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Jan 27, 2021

BlackBerry revival rewards Watsa's faith with US$1.2B gain

BlackBerry and GameStop valuations show some sanity in recent spike

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Day traders have pushed BlackBerry Ltd.’s share price to levels not seen in more than nine years. They’ve also given a jolt to a Canadian investment company that got crushed in last spring’s market crash.

BlackBerry soared as much as 52 per cent Wednesday in New York after a brief trading halt. The stock reached its highest level since 2011, and is up about 300 per cent this year. That is repaying the patience of Prem Watsa and his Fairfax Financial Holdings Ltd., which owns 8.3 per cent of the software firm’s shares, according to data compiled by Bloomberg.

Once the toast of the mobile tech world, BlackBerry failed to keep pace with competitors including Apple Inc. and the stock lost most of its value in 2010 and 2011. Around that time, Watsa, a value investor who has tried to model Fairfax after Berkshire Hathaway Inc., began building a large stake, which also includes convertible debentures with a conversion price of US$6 each that could be turned into 55 million shares.

The run-up in BlackBerry shares this year would drive a pretax gain of about US$1.16 billion for Fairfax in the first quarter, Phil Hardie, a Toronto-based analyst at Bank of Nova Scotia, told clients in a note before markets opened on Tuesday. Hardie upgraded his recommendation on Fairfax’s shares to a buy-equivalent.

Fairfax closed at CUS$488.94 on Tuesday. With a 12.7 per cent gain as of Tuesday’s close, it’s the best-performing financial stock in the S&P/TSX Composite Index this year after being one of the worst in 2020 with a 29 per cent drop.

Scotiabank’s most bullish scenario for Fairfax “implies almost 50 per cent upside and assumes that the stock sheds its valuation discount and trades at book value, with Fairfax locking in recent gains in BlackBerry through hedging or monetizing its position,” Hardie wrote. Fairfax didn’t respond to a request for comment.

Watsa has been waiting for such a payoff for years. Fairfax even organized a bid to take BlackBerry private in 2013 -- the same year the latter changed its name from Research In Motion Ltd. -- then abandoned it in favor of a bond deal and management shakeup that brought in John Chen as chief executive officer.

Despite an unrealized loss of US$50 million on the investment as of 2019, Fairfax’s letter to shareholders last March made clear Watsa still believed in the CEO, who has focused BlackBerry on enterprise software. “We continue to support John Chen as he works diligently to make BlackBerry a growth company again,” Watsa wrote.

The sudden rise has been partly fueled by Reddit forums and social media channels where retail speculators seek out unloved or heavily-shorted stocks like GameStop Corp., hoping to drive them up quickly.

RBC Capital Markets downgraded its recommendation on BlackBerry to a sell-equivalent Tuesday, citing the torrid rally and unchanged fundamental outlook. Analyst Paul Treiber kept his price target at US$7.50. Scotiabank also elected to cut BlackBerry’s stock rating to a sell-equivalent early Wednesday, as analyst Paul Steep calling the share run “overdone.”

Short interest in BlackBerry is 7.6 per cent of float, according to data compiled by S3 Partners.

Watsa, 70, founded Fairfax in 1985, following Warren Buffett’s strategy of using insurance float as a way to build an investment portfolio. With a market value of more than CUS$14 billion it’s a fraction of Berkshire’s size, though it’s more than twice as large as buyout firm Onex Corp.