The TSX Index may have recovered ample ground lost in the February-March sell-off, but the Canadian index still reeks of bargains that are too cheap for value-conscious investors to ignore. Many firms have seen their operations decimated by the COVID-19 crisis.
While there’s no telling when the economy will return to complete normalcy (the new normal could last longer than most think), I think long-term investors shouldn’t be waiting around for the perfect moment to scoop up many battered firms that have demonstrated resilience amid this crisis.
Such affected firms with sufficient liquidity positions and ample financial flexibility will be the ones that will escape this crisis with minimal long-term business erosion. And although cash flows stand to be impacted for some undisclosed period, I still think the negative impact has already been more than baked into the shares of certain COVID-hit companies at this juncture.
Invest alongside an iconic Canadian investor at a steep discount
Consider Fairfax Financial Holdings (TSX:FFH). The company is run by the legendary investor Prem Watsa, who’s known for his incredible patience and the boldness (and unorthodox nature) of his bets. Fairfax is technically and insurer and holding company like Berkshire Hathaway. Prem Watsa is also known as Canada’s Warren Buffett for his talents. However, I view Fairfax more of Watsa’s hedge because of the past use of exotic investment instruments and hedges.
Watsa has a knack for spotting macroeconomic trends, and he’s not afraid to bet big on what he believes in. The man saw trouble leading up to the Great Financial Crisis, he hedged his bets, and as a result, Fairfax was one of few firms that were green in what was a sea of red.
Despite Watsa’s past successes, of late, Fairfax has been severely underperforming — so much so such that the stock plummeted to lows not seen in over a decade amid the February-March sell-off. Fairfax stock has since bounced back modestly, but the stock is still close to the cheapest it’s been in recent memory, providing contrarians with a rare opportunity to bet on Watsa’s comeback at a bargain-basement multiple.
Sure, Fairfax is in a massive slump. But there are signs that things are on the mend. Fairfax’s underwriting track record has shown signs of improvement. If you’re a believer in Watsa and think he can outperform the markets over the long haul, I find few reasons not to back up the truck on shares at today’s depressed levels.
Just how cheap are shares of Fairfax?
At the time of writing, Fairfax stock trades at a 30% discount to book value.
Fellow Fool contributor Ryan Vanzo views Fairfax as a “rare long-term winners priced at a short-term discount,” and I think he’s right on the money. Despite the recent decade of vast underperformance, Vanzo highlights the fact that Fairfax is an outperformer in the grander scheme of things: “Since 1986, shares have risen by 15% annually. You could have become a TFSA millionaire by investing a few thousand dollars.”
I’m not so sure you could become a millionaire by investing just a few thousand in Fairfax, even under the assumption that Watsa gets back to his market-beating ways. But regardless, if you’re like Warren Buffett or Prem Watsa and are looking for excess risk-adjusted returns over the extremely long term, Fairfax is a generational buy while it’s down and out amid this pandemic-plagued market.
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 owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends FAIRFAX FINANCIAL HOLDINGS LTD and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares).