Today we’ve got a quickie just to answer some reader questions — and, frankly, it’s a quickie mostly because we’ve covered this pitch several times before, in slightly different variations.
This time around, the tease is coming from Charles Mizrahi in ads for “Charter Memberships” in his new Park Avenue Investment Club… which sounds pretty similar to his past newsletters in offering a basic portfolio of “value investing” picks to choose from. The offer is at $99 a year
But Mizrahi for this new service is teasing the same stock he’s been using for years as bait to lure new subscribers — whether for his Insider Alert or his Inevitable Wealth Portfolio.
So what’s the idea? Well, I won’t go to deep into the quotes from the ad or make you wait too long, since this is an idea that we’ve looked at so many times, but here’s a little taste of this “next Buffett” idea:
“In the ’70s, a then-unknown man immigrated to Canada with $8 in his pocket.
“Today, he heads a multinational holding company that pays out insane profits, makes piles of cash on companies no one else cares about, and has outperformed just about everyone else in the stock market since 1985.
“Oh, and he’s also a multibillionaire.
“So it’s no surprise many call him the “Warren Buffett of Canada….
“Since 1985, the “Next Buffett” has led his company on a profit run — growing it at a compound rate of 21.3% — that’s outperformed Berkshire hands down.
“And he’s done it by putting his money where his mouth is.
“Like the Oracle of Omaha, he draws a modest salary while roughly 95% of his net worth is in his company’s stock.”
Mizrahi also points out some of the big wins this “Buffett of Canada” has had in the past, including huge gains on the market crash in 2008 and “calling” the 1987 crash… though the ad also overstates his recent prescience in saying that the 2015 call he made on tech stocks being overvalued has worked out well (it hasn’t).
And also notes that he’s currently “pounding the table” on pending deflation…
“Right now, he’s pounding the table on the fact that China is massively overvalued, and he also has active moves to hedge against pending deflation in Canada, the U.S., and Europe.”
Finally, the ad notes that this stock, unlike Berkshire, pays a (modest) dividend, with a yield of about 2%, and benefits from the same “free leverage” that Berkshire (and other insurance companies) enjoy by using the insurance float to boost their investment portfolio.
So who is it? It is, of course, still Prem Watsa’s Fairfax Financial (FFH in Toronto, FRFHF OTC in the US) that Mizrahi is teasing for his new Park Avenue Investment Club.
And this latest revamp caught my eye not just because several readers have asked about it, but because I also like the stock and have been building my position in it since last last year, while the stock has been pretty weak — including a buy a little less than two weeks ago.
Nothing has changed materially for the company since I last purchased shares, other than that Hurricane Harvey has hit and Hurricane Irma is on its tail and headed for Puerto Rico, Hispaniola, Cuba and maybe Florida (and the stock price is now about C$633, or US$512), so I’ll just share what I wrote to the Irregulars in their Friday File on August 25 about Fairfax:
“I noted last week that Fairfax Financial (FFH.TO, FRFHF) was the most appealing stock to me at the time, though I didn’t buy last week, and it became a bit more appealing this week… so I did take some of that AIG money and boost my Fairfax position by about 20%. Fairfax was trading at very close to my cost basis anyway, so there’s no real change to that — just a bigger allocation now.
“What happened? Well, Fairfax is not as cheap as it was a week ago — but that’s for good reason, they made a deal with Mitsui Sumitomo this week that looks really appealing to me, and it also should immediately boost Fairfax’s book value per share. This, combined with the transformational nature of their large Allied World acquisition that’s not yet reflected in the share price, makes Fairfax a more compelling buy. The Allied World deal closed in early July, after the most recent quarter ended, and the incremental positive change in Fairfax’s balance sheet and increase in size of their investment portfolio on a per-share basis from the acquisition will take some time to have an impact, but the small book value boost should hit right away.
“In terms of specifics, you can check the presentation here for more detail but Mitsui Sumitomo is buying Fairfax’s controlling interest in First Capital for $1.6 billion, which creates a $900 million after-tax profit for Fairfax on that position and will, they say, boost book value per share by $33 when the deal closes (late this year or early next year). Add that to the estimated $8 per share that the Allied World deal will immediately bring (conservatively calculated, I think), and you get a boost from the recently reported $378 per share to $419. That assumes there are no substantial negative book value events over the next six months, my basic assumption is that book value is likely to grow in at least the high single digits on an annual basis (it has increased at close to 20% a year for a long period of time.
That makes the current price, just above $500, pretty reasonable at roughly 1.2X book value. Particularly when we reflect on the huge growth potential of Fairfax’s many international operations — note for example, that this sale of First Capital, which Fairfax first capitalized back in 2002 with just $35 million, is going through at a massive premium to its book value (the presentation notes that First Capital had a book value of $485 million at the beginning of the year, and is being sold for $1.6 billion in cash).Are you getting our free Daily Update
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“As I mentioned last week, that definitely doesn’t guarantee that 1.2X book is a bargain basement price for Fairfax, which has someti