Prem Watsa is not a household name, but he is known well on Wall Street as “Canada’s Warren Buffett.” He modeled his Fairfax Financial Holdings fund by acquiring insurance companies and taking large stakes in businesses.
He takes a value investing approach to buying stocks, seeking companies trading below their intrinsic value before committing money. It has proved an effective and successful strategy. Since its founding in 1985, Fairfax Financial has generated annualized returns of 18.2%, including dividends. The book value of the fund has grown 19% annually.
On July 1, Watsa stepped down as Fairfax’s chairman, though he remains a director of the company. He was replaced by his son, Benjamin Watsa.
The fund has $1.2 billion in assets under management and possesses a diversified portfolio of 38 stocks. Yet of those three dozen companies, Watsa has 61% of the portfolio invested in just three companies. Let’s dive into them to see whether they belong in your portfolio too.
Key Points About This Article:
- Prem Watsa is known as “Canada’s Warren Buffett” and has developed a very similar investment style, even buying insurance companies to serve as an investment vehicle.
- His Fairfax Financial Holdings fund has generated better than 18% annual returns since its founding in 1985, but Watsa recently stepped down as chairman, though he remains a fund director.
- If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.
Occidental Petroleum (OXY)
Ripping a page right out of Buffett’s playbook, Watsa owns Occidental Petroleum (NYSE:OXY), arguably his mentor’s favorite oil stock. He first acquired a position in the stock in the second quarter of 2022 just after Buffett revealed his stake. He bought an initial position of 886,000 shares and steadily acquired more until finally hitting just over 6 million shares in the second quarter of 2023. Where Buffett continues to buy the stock, Watsa has maintained his position and it is valued at $379 million.
Watsa’s stake is the largest position in Fairfax’s portfolio, representing 32% of the total. Yet with an average buy price of around $61 a share, Watsa is showing an implied loss of around 15%. Buffett may be doing slightly better as he had bought more shares at lower prices, but he is only at break-even.
Part of Occidental’s problem has been weakened oil prices, but also the oil company’s heavy debt load. It has $18.4 billion in long-term debt on its balance sheet stemming from its acquisition of Anadarko Petroleum in 2019.
Buffett actually assisted in the purchase, loaning the company $10 billion in exchange for 100,000 shares of Occidental’s preferred stock. As those shares pay Buffett an 8% dividend, he receives an extra $679 million a year bringing his total annual dividend payment to almost $1 billion.
Orla Mining (ORLA)
Watsa is on his own with his second-largest holding, Orla Mining (NYSEAMEX:ORLA), a Vancouver-based gold and silver miner with projects in Mexico and Nevada. The billionaire investor owns 55.7 million shares valued at almost $214 million, which represents 18% of Fairfax’s portfolio.
Orla’s Mexican mine is proving productive. The Camino Rojo Oxide Mine is a gold and silver open-pit and heap leach mine that produced 33,206 ounces of gold in the second quarter. Orla sold 34,875 ounces for the period. It is also developing the South Railroad project in Nevada, a feasibility-stage, open pit, heap leach gold project situated on the Carlin trend.
The miner also owns Cerro Quema in Panama, which holds significant potential for Orla as it includes a pre-feasibility stage, open pit, heap leach gold project, a copper-gold sulphide resource, and various exploration targets. The Panamanian government, however, has rejected Orla’s permits for the project so the miner has taken the government to arbitration.
Shares of Orla Mining are up 27% in 2024. With Fairfax’s $3.64 per share average buy price, it implies a 13% profit on its investment so far.
Kennedy-Wilson Holdings (KW)
The third-biggest holding in the fund is Kennedy-Wilson Holdings (NYSE:KW), a global real estate investment company that owns, operates, and invests in real estate directly as well as through its investment management platform. Based in California, Kennedy-Wilson focuses on multifamily and office properties in the U.S., the U.K., and Ireland.
What sets K-W off from many other real estate investments is it is not a REIT, but rather a regular corporation for tax purposes. Even so, it offers investors a high dividend yield just like a REIT, one which currently offers 7.7% annually.
Yet like REITs, K-W has struggled in the high interest rate environment we’re in. Over the past three years, shares have fallen 48%, but they’re up 39% off recent lows as the prospects for interest rate cuts grew. Now that the Federal Reserve has cut rates by half a percentage point it could spur greater real estate investment opportunities.
Fairfax Financial owns 13.3 million shares valued at $129.5 million, equal to a 11% position in the portfolio. But with an average buy price of around $23.50 per share, Wasta is sitting on an implied loss of 54%.
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