Prem Watsa Warns Of Bubbles In Dot-com


Fairfax Financial Holdings Ltd (TSE:FFH) Chief Prem Watsa says there’s a world of hurt coming for investors who are in on the dot-com bubble right now. According to Bloomberg Businessweek he suggested that Twitter Inc (NYSE:TWTR), Netflix, Inc. (NASDAQ:NFLX) and Facebook Inc (NASDAQ:FB) are all overvalued. ValueWalk confirmed the comments after speaking to three shareholders who attended Watsa’s conference for investors.

Prem Watsa sees no value in dot-coms

Speaking at Fairfax Financial Holdings Ltd (TSE:FFH)’s annual meeting today, the well-known investor says there’s “nothing underlying the value of these companies.” He referenced a chart showing the price to earnings ratios of Twitter Inc (NYSE:TWTR), Netflix, Inc. (NASDAQ:NFLX) and Facebook Inc (NASDAQ:FB). Watsa believes that the bubble “will end in tears” and notes that the last time there was a similar situation was in the dot-com era.

He’s not the only investor worried about momentum stocks, many of which have been technology stocks recently. The momentum has fallen out of the market over the last few weeks or so, although some stocks started to pick up again, like Facebook Inc (NASDAQ:FB), which led the NASDAQ higher today with its more than 7% gains.

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The NASDAQ 100 Index declined the most in two years on April 4 but then turned around and increased on Tuesday and today.

What about BlackBerry?

Watsa also said he continues to believe in BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB), a company in which Fairfax Financial Holdings Ltd (TSE:FFH) is the largest shareholder. Watsa tried to take the struggling Canadian handset maker private last year but was unable to line up the necessary financing to do i. Instead, he ended up financing the company with a number of partners.

Speaking at the shareholder meeting today, Watsa said he still believes BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) is a good value investment and that the company’s performance will improve gradually in time. Last month in his annual shareholder letter, Watsa expressed support for new executive chairman John Chen.

He also compared the market value of BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) and Twitter Inc (NYSE:TWTR) at that time, noting that with $8 billion in revenue and $2.6 billion in cash, BlackBerry had a market value of $3 billion. Twitter, on the other hand, had $665 million in revenue and losses of $645 million but a market value of $18 billion.

Watsa warned about bubbles in China’s real estate, construction

Last month Prem Watsa also warned about what he called the “monstrous real estate and construction bubble in China.” He said the bubble could burst at any time and that it nearly did in 2011. However, he said China significantly increased its credit growth, thus averting that disaster. He noted that home ownership rates in China are more than 100%, compared to the U.S. rate of 65%. He said many cities report ownership of more than 200% and says this is only possible because of unrestrained credit growth.

ValueWalk attended the conference and noted the following points from Prem Watsa regarding China.

  • Prem Watsa thinks china story will end badly:
  • Country Built 50 manhattan sized cities 
  • Shadow banking system is larger % of china GDP than the us system was of GDP in ’07 
  • But, Watsa believes India is a great opportunity for investment
  • Due to risks from the social media bubble and China, he is maintaining deflation bet even though incurring significant mark to market losses

UPDATE 5:40PM EST some more (informal) notes from the conference

Looking at some natural gas cos, but prices are not compelling, thinks oil company shares reflect elevated price of oil
Spoke about the deflation story and referenced Japan’s lost decade as a case study
Discussed their  5 year equity returns and how they have trailed the s&p because they are 100% hedged. Mentioned Fairfax’s permanent capital ,long-term mindset and shareholder base that tolerates periods of underperformance.
Also said most of the underperformance is due to the speculative run in the market in ’13, and that relative performance would look different without 2013
Mentioned that he believes 15% annual growth in book value is doable going forward, even though they have not done 15% in past years..