Markel now more Berkshire-like than ever (MKL)

I've often noted that I think of Markel (MKL), the specialty line insurer, as having the potential to become a junior version of Warren Buffett's Berkshire Hathaway. And now, the similarities have gotten just a little bit stronger.

The last time I made this argument, it was based not only on the fact that Thomas Gayner, who runs the investments for Markel, invests in a very Buffett-like fashion, or on the fact that Markel actually owns a big chunk of Berkshire shares (among other value-oriented holdings, listed here on Stockpickr), or on the fact that Markel has begun cautiously diversifying away from straight stock market investing with their investments in First Market Bank and a bakery equipment business.

No, perhaps as importantly it was based on the fact that Markel's releases read like Berkshire Hathaway releases -- or put differently, the Markels and Thomas Gayner sound a bit like Warren Buffett.

And now, they're following in his footsteps in another small way, too. Thomas Gayner was just last week appointed to the board (and the audit committee) of the Washington Post Co. (WPO), one of the bedrock holdings of Berkshire Hathaway and a company that Warren Buffett has served as a board member for more than 20 years (albeit not sequentially). It's an interesting board and a great company, though I've unfortunately been too timid about their local TV and newspaper holdings to ever invest and reap the rewards of their Kaplan division and the surprisingly strong performance of the washingtonpost.com division (the rest of the board is listed here, FYI).

So does this add fuel to the fire for speculation that Markel will turn out to be as great an investment as Berkshire Hathaway was a couple decades ago? Well, maybe a little, but it's just a board seat -- I consider it just another tiny indication that Gayner is moving in the right company, but that's really all.

More importantly, Markel releases their earnings report tomorrow morning -- and for someone who's been waiting a long time for the shares to dip so I could buy some more, I'm having trouble making a decision about what to do. Should I buy additional shares this afternoon before the earnings report, or wait until after they report and hope the shares will dip then?

It's a tough call -- Markel has solidly beaten the estimates several times in the past year (and missed them once), but their earnings are notoriously hard for analysts to estimate. One thing everyone agrees on is that this past year was exceptional for Markel, thanks largely to the lack of any big insured losses (as they had with the hurricane season of 2005) combined with the higher rates they were able to charge following those hurricanes, and some great investment returns. So all the estimates have Markel's sales increasing slightly for the coming year, but earnings dipping a bit from 2006 levels.

Will the company downplay future performance on the conference call, and emphasize that the huge upswing in 2006 really was a bit of a fluke ... or will they seem optimistic about 2007? It's pretty impossible to tell, and they usually keep their cards pretty close to their vest.

But with the company's ability to grow book value consistently over time, I'm sorely tempted to buy more -- whether I do so before or after the earnings release, or both, I'll let you know.

4pm update: I did end up buying a little bit more MKL today, I purchased additional shares with a limit order that was executed at $490.68 right before the market close. Ideally, I'd like to own a few more shares and may make an additional purchase if we see a dip following the earnings ... otherwise, I'll wait.

full disclosure: I own shares of Berkshire Hathaway and Markel and may purchase more Markel in the near future. I also partner with the Washington Post/Newsweek Interactive Blogroll for advertising purposes.

Keep up with One Guy's Investments, Free Subscription
Enter your email address:

Delivered by FeedBurner

Looking into Asset Managers (LM, RJF, AGE)

I sold my only big investment bank holding recently in UBS, and I've been thinking that, although I have a lot of holdings in insurance companies (in Markel and Berkshire Hathaway), I think it makes sense to own a US asset manager.

The primary argument for this is demographic -- with the retirement of the baby boomers looming, and the massive intergenerational transfer of wealth taking off in the decades to come, I think the companies that can offer simple solutions for asset management should do well for many years. Berkshire may get some benefit from this eventually, since they do sell some annuity products, but it certainly wouldn't move the needle of their performance numbers.

There are a few different ways to go.

I could invest in one of the big brokerage houses, but their shares have climbed so dramatically and they are so dependent on their own proprietary trading and on M&A fee activity that I'm not entirely confident that the demographic shift is going to be of huge additional benefit to Goldman Sachs, Merrill Lynch, etc. (though I do have some LEAP call options on Goldman Sachs, just in case they're able to keep this growth going).

