Fairfax Financial Stock Rises Back on Strong Earnings After 13% Short Seller Drop

Fairfax stock (TSX:FFH) saw shares drop 13%, only to come right back up on strong, estimate-beating earnings for the fourth quarter.

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It’s been a crazy month for Fairfax Financial Holdings (TSX:FFH). The insurance company was hammered earlier in the month when a short seller report sent shares of the company down by a whopping 13% in a day. However, shares slowly recovered and came back to the previous price after earnings this week.

What happened

The Canadian insurer beat estimates for its fourth quarter, bringing in high profit thanks to higher gains on investments. The stock continued to bet that banks around the world would be cutting rates back this year. This would fuel a stock market rally, and has already driven gains for the stock. Especially for companies with exposure to equities.

In fact, the company’s equity exposure brought in gains from investments of $2.1 billion in the fourth quarter alone. This was almost double what Fairfax stock earned the same time last year. The stock also reported net insurance revenue at $5.7 billion, up from $5.3 billion the year before.

Now it wasn’t perfect, as FFH stock reported a ratio of 89.9% in its property and casualty insurance reinsurance segments. This was down slightly from 90.9% the year before. Even so, since the ratio is under 100, this means the company continued to earn more from premiums than it paid out.

Short seller turn around

The earnings were welcome after short-seller Muddy Waters Research came out recently stating Fairfax stock overstated its balance sheet. What’s more, it overstated it by as much as US$4.5 billion. This was due to accounting choices and investments.

Fairfax stock called the allegations “false and misleading.” What’s more, the company believed that Muddy Waters had never even attended any of the company’s conference calls, asked a question, written, or asked them anything regarding the allegations.

“They may have successfully done this with other companies, but they have woefully misjudged the strength of Fairfax’s financials and prospects and we are confident the marketplace will reflect our strong fundamentals,” they said in a statement.

The “Buffett of Canada”

Prem Watsa remains the chief executive officer of Fairfax stock, and has been called the Warren Buffett of Canada. This comes as he follows a similar business model to Buffett. The company uses premiums from its insurance companies to make strong investments. And those investments have certainly paid off over the years.

Clearly, the short sellers underestimated the company’s performance. So while shares may have dropped, they returned to the pre-report share price after earnings came out. And that’s even despite seeing overall profit drop from the year before. The company reported profit for shareholders at US$1.3 billion compared to US$2.3 billion in 2023.

Even so, this profit beat out estimates, and was able to bring in “the best year” for Fairfax stock, as the company stated. And with the market looking to rally in the next year, Watsa is betting that there will be even more growth for the insurance stock.

So with shares trading at 8.3 times earnings and up 50% in the last year, Fairfax stock still looks like a strong investment today.

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 Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Fairfax Financial. The Motley Fool has a disclosure policy.

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