by Thomspon Clark, Mauldin Economics
We all know Berkshire Hathaway, billionaire Warren Buffettâs wildly successful holding company.
Shares of Berkshire have soared 600% since 2000, making a lot of people rich in the process.
People call Buffett the âOracle of Omahaâ for his investing savvy, which has helped make Berkshire one of the worldâs largest public companies.
When you think of it, you probably think of the household names it owns. Like Seeâs Candy, Fruit of the Loom, Dairy Queen, and Duracell.
Theyâve all contributed to Berkshireâs success. But the bulk of its growth came from one sector: Insurance.
- Without insurance, Berkshire would never have grown into the $600 billion company it is today.
It owns GEICO, National Indemnity Company, and many other insurers. Altogether, insurance makes up roughly 25% of its pre-tax profit.
Berkshire follows a straightforward model here. It takes control of an insurance company and starts collecting insurance premiums. Then, instead of investing those premiums in boring securities like bonds, it puts them in higher-returning investments like stocks, real estate, and private businesses.
Fifteen years ago, insurance made up more than half of Berkshireâs earnings. Thatâs declined in recent years as Berkshire acquired railroads and other businesses. But insurance has been a key driver of the companyâs success.
Here at Smart Money Monday, I share one great investment idea to kick off your weekâoften an âundiscoveredâ stock that most investors havenât heard of yet. Today, Iâll share why Iâm putting my money on Canadaâs answer to Berkshire Hathaway.
- Prem Watsa isnât a household name in the USâŚ
Your average Canadian probably hasnât heard of him, either. But experienced investors up north know him as the âOracle of Toronto.â
Thatâs because Watsaâs company, Fairfax Financial Holdings (FRFHF), follows the same model as Berkshire Hathaway. It owns a slew of insurance companies. And it puts the premiums it collects in higher-growth investments.
Watsa founded Fairfax in 1985 as a small insurance company. Since then, heâs grown it into a $12 billion insurance conglomerate.
- Iâve been following Fairfax Financial for yearsâŚ
I flew in for its annual meeting in Toronto in 2016 and 2017. Both times, I left even more impressed with the company that Watsa and his team have built.
That kind of boots-on-the-ground research is routine for me. Whenever possible, I want to meet the people running the show. That means a lot of air miles. Especially because bottom-up stock picking, like we do here, is a numbers game. You have to turn over a lot of rocks to win.
Iâve dissected over 1,000 stocks in my career. I have fat folders on each one. Of course, most never make the cut. And with many others, I have to sit and wait for the right opening⌠the right âbuy signal.â
It takes pickiness. And it takes patience.
Cleveland-Cliffs (CLF) is a great example. I followed the company and its brash CEO for over 7 years before recommending the stock. Or Franchise Group (FRG), which I stalked for 3-plus years before recommending it.
- Now I see the buy signal Iâve been waiting for with FairfaxâŚ
For starters, the stock is the cheapest itâs been since the financial crisis.
Then thereâs the business in IndiaâŚ
See, Fairfax recently released its second-quarter earnings. And I found a critical piece of information buried in the press release.
One of Fairfaxâs holdings, and Indian insurance company called Digit, just became a lot more valuable. Digit recently raised a ton of money from a handful of venture capitalists. This pushed its implied total value over $2 billion. But Fairfax still has Digit on the books at $540 million.
The change wonât show in Fairfaxâs financials until it releases its third-quarter results. When that happens, it should increase the companyâs book value by $61 per share. Thatâs an 11% increase.
This might seem like a minor detail. But itâs a major buy signal for an insurance company like Fairfax.
- CEO Prem Watsa bought $150 million worth of Fairfax stock not too long agoâŚ
Watsa has built his career on shrewd stock picking. Itâs a big reason Fairfax has done so well over the past 35 years. And last year, he made a massive wager on the company he knows bestâhis own.
Insiders buy for one reason: They think the stock will go up. Itâs fairly common to see insider purchases worth a few million dollars. But $150 million? Thatâs extremely rare.
Itâs also a great sign.
Shares of Fairfax have already climbed about 40% since the purchase. But my research indicates they still have a lot more room to run.
- Remember, this stock is still extraordinarily cheap.
Today, Fairfax trades at around 0.75X price-to-book. That is just too cheap for a high-quality insurance company.
As a reference point, Berkshire Hathaway trades at a substantial premium to its book valueâaround 1.4X. Were Fairfax to even approach a more reasonable 1.2X price-to-book, the stock would have nearly 60% upside from current prices.
I like the setup here. Fairfax Financial is a solid, well-established company with a formidable CEO. But its stock is still undiscovered by most investors.
I just saw the buy signal Iâve been waiting for. Consider picking up shares now while theyâre still ultra-cheap.
âThompson Clark
Editor
P.S. Weâll take a closer look at Fairfax's robust business in India in the next issue of Smart Money Monday.
