"Tracking Prem Watsa’s Fairfax Financial Holdings Portfolio – Q2 2016 Update"
"Prem Watsa’s US long portfolio decreased from $1.66B to $1.53B this quarter.Fairfax Financial’s largest five 13F stakes are Blackberry, International Business Machines, Kennedy Wilson, Resolute Forest Products, & Overstock.com. They together account for ~59% of the US long assets.The 13F portfolio is a small portion of the 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 08/12/2016. Please visit our  to get an idea of his investment philosophy and our  highlighting the fund’s moves during Q1 2016.This quarter, Watsa’s US long portfolio decreased 7.96% from $1.66B to $1.53B. There are 28 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 59.10% of the US long assets. The top-two holdings are Blackberry and International Business Machines and together they account for just over one-third the entire 13F portfolio.Note: Fairfax Financial (FRFHF) has a negative view on equities, the stock portfolio is hedged (115.3% as of June 30, 2016), and the 13F holdings only represent a small portion of the overall investment portfolio. The total size of their investment portfolio as of Q2 2016 was $28.04B of which 18.5% is in cash and short-term positions. Also, they have a huge position in CPI linked derivative contracts ($112.4B notional amount, $227.3M fair value, 6.1 years average maturity) designed to protect against global deflation. FRFHF currently trades at $565 compared to a book value of $406.07.Stake Disposals:ICICI Bank (IBN) and BCE Inc. (BCE): IBN was a very small 0.65% of the 13F portfolio stake established last quarter at prices between $5.18 and $7.83 and disposed of this quarter at prices between $6.38 and $7.85. The stock currently trades at $7.19. The very small 0.74% of portfolio stake in BCE was a very long-term position established before the financial crisis. It was eliminated this quarter at prices between $45.30 and $47.46. The stock is now at $48.76.Stake Increases:Resolute Forest Products (RFP): RFP is the fourth-largest holding at 10.58% 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 $12.70 and $16.49. This quarter saw another ~5% increase at prices between $4.81 and $6.72 Watsa’s cost-basis on RFP is much higher than the current quote of around $5.85. The stock lost ~55% in 2015 and another ~25% YTD.Kept Steady:Blackberry Inc. (BBRY): BBRY is Watsa’s largest position at 20.50% 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 $8.08. There has only been very minor activity in the last ten quarters.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 takes their ownership up to ~16.5% of the business. The huge position in the converts currently valued at ~$496M is also listed in the 13F.Exco Resources (XCO): XCO is a 2.17% 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 $6.77 and $8.93. Q4 2015 saw another ~46% increase at prices between $0.75 and $1.36. The stock currently trades at $1.34. Watsa controls ~9% of the business.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.Helmerich & Payne (HP): HP was a minutely small stake as of Q3 2015. The following quarter saw the position increased to a 1.52% of the portfolio stake at prices between $46.86 and $61. The stock is currently just above that range at $61.87.International Business Machines (IBM): IBM is a large (second largest) 13.54% 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 $162. For investors attempting to follow Watsa, IBM is a good option to consider for further research.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 stake was sold at prices between $85.86 and $94.39 and in the following quarter the remaining position was almost eliminated at prices between $85.61 and $95.63. The stock currently trades at $123 and the stake is now very small at 0.66%.Kennedy-Wilson Holdings (KW): KW stake in the common stock is the third-largest at 11.12% of the US long portfolio. Watsa’s ownership stake in the business is ~8%. KW currently trades at $21.51 and his cost-basis is $11.90.Note: The original stake is from a 2010 private placement for Kennedy Wilson convertible preferred stock. The total investment from that point on was $645M. Over the years they received distributions of $625M and so the net investment is only $20M compared to the current value of ~$170M.Overstock.com Inc. (OSTK): OSTK is a top-five position at 3.36% 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 $16.02.POSCO ADR (PKX): PKX is a very small 0.56% of the US long portfolio stake established in Q3 2015 at prices between $34.64 and $50.83. The stock currently trades at $48.85.Baldwin & Lyons Inc. (BWINB): BWINB is a very small 1.57% of the portfolio position kept steady this quarter. It is a very long-term holding that has been in the portfolio since before the financial crisis.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), CSX Corporation (CSX), Cvent Inc. (CVT), General Dynamics (GD), K12 Inc. (LRN), Leucadia National (LUK), Lexmark Intl. (LXK), National Oilwell Varco (NOV), New Oriental Education (EDU), Pfizer Inc. (PFE), Rayonier Advanced Materials (RYAM), Turquoise Hill Resources (TRQ), US Bancorp (USB), USG Corporation (USG), and Wells Fargo (WFC).The spreadsheet below highlights changes to Watsa’s US stock holdings in Q2 2016:Per Q1 2016 Interim Report & earnings call transcript: Equity Hedges: At March 31, 2016 equity hedges with a notional amount of $7,049.9M (December 31, 2015 - $5,894.8) represented 107.2% (December 31, 2015 - 100.3%) of the company's equity and equity-related holdings of $6,575.7 (December 31, 2015 - $6,687.4). Book Value: $398.83 per basic share on March 31, 2016 compared to $403.1 as of December 31, 2015. Investment Portfolio: $28.6 billion on March 31, 2016 compared to $27.8 billion as of December 31, 2015. Cash: As of March 31, 2016, $5.25 billion (18.3% of investment portfolio) in cash and short-term investments compared to $6.64B (23.9% of investment portfolio) as of December 31, 2015. CPI linked derivative hedges against deflation: At March 31, 2016 these contracts have a remaining weighted average life of 6.3 years (December 31, 2015 - 6.6 years), a notional amount of $112.1 billion (December 31, 2015 - $109.4 billion) and a fair value of $228.9 (December 31, 2015 - $272.6). The company’s CPI-linked derivative contracts produced net unrealized losses of $54.6 in the first quarter of 2016, compared to net unrealized gains of $75.2 in the first quarter of 2015Info from 2015 Letter: Record low underwriting combined ratio of 89.9% overall. Book Value - $403 - has compounded at 21.2% (including dividends) from 1985. Size of investment portfolio - $29B. Equity Hedges & deflation hedges thru CPI linked derivative contracts. The contracts have 6.6 years to maturity, has a notional value of $109B, $656M cost, and market value of $272.6M.Regulatory Filings thru 5/13/2016: RFP - 13D/A on 5/13/2016 - 29,485,689 shares - 32.9%."