When investors think about deep-value investing, one name inevitably comes to mind — Warren Buffett. Frankly, that is tiring because it doesn’t allow investors like us to benefit from some of the other great wisdom out there.
Another Canadian investor in the mould of Buffett who we don’t talk about much is Prem Watsa, founder and head of Fairfax Finacial Holdings (TSX: FFH), a Canadian headquartered global investment firm with an objective to achieve a high rate of return on invested capital and build long-term shareholder value. Prem and Fairfax are the focus of my article today.
The stock and the play
For patient, long-term-oriented investors, there is no better place to put capital to work than alongside Prem and his talented team at Fairfax. Fairfax was in the news recently for a few wrong reasons — specifically because of its ownership stake in BlackBerry and Stelco shares. Both Stelco and BlackBerry came out with stinky quarterly earnings recently, and Fairfax predictably swooned on the back of those horrendous results.
Yes, when its major investment holdings don’t do well, Fairfax suffers, but smart investors will do well to look deeper. Fairfax has proven over the last 33 years of its existence that it knows how to compound investor capital. In fact, Fairfax has grown its book value per share by almost 19% annually since inception in 1985.
I understand that book value is not the same as stock price, but as Warren Buffett has always told people, looking at a minute-by-minute stock price ticker tape is the worst way to ascertain a company’s worth, because that is only a measure of price and not value.
Focus on the principles, not the background noise
Fairfax is one of the few companies that actually publishes its principles right on its website; they’re easy to find and simple to read. These principles sound an awful lot like Warren Buffett’s thoughts on how to make money the right way.
Embedded in these principles are eight guiding values, one of which is that Fairfax always looks at opportunities but emphasizes downside protection and looks for ways to minimize capital loss. This principle makes Fairfax a perfect stock for market downturns when there is a premium on capital preservation.
Fairfax India is the stealth weapon in Fairfax’s arsenal
Fairfax India was established in 2014 and has made nine major investments in a country that has one of the fastest growth rates in the world. The “cream of the crop” Fairfax investment in India is, without a doubt, the Bangalore International Airport (BIAL).
BIAL is the third-largest airport in India, but it is the second-fastest-growing airport in the world and recently was the first airport ever to win the best customer service for both arrivals and departures, awarded by the Airports Council International. The airport served 32 million passengers in 2018, up 29% from 2017.
BIAL is adding a second runway and terminal, which will be completed by 2019 and 2021, respectively. These infrastructure investments of about $2 billion will be internally funded by Fairfax. When these projects are complete, BIAL expects to serve 65 million passengers annually, which is double the current rates.
To put this passenger level is context, Bangalore in 2021 would serve the same number of passengers that are currently served at major hubs like Singapore International and Denver International airports. That means it would be in the big leagues, and Fairfax would ride its positive coattails for a long time to come.
The final verdict
Long-term investors have to keep in mind that for every investment like BlackBerry, Fairfax also has a Bangalore International Airport in its portfolio. But let’s be clear, Fairfax fully expects BlackBerry to be a great long-term holding for the company. By many estimates, BlackBerry’s patent portfolio alone may be valued at a level that its shares are trading hands at right now.
The bottom line is that Fairfax stock is currently at $570 per share, which is almost the same level it was five years ago. However, during that time, the book value has grown steadily from $395 to $465 per share as of June 2019.
Smart investors will recognize the value play here and start nibbling at Fairfax shares at these multi-year lows to build a brilliant retirement portfolio.