[advertisement:] Check out SogoInvest today -- $1 Stock Trades for 90 Days!, $3 after that, no subscription fees, and lots of great tools, watch lists and services.

Or I could invest in one of the smaller regional brokerage/investment advisors -- this would include Raymond James (RJF), or AG Edwards (AGE). I think these might actually be good buys, and I think AG Edwards is often overlooked as an investment, so that's a strong possibility if I can get my head around which one of these companies is likely to be able to grow their footprint as well as take advantage of the growing assets of their near-retirement clients.

And finally, I could look at a company that primarily manages mutual funds. There are tons of these as well, and many of them are public -- two that have caught my eye in the past are Legg Mason (LM) and Affiliated Managers Group (AMG), which is the umbrella holding company for lots of excellent firms like Third Avenue. Most of these companies also manage private accounts in some fashion, and some also offer brokerage services. I think the AMG stable of funds is one of the finest ones in the industry, but I don't like the valuation of the company very much right here.

Legg Mason, however, really appeals to me. Being generally a long term investor, I am very intrigued by the huge fall the shares have had this year for what I consider to be short term problems -- they've had several hiccups in integrating their massive asset swap, the big deal everyone probably heard about when they swapped their brokerage for Citigroup asset management business, and they've gotten some negative attention over the past six months as it appears Bill Miller, their biggest fund managing star, is going to finally lose out to the S&P for the first time in 15 or so years.

LM might still run into trouble as they continue integrating their new funds and clients, and it's possible that a serious market correction could bring prices lower, but at the moment this company is at the top of my list as I search for investments that might benefit from the baby boomer retirement years. I'll let you know if I decide to actually purchase shares.

full disclosure: I own Berkshire Hathaway and Markel shares, and LEAP call options on Goldman Sachs, and I have money in several Third Avenue mutual funds.

Keep up with One Guy's Investments, Free Subscription
Enter your email address:

Delivered by FeedBurner

The Next Berkshire Hathaway? (MKL, SHLD, BRKB, WTM, FFH, LUK, BAM)

There are few things more entertaining or evergreen in stock investing than the search for the next Berkshire Hathaway (BRKB) and the next Warren Buffett -- with Berkshire having a nice renaissance in the last few months (up 20% or so) as they make headlines for breaking the $100,000 mark, I decided to check in on the search again.

Jim Cramer thinks he's found the next Warren (though he's far from the first to say so) in hedge fund whiz-kid turned Sears Holdings (SHLD) Chairman Eddie Lampert ... and many folks have identified other candidates, from Prem Watsa (at one time known as the "Canadian Warren Buffett") up at Fairfax Financial (FFH), to the guys at Markel (MKL). I've argued that Markel seems very Berkshire-like in the way they do business and conduct their conference calls (though having such a call is not very Berkshire-like), but they're definitely not the only ones.

Cramer is friends with Eddie Lampert and has talked about him for years, which may be coloring his assessment, but it's also a pretty nice, tidy argument to make. Warren Buffett started with a successful investment portfolio of moderate size, took over a failing company in Berkshire (a textile mill, if I remember correctly), diversified into a high-cash flow business (insurance -- most profitably GEICO), and figured out how to use insurance float and a contrarian bent to magnify his investing acumen.

Just as an aside, Cramer has also argued that Google and Goldman Sachs are good "next Berkshire" companies -- though presumably more for their high-dollar price points and growth potential than for any likelihood that they'll become investing conglomerates or holding companies.

Eddie Lampert is certainly, for a young man, a dramatically successful investor -- his ESL Investments hedge fund is generally admired for tremendous returns, and he certainly does follow some of the same contrarian investing principles as Buffett, though he has tended to be an activist investor rather than a buyer of entire companies ... and in my opinion, he has focused more on financial efficiency and on unlocking value than on building companies with great operating performance. To be fair, that's something like what Buffett did in his not-entirely-friendly takeover of Berkshire in the first place, so maybe my opinion is colored more by Buffett the friendly billionaire philanthropist than Buffett the aggressive young takeover investor, who probably shared many more of Eddie Lampert's current qualities.

