"Tracking Prem Watsa’s Fairfax Financial Holdings Portfolio – Q4 2016 Update"
"Prem Watsa’s US long portfolio increased from $1.11B to $1.17B this quarter.Fairfax Financial’s largest five 13F stakes are Blackberry, Kennedy Wilson, International Business Machines, Resolute Forest Products, & Overstock.com. They together account for ~87% 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 02/13/2017. Please visit our  to get an idea of his investment philosophy and our  for the fund’s moves during Q3 2016.This quarter, Watsa’s US long portfolio increased ~5% from $1.11B to $1.17B. There are 29 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% 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 (FRFHF) had a negative view on equities and the stock portfolio was hedged 112.7% as of September 30, 2016. The US election results prompted a huge change: equity hedges removed and bond portfolio duration shortened to one year. The 13F holdings only represent a small portion of the overall investment portfolio. The total size of their investment portfolio as of Q4 2016 was $27.29B of which 37.4% is in cash and short-term positions. The cash allocation is up a lot compared to 19.3% as of last quarter. They still have a huge position in CPI linked derivative contracts ($110.4B notional amount, $83.4M fair value, 5.6 years average maturity) designed to protect against global deflation. FRFHF currently trades at $473 compared to a book value of ~$367.Stake Decreases: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 $181. For investors attempting to follow Watsa, IBM is a good option to consider for further research. This quarter saw marginal trimming.Baldwin & Lyons Inc. (BWINB): BWINB was a small 2.24% of the portfolio position last quarter. This quarter saw a ~60% reduction to a very small 0.81% stake at prices between $23.50 and $27.50. The stock is now at $23. It is a very long-term stake that was kept steady over many years. The large reduction this quarter indicates a bearish bias.Stake Increases: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%. This quarter saw a ~40% increase at prices between $20 and $23.  KW currently trades at $21.30.Note: The original stake is from a 2010 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. This quarter, they invested another ~$70M. That is compared to a current market value of ~$260M.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 $0.64. Watsa controls ~10% of the business. This 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.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. This quarter saw an about turn: ~80% increase at prices between $111 and $120. The stock currently trades at $119 and the position is still very small at ~1.5%.US Bancorp (USB) and USG Corp. (USG): These were minutely small stakes last quarter. They were both increased to significantly large positions this quarter. The ~1.8% USB stake was purchased at prices between $42.50 and $52.50 and the stock is now above that range at $54.88. The ~0.9% USG position was established at prices between $24 and $32 and the stock currently trades just above that range at $32.74.Kept Steady:Blackberry Inc. (BBRY): BBRY is Watsa’s largest position at ~28% 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 $7.49. There has only been very minor activity in the last two 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 fourth-largest holding at ~14% 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 $4.65. The stock lost ~55% in 2015 and has since lost another ~40%.Overstock.com Inc. (OSTK): OSTK is a top-five position at ~5% of the US long portfolio. The original stake was purchased in Q4 2008 at prices between $9 and $17 and has since been kept relatively steady. The stock currently trades at $18.60.Note: Regulatory filings since the quarter ended show Fairfax no longer holding Overstock shares. The exit happened at ~$16 per share.Helmerich & Payne (HP): HP was a minutely small stake as of Q3 2015. The following quarter saw the position built up to the current 2.32% of the portfolio stake at prices between $46.50 and $61. The stock is currently at $68.26.POSCO ADR (PKX): PKX is a very small 0.86% of the US long portfolio stake established in Q3 2015 at prices between $34.50 and $51. The stock currently trades at $62.06.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 ~1.5%.  The stakes are Berkshire Hathaway (BRK.A) (BRK.B), Colfax Corp. (CFX), 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), TeamHealth Holdings (TMH), Turquoise Hill Resources (TRQ), The Valspar Corp (VAL), and Wells Fargo (WFC).Note: Blackstone (BX) acquired TeamHealth at $43.50 per share in a transaction that closed earlier this month. Blackstone had originally brought it public at the end of 2009 at ~$15 per share.The spreadsheet below highlights changes to Watsa’s US stock holdings in Q4 2016:Per Q3 2016 Interim Report & earnings call transcript: Equity Hedges: At September 30, 2016 equity hedges with a notional amount of $7,599.7 (December 31, 2015 - $5,894.8) represented 112.7% (December 31, 2015 - 88.1%) of the company's equity and equity-related holdings of $6,744.6 (December 31,2015 - $6,687.4).Book Value: $406.65 per basic share on September 30, 2016 compared to $403.1 as of December 31, 2015. Investment Portfolio: $28.53 billion on September 30, 2016 compared to $27.83 billion on December 31, 2015. Cash: As of September 30, 2016 we had $5.5 billion in cash and short-term investments in our portfolios which is 19.3% of our total investment portfolios. After quarter ended, we sold approximately 90% of our U.S. long term treasuries in our investment portfolio. And as a result we will have cash and short term investments in excess of $10 billion or 35% of the portfolio. Since we began buying treasuries in 2010 we have realized a cumulative gain. Now this is a cumulative gain of over $1 billion. CPI linked derivative hedges against deflation: At September 30, 2016 these contracts have a remaining weighted average life of 5.9 years (December 31, 2015 - 6.6 years), a notional amount of $113.65 billion (December 31, 2015 - $109.4 billion) and a fair value of $155.9 (December 31, 2015 - $272.6). The company’s CPI-linked derivative contracts produced net unrealized losses of $77.3M compared to $2M in the second quarter of 2016."