A few readers forwarded this email to me recently, though I don’t know how widely it’s being disseminated at the moment… it is an ad for the Motley Fool’s flagship Stock Advisor newsletter, which has probably gotten more coverage in the pages of Stock Gumshoe than any other newsletter (if only because it’s an inexpensive “entry level” letter and has been around for a decade without changing names or editors).
The promise of the “next Berkshire Hathaway” has been around for longer than Stock Gumshoe, for certain, and those promises have always gotten attention. We were deciphering pitches about the “next Warren Buffett” during the very first days of publishing Stock Gumshoe back in 2007.
It’s no wonder why, of course — gains like the early Berkshire Hathaway investors enjoyed are the stuff of daydreams. Being a regular investor, backing Warren Buffett with $10,000 in the 1960s or 70s, and finding that 50 years later you’ve got a fortune that can endow a building at your local university is amazing… and that’s what happened to the few who invested in Berkshire and, equally important, stuck with it for decades, including during those times, like 1999, when even the news media gave up on Warren Buffett and told you he was out of touch and missing out on the promise of the internet… and those times when he hit his mid-70s and everyone expected the stock to collapse if he fell down the stairs or retired. Berkshire Hathaway was not a small or overlooked stock ten years ago, but it has risen