Fairfax Financial Holdings is a Bargain

Fairfax Financial Holdings Ltd. (FFH/NYSE or FFH.SV/TSE) is a financial services holding company that, through its subsidiaries, is primarily engaged in property and casualty insurance conducted on a direct and reinsurance basis.

Put simply, FFH trades at a substantial discount from it's book value of $185. It closed Monday at $132.50 on the NYSE.

The price/sales ratio is 0.30 and the market cap is nearly $2.2 billion. It's goal is to increase shareholder value by growing book value by 15% annually.

FFH stock has dropped recently. One reason is probably because Merrill Lynch issued a negative report at the end of March. This is nothing new -- FFH is either misunderstood or hated (or both) on Wall Street and this is not the first time the stock price has been knocked down thanks in part to a negative brokerage house report. Another reason is the worry that FFH, like any insurance company, might somehow turnout to be another AIG and wind up in the crosshairs of Elliot Spitzer. And the last reason that the stock price has fallen is because of weakness in some of the company's European operations.

I believe the Merrill Lynch report is wrongheaded and that FFH will not be another AIG. And even if the problem European business is worth zero (not likely), FFH is still worth more than the current stock price.

V. Prem Watsa, Fairfax's Chairman and CEO is one of the best chief executives on the planet. He has the vast majority of his personal net worth in the company, so his interests are clearly aligned with shareholders.

As long as the share price stays at these levels or goes down, and the book value holds up or increases, I'll continue accumulating shares of FFH.

UPDATE 6/26/2006: More FFH stock was purchased, boosting my share count by 30%. The price paid was $92 per share. That makes the average price $123.16 for the purposes of the blog’s readers.

Remember, my average cost for the company had been $125, having owned it long before launching this site. So my personal average cost is $117.39.

Comments

[John Calderone]

I found your blog about a month ago and it inspired me to put one together. I am a huge fan of Meryl Witmer and have been buying her picks for about 5 years. I frankly think that I should only use her picks but that takes away all the fun.

Keep up the great blog. I am going to buy CBS based on your inputs and on digging into it from a few other angles.

[John]

John,

Thanks for your compliments. I hope you have as much fun with your blog as I am having with mine. I'll also be sure to check your site out when I get a chance.

Regarding CBS, I don't see much downside with it, that's for sure.

As for Meryl Witmer, she's a great stock picker as you said. I just wish I'd picked up CHAP back when it was first spun off. It could be had for under $13 last summer, if memory serves. Ouch.

[lisamopett]

hi this is lisa,i am very interested in finance related topics your information on FFH stock is nice.

regards:)
http://www.stocksatbottom.com

[John]

Thanks for the kind words, Lisa. And thanks for reading the site.

[Mother Cabrini]

I've taken a small position in FFH. Looks like some stormy seas ahead vis a vis restatement. My gut reaction is there's going to be a sharp sell off tomorrow (7/28) and stock purchased then will show great returns 6-12 months out.

[Ravi]

I am enjoying your comments. I am Fairfax shareholder from last 10 years and adding my ownership. I always looked my ownwrship as true owner and i have huge confidence in Prem Watsa, Francis chou's as money managers. For me it FFH is mutual fund comany with Prem, Francis and their team as managers. Managing 16 billion dollars and 5% return ( if combined ratio of 100% can be achieved ) will provide $800 million earnings in hands of honest and intelligent team to re invest. so even today's price of $200 per share looks very cheap.

[John]

Ravi: I've thought about adding to Fairfax myself. In fact, I did add to it when it went under US$100 last year.