by Travis Johnson, Stock Gumshoe | December 19, 2013 2:53 pm
If I had a dollar for every time someone promised they had found the “next Warren Buffett” I’d be rich!
OK, maybe not, but I would have enough money to subscribe to some of these overpromising newsletters …
The appeal is obvious — if you hitch your wagon to a rising investing star and get to enjoy his or her outsize compounding returns for decades, you might someday become one of those “Berkshire Millionaires” who dominate civic life in Omaha, Nebraska. You could put in your modest $50,000 or so and end up with millions in forty years, perhaps, as several folks did who trusted the young Warren Buffett with their life savings in the 1950s or 1960s.
Of course, there were also thousands of other investment managers and investment partnerships available at that time, and no magic halo surrounding Warren Buffett to alert you to the fact that he was unusually disciplined, perceptive, and wise as an investor. So looking for the “next Warren Buffett” really means that you’re looking for someone who has shown some investment acumen and who has an appealing vehicle in which you can invest. Usually, that investment vehicle has some similarity to the modern Berkshire Hathaway, with a core business (like insurance) that provides a lot of cash flow for investing and compounding returns.
We’ve heard the promise of the “next Berkshire Hathaway” made about most of the successful insurance companies over the years, particularly those who are attached to conglomerates that do other things to generate large returns from the insurance cash flow and “float” (“float” is the money that insurance companies have taken in in premium payments but are holding in reserve to pay potential future claims, insurance companies often earn most of their money from the investment returns on that cash).
But today we’ve got a specific one to seek out for your edification — we’re following up on the teaser pitch by Jimmy Mengel for The Crow’s Nest, we covered their first idea last week here (that was about uranium), but they had a couple others teased as well so now I’m catching up.
Here’s how Mengel teases this “next Warren Buffett” …
“There’s no question Warren Buffett is the best investor ever. He has amassed a personal multi-billion-dollar fortune, mainly through investing in stocks and buying companies through his company Berkshire Hathaway.
“Shareholders who invested $10,000 in the company in 1965 are above the $50 million mark today.
“Sadly, you can’t go back in time to invest in Berkshire Hathaway… but you CAN invest in ‘the next Berkshire Hathaway,’ managed by ‘the next Warren Buffett.’
“With $309 million of his net worth directly tied to this company, this super-investor has skin in the game. So you know he will do everything he can to increase the value of the shares.”
And apparently this “next Warren Buffett” has been doing better than the original, they show us a comparison chart and tell us that:
“The company he runs is a bit like Buffett’s company, Berkshire Hathaway: Both own a major insurance company as their core holding, and they own whatever other businesses they think could increase shareholder value… his company has performed better than Berkshire Hathaway over the past decade.”
What else do we learn about this company? Well, it’s been around for a long time, has outperformed the S&P 500, and is involved in shale gas as part of the “energy revolution” we’re seeing in North Dakota, Louisiana, Pennsylvania and elsewhere:
“Shares of his company have returned an average of 16% annually in the 50 years through 2012 — more than double the return of the S&P 500 Index.
“As I said, aside from its core insurance business, his company invests in other businesses. And right now it’s heavily invested in what will become the greatest creation of wealth in America’s history….
“the ‘new Berkshire’ has more than $8.7 billion invested in the energy sector.
“It owns 44 drilling rigs and operates more than 14,000 miles of pipeline that transport about 12% of the natural gas consumed in the United States.
“With these assets, the company is well positioned to profit from the ongoing oil and natural gas revolution in the U.S.”
So … hoodat? Thinkolator sez this is Loews (L)
Which has, indeed, been pitched as a “next Berkshire” many times — Loews, which has no relation to the hardware chain Lowes, is controlled by the Tisch family (now the second generation, the three top executives are the sons of the founding Tisch brothers) and owns controlling interest in Boardwalk Pipeline (BWP) and Diamond Offshore (DO), an oil and gas company called Highmount (not separately traded), the Loews hotel chain, and, yes, controlling interest in a big insurance company called CNA Financial (CNA).
