Progressive: Stronger Performance, Lower Price, Reduced AV Risk
This is an update on Progressive (PGR), but I will begin with a short preface.
I have added to two long-term positions, Fairfax and Progressive, and remain committed to long-term compounding through superior businesses at attractive prices.
It is no secret that I consider Fairfax (FFH, FRFHF) one of the best long-term, risk-adjusted opportunities, given its current price and fundamentals. Having recently published two articles on it (here and here), there is little left to add. And still a couple of points worth mentioning…
Fairfax was ~10% down when I published my last piece, where I speculated that Fairfax trades so low because investors remain cautious in the current soft insurance market. After I posted, it occurred to me that some investors may also be concerned about Fairfax’s TRS (Total Return Swap) position on its own stock. Since FFH is down YTD, the TRS causes investment losses to be accounted for in Q1. So the stock being down may further discourage investors from buying it.
This logic seemed unlikely to me until I came across a BMO analyst’s opinion on TIKR a couple of months ago as one of the reasons for Fairfax’s downgrade:
Much of FFH’s recent outperformance came from buoyant markets and an unusually large boost from its total return swap on shares
So the tail wags the dog. If it is something you are concerned about, think twice. When Fairfax’s stock drops, the company increases buybacks, which eventually lead to growth in the stock’s value, a recovery in the stock price, and a higher contribution from the TRS. Stock declines are good for long-term investors, and the mark-to-market TRS should not affect one’s thinking.
By the way, I have never properly explained Fairfax’s TRS with its subtleties and comparison to buybacks. Please let me know in the comments if you think it is necessary.
The second point refers to how I think about Fairfax compared to other stocks in my portfolio. It is now my #4 position, driven by my continued additions and the depreciation of several other financial stocks (yes, this year has been a tough one for financials so far). I am ready to increase my Fairfax exposure without visible limits as long as it trades meaningfully below its intrinsic value per my model. For all other stocks, except for Berkshire Hathaway, I do have limits. But due to its size, Berkshire is unlikely to deliver returns comparable to Fairfax’s in the long run.
Progressive
I keep nibbling on Progressive, driven by its price and the emergence of new, material information from its earnings call. Today, I will share my rationale, following the outline below:
Update on intrinsic value
Progressive’s financial management and the jump in buybacks — reasons, metrics, and consequences.
Progressive’s investment management and its targets.
How the company evaluates the existential risk of AV disruption with new material information.
Conclusion on how attractive PGR is at its current price.