I expect Lampert would need to focus on either ESL or Sears Holdings as his investment vehicle -- his hedge fund already has big investors like Michael Dell and David Geffen, and while SHLD probably makes up at least 2/3 of ESL Investments' holdings, it's not as if the two are the same. Buffett ended up having to drop his Buffett Partners investment vehicle to focus on Berkshire -- will Lampert do the same, or does he need to?

No one really knows what he'll do next, though speculation remains rampant that Lampert will be looking for acquisitions now that Sears appears to be stabilized (though the actual department store chain is still an awful business, as far as I can tell). As an outsider (though I did own Sears shares for a while and regrettably sold them well before the recent runup), I lke that Lampert's SHLD doesn't issue guidance and seems to be focused on the long term, but I don't like the fact that the companies he has worked with generally focus on improving near term profitability, arguably without an eye on long term business success. I think Sears will probably continue to spin out a lot of cash that Lampert may use effectively, but I question the staying power of the Sears stores and wonder if he's just milking a dying cow. I could easily be wrong on that.

Markel (MKL), as I've written before, seems to be following a very similar tack to Berkshire Hathaway -- albeit skipping the first few steps of buying the failing textile mill, etc., and instead moving straight into the lucrative insurance business. One of the things that stands out for me, aside from the great performance from their insurance lines during this nice rebound year for the insurers, is that management really SOUNDS like Warren Buffett in their corporate releases. And with their investment in the local First Market Bank in their local VA stomping grounds, there's some speculation that they're starting to spread their wings, investment-wise, and begin investing some of their prodigious cash flow outside the stock market (even as Thomas Gayner, who runs the investments for Markel, focuses on a lot of the same conservative, boring criteria as Buffett has in making hugely successful stock investment decisions).

What are some of the other companies that might look a little like a young Berkshire?

White Mountains Insurance (WTM) comes up with some regularity, not least because Buffett has owned shares for ages. Another insurance conglomerate, with a strong investment portfolio but without the Berkshire focus on buying operating companies in other industries, White Mountains may be a great investment -- and certainly an underlooked one, with shares trading well above $500 according to the Buffett anti-split preferences. But with the aging insurance legend Jack Byrne at the helm this feels more like a current Berkshire Hathaway, Junior than a company that's likely to take it to the next level in the coming decades.

Leucadia (LUK) wins for having the most Berkshire-like website (just compare http://www.leucadia.com to http://www.berkshirehathaway.com). It's a relatively small company for all the investments and properties they own, and I'm sure there's a significant "conglomerate discount" built into these shares to compensate for the fact that anyone buying LUK shares has to understand operations as diverse as wineries, timber, telecom, and manufacturing. I believe Leucadia started as a financial company, but is no longer significantly exposed to insurance or banking as far as I can tell -- this is certainly an intriguing company for further research.

Prem Watsa at FFH seems to be too much of a lightning rod at this point for my taste -- I'd rather not buy into a company with so much legal risk, even if he has shown some promise in building an insurance holding company in Canada (and the shares may have more volatility than any other pretender to the Berkshire throne, which some folks like).

Also up North -- the former Brascan, now Brookfield Asset Management (BAM), has been hugely successful both in managing money for institutions and in building up a collection of hard assets in, among other areas, real estate, timber, and power generation, and may be able to use the recent Canadian Trust tax law changes to buy up some valuable trust assets on the cheap, not unlike Buffett's investment in MidAmerican Energy back when pipelines seemed boring ... but while the conglomerate is growing and I'm intrigued by the opportunity ahead for this company to potentially build itself into the Macquarie of North America, there's no hint of the kind of quiet under-the-radar wealth building that early Berkshire investors enjoyed.

Others that have done a great job of building conglomerates and becoming bazillionaires? The Rales brothers who built Danaher (DHR) come to mind, and I used to own shares in that company -- but given their extremely hands-on management style and focus on manufacturing this is really more like GE Junior than Berkshire Junior.

The search goes far and wide. A Motley Fool author argued that Joel Greenblatt is investing like Warren Buffett, though he doesn't run a public company that we can invest in -- so that's not exactly the same kettle of fish.

And smaller companies with intriguing holdings or misunderstood book value often get compared to Berkshire -- including PICO holdings, described here by Cheap Stocks.

There's even a small Chinese holding company that likes to say that it has a "Berkshire Hathaway model" for China (I don't know anything about this company, they seem to be some sort of a venture investment group).

