3. Discovery, Inc. (NASDAQ: DISCA)
Watsa’s Stake Value: $1,434,000
Percentage of Prem Watsa’s 13F Portfolio: 0.05%
No. of Hedge Fund Holders: 28
Discovery, Inc. (NASDAQ: DISCA) is a media company that offers content on various platforms in close to 50 languages worldwide. Fairfax added this stock to its portfolio in the latest quarter by buying 33,000 shares and it now ranks 3rd in the list of best stocks to buy in 2021 according to billionaire Prem Watsa.
The company recently announced revenues of $2,792 million in Q1 2021, representing a 4% increase compared to Q1 2019.
White Brook Capital, in its Q1 2021 investor letter, mentioned Discovery, Inc. (NASDAQ: DISCA). Here is what White Brook Capital has to say about Discovery, Inc. in its letter:
“Discovery Communications voting shares (DISCA) were sold in favor of swapping the stake with Discovery Communications non-voting C shares (DISCK). Discovery has three classes of stock with varying voting power but that share equally in the economics of the business. We initially owned the class A voting shares, that have a single vote per share because they traded within the range of its historical premium to the C shares, and it’s usually inconsequential which one owns. This is because Discovery’s board of directors is populated with members loyal to Dr. John Malone, the largest individual shareholder – therefore a shareholder’s vote which typically advises the board is relatively meaningless.
During the quarter, the premium the A shares traded for expanded significantly from the historical ~5% to almost 20%. This caused White Brook to swap our investment from the A shares to the C shares. We then continued to sell the stock as it increased in value, continuing to have a significant, but not full stake as the stock doubled during the quarter. While a 30-50% rise in the stock price from where it closed last year seemed reasonable for the year, in excess of 50% was excessive and the ~130% rise at its peak was irrational. After selling much of the position for a very healthy gain, I held on to a stake until peer ViacomCBS took advantage of its own even more impressive rise by issuing equity to cure it’s over indebted balance sheet. Believing the bubble to finally be deflating, I sold our remaining position. Several days later, Discovery fell precipitously as an over-levered Fund that had recklessly bought Discovery, ViacomCBS and several other stocks fueling their rise, “blew up”. At quarter end the stock was up ~35% year to date (although it has appreciated considerably in the early days of this quarter).
Exchanging Discovery’s A shares for C shares was the right move, despite the harmful tax consequences. Had we held the A shares for the exact same length of time, we would have made more money as 1) the spread between the A and C shares widened during our time owning the C shares and 2) the taxes of selling just our A shares would have been less significant than the long term capital gains we will endure on the A shares and the short term gain we recognized on the C shares. But by exchanging A shares for C shares, we owned the same company at a much cheaper price and it meant I could rationalize the price of the Company, longer. If it happened again, I would likely make the same exact trades. The process was correct, even if the outcome wasn’t ideal. I continue to like Discovery’s prospects, and we may re-enter the stock in the future if its valuation is again unreasonably cheap. It was a very good investment for the Firm even without the extraordinary run. The extraordinary additional returns added almost 1000 bps to gross performance (~35%) for the quarter or just less than a third of our gross outperformance vs the S&P 500.”
