 banks.
6) Greece has done deep reforms and now (finally) has a pro-business government.

Q1 results are out at the end of May. They will be very interesting. There is risk here. But I think there is a good chance Eurobank gets back to carrying value, and may do much better, over the next couple of years. Hopefully this post ages well.

I'll PM you!

[petec]

When is this going to stop?

Just after the last potential seller throws in the towel!

Low interest rates (all else equal) mean less income from float. So yes, bad.

Covid 19 has two impacts:
1) big recession means less demand for insurance.
2) potentially higher claims although Fairfax don't think they are badly affected.

But who knows why the stock is getting (even) cheaper today. Might be Powell's comments, might be because Eurobank is down 10%, or it might just be because there are more sellers than buyers today.

Bryggen, I am sorry you are experiencing this pain however a few of us on here (myself included) attempted to warn shareholders and those considering becoming shareholders to stay away from owning the shares of this company. Before I write anything further please understand that there are a few on here that will continue to strongly advocate for investing in Fairfax. They will cite the "undervalued" nature of their major equity holdings, the fixed income yield pick up during the bottom in mid-March, the long term track record of Prem and team, the hardening market, the vastly improved underwriting results and of course the fair and friendly culture. In my view, none of these reasons is sufficient to overcome the many deficiencies that have existed at Fairfax for several years and which are now being exposed for what they are. For every positive point put forward by those who still believe and advocate for investing in Fairfax's shares are equal and in my view more compelling reasons for not doing so.

The company is now swimming in debt, it never had a strong capital structure however it is now simply awful. Its long term holdings in Eurobank, Resolute Forest, Stelco to name just a few are likely impaired beyond repair. I fear a similar fate for Recipe and the myriad of its private holdings in the retail space. These were low margin businesses at the best of times and that was before any additional costs that Covid will impose on all retail establishments. Fairfax Africa and India have been so very disappointing for shareholders in those companies as well as for shareholders of Fairfax who have watched their seed capital into these entities melt away. Furthermore, the low interest rates will hamper all insurance companies going forward. God help any existing shareholders if we have an active hurricane season this year.

You now have a decision to make. Continue to hold and believe in the long term value of Fairfax (that was hard for me to write) or sell your shares now and redeploy the proceeds into other more compelling opportunities. The choice is yours. I have made mine!

Thanks for your honest input. Not reassuring, but I would rather honesty.

I am now curious to hear from the others on it

Bry

He hit the nail on the head for the bull argument.

That was the bull argument?? 

[Viking]

Today the overall market is down 2%, insurance stocks are down about 3% and Fairfax is down 5%. Sounds about right for a risk off day.

I was wondering what would happen to Fairfax if the market started to once again sell off. Looks like there is still risk to the downside.

How low could it go? Look at the WFC thread... some stocks just seem to be one way trains. Crazy times.

We seem to have a bifurcated market - big winners and big losers. The stock market looks like it might be rolling over.  What happens to the dogs if we get another brutal sell off?

[TwoCitiesCapital]

When is this going to stop?

Just after the last potential seller throws in the towel!

Low interest rates (all else equal) mean less income from float. So yes, bad.

Covid 19 has two impacts:
1) big recession means less demand for insurance.
2) potentially higher claims although Fairfax don't think they are badly affected.

But who knows why the stock is getting (even) cheaper today. Might be Powell's comments, might be because Eurobank is down 10%, or it might just be because there are more sellers than buyers today.

Bryggen, I am sorry you are experiencing this pain however a few of us on here (myself included) attempted to warn shareholders and those considering becoming shareholders to stay away from owning the shares of this company. Before I write anything further please understand that there are a few on here that will continue to strongly advocate for investing in Fairfax. They will cite the "undervalued" nature of their major equity holdings, the fixed income yield pick up during the bottom in mid-March, the long term track record of Prem and team, the hardening market, the vastly improved underwriting results and of course the fair and friendly culture. In my view, none of these reasons is sufficient to overcome the many deficiencies that have existed at Fairfax for several years and which are now being exposed for what they are. For every positive point put forward by those who still believe and advocate for investing in Fairfax's shares are equal and in my view more compelling reasons for not doing so.

