Don’t look now, but shares of Fairfax Financial Holdings (TSX:FFH) are really heating up, with the name now up more than 45% since its lows in October 2022.
Undoubtedly, the insurance and holding company run by investing legend Prem Watsa has been in a slump for years before the latest pop. Though recent momentum behind shares of Fairfax is remarkable, the stock remains quite cheap. In any case, it seems like Watsa and Fairfax are back. And those who stood by the firm are now raking in the rewards at a time when broader stock markets are feeling a bit wobbly.
One of Prem Watsa’s biggest claims to fame is how he helped Fairfax stock navigate through the Great Financial Crisis without having to endure too big a hit on the chin. As markets crumbled in 2008, Fairfax ultimately trended higher, leaving nearly everything else behind. Thanks to hedges in place, Watsa was able to zig while the markets zagged, right into the depths of one of the worst recessions in decades.
With another recession on the minds of investors, we have Fairfax, once again, outperforming the broader indices. As markets fluctuate wildly, Fairfax could be in a spot to win back the many shareholders it let down over the past decade.
Fairfax stock: Outperforming in the face of a downturn
When times get tough, Fairfax and Watsa begin to flex their muscles. In that regard, I view Fairfax stock as a magnificent name to own as a hedge against bleak economic environments. Now, Fairfax stock didn’t do much between 2015 and 2021, ultimately missing out on the gains to be had from the bull market.
With an improved underwriting and value beginning to outshine growth, Fairfax seems to be in a sweet spot. The fundamentals have improved at the company-specific level. Further, the economic environment is one that Watsa can thrive in. With such a value-conscious investing approach and a focus on the long haul, Watsa seems to be back to his old ways. And that makes me very bullish as the recession begins to inch closer by the week.
Headwinds apparent but resilience unignorable
In the latest quarter, Fairfax clocked in a quarterly profit of around US$78.33 per share. That’s up big from the US$33.64 the firm posted over the same period last year. Insurance and reinsurance held the fort, while bond investments weighed heavily at the hands of higher rates. Watsa expects the action hitting the bond market to “reverse over the short term.”
In short, Fairfax felt the headwinds hitting almost everything else. Strength in insurance helped the firm power through weakness in the bond portfolio, ultimately helping the stock sustain a rally in the face of recent macro woes.
I think Watsa is right on the money with expectations of a reversal. As investment losses turn to gains while Fairfax’s core insurance business continues to thrive, I expect FFH stock still has a lot of rally fuel left in the tank.
At 1.21 times price to book, Fairfax seems to be a cheap momentum stock that has the tools to rally in the face of broader market weakness.