And yes, BWP owns more than 14,000 miles of pipeline, and Diamond Offshore owns 44 (offshore) rigs. And the Tisch’s as a group own far more than $300 million worth of L shares.
Usually investors value Loews based on some kind of “sum of the parts” assessment — you can quite easily figure out what their ownership of the publicly traded subsidiaries is worth and place some kind of discount on that, and then you can try to figure whether the remaining valuation is fair for the hotel chain and for the Highmount oil and gas business.
That’s what I did when I suggested Loews to the Irregulars back during the financial crisis, but then I fairly quickly recanted from that and noted that if all the insurance conglomerates were seeing their values crushed, as they were (this was the Fall of 2008), it was better to buy one built around a really good insurance company rather than a very weak one, as CNA was at the time — and I thought it wiser to put funds into either Markel (MKL) or, yes, Berkshire Hathaway (BRK-B) at that time. All three of those have done worse than the S&P since October of 2008 when I had those thoughts, though Markel has almost matched the market and Berkshire and Loews have had roughly similar performance.
For recent periods Loews has been a disappointment — they’ve had the same beta as the overall market, so they’re moving roughly when the market moves, but over the past year have only gained about 15% versus the market’s 25% return, even though CNA Financial has had a great year and shown a substantial recovery in their operations over the last couple of years. That’s because both Diamond Offshore and Boardwalk Pipeline have fallen over the last twelve months.
[Beta is, roughly speaking, a measure of how much of a stock’s movement matches the broader market — 1.0 means the stock has been exactly as volatile as the market average, so the Loews beta of 1.03 means it has had the tendency to move almost exactly in line with the S&P 500. Berkshire Hathaway, by contrast, has a beta of 0.29, far less volatile than the broader market and therefore possessing a lower risk and, theoretically, lower return potential … beta is not necessarily a great predictor of returns, but gives an idea of how wild or boring a stock’s movements have been.]
So what’s the sum of the parts now? There was a pretty good recent analysis back in May at beyondproxy that’s worth checking if you want to go through the steps yourself, but the current value of their shares (50.4% of DO, 90% of CNA, 66% of BWP) is almost exactly $18 billion. Loews the parent has a market cap right now of $18.25 billion, so the valuation is certainly pretty reasonable — and if you feel confident in CNA’s resurgence, then L is probably a good buy here because they can lever that resurgence nicely with their other investments … as long as oil and gas don’t collapse.
Boardwalk Pipeline has gotten more from their parent than they’ve given over the last couple years, it has been more exposed to gas prices and had some trouble keeping up with their MLP peers in recent years because of weakness in the Haynesville shale and other gas areas (pipelines aren’t that price sensitive in general, since they’re toll businesses, but if fields are shut in because of low prices or don’t produce as much as expected, then BWP’s gathering systems and pipelines aren’t as heavily used and they earn less).
Diamond Offshore has been weaker than their big offshore drilling peers in recent years, which I think is because they were pretty conservative and late to invest in new rigs.
But CNA has done very well, beating most insurers and showing improving operations and a profitable combined ratio so far this year.
Loews has been a good custodian of cash over the years, they’re not wasteful or foolish and they haven’t loaded the parent company with debt (BWP is the most indebted of the subsidiaries, and they seem easily able to handle the debt), but they are very much levered to oil and gas and to CNA’s operational results — I don’t know what valuation to put on the hotels or the Highmount business now, but it’s probably extremely safe to say that they’re worth more than a couple hundred million dollars, which means that L is now trading at a discount to the sum of the parts. It could easily remain discounted, particularly if gas prices remain weak or DO or CNA have bad quarters, but buying at a discount is better than buying at a premium.
So there you have it — the Tisch brothers and cousin are in their 60s now, so they’re not exactly like the young Warren Buffett and they’re not active value investors who make a lot of acquisitions like Berkshire, but Loews ain’t bad. I’ll still take Berkshire for my value investing conglomerate, and Markel or Greenlight Re (GLRE) for my “good investor” insurance companies (I own all three of those), but all of those are pricier than Loews right now.
Have an opinion of your own on Loews? Let us know with a comment below.
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