The company is now swimming in debt, it never had a strong capital structure however it is now simply awful. Its long term holdings in Eurobank, Resolute Forest, Stelco to name just a few are likely impaired beyond repair. I fear a similar fate for Recipe and the myriad of its private holdings in the retail space. These were low margin businesses at the best of times and that was before any additional costs that Covid will impose on all retail establishments. Fairfax Africa and India have been so very disappointing for shareholders in those companies as well as for shareholders of Fairfax who have watched their seed capital into these entities melt away. Furthermore, the low interest rates will hamper all insurance companies going forward. God help any existing shareholders if we have an active hurricane season this year.

You now have a decision to make. Continue to hold and believe in the long term value of Fairfax (that was hard for me to write) or sell your shares now and redeploy the proceeds into other more compelling opportunities. The choice is yours. I have made mine!

Thanks for your honest input. Not reassuring, but I would rather honesty.

I am now curious to hear from the others on it

Bry

He hit the nail on the head for the bull argument.

That was the bull argument?? 

He clearly listed what the bulls would say in response - which is basically what I said.

On an unrelated note, anyone have the transcript from Q1 earnings call? Seeking Alpha doesn't seem to have it and I'm uncertain that it will be posted at this point.

[Xerxes]

Clearly a very polarized name with very diverse and interesting point of views. 
Much like the Tesla thread but without the Muskism.

Covid 19 changed the chessboard, I rather wait to see what the new generation would be doing. Starting by this quarter 13F. I like to think I should not underestimate someone who built a multi billion dollar business and his capacity to learn from mistakes.

I sold Nvidia few weeks ago after a good run from $130 ish.
At least that is what I tell to comfort myself when I look at my melting FFH holding ....

[Bryggen]

Clearly a very polarized name with very diverse and interesting point of views. 
Much like the Tesla thread but without the Muskism.

Covid 19 changed the chessboard, I rather wait to see what the new generation would be doing. Starting by this quarter 13F. I like to think I should not underestimate someone who built a multi billion dollar business and his capacity to learn from mistakes.

I sold Nvidia few weeks ago after a good run from $130 ish.
At least that is what I tell to comfort myself when I look at my melting FFH holding ....

Feeling better that I am not alone watching my FFH holding melting

[Parsad]

I suspect we will have one more down swing here through the 2nd quarter...from the posts above, we are getting closer to capitulation, as the bears are all growling and even some of the bulls are getting frustrated.  You've hit bottom when people just give up...probably around high 290's.

- People are complaining about Fairfax India and Fairfax Africa...one has been about 5-6 years and one has been about 2-3 years.  Do you know how long it took Fairfax Asia to become the fantastic deal it was when we sold...13 years! 
- I hear complaints about Eurobank...but we saw the same thing with Bank of Ireland which was a winner. 
- Whining about insurance...we're writing at 96% across the board for several years...do you guys remember when we could barely break 105% for 8 years! 
- We have a ton of bonds and cash, while debt to equity is below 35%...about $1.5B in the holding company...do you remember when we borrowed $300M from Cundill, Southeastern and Markel?!
- While Seaspan is breakeven right now, can anyone deny that this going to be a winner 10-15 years from now? 
- Yes, we are having challenges with BB, but this is a business that for all intents and purposes should have been bankrupt already...if the board had listened to Prem and hired John Chen in the beginning, BB would be sitting on another $1B in cash and wouldn't have wasted 18 months since Fairfax originally bought the stock.  Yeah, they should have avoided it, but shit happens...at least they dealing with it!
- You have a young portfolio team but with alot of experience, and you still have the old dogs like Brian and Prem paving the way...I think non-bond investments will do better this decade than last!
- It's trading at 60 cents on the tangible dollar...yet people are scared it might go down to 50 cents on the tangible dollar before it eventually goes back to par...that's the psychology right now from you guys!

As a distressed value investor, I'm almost always early in and early out...that's just the nature of the beast.  So I don't care if Fairfax falls another $100 in the next 6 months...as long as it's back at par 2 years from now!  Cheers!

[Pedro]

Can someone call up Mitsui and get them to offer 4X BV for all of FFH like they did for First Capital? That would be a nice way to expand their  broad global partnership.

https://www.fairfax.ca/news/press-releases/press-release-details/2017/Fairfax-and-Mitsui-Sumitomo-Insurance--Enter-into-Strategic-Alliance-and-Sale-of-First-Capital/default.aspx