Fairfax Financial: Buy, Hold, or Sell?

Here’s why I think Fairfax Financial (TSX:FFH) could be an excellent long-term buy-and-hold opportunity in this rising-rate environment.

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Fairfax Financial (TSX:FFH) has spent years building a renowned insurance platform and crafting a judicious underwriting culture. The company’s global premiums have seen a compounded growth rate of nearly 23%. Meanwhile, the average combined ratio of its insurance portfolio has declined.

However, what many investors may not focus on as much is the company’s other businesses. The company has significant real estate exposure both via its holdings as well as its retail businesses. For investors looking for long-term growth from the insurance/real estate space, Fairfax Financial is certainly an interesting pick.

Right now, there’s tremendous uncertainty in the market. However, here’s why I think Fairfax could be a buy moving forward.

2021 was the best year for Fairfax

Fairfax Financial announced some rather impressive earnings in early February. The company’s full-year results for 2021 showed net earnings of $3.4 billion, which came in astronomically higher, relative to last year’s net earnings of only $218 million. This was the company’s best year by far, with its book value growing 34% on a year-over-year basis. Additionally, gross profit surged, leading many investors to focus on the margin story with this company.

As primarily an insurance play, Fairfax is a unique company to assess at these levels. The company is massive, yet trades at only 4.5 times earnings. Like other insurance companies, this compressed multiple suggests a significant amount of forward-looking trepidation with respect to the overall market. That’s fair.

However, at these levels, Fairfax’s overall business is trading at an extreme discount to its intrinsic value, in my view. The company’s core businesses are performing well, and all indications are that this will continue. For investors seeking value, Fairfax is very attractive below $700 per share.

Fairfax might benefit from inflation

Inflation is the “I” word many investors don’t want to talk about right now. Inflation stands to hurt the margins of most businesses. Worse, this inflation is largely supply generated, meaning supply chain disruptions could impact the revenue of many top companies moving forward.

For insurance companies, a rising interest rate environment can be a good thing. Higher interest rates positively benefit margins, which are then passed on to shareholders. In the case of Fairfax, this is reflected in the company’s small but meaningful yield of 1.8%.

I think over time, Fairfax has the potential and the willingness to raise its dividend over time. Accordingly, there is an income thesis as well to holding this long-term growth stock trading at a very attractive valuation. Overall, Fairfax checks a lot of boxes for me personally.

Bottom line

Right now, Fairfax Financial is one of the top stocks on my watch list. I look at this company as both a value investment as well as a long-term growth and dividend play. Over time, I think more investors will see the value Fairfax has to offer.

Right now, the market disagrees. But that’s okay — these are the sorts of plays where long-term investors can find real value.

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 Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool recommends FAIRFAX FINANCIAL HOLDINGS LTD.

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