Certain companies out there are expensive for a reason. One of those companies includes Fairfax Financial Holdings (TSX:FFH). The property and casualty insurance, and asset manager has become a top holding during these rough economic times. But honestly, there is likely a lot more growth on the way.
A history of opportunity
Fairfax stock may focus on insurance, but it has come a long way as an investment fund. Chairman and Chief Executive Officer Prem Watsa has made some strong investments in the past, creating a portfolio that some might call unorthodox. However, this has driven enormous returns through the investment side.
With Watsa continuing at the head, investors should continue to expect Fairfax stock to do well. Especially as its pivots towards Watsa’s different approach to investing. While this has come with volatility in more recent years, overall investors have been quite happy with the company’s results. Even during some incredibly difficult times.
Fairfax stock continues to have a strong balance sheet, and has a long history of finding value opportunities thanks to Watsa’s leadership. This method of investing might come with some missed opportunities, and even losses, but overall investors should be happy with a long-term investment in the stock.
Earnings speak for themselves
The company’s most recent earnings report demonstrated Fairfax’s strength, with net earnings at US$1.3 billion, compared to under half that the year before. The company was able to lock in a dividend annual run-rate of over US$1.5 billion for the next three years thanks to strong performance. As of writing, 80% of its fixed income portfolio is positioned in government bonds, with only 14% in short-dated corporate bonds. This will keep investors happy knowing their dividends are safe and sound.
This also shows why right now, Watsa and his crew are in preparation mode. The stock has US$1 billion in cash and investments in the holding company, not including proceeds from a recent sale. Fairfax now wants to continue to focus on being “soundly financed,” says Watsa, as market volatility continues.
Now, the stock is making some acquisition moves in the market. The company purchased a portfolio of U.S. real estate construction loans for US$2 billion recently, with results expected to yield double-digit returns.
Analysts weigh in
This recent news had at least one analyst up his price target for Fairfax stock to $1,400, up from the consensus of $1,330 as of writing. Given that the stock is still below the four-digit mark, this could mean investors are in for a huge deal.
The stock looks as though it will create strong mid-teen returns on equity in both 2023 and 2024, according to another analyst. This will occur through a combination of growth and profits in underwriting, as well as improvement in its total investment return performance. So should interest rates come down, combined with a strong acquisition, there could be huge gains for investors of this stock in the next year or two.
As for now, Fairfax stock trades at 10.4 times earnings, with a dividend yield at 1.39%. Shares are up about 20% in 2023 so far, and analysts believe there is a lot more room to grow.