But maybe we're missing the real story -- is Buffett really just the next William Jardine? Jardine Matheson (JMHLY.PK or Jardine Strategic at JSHLY.PK, both are difficult to trade) is an international conglomerate that owns pieces of everything from the Mandarin Oriental hotels to Hong Kong Land to Astra ... and some big insurance operations.

I'm still nervous about Sears Holdings, with so many people buying it because they want to ride along as Eddie Lampert invests the Sears cash flow into other companies -- but maybe that's like being nervous about Warren Buffett buying a suffering textile mill, perhaps I just need to see through my hangups about Sears and trust in Cramer and Lampert.

For my taste, right now an investment in Markel feels much more solid -- I know I'm getting a company that focuses on profitability and growth in book value while ignoring their stock price, and I know they have the built-in insurance company advantage that Buffett had of investing with other peoples' money. Leucadia is very tempting for me if I find time to really delve into their operations, but I like the potential of Markel, and Berkshire itself (especially if they become a massive dividender following Buffett's demise, as I think is quite possible), more than that of White Mountains right now.

It's a fun game, but of course we're as likely to find the next Warren Buffett today as our parents were forty years ago -- and the brilliance of Buffett was certainly not taken as gospel even back in the 1980s, when you could have bought A shares for well under $1,000. If the next Buffett is out there right now, getting his business started, we'll probably overlook him -- after all, he'll probably be a boring, small-town businessman in a cheap suit, running a snoozy business and flying under the radar.

If you're lucky enough to find a small company with steady and ethical management, a contrarian bent, a focus on building cash flow, and a distaste for quarterly stock market performance metrics, it may be worth a shot -- especially if no one is calling it the next Berkshire Hathaway, and especially if your broker thinks you're crazy for asking about it.

Disclosure: as of this writing I own shares in Markel and Berkshire Hathaway.

Keep up with One Guy's Investments, Free Subscription
Enter your email address:

Delivered by FeedBurner

More on Markel (MKL)

I probably should be writing something right now about Radyne (RADN), which just released earnings that beat the street and shot up in after hours.

Or about Gol (GOL), one of my larger holdings, which also released earnings today ... again beating the street by a hair.

But beating the estimates by a little isn't a good enough reason to write about them right now ... not when I've got old, old, old news to type about.

See, I still like to read the old-fashioned printed and bound annual reports that show up on my doorstep -- it's old news by the time it gets there, certainly, and I knew months ago all the pertinent 2005 information from the latest Markel (MKL) report that I just received. But I still like to read them -- I like to review the letters to the shareholders especially, and I even like the purty pictures that give an idea of the image the company is trying to project (Rayonier (RYN) always does a nice job printing theirs, by the way, appropriate for a pulp company, and SpaceDev's looks like a teenager printed it out on a dot matric printer in 1985 ... also appropriate).

So I was looking through the 2005 Markel letter to shareholders, and thought I'd share a few of the things that I really like about this specialty insurer, things that I may not have gone into detail on when I noted that I bought shares back in March.

Part of an earlier Markel post of mine was retitled "Markel looks like Berkshire Hathaway Junior" when it was republished on Seeking Alpha a little while back, so while that wasn't the central crux of my argument for investing in MKL it was in front of my mind when reading the annual report. It's a comparison that has been made before, so I'm not exactly reinventing the wheel now, but the sport of imaging what it would be like if you were one of those lucky few who bought Berkshire thirty years ago is an addictive one.

And the Markels are starting to sound quite a bit like the Oracle of Omaha in some ways. Read these quotes -- if you squint a little, they could be Nebraskan:

"should we find the market unwilling to allow us to achieve our profitability targets on this basis, we may find it necessary to withdraw"

"We strive to manage the business so that each product will earn good returns in five=year blocks of time and so that our varied product mix will produce underwriting profits every year."

"We would expect that if the weather were the same in 2006 as 2005 our results would be much improved, should it get worse, we will remain financially secure and adjust accordingly, and with good weather, our results should be very pleasing."

On missing out on hot markets in energy and technology: "Energy and energy sources, like technology, change over time. For investors, this change is both exciting and dangerous. It is exciting because change creates dramatic positive outcomes for certain companies in the energy markets. It is negative because the long-term trend in energy and technology pricing is down. This creates a headwind for businesses in those fields and we p refer to avoid investing in companeis with decreasing pricing power ... We remain investors focused on long term, durable-compounding businesses with easier to understand franchises or business dynamics ... over long periods of time this approach has proven sound."

