FFH | Profit-taking Seems Unlikely On The Basis Of Relative Value
Event: We are revisiting Fairfax’s valuation in the context of an exceptional run-up in the shares on a YTD basis.
Our Take: Fairfax shares have advanced 43% YTD making it the best-performing financial services name in Canada by a fairly wide margin. We would attribute the
strong relative performance to a variety of factors including (but not limited to): 1) demonstrating consistently positive underwriting margins; 2) a sizeable step-up in
run-rate dividend and interest income (owing partly to higher market yields but also a rotation of the investment portfolio from cash to fixed income); and 3) a de-
risking of portfolios which benefits the P&C insurers as investors rotate away from credit-sensitive names and into more defensive names like the P&C insurers.
Despite the strong run, we note that Fairfax still trades towards the bottom end of the peer group range on the basis of P/B and P/E. In this context, we see little
incentive for profit-taking on the basis of relative value, and continue to promote shares of Fairfax as a higher-conviction Outperformer-rated name.