"Tracking Prem Watsa’s Fairfax Financial Holdings Portfolio – Q3 2017 Update"
"Prem Watsa’s US long portfolio value increased ~8% from $1.13B to $1.22B this quarter.Fairfax Financial’s largest five 13F stakes are Blackberry, Kennedy Wilson, Resolute Forest Products, Intrepid Potash, and USG. They together account for ~84% 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 13F portfolio on a quarterly basis. It is based on Watsa’s regulatory  filed on 11/14/2017. Please visit our  to get an idea of his investment philosophy and our  for the fund’s moves during Q2 2017.This quarter, Watsa’s US long portfolio value increased ~8% from $1.13B to $1.22B. There are 48 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 three holdings are Blackberry, Kennedy-Wilson, and Resolute Forest Products and together they account for ~74% 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 Q3 2017 was $37.38B of which ~43% 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 ~$533 compared to a book value of ~$416. The equity portfolio was over 100% hedged as of Q3 2016 but those were removed the following quarter.New Stakes:Alere Inc. and Chicago Bridge & Iron (CBI): ALR is a 1.52% position established this quarter. Last month, 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. CBI is a ~1% portfolio position purchased this quarter at prices between $9.55 and $20 and the stock is currently at $15.36.Stake Decreases:International Business Machines (IBM): IBM is a 3.34% of the US long 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. Last quarter saw the position reduced by half at prices between $150 and $175 and that was followed with another ~60% selling this quarter at prices between $140 and $156. The stock currently trades at $149.US Bancorp (USB): The bulk of the ~2% USB stake as of last quarter was purchased in Q4 2016 at prices between $42.50 and $52.50. It was almost sold out this quarter at prices between $50 and $54. The stock is now at $51.81.Leucadia National (LUK): LUK is now a minutely small 0.21% portfolio position. The stake saw a two-thirds reduction this quarter.Kept Steady:Blackberry Ltd (BB): BB is Watsa’s largest position at ~43% of the 13F 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 $10.38. There has only been very minor activity in the last 3+ 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 ~19% of the US long 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 $18.70.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 ~$240M.Resolute Forest Products (RFP): RFP is the third-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. Watsa’s cost-basis on RFP is much higher than the current quote of around $8.90. The stock lost ~55% in 2015 and is up ~15% since. Last month saw a ~50% rebound in the stock.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 $3.61.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 last quarter at prices between $28.50 and $34.50. The stock currently trades at $34.44.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 $139 and the position is at 1.61%.Helmerich & Payne (HP): HP was a minutely small stake as of Q3 2015. The following quarter saw the position built up to the current 1.49% of the portfolio stake at prices between $46.50 and $61. The stock is currently at $54.37.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 $70.82.Exco Resources (XCO): XCO is a 0.21% of the US long portfolio stake first purchased in Q1 2012. The position was built up at much higher prices compared to the current price. The stock currently trades at $0.81. The 13F position was substantially increased last quarter as Exco paid interest to Fairfax in stock in lieu of cash.Note: XCO had a 1-for-15 reverse stock-split in June. Including warrants held and the implied dilutions, Fairfax’s ownership stake in the business is ~46% of the business.Pfizer Inc. (PFE): PFE is a very small 0.61% portfolio position kept steady this quarter.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 ~4.6%.  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), Cray Inc. (CRAY), FreightCar America Inc. (RAIL), Jacobs Engineering (JEC), Kulicke and Soffa Inds. (KLIC), MYR Group Inc. (MYRG), Northwest Pipe (NWPX), Pengrowth Energy (PGH), RPX Corp. (RPXC), Stratasys Ltd. (SSYS), Terraform Global (GLBL), Turquoise Hill Resources (TRQ) and Wells Fargo (WFC).The spreadsheet below highlights changes to Watsa’s US stock holdings in Q3 2017:Regulatory Filings thru 8/12/2017: Form 3,4 – XCO – 8/8-9/2017 – Acquired 1.657M shares at $10.05 (paid in lieu of accrued interest in Notes held). Warrants - ~12.5M shares also held.  13D – 7/14/2017 – AWHHF – Swiss based Allied World Assurance – merger related filing. 13D – 6/9/2017 – XCO – 45.8% ownership including warrants.: 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: $377.97 per basic share on June 30, 2017 compared to $367.40 per basic share on December 31, 2016 compared to $403.1 as of December 31, 2015. Investment Portfolio: $27.93 billion compared to $27.29 billion on December 31, 2016. Cash: 40% of investment portfolio - $11.14B 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).5/16/2017 - Reader Input - the phrase “BBRY is the largest position in the US long portfolio” is inaccurate as BBRY is a Canadian company - should adjust it to say “13F portfolio” from the next round."