Don’t look now, but Fairfax Financial Holdings (TSX:FFH) top boss Prem Watsa is back to his old ways. Shares of FFH have been incredibly hot, leaving the TSX Index for the dust this year, with nearly 20% gains year to date.
It’s hard to believe that shares are up over 170% since the 2020 depths when it seemed like the stock could only go down and Prem Watsa — a man some refer to as the Canadian Warren Buffett — had lost his ability to outdo markets over a prolonged period of time. The tables have turned, and in such a hurry, with FFH stock now in the midst of one of a historic rally that could take it to even higher highs.
Fairfax stock: Momentum that’s too hard to ignore
I tend to avoid stocks that have recently doubled. They tend to be too hot for me to handle. As a value-conscious investor, I hate the idea of missing out on huge gains that are now in the rearview. There are a lot of stocks that are at new highs these days.
For most of them, I’d have no issue scratching off my watchlist. Fairfax isn’t one of them. The company’s newfound upward momentum across various business metrics (investment performance, underwriting) seems sustainable. And it’s this momentum that leads me to believe that there could be another leg higher in the name.
Further, Fairfax has the fundamentals to back it up and a pretty depressed valuation multiple. Today, the stock goes for just north of 10 times trailing price to earnings. That’s not an expensive stock in the slightest. Recent share price action may suggest such, but such valuation metrics suggest deep value to be had.
Just over a month ago, Fairfax acquired a book of U.S. real estate construction loans for US$2 billion. Indeed, the deal could help the company jolt its returns. Though the deal is not free from risk, I’m incredibly confident in Watsa’s team and their ability to tilt the risk/reward scenario in favour of its shareholders. Expect more deals to come!
How to play shares of Fairfax
Indeed, Fairfax saw three legs higher end in a correction (dips between 10-15%) since bottoming out in 2020. The latest leg higher seems to be stalling out, and though there’s no telling how deep the next period of stagnation could be, I do not think shares have overshot, given how the tides could continue to turn.
Investors getting in at these prices may need to roll with the punches, even if the stock is overdue for another one of its 10% dips. In any case, Prem Watsa has proven that he still has plenty of skill. And as a recession comes rolling in, expect Fairfax to roll with the punches. Fairfax and Watsa are back, and investors should really take notice, even if shares are near an all-time high.
Looking ahead, look for Watsa and company to keep making acquisitions where there’s an opportunity to get an above-average return. Remember, Watsa is a value investor, and he’s unlikely to be interested, unless there’s ample value to be had over the long run! The good thing is, there’s no shortage of opportunity out there, especially among some of the sectors that are under the most pressure.
