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Fairfax Financial: Should You Follow This Insider Trade?

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In July 2020, I tipped readers off to the biggest insider purchase I had ever seen.

The CEO of the Canadian reinsurer Fairfax Financial (OTC: FRFHF) had just spent $150 million of his own money to buy shares of Fairfax.

Clearly, this was not just a trivial insider purchase that was done so the CEO could say he believed in his own stock.

This was a massive insider purchase that could have been done for only one reason…

The CEO, Prem Watsa, believed his company was incredibly undervalued.

But we actually didn’t even need to speculate on the reason for Watsa’s purchase.

Because the purchase was so enormous, Fairfax was obligated to issue a press release. In that release, Watsa said…

At our [annual general meeting] and on our first quarter earnings release call, I said that our shares are “ridiculously cheap.”

That statement reflected my recognition that in the 35 years since Fairfax began, I have never seen Fairfax shares sell at a bigger discount to their intrinsic value than they have recently.

I have now backed up my strong words by purchasing close to US$150 million of Fairfax shares in the market over the last few days, as I believe that this will be an excellent long-term investment.

Watsa’s average purchase price was $308 per share.

That turned out to be a steal of a deal, and the man has made a boatload of money.

Since he bought at $308 a little more than three years ago, Fairfax shares have steadily increased and are now trading at well over $850 as I write.

That investment by Watsa has outperformed the S&P 500 by more than 6X over that time.

Prem Watsa

Watsa’s $150 million investment in 2020 is now worth over $400 million.

That means he’s made over $250 million on this trade alone!

Are Fairfax Shares Still Attractive Today?

Historically, Fairfax has traded at close to 1.2 times its book value.

But when Watsa made his $150 million investment, Fairfax was trading at just 0.7 times book value. That was a big discount to the historical norm.

Right now, Fairfax is trading at 1.1 times book value.

Fairfax Financial Holdings Ltd Price to Book Value

While that is slightly below the company’s historical valuation, it certainly isn’t the deeply discounted valuation that prompted Watsa to make his massive purchase.

This increase in the company’s valuation is one of the reasons Watsa’s 2020 investment has been so successful. But it isn’t the only reason.

Book value itself has also grown in a major way.

Fairfax Financial Holdings Ltd Book Value (Per Share)

Fairfax’s book value per share has more than doubled from $409 at the time of Watsa’s purchase to $834 today.

This powerful combination of the business more than doubling its value and the market finally applying a more reasonable multiple to that value is what has made Watsa $250 million!

With the stock now trading just a little bit under Fairfax’s historical price-to-book (P/B) ratio of 1.2, the company clearly isn’t the incredible bargain it was in mid-2020.

But thanks to Watsa’s ability to grow the company’s book value and its still reasonably attractive P/B ratio, The Value Meter rates Fairfax Financial as being “Slightly Undervalued.”

The Value Meter

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