Is This Company the Next Berkshire Hathaway?

Don't you wish you had owned Berkshire Hathaway (NYSE: BRK-B  ) 40, 20, 10 -- even five years ago? You can't get through the famous shareholder letter without seeing that 46-year average of 20% compound annual growth.

But there's a stock out there with a record that's shaping up to be even better than Berkshire's, and its only 26 years into its run.

Bring home the Canadian bacon
Canada: a land of beauty, history, and a cash-printing insurance company. Toronto-based Fairfax Financial Holdings (OTC: FRFHF.PK) is a quiet but powerful company run by Prem Watsa, a man who has molded himself in the image of the Oracle of Omaha. The company went public in the early 1980s at $4 per share and now trades a sliver under $400. Few people talk about it, because Watsa is a recluse rarely making headlines, unlike media darling Buffett. So it makes sense that this value investor extraordinaire and his company are underfollowed.

Who'sa Watsa?
Indian-born Watsa is known as the Oracle of Ontario. As one can assume with that nickname, the chief executive has an undeniably stellar track record. One of his most lucrative bets was against the U.S. housing market a few years ago. More recently, Fairfax took a 9% interest in the Bank of Ireland (NYSE: IRE  ) . The deal was viewed by many as a risky bailout bet, but so far the deal has earned Watsa nearly a 30% return on his $387 million investment.

While Fairfax's underwriting business tends to operate at an annual loss, Watsa's investing prowess has earned the firm consistent double-digit returns.

A Berkshire of a different name
So how close is Fairfax to looking like a mini-Berkshire? Pretty close. Where Berkshire has the edge is in its underwriting. The company manages the impressive feat of operating at breakeven or net profits for its underwriting business -- giving Buffett essentially free money to invest. Berkshire's near-zero cost of capital is one of its unique beauties. 2011 was particularly bad due to an increase in natural disasters around various parts of the globe. The Japanese earthquake, Thai flooding, and U.S. tornados strongly affected many of Fairfax's subsidiaries.

Berkshire trades at roughly 1.2 times its book value, whereas Fairfax looks cheaper at 1.08 times book. While 2011 was a rough year for Fairfax, with a net loss per share, the year before that the company earned more than $14 per share. I believe 2011 was an isolated event and not an indicator of Fairfax's long-term prospects.

Researching motion
Fairfax's recent 5% stake in Research In Motion (Nasdaq: RIMM  ) and the addition of Watsa to the company's board of directors could be its most controversial move to date. As is now evident, I believe in Watsa's ability to find value in troubled companies. He is an incredibly skilled deep-value investor and even a great macro player. Yet I am having a little trouble seeing the rationale in this move. Research In Motion is a tough company to like these days. It was good to see the co-CEOs step down, as they were cremating the company and spreading its ashes all over the place, but with products struggling to compete with the current line of iPhones and Android devices, the company has a long way to go if it wants to turn things around.

Furthermore, Watsa is not known as an activist. He prefers to be passive in his investments and let his skilled analysis speak for itself. How active will he be as a board member? Will he encourage a spinoff or liquidation of the consumer goods segment and focus on the company's bread-and-butter corporate business? I am cautious to question the motives of one of the best investors out there, but this half-billion-dollar move weighs heavily in my analysis of the company.

Survey says...   
Aside from the Research In Motion bet, I am a firm believer in Watsa and Fairfax. Not only that, but after 2011's lackluster performance, the stock has tumbled about 10%. When a great company with excellent management gets hit with some bad news and negative sentiment, I smell opportunity.

Even Berkshire has had its tough years over the past 46, yet one cannot argue with its absolute return of more than 513,000% since inception. Will Fairfax attain that ludicrous return? Probably not, but I'll settle for half of that -- or a quarter.

I follow the investors who achieve the best returns, like Prem Watsa. If you want to be a good investor, why wouldn't you? You can follow what some other all-star investors are doing by checking out The Motley Fool's special report, "The Stocks Only the Smartest Investors Are Buying." Simply click here for free access.

At the time this article was pubished, Fool contributor Michael Lewis owned none of the abovementioned stocks. The Motley Fool owns shares of Berkshire Hathaway and Governor and Company of The Bank of Ireland. Motley Fool newsletter services have recommended buying shares of Fairfax Financial Holdings and Berkshire Hathaway. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (10) | Recommend This Article (41)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 20, 2012, at 2:20 PM, skeefe17 wrote:

    Actually I'm glad I haven't owned BRK.B in the past 5 (flat) or 10 (less than a double) years. Not very foolish returns. Fairfax has had much more impressive returns in that time frame but if we are talking about getting in early it would be nice to know that the 62 year old Watsa has planned rather than be left to assume he's going to work as long (and remain as healthy and sharp as Buffet). Even with prostate cancer Buffet is out performing his peer group on health too!

  • Report this Comment On April 20, 2012, at 2:44 PM, XMFMadMardigan wrote:

    Well if Watsa follows eastern plant based diet principles, he is statistically way better off than Buffett. I think we are on to some great fundamental analysis here...New article: What are the best investors eating?

  • Report this Comment On April 20, 2012, at 4:04 PM, constructive wrote:

    I follow Buffett's principles with one exception: Vanilla Coke is better than Cherry Coke.

  • Report this Comment On April 20, 2012, at 7:33 PM, XMFTheGuruEbby wrote:

    Great article. One thing I would point to that makes Watsa slightly different than Buffett is the $10 per share dividend that Fairfax is currently paying. The Oracle of Omaha would find something better to do with that $350 million a year. But otherwise, Watsa seems legit.

    Add Fairfax to the list of potential Berkshire Hathaways with the Markels and Biglari Holdings of the world.

  • Report this Comment On April 21, 2012, at 1:20 AM, XMFMadMardigan wrote:

    I certainly agree with you that Buffett would do more with that money than pay it out in a dividend. No argument there. But seems to be in it for personal gain--an egoist. He's an incredibly smart guy, like Eddie Lampert, but is he a true shareholder champion? who knows.

  • Report this Comment On April 21, 2012, at 8:43 PM, jerryz11 wrote:

    I certainly wouldn't put Biglari in the same league as watsa, Gaynor, or Buffett. His compensation seems very hedge fund-like excessive.

  • Report this Comment On April 22, 2012, at 12:20 PM, MTC119 wrote:

    Question this investment re FairFax given its financial restatements back in 2006. Fundamental issues regarding controlling operations and financial reporting. What provides us the assurance that issues will not surface again?

  • Report this Comment On April 28, 2012, at 8:44 AM, jillybeansisme wrote:

    I do believe the writer means BRK/A shares, not BRK/B shares, since the latter have not been around 5, 10, 20, or 40 years.

  • Report this Comment On May 09, 2012, at 1:07 PM, jpdud wrote:

    I am trying to decide between Markel and Fairfax. Roughly similar companies. Any thoughts?

  • Report this Comment On May 17, 2012, at 1:06 PM, cbglobal wrote:

    Matt... You cannot see what Watsa sees in RIM. Watsa is a self make multi-billionaire. You are not.

    There is your answer.

    As you say; RIM is a tough company to love. Loved company's do not sell at deep value prices. Hated ones do.

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