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Fairfax’s Torstar investment scores points for value

Flint knapping was an important skill many years ago and then technological change made it obsolete. But, in a strange twist of fate, it has been making a bit of a comeback thanks to the Internet. It's now easy to learn how to knock out an arrow tip the old-fashioned way.

While the Internet is a great boon to hobbies such as flint knapping, it's knocking the stuffing out of some businesses. Newspapers are a case in point. They've suffered mightily due to a shift in the advertising market and the ubiquity of free content.

The past few years have been particularly hard on the industry, and the financial crisis of 2008 was the last straw for many newspapers. Those that survived are but shadows of their former selves. As a result, the idea of buying newspaper stock seems preposterous.

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But Fairfax Financial's Prem Watsa thinks otherwise. His firm recently snapped up an additional 3.4 per cent of Torstar Corp.'s class-B shares and it now owns roughly 22.7 per cent of them. That represents a large stake in Torstar, but the position is only a small fraction of Fairfax's common-stock portfolio, at about 2 per cent. (Full disclosure: I own a few shares of both companies myself.)

Mr. Watsa's focus on downtrodden stocks has served him well over the years. His firm's common-stock portfolio has advanced by 13.5 per cent annually over the 15 years ending Dec. 31, 2012.

His reputation as a savvy investor helps to explain why Torstar's stock moved sharply higher after his latest purchase, at $5.35 a share, was announced on March 20, 2014. Copycat investors have already pushed up the media stock to $6.90 a share.

Before jumping in, it's important to remember what happened after Mr. Watsa snapped up Reitmans (Canada) Ltd. for $6.35 a share in December. The downtrodden retailer's shares briefly bounced up to more than $7 a share on the news and then they slipped back. More patient investors were able to buy the stock for less than $5.70 a share this week.

Torstar is best known for its flagship newspaper the Toronto Star, but it's better thought of as a print-heavy media conglomerate. It generates about a third of its sales in book publishing, and its community newspaper group represents another significant business. It also has an interest in several popular online businesses.

Mr. Watsa recently bought the stock for roughly 54 per cent of book value and at 5.4 times average earnings estimates for the next 12 months, according to S&P Capital IQ. Those are attractive metrics for many value investors.

Less positively, the media company lost $28-million over the past year. Its bottom line was hurt by large writedowns that saw its intangible assets decline by $77-million.

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Torstar's poor growth record is also worrisome. Over the past five years, revenues have declined by 3.1 per cent annually, gross profits are down by 11.8 per cent annually and cash flow from operations has slumped by 8.0 per cent annually.

Some income-hungry investors might be attracted to the stock's 7.6-per-cent dividend yield. But they should be aware that Torstar hasn't been shy about reducing its dividend in hard times. It might do so again.

For better, or worse, Torstar's business will have to adjust to the changing world. Its ability to do so remains an open question.

But I think the market has overreacted to the situation. If it has, Mr. Watsa stands to make a tidy profit on the stock. On the other hand, the newspaper business might be doomed. In the latter case, I can only say that I've enjoyed my time as a modern-day flint knapper.

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About the Author

Norman Rothery, Ph.D., CFA, is the founder of StingyInvestor.com and has been catering to value investors since 1995. He publishes the Rothery Report, a value stock newsletter. Norm obtained a Ph.D. in atomic physics from York University before following his passion for investing. More

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