On the surge in hedge fund popularity: "After the 'swarm' phase, we believe that returns become disappointing, if not dreadful, and opportunities begin to be created as sellers get out and prices drop to more economically attractive levels. We expect this to occur over the next several years and we look forward to participating in these markets as opportunities present themselves."

What else comes to mind when reading the report? Compensation is also done right at Markel -- they pay very generous bonuses to their top performers, to the extent that more than 30 of their associates earned larger cash bonuses than the Markel executives. This year, only about 2% of the bonuses given out went to the executives, which is pretty impressive in today's environment of insame execitive compensation.

And they base the bonuses for the executives on something important, too: It's not the share price, since the executives can't do much (at least, not much that's good for long term investors) to boost the share price in any given month. No, Markel executives get bonuses based on the increase in book value of the firm.

But what I find most intriguing is the way in which the investing arm of Markel is starting to behave a little bit more like Berkshire Hathaway. Not the focus on large companies that are undervalued, and that they want to hold forever (Markel's unrealized taxable gain on investments is now over $400 million) ... that's been the case at Markel for a long time.

No, what I find interesting is the fact that Markel is starting to branch out into operating businesses and private transactions. Just as Buffett has several times said he would prefer to buy a company outright, so Markel has dipped a toe into the water of outright business ownership.

Their investment criteria are the same for private transactions as they are for stock purchases: profitable businesses with good return on capital, management teams with talent and integrity, reinvestment opportunities and capital discipline, and reasonable prices.

The two companies that caught their eye this past year, as they decided to delve into private "alternative" investments, were, appropriately enough, right in their own back yard in Virginia -- AMF Bakery Systems, a baking equipment producer, and First Market Bank in Richmond, which they acquired a partial share in together with the Ukrop supermarket-owning family.

Boring businesses. Easily understood. Unsexy generators of good cash flow. Salt-of-the-earth management in place who can continue running the businesses. Not anything the hedge fund managers would be competing for, or driving up the prices on.

Sound like anyone else you know?

In Markel's words, "In both these instances, we were able to find and negotiate these transactions principal to principal ... We believe similar additional opportunities will develop over time and we look forward to expanding this part of our investment portfolio."

Me, too.

Keep up with One Guy's Investments, Free Subscription
Enter your email address:

Delivered by FeedBurner

New buys -- GOL and MKL

I picked up one new position and added to another one late on Friday.

I wrote after their earnings release that I was still very happy with Gol and with their remarkable management team and growth prospects -- no need to rehash that here, but I found myself unable to resist nibbling a little more at the stock. After seeing the shares begin to decline in the mornign I put in a limit order at $25.50 that was filled near the end of the day at $25.47, so I'm the proud owner of a few more shares of GOL. I think I'm in near the ground floor of a remarkable growth story here, and in my opinion the only significant risks are related to the possibility that Brazil's economy might stop growing ... not a huge risk, in my opinion. I love the disclosure the company provides, their ability to beat their competitors on costs and service, and the huge untapped market. This will be enough for me for a while -- GOL is now one of my five largest holdings.

And I also wrote last week, while the market was in the doldrums, that I was looking at an investment in Markel (MKL). No time to write it up in detail now, but I picked up a small MKL position at $339.20 on Friday. Very solid insurance company with a great reputation for not writing unprofitable business, and a nice counterpart to much of my portfolio because, like Buffett's Berkshire Hathaway, Markel uses it's float to build a strong portfolio of undervalued equities. Markel is entering the profitable maritime energy insurance business and should see nice pricing in some of their lines following the hurricanes, and their overseas offices -- especially the London business -- look like they might be ready to contribute significantly to earnings going forward. Will write some more about my argument for buying Markel when I can, though reading insurance company earnings can sometimes cause drowsiness.

Keep up with One Guy's Investments, Free Subscription
Enter your email address:

Delivered by FeedBurner

Bear Market Blahs -- Where to invest now?

Well, when the market as a whole is taking a tumble like it's doing this week, and my portfolio is almost entirely awash in red, it's hard to get motivated to think about your holdings.

