Invest Alongside Prem Watsa

Scraping together enough coin to win the annual luncheon auction with Warren Buffett is probably beyond most investors' means. With the proceeds going to charity, this year's winning bidder forked over $2.63 million for the privilege.

Feast or famine
While we likely can't afford to break bread with the greats, we can peek at their stock ideas through their SEC filings. Here, we'll pore over some of the top investors' reports to see which stocks they've chosen as their best investments. We'll then check in with Motley Fool CAPS members to learn whether they agree.

First, a few caveats ...

  • There's a delay between when the stocks were bought and when these investors filed their paperwork, so they might have sold out since.
  • These legends may be hot investors now, but that can change in an instant. Bill Miller was a wunderkind after beating the market 15 years in a row. Then he went cold for three. He came back in 2009, but we don't know what 2010 will bring.

Contrary to popular opinion
Fools should definitely do their own further research here. But in the meantime, let's take a look again at Prem Watsa of Fairfax Financial, who is called the "Canadian Warren Buffett." When we last looked at Watsa's portfolio he was focusing on financials, information technology, and health care. Let' see if he's changed directions.

Fund: Fairfax Financial
No. of Stocks Owned: 49
Top 5 Holdings: Johnson & Johnson, Wells Fargo, Kraft, Dell, US Bancorp
Top Sectors: Financials, Health Care, Consumer Goods, Telecommunications, Technology

Although a lot has remained the same at Fairfax there's plenty of change, so let's look closer at a few of his most recent choices below.

Stock

Average Price

Current Price

% Chg

CAPS Rating (out of 5)

Duke Energy (NYSE: DUK  )

$16.32

$17.16

5.1%

****

MBIA (NYSE: MBI  )

$7.69

$8.91

15.9%

*

PPL (NYSE: PPL  )

$26.09

$26.65

2.1

****

Source: GuruFocus and Motley Fool CAPS.

Price is what you pay
Wind might be one of our future sources of renewable energy, but not if the hurdles being erected in front of those want to build windmills and wind farms keep getting higher. Duke Energy just backed out of a planned three-turbine demonstration project off the coast of North Carolina because the cost of building it would be prohibitive. Duke cited the costs of permits as one of the reasons for abandoning the idea, but also because it would have disturbed underwater vegetation, which suggests a whole raft of environmental battles it would have had to fight.

NRG Energy (NYSE: NRG  ) almost didn't get to build its wind farm off the coast of Cape Cod because of local opposition, meaning Siemens (NYSE: SI  ) would have lost out on a 130-turbine contract. Apparently the turbines associated with the farms are something other people have to contend with. NRG wants to build deepwater wind farms up and down the east coast and Duke still wants to building larger ones that would be more cost effective, but if regulatory, environmental, and legal barriers keep going up there will be less willingness on the part of utilities to engage in this blood sport.

CAPS member soonipi points out that Duke faces higher costs with its traditional sources of energy, let alone wind.

Longer term (2 years), however, capital requirements related to an aging fleet of power plants and more stringent environmental regulations, along with limited opportunities for revenue growth, will put severe pressure on DUK's cash flow and EPS making continued growth in the dividend very challenging.

It might be that utilities are a particularly undervalued sector, which is why Watsa also picked up PPL, which delivers electricity in the northeast and western U.S. Valuation is also what's apparently behind the spate of M&A activity in the sector, with PPL buying E.ON's U.S. unit and Dynegy (NYSE: DYN  ) going private. In fact, accounting firm PriceWaterhouseCoopers found deal value increased 14% in the second quarter with 21 deals valued at more than $50 million and four of the top 10 in excess of $1 billion.

Valuation is key for CAPS member WPThatcher who find PPL offers "cheap earnings," which underscores why 96% of those rating the utility believe it will outperform the market.

You can bank on it
Valuation no doubt also played a role in Watsa's purchase of beleaguered bond insurer MBIA, which along with peer Ambac Financial  (NYSE: ABK  ) struggles for survival. MBIA got a boost when Bruce Berkowitz of Fairholme Capital Management reported he had increased his stake in its business, raising his position to more than 11% of outstanding shares. It followed that up with a surprisingly strong earnings report that saw profits climb 45% as the far value of insured credit dividends surged.

Seemingly, the conga line of investing superstars backing MBIA is enough to attract other investors too, like Geofiz, who likes the risk-reward profile of the company too.

I was impressed by Bruce Berkowitz's investment in MBIA and in AIG. Yes, huge risk involved in both (especially AIG with the Federal government in the picture). However, these are situations in which there is much inherent value if the financial pitfalls can be negotiated. 

Value is what you get
Become an investing legend yourself by starting your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page.

Sign up today for the completely free service, and tell us whether these stocks are as good a value as these investing legends think they are.

Duke Energy and Johnson & Johnson are Motley Fool Income Investor recommendations. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. Try any of our Foolish newsletter services today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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