DeCloet: "Market is Pricing Fairfax Logically"

Derek DeCloet of the The Globe and Mail opines that regardless of the merits of its legal action against short sellers, Fairfax Financial (FFH/NYSE) deserves to have its stock trading at a discount:

If a fraction of the claims are true (they have not been proven in court), then Fairfax is dealing with a very sleazy bunch here. But the heart of the lawsuit is Mr. Watsa's view that the conspiracy brought about "massive declines in Fairfax's stock price."

The implication, of course, is that the company is undervalued -- that the stock would be worth more than its current price, $120 (Canadian), if not for the nasty tricks campaign of the short sellers. Could that be true?

Maybe the shorts are nasty people, but that isn't why Fairfax's stock is down according to DeCloet:

What kind of return would you need to compensate you for the risk in a highly leveraged insurance holding company? It's a lot higher than 6.3 per cent. But the only way to get it is (a) if Fairfax starts generating a much higher profit and return on equity, or (b) if you pay much less than book value.

Since the investor can't control Fairfax's profitability, he chooses (b). If we had to guess, we'd say the "correct" price for a stock with an ROE this low is probably two-thirds of book value -- or about $120 in Fairfax's case.

Fairfax seems undervalued to me -- and I remain optimistic its true value will be realized over time.

But you have to read as much stuff as possible when managing your own money, and not only columns cheering your point of view.

Comments

[Investorial]

Maybe I've been reading too much Herb Greenberg, but I simply don't appreciate when management feels the need to take on the market in order to explain their stock price.

There are far more important things that management should be concerned about rather than argue against shorters or hedgefunds.

To me, it's like Overstock.com, the ridiculousness of such "manipulation" serves as more than a distraction from a company's operations, execution and fundamentals.

[John]

Investorial,

Well, time will tell...about whether or not FFH is "a zero" as James Chanos is reported to have said...and whether or not this lawsuit has merit. Thanks for reading.

[nodoodahs]

http://www.insurancenewsnet.com/article.asp?n=1&neID=200608292800.1_01cf0018fa53656f

May be of interest to you. More opaqueness of the FFH financials.