"Tracking Prem Watsa’s Fairfax Financial Holdings Portfolio – Q4 2017 Update"
"Prem Watsa’s 13F portfolio value increased ~16% from $1.22B to $1.42B this quarter.Fairfax Financial’s largest five stakes are Blackberry, Resolute Forest Products, Kennedy Wilson, Intrepid Potash, and USG. They together account for ~85% of the US long assets.The 13F securities form 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 13F portfolio on a quarterly basis. It is based on Watsa’s regulatory  filed on 02/14/2018. Please visit our  to get an idea of his investment philosophy and our  for the fund’s moves during Q3 2017.This quarter, Watsa’s 13F portfolio value increased ~16% from $1.22B to $1.42B. There are 44 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 three positions are Blackberry, Resolute Forest Products, and Kennedy-Wilson. Together, they account for ~76% 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 Q4 2017 was $37.01B of which ~47% 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 (~$116B notional amount, $60M fair value, 4.9 years average maturity) designed to protect against global deflation. FRFHF currently trades at ~$505 compared to a book value of ~$450. The equity portfolio was over 100% hedged as of Q3 2016 but those were removed the following quarter.New Stakes:Centurylink (CTL): CTL is a small 1.68% of the portfolio stake established this quarter at prices between $13.50 and $20.50 and the stock currently trades at $19.13.Stake Decreases:International Business Machines (IBM): IBM is a 2.87% of the 13F portfolio position established in Q3 2014 at prices between $181 and $196. The stake was increased by ~28% in the following quarter at prices between $151 and $190. Q2 2017 saw an about turn: position reduced by half at prices between $150 and $175 and that was followed with another ~60% selling last quarter at prices between $140 and $156. The stock currently trades at $156. There was a ~6% further trimming this quarter.Kept Steady:Blackberry Ltd (BB): BB is Watsa’s largest position at ~37% of the 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 $12.12. There has only been very minor activity in the last four 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.Resolute Forest Products (RFP): RFP is the second-largest holding at ~24% of the portfolio. The stake was first established in Q4 2010 when it was named Abitibi Bowater and the position has since been more than doubled. Watsa’s cost-basis on RFP is much higher than the current quote of around $8.05.Kennedy-Wilson Holdings (KW): KW stake is the third-largest position at ~15% of the 13F portfolio. Watsa’s ownership stake in the business is ~11%. Q4 2016 saw a ~40% increase at prices between $20 and $23.  KW currently trades at $16.65.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. By EOY 2015, they had already received distributions of $625M and so the net investment was only $20M. In Q4 2016, they invested another ~$70M. That is compared to a current market value of ~$205M.Intrepid Potash (IPI): IPI is a ~6% of the portfolio stake established in Q1 2017 at prices between $1.40 and $2.45 and the stock currently trades well above that range at $3.54.USG Corp. (USG): The ~4% USG position was established in Q4 2016 at prices between $24 and $32. There was a huge 335% stake increase in Q2 2017 at prices between $28.50 and $34.50. The stock currently trades at $33.87.Helmerich & Payne (HP): HP was a minutely small stake as of Q3 2015. The following quarter saw the position built up to the current 1.60% of the portfolio stake at prices between $46.50 and $61. The stock is currently at $65.73.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. Q4 2016 saw an about turn: ~80% increase at prices between $111 and $120. The stock currently trades at $131 and the position is at 1.49%.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 well above that range at $86.62.Chicago Bridge & Iron (CBI): CBI is a ~1% portfolio position purchased last quarter at prices between $9.55 and $20 and the stock is currently at $18.67.Pfizer Inc. (PFE): PFE is a very small 0.54% portfolio position kept steady this quarter.Note 1: Exco Resources (XCOOQ): Exco stake was first purchased in Q1 2012. The position was built up over several years. Recent regulatory filings show them owning 3.53M shares (16.3% of shares outstanding). They also hold securities higher up in the capital structure. The company filed for Chapter 11 bankruptcy in January. The 13F report does not show any Exco holdings as it is no longer a 13F security.Note 2: Alere Inc.: Alere was a 1.52% position established last quarter. In October 2017, Abbott Laboratories (ABT) closed on a deal to acquire Alere at $51 per share. The deal, first announced in February 2016 finally got done after the price was negotiated down from the original offer of $56 per share.The 13F portfolio also has numerous very small equity stakes (less than ~0.5% of the US long portfolio each) that add up to a total allocation of ~4.5%.  The following positions are sized between ~0.1% and ~0.5% of the portfolio: Ampco-Pittsburgh (AP), Argan Inc. (AGX), Berkshire Hathaway (BRK.A) (BRK.B), Carbo Ceramics (CRR), Centennial Resource (CDEV), Cray Inc. (CRAY), FreightCar America Inc. (RAIL), Jacobs Engineering (JEC), Kulicke and Soffa Inds. (KLIC), Leucadia National (LUK), MYR Group Inc. (MYRG), NetEase Inc. (NTES), Northwest Pipe (NWPX), Pengrowth Energy (PGH), RPX Corp. (RPXC), Signature Bank New York (SBNY), Stratasys Ltd. (SSYS), Turquoise Hill Resources (TRQ), and Wells Fargo (WFC).The spreadsheet below highlights changes to Watsa’s 13F stock holdings in Q4 2017:Regulatory Filings thru 11/16/2017: None.: Equity Hedges: Removed in Q4 2016. 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: $415.48 per basic share on September 30, 2017 compared to $367.40 per basic share on December 31, 2016 compared to $403.1 as of December 31, 2015. Portfolio Investments: $37.38 billion compared to $27.29 billion on December 31, 2016. Cash: ~43% of investment portfolio - $15.90B compared to $9.9B on December 31, 2016 and $6.6B on December 31, 2015. Credit Risk: Treasury duration shortened to 1 year in Q4 2016. CPI linked derivative hedges against deflation (): As of June 30 2017, continues to ~$114B notional amount derivatives - these contracts had a remaining weighted average life of just over 5 years – will hold for some time – fair value is around 58M (December 31, 2016 - $83.4)."