"Tracking Prem Watsa’s Fairfax Financial Holdings Portfolio – Q1 2017 Update"
"Prem Watsa’s US long portfolio value increased from $1.17B to $1.24B this quarter.Fairfax Financial’s largest five 13F stakes are Blackberry, Kennedy Wilson, International Business Machines, Resolute Forest Products, & USG. They together account for ~88% of the US long assets.The 13F portfolio is a small portion of their overall investment portfolio.This article is part of a series that provides an ongoing analysis of the changes made to Prem Watsa’s US stock portfolio on a quarterly basis. It is based on Watsa’s regulatory  filed on 05/12/2017. Please visit our  to get an idea of his investment philosophy and our  for the fund’s moves during Q4 2016.This quarter, Watsa’s US long portfolio increased ~6% from $1.17B to $1.24B. There are 31 13F securities in the portfolio, but it is concentrated among a few large stakes. The focus of this article is on the larger (greater than 0.5% of the portfolio each) holdings. The top five positions represent 87.62% of the US long assets. The top-three holdings are Blackberry, Kennedy-Wilson, and International Business Machines and together they account for more than two-thirds of the entire 13F portfolio.Note: Fairfax Financial’s (FRFHF) 13F holdings only represent a small portion of their overall investment portfolio. The total size as of Q1 2017 was $27.56B of which 40.4% is in cash and short-term positions. The cash allocation is up a lot compared to 19.3% as of Q3 2016. They have a huge position in CPI linked derivative contracts ($111.07B notional amount, $71M fair value, 5.4 years average maturity) designed to protect against global deflation. FRFHF currently trades at ~$443 compared to a book value of ~$361. The equity portfolio was over 100% hedged as of Q3 2016 but those were removed after the US election results.New Stakes:Intrepid Potash (IPI): IPI is a 2.3% of the portfolio stake established this quarter at prices between $1.40 and $2.45 and the stock currently trades near the top end of that range at $2.20.Stake Disposals:Overstock.com Inc. (OSTK): OSTK was a top-five position at ~5% of the US long portfolio as of last quarter. The original stake was purchased in Q4 2008 at prices between $9 and $17 and had since been kept relatively steady. The disposal happened this quarter at ~$16 per share. The stock currently trades at $15.40.Baldwin & Lyons Inc. (BWINB): BWINB was a very small 0.81% of the portfolio position last quarter. Q3 2016 had seen a ~60% stake reduction at prices between $23.50 and $27.50. The remaining position was disposed of this quarter at prices between $23 and $25.40. It was a very long-term stake that was kept steady over many years. The stock is now at $24.30.Stake Increases:USG Corp. (USG): The ~4% USG position was established last quarter at prices between $24 and $32. There was a huge 335% stake increase this quarter at prices between $28.50 and $34.50. The stock currently trades at $30.60. For investors attempting to follow Watsa, USG is a good option to consider for further research.Kept Steady:Blackberry Inc. (BBRY): BBRY is Watsa’s largest position at ~29% of the US long portfolio. The stake was first purchased in 2010 at around $50 for 2M shares. Since then, the position was aggressively built up to 46.7M shares (~9% of the business). His cost-basis is ~$17 and the stock currently trades at $9.35. There has only been very minor activity in the last three years.Note: In Q4 2013, Fairfax co-sponsored a cash-infusion of $1B through convertible debentures ($10 conversion price earning 6% interest) - they financed $500M of that transaction and the remaining was funded by a consortium of other investment funds - the implied dilution took their ownership up to ~16.5% of the business. In Q3 2016, those shares were redeemed and new ones issued ($605M in 3.75% debentures convertible at $10 due 11/13/2020) to the same entities in a private placement.Kennedy-Wilson Holdings (KW): KW stake is the second-largest position at ~22% of the US long portfolio. Watsa’s ownership stake in the business is ~11%. Last quarter saw a ~40% increase at prices between $20 and $23.  