Some are still doing quite well ... PDL Biopharma (PDLI -- click to register for free RT streaming quote)got a fair amount of attention around the time of its earnings release last week -- they would have had their first quarter of positive earnings if not for some one time charges, and forecasts are for real-life earnings in 2006 that will give PDLI a PE ratio for the first time. Always exciting for a biotech. Business Week recently came out with a PDLI article and they make a few good points -- principally that PDLI, though risky, should generally be considered less risky than many similar early-stage biotechs.

And Northern Orion (NTO) continues to steam ahead, enjoying the wonderful tailwind of low-cost mining production and very high copper and gold prices. That one will ebb and flow with the commodity pricing over the next several years until Agua Rica is online -- though some folks think they'll be bought out before then so a bigger company can get their hooks into Agua Rica. Either way's fine with me, this is my only real metals investment and it seems to be doing just fine.

But nearly all of my holdings are tanking this week. Tough news on interest rates is rough on the market as a whole, and especially on the more volatile sectors that I am fairly heavily weighted in like emerging markets, growth stocks and the like. Some of these companies I find tempting for additional investment during this general decline ... GOL is down about 6% today, a rough give-back of most of their recent gains ... ISRG has had a horrible month and is now extremely tempting for another add-on purchase. But I've already committed so much to these two stocks that I'm wary to double down again just yet.

On the flip side, this is the worst time to offload most of my holdings (though I may soon sell Overstock, for reasons I've covered recently, and if I wasn't overly patient I would have already lightened up on my Google position a little -- too bad I didn't foresee their ridiculous problems of the last few weeks). When the market's taking a dip like this, seems to me that it's time to look for new investments that might be going on sale. Here are a couple that I'm thinking of at the moment:

Options Express (OXPS). I've had my eye on this one for a little while as it has had an almost unmitigated upward trajectory. I like a lot of things about the company. I think they're in a great business as options trading is climbing dramatically worldwide, and should climb faster if the market becomes more volatile in the coming year as many people expect. They have a fairly distinguished product that is substantially different from what the major online brokerages can offer for options trading. Though a fairly young company, they are very profitable even though they trade at a current high PE. And they have huge insider ownership, which I always like to see. Insiders have sold a lot of shares recently which is not terribly surprising since they've just completed their first year as a public company, but that's certainly an area of concern to investigate. They also pay a small dividend, which is a nice treat.

Oh, and did I mention that they're getting clobbered today? Down close to 10% as I write this after announcing what I can only imagine are weaker performance numbers than expected. I see that their performance is still up dramatically YOY but down from last month, which might be the reason for the current panic -- I am interested in picking up shares but need to do some more research first. If the price keeps plummeting the dividend yield will be up to 1% in a few minutes.

Markel Corp. (MKL). Markel is a big insurance underwriter, and a lot of folks think of them as a junior Berkshire Hathaway (not unlike White Mountains). Like Berkshire (and Google and others) they haven't split the shares so the stock price is up north of $330 at the moment. And this week, Markel is one of the few companies I'm watching that isn't dropping like a stone.

Markel had a tough 2005 business-wise, as did all the big insurers with hurricane exposure. It now seems like it might be a reasonable time to re-purchase a MKL position for my portfolio given the firming prices for P&C insurance and Markel's excellent investment performance. I owned MKL for a while, selling back in 2004 at a small loss when they weren't doing very well, but they're looking appealing again. Like BRK, they have a large cash hoard (though much smaller than Warren's, of course) and have some solid float performance that gives them free money with which to invest. This would be a nice counterpoint to much of my portolio, given that MKL focuses on value investing in equities with their float. Haven't done much research ye to reacquaint myself with MKL after a year or two of absence, but I've got their latest filings and conference call transcripts to pore through and I'll see if I like what they're doing. 2006 is expected by analysts to be a very solid year for MKL, giving them a forward estimated PE of about 12 ... if I can have faith in those numbers, I think now is a good time to pick up some MKL holdings that I can stash in a retirement account and hopefully ignore for a good many years.

Will let you know if I take any action on these or other ideas that are mulling around in the back of my head.

Keep up with One Guy's Investments, Free Subscription
Enter your email address:

Delivered by FeedBurner