In this market, a lot of stocks are at or near all-time highs. Despite a brief selloff this past Friday, the U.S. and Canadian markets are both breaking records this year. The strength is being observed especially in the tech and banking sectors, which have been scorching hot over the last 12 months. There has been a lot to love.
With that said, seeing stocks hitting all-time highs is not always something to celebrate. A higher price means a lower future return, all other things being the same. The higher the stocks go, the higher the odds they’re about to come down.
Nevertheless, there are some stocks setting and even exceeding all-time highs right now that look like good buys. In this article, I will share one of them, along with my reasons for thinking it could perform well going forward.
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Fairfax
Fairfax Financial Holdings (TSX: FFH) is a Canadian insurance company run by the Indian-Canadian billionaire Prem Watsa. The company has performed quite well over the years, vastly outperforming both the TSX Composite Index and the TSX financials sub-index since 1995. Its stock is currently a stone’s throw away from an all-time high, being a mere 2.4% below the all-time high set in July.
What has made Fairfax such a success over the years?
Mainly, two things:
- Operational excellence.
- Investing skill.
Operationally, Fairfax is quite a successful enterprise. The company has grown its policyholders, premiums and many other metrics over the years, to the point where it has achieved some of the highest growth rates of any TSX company. Over the last 10 years, it has compounded its revenue, earnings, equity, and free cash flow (FCF) at the following rates:
- Revenue: 15.9%.
- Earnings: 24.8%.
- Equity: 10.7%.
- FCF: 9.8%.
Over a long period of time, these compounded rates of growth really add up. For example, 24.8% earnings growth compounded over 10 years is 916%! If Fairfax can keep up these results, it stands a good chance of delivering high returns.
Will Fairfax keep up its illustrious track record?
I’d say as long as it has Prem Watsa at the helm, it will. Watsa is a disciplined value investor, the type of person who manages risks prudently and picks stocks only after thorough research. Investing is a big part of running an insurance company, so that bodes well for Fairfax’s future with Watsa in charge. As for operations: that’s harder to gauge, although the historical track record argues it should turn out fine.
Valuation
Having looked at various things that Fairfax has going for it, we can now proceed to valuing the stock.
Going by multiples, Fairfax is a pretty cheap stock, trading at the following:
- 16 times adjusted earnings.
- Nine times GAAP (generally accepted accounting priciples) earnings.
- 1.04 times sales.
- 1.55 times book value.
- 10.65 times cash flow.
These are pretty low multiples for an insurer, a category of stocks that are trading at about 16 times earnings on average these days (according to S&P Global). This, combined with the company’s good management, makes the stock a decent buy today.
Foolish bottom line
Fairfax Financial Holdings is one of Canada’s most respected companies for a reason. Well run and prosperous, it has a great track record. The fact that it’s cheaper than its industry appears to be irrational. So, the stock seems like a decent buy here.
