A Cheap Financial Stock for Extraordinary Price Gains

Fairfax Financial Holdings Ltd. (TSX:FFH) is a curious stock that moves differently from the U.S. and Canadian stock markets. This potentially makes Fairfax a good candidate to trade while adding diversification to investors’ stock portfolios.

The Business

Fairfax’s business model is similar to Berkshire Hathaway’s (NYSE:BRK.A)(NYSE:BRK.B). It has an underlying insurance business that generates float as a source of low-cost capital to invest for higher returns. Fairfax’s insurance businesses operate on a decentralized basis, which allows Fairfax to focus on capital allocation.

In the first half of the year, Fairfax’s insurance businesses were profitable. It had a consolidated combined ratio of 96.9% for its insurance operations. The combined ratio of <100% implies profitability.

According to Prem Watsa, the chairman, CEO, and founder of Fairfax, the company can achieve a 15% return on shareholders’ equity with a 95% combined ratio and a 7% return from the investment portfolio.

Fairfax’s Diversified Investment Portfolio

At the end of Q2 2019, Fairfax held more than US$10 billion in cash and short-term investments and more than $16 billion of bonds against roughly US$5.5 of common stocks. It also had US$2.75 billion invested in emerging markets of India and Africa via Fairfax India Holdings Corp. (TSX:FIH.U) and Fairfax Africa Holdings Corp. (TSX:FAH.U), which can lead to greater long-term returns.

The US$10 billion in cash and short-term investments offers liquidity for the company to take advantage of future downturns in the markets.

It’s important to emphasize that Fairfax’s stock portfolio only makes up roughly 14% of its entire investment portfolio.

Unfortunately, we have maxed the word limit for this excerpt. But you can read the Seeking Alpha article (with images and graphs) here: It’s Time To Trade Fairfax Financial Again

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Disclosure: As of writing, we’re long FFH and BRK.B.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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