KW currently trades at $20.55.Note: The original 2010 stake was from a private placement for Kennedy Wilson convertible preferred stock. The total investment from that point thru Q3 2016 was $645M. Over the years they received distributions of $625M and so the net investment was only $20M. Last quarter, they invested another ~$70M. That is compared to a current market value of ~$270M.International Business Machines (IBM): IBM is a large (top three) ~19% of the US long portfolio position established in Q3 2014 at prices between $181 and $196. The stake was increased by ~28% in Q4 2014 at prices between $151 and $190. The stock currently trades at $150. For investors attempting to follow Watsa, IBM is a good option to consider for further research.Resolute Forest Products (RFP): RFP is the fourth-largest holding at ~13% of the US long portfolio. The stake was first established in Q4 2010 when it was named Abitibi Bowater and the position has since been more than doubled. In Q2 2013, the original stake was increased by ~17% at prices between $12.50 and $16.50. Q2 2016 saw another ~5% increase at prices between $4.75 and $6.75 Watsa’s cost-basis on RFP is much higher than the current quote of around $4.75. The stock lost ~55% in 2015 and has since lost another ~38%.Helmerich & Payne (HP): HP was a minutely small stake as of Q3 2015. The following quarter saw the position built up to the current 1.88% of the portfolio stake at prices between $46.50 and $61. The stock is currently at $57.42.US Bancorp (USB): The bulk of the ~1.7% USB stake was purchased last quarter at prices between $42.50 and $52.50 and the stock is now at $51.41.Johnson & Johnson (JNJ): JNJ is a long-term position that has been in the portfolio since 2007. The original stake was 5.9M shares purchased at a cost-basis of $62.29. In Q3 2013, roughly half the position was sold at prices between $85.50 and $94.50 and in the following quarter the remaining stake was almost eliminated at prices between $85.50 and $96. Last quarter saw an about turn: ~80% increase at prices between $111 and $120. The stock currently trades at $124 and the position is still very small at ~1.5%.Exco Resources (XCO): XCO is a ~2% of the US long portfolio stake first purchased in Q1 2012. The bulk of the current position was purchased in Q4 2012 at prices between $6.50 and $9. Q4 2015 saw another ~50% increase at prices between $0.75 and $1.36. The stock currently trades at $0.41. Watsa controls ~10% of the business. Last quarter saw a minor ~8% increase.Note: In January 2014, XCO had a rights offering (one new share at $5 for every four shares of XCO held) and Watsa increased his stake from 10.81M shares to 17.54M shares as a result - Prem Watsa along with Wilbur Ross agreed to backstop the offering thereby acquiring more shares than what they would have received by exercising their rights.POSCO ADR (PKX): PKX is a very small 1% of the US long portfolio stake established in Q3 2015 at prices between $34.50 and $51. The stock currently trades at $59.89.Leucadia National (LUK) and Pfizer Inc. (PFE): These two very small stakes (less than ~1% of the portfolio each) were kept steady this quarter.The 13F portfolio also has numerous very small equity positions (less than ~0.5% of the US long portfolio each) that add up to a total allocation ~1.4%.  The stakes are Berkshire Hathaway (BRK.A) (BRK.B), Carlisle Cos. (CSL), Colfax Corp. (CFX), CSX Corp. (CSX), Destination Maternity Corp. (DEST) previously Mothers Work, General Dynamics (GD), K12 Inc. (LRN), Monsanto Company (MON), National Oilwell Varco (NOV), NetEase Inc. (NTES), New Oriental Education (EDU), Rayonier Advanced Materials (RYAM), Sherwin Williams (SHW), Thermo Fisher Scientific (TMO), Turquoise Hill Resources (TRQ), The Valspar Corp (VAL), and Wells Fargo (WFC).The spreadsheet below highlights changes to Watsa’s US stock holdings in Q1 2017:Regulatory Filings thru 2/20/2017: 13G/A on 2/14/2017: XCO - 27.5M shares - 9.8%. 13G/A on 2/14/2017: OSTK - 0. 13D/A on 12/22/2016: RFP - 30.55M shares - 34.1%.: Equity Hedges: Removed. At September 30, 2016 equity hedges with a notional amount of $7,599.7 represented 112.7% of the company's equity and equity-related holdings of $6,744.6. Book Value: $367.40 per basic share on December 31. 2016 compared to $406.65 per basic share on September 30, 2016 compared to $403.1 as of December 31, 2015. Investment Portfolio: $27.29 billion on December 31, 2016 compared to $27.83 billion on December 31, 2015. Cash: At $9.9B compared to $6.6B on December 31, 2015. Treasury duration shortened to 1 year. CPI linked derivative hedges against deflation: At December 21, 2016 these contracts have a remaining weighted average life of 5.6 years (December 31, 2015 - 6.6 years), a notional amount of $110.4 billion (December 31, 2015 - $109.4 billion) and a fair value of $83.4M (December 31, 2015 - $272.6)."