Fairfax Financial Holdings Ltd. FFH-T pushed back Monday on allegations by short-seller Muddy Waters Research, calling them “false and misleading.”
In a report last Thursday, Muddy Waters said it believes Fairfax has overstated its balance sheet by US$4.5-billion due to accounting choices or transactions involving 13 of its investments, subsidiaries or joint ventures. Muddy Waters also questioned how Fairfax implemented a recent insurance industry accounting standard, IFRS 17, saying the company obtained far better results than typical property and casualty insurers.
In its statement Monday, Fairfax did not explain any of the transactions Muddy Waters highlighted, but instead offered a broader defence.
“To the best of our knowledge, Muddy Waters has never attended our conference calls and never asked a question, called us or written to us, but instead went to CNBC during our quiet period with these one-sided, ill-informed allegations and insinuations in a transparent attempt to profit by short selling our stock,” Fairfax said in Monday’s statement.
“They may have successfully done this with other companies, but they have woefully misjudged the strength of Fairfax’s financials and prospects and we are confident the marketplace will reflect our strong fundamentals.”
Fairfax stock closed up nearly 5 per cent Monday at $1,323.40 per share, but has not returned to last Wednesday’s closing price of $1,405.35, prior to the short report.
In a statement Monday, Muddy Waters said: ”We look forward to a substantive response from Fairfax that actually addresses our findings.”
Muddy Waters, as a short-seller, profits when a stock falls. Short-selling is a bet that the share price will drop, with an investor borrowing shares, selling them and repaying the loan by returning new shares, hopefully bought at a lower price.
The report is not Fairfax chief executive officer Prem Watsa’s first dance with the shorts. In 2006, Fairfax sued a group of prominent hedge fund managers, contending they had orchestrated a multiyear campaign to spread disinformation about Fairfax’s business model. Twelve years later, a judge dismissed the case.
Muddy Waters is best known in Canada for issuing a devastating report in June, 2011, claiming Chinese-Canadian timber company Sino-Forest Corp. was a fraud. The company claimed to be one of the leading tree growers in China, then slid into bankruptcy less than 12 months later. But Muddy Waters founder Carson Block’s most recent Canadian short report, a 2018 thesis involving a lawsuit against Manulife Financial Corp., was a swing and a miss.
In its report Thursday, Muddy Waters said 60 per cent of the increase in Fairfax’s book value since 2017 “is the product of abusive accounting often from value destructive, non-substantive transactions.” The book value, the excess of a company’s assets over its liabilities, is overstated by 18 per cent, the firm argues.
Mr. Watsa has often been called “the Warren Buffett of Canada” because Fairfax follows a business model similar to Buffett’s Berkshire Hathaway Inc., using premiums from its wholly-owned insurance companies to make investments outside of that industry, preferably in undervalued businesses. Berkshire Hathaway and Fairfax are both typically valued by investors at a multiple of book value, meaning any increase in the measure ought to drive the companies’ share prices higher.
In its report, Muddy Waters said Fairfax is more like General Electric Co., whose stock has suffered for years as it unwound the excesses of its GE Finance division.
“We are neither Berkshire Hathaway, nor GE, as Muddy Waters suggests,” Fairfax said in a portion of the statement attributed to Mr. Watsa. “We are Fairfax, a strong and enduring company built over 38 years … We strive to provide excellent returns to shareholders, and are committed to providing full disclosure in our annual report, highlighting both our pluses and minuses.”
Mr. Watsa said over 38 years, Fairfax’s book value per share has compounded by 18.9 per cent annually and its stock price at 18.0 per cent. Out of 6,000 companies listed in the U.S. in 1985, when Fairfax began, fewer than 20 companies have a similar record, he said. “Moreover, as those following Fairfax more closely are aware, the foundation of our operating income … is stronger than ever, and bodes well for the future.”
Fairfax said it will answer more questions about the Muddy Waters allegations in its fourth-quarter earnings call on Friday.
David Milstead