This Stock Is Like an Insurance Policy for Your Portfolio

Fairfax Financial Holdings Ltd. (TSX:FFH) has gone out of favour with most investors. Is it time to buy on the dip?

| More on:

It caught many investors by surprise when the market soared after Donald Trump won the presidential election. Many pundits saw the S&P 500 correcting by 10% if Trump won the election, and many investors were preparing for the worst going into election night. Fast-forward to today, and the markets are up about 10% in a few months.

If you’d followed Warren Buffett’s time-tested piece of contrarian advice to “be fearful when others are greedy, and greedy when others are fearful,” then you would have profited greatly from Trump’s election win.

Investing in the stock market is a long-term game, and nobody knows where the market is going in the short term. If you panicked and sold your stocks, then you would have missed out on the incredible Trump rally. If you stay the course and take a look at the big picture, then there’s no doubt that you’ll do very well in the long run as you unlock the true power of compounding.

Prem Watsa, also known as the “Warren Buffett of Canada,” needs no introduction to most investors. He’s the CEO of Fairfax Financial Holdings Ltd. (TSX:FFH), and he’s one of the best-known bearish investors out there. He was fully hedged against an economic downturn and had many short positions initiated because he believed there would be a correction in the near future, potentially triggered by a Trump victory.

Watsa was caught with his pants down when the markets soared into the atmosphere as investors became confident with the Trump Administration’s plans to “Make America great again.” President Trump is prepared to reduce corporate tax rates and reduce a number of regulations, so there’s no question that American businesses will thrive. This was enough to turn long-time bear Prem Watsa into a bull, which caught many by surprise.

Watsa recently removed all defensive equity index hedges because Fairfax suffered massive losses in 2016, which were likely to continue in 2017 and beyond. Because of this move, I believe Fairfax has limited downside from current levels and there exists a considerable margin of safety.

Fairfax stock has gone virtually nowhere for the last two years, and it might be a good time to load up on shares as we head into the late stages of a bull market. Sure, the bull still has legs, but this will inevitably change a few years down the road.

There’s no need to get overexcited in this high-flying market, and it can’t hurt to have an insurance policy for your portfolio in case the markets start sliding. Defensive names will eventually become popular with investors again, and when this time comes, Fairfax will be a huge winner.

The stock currently trades at a 1.2 price-to-book multiple and a 1.1 price-to-sales multiple, both of which are in line with the company’s five-year historical average multiples of 1.2 and 1.2, respectively. The stock is definitely one of the few cheap names in an overheated market, so if you’re a conservative investor, then it might be time to pick up shares of Fairfax on the recent dip. Collect the 2.1% dividend yield while you wait for shares to rebound over the next few years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any stocks mentioned. Fairfax Financial is a recommendation of Stock Advisor Canada.

More on Investing

worry concern
Investing

Is it Safe to Own U.S. Stocks These Days?

Alphabet (NASDAQ:GOOG) is a robust value bet, even after soaring 11% on the back of its quantum computing chip news.

Read more »

A worker drinks out of a mug in an office.
Dividend Stocks

A Dividend Giant I’d Buy Over BCE Stock Right Now

The largest telecom company in Canada is brutally discounted, and the dividend yield is naturally up, but it's too risky…

Read more »

a man celebrates his good fortune with a disco ball and confetti
Dividend Stocks

Get Ready to Invest $7,000 in This Dividend Stock for New Year Passive Income

This is the year you get ahead, and maxing out your TFSA contribution is the best way to start.

Read more »

ways to boost income
Dividend Stocks

Buy 2,653 Shares of This Top Dividend Stock for $10K in Annual Passive Income

Enbridge is a blue-chip TSX dividend stock that offers shareholders a forward yield of 6%. Is it still a good…

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Friday, December 13

Down 1.1% week to date, the TSX Composite Index seems on track to end its five-week winning streak.

Read more »

ETF stands for Exchange Traded Fund
Bank Stocks

A Canadian Bank ETF I’d Buy With $1,000 and Hold Forever

This unique Hamilton ETF gives you 1.25x leveraged exposure to Canada's Big Six bank stocks.

Read more »

a person looks out a window into a cityscape
Dividend Stocks

1 Marvellous Canadian Dividend Stock Down 11% to Buy and Hold Immediately

Buying up this dividend stock while it's down isn't just a smart move, it could make you even more passive…

Read more »

Blocks conceptualizing the Registered Retirement Savings Plan
Dividend Stocks

CPP at 70: Is it Enough if Invested in an RRSP?

Even if you wait to take out CPP at 70, it's simply not going to cut it during retirement. Which…

Read more »