Canadian investors Prem Watsa (Trades, Portfolio), leader of Fairfax Financial Holdings Ltd. (TSX:FFH, Financial), and Francis Chou (Trades, Portfolio), head of Chou Associates Management, met each other while working for Gardiner Watson in the 1980s before going on to establish their own firms. While they take different approaches to identifying good value opportunities today, they do have a couple holdings in common.
Inspired by Chou’s explanation of how Warren Buffett (Trades, Portfolio) invests Berkshire Hathaway’s (BRK.A, Financial)(BRK.B, Financial) insurance float while also purchasing entire companies, Watsa decided to take the same approach after buying Markel Financial Holdings, a precursor to Fairfax, in 1985. As a result, the Toronto-based guru is widely known as “Canada’s Warren Buffett (Trades, Portfolio).” A devotee of Benjamin Graham, the founder of value investing, Watsa has historically purchased stakes in large, stable companies and held for the long term.
Chou, whose firm is also headquartered in Toronto, bases his philosophy on rigorous analysis of each company’s “balance sheet, cash flow characteristics, profitability, industry positions, special strengths, future growth potential and management ability.” The more a stock appears undervalued as calculated with the above data, the more of his fund he allocates to it, and margin of safety is paramount.
According to GuruFocus’ Aggregated Portfolio, a Premium feature, the two gurus both have positions in BlackBerry Ltd. (BB, Financial) and Resolute Forest Products Inc. (RFP, Financial) as of the end of the second quarter.
BlackBerry
Both gurus left their positions in BlackBerry (BB, Financial) unchanged during the three months ended June 30. While Watsa holds 46.7 million shares, Chou’s investment is much smaller at 400,000 shares.
The Canadian software company, which was previously known for its smart phones before shifting focus to cybersecurity, communications software and internet of things applications, has a $5.84 billion market cap; its shares were trading around $10.33 on Tuesday with a price-book ratio of 4.19 and a price-sales ratio of 6.66.
The GF Value Line suggests the stock is significantly overvalued based on its historical ratios, past performance and future earnings projections.
BlackBerry’ financial strength was rated 4 out of 10. In addition to a Sloan ratio that is indicative of poor earnings quality, the Altman Z-Score of 2.14 is in the grey zone, meaning it is under some pressure since revenue per share has declined for the past five years.
The company’s profitability fared even worse, scoring a 2 out of 10 rating. Although the operating margin is expanding, the returns on equity, assets and capital are negative and underperform a majority of competitors. BlackBerry is supported by a moderate Piotroski F-Score of 4 out of 9, though, which indicates its business conditions are stable. It also has a predictability rank of one out of five stars. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.
GuruFocus estimates Watsa, who is the company’s largest guru shareholder with an 8.25% stake, has lost 39.76% on the investment, which he has had since 2010. Chou has yielded a 32.84% return since establishing the position in the third quarter of 2012.
Other gurus who own the stock include PRIMECAP Management (Trades, Portfolio), Kahn Brothers (Trades, Portfolio), Michael Price (Trades, Portfolio), Pioneer Investments, Ray Dalio (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio) and Baillie Gifford (Trades, Portfolio).
Resolute Forest Products
Watsa left his holding of Resolute Forest Products (RFP, Financial) unchanged in the second quarter with 30.5 million shares. Chou, on the other hand, reduced his 3.9 million-share stake by 13.58%.
Headquartered in Montreal, Quebec, the pulp and paper manufacturer has a market cap of $830.64 million; its shares were trading around $10.51 on Tuesday with a price-earnings ratio of 2.38, a price-book ratio of 0.6 and a price-sales ratio of 0.25.
According to the GF Value Line, the stock is significantly overvalued currently.
GuruFocus rated Resolute’s financial strength 5 out of 10. Despite having adequate interest coverage, the Altman Z-Score of 1.41 warns the company could be at risk of bankruptcy if it does not improve its liquidity. The weighted average cost of capital is also overshadowed by the return on invested capital, indicating value creation is occurring as the company grows.
The company’s profitability scored a 4 out of 10 rating on the back of strong margins and returns that outperform a majority of industry peers and a high Piotroski F-Score of 8, indicating operations are healthy. Although Resolute’s revenue per share has declined over the past five years, it has a one-star predictability rank.
GuruFocus data shows Watsa has lost an estimated 44.43% on the investment so far. Chou has lost approximately 34.92% on the investment over its lifetime.
With 38.61% of outstanding shares, Watsa is the company’s largest guru shareholder. Chou has the second-largest holding with a 4.98% stake. Donald Smith & Co., Jeremy Grantham (Trades, Portfolio) and azValor Managers FI also have positions in the stock.
Portfolio composition
Watsa’s $3.11 billion equity portfolio, which was composed of 59 stocks as of the end of the second quarter, is heavily invested in the financial services sector with a weight of 49.85%.
Chou’s $229 million equity portfolio, which is composed of 19 holdings, is largely invested in the basic materials, financial services and health care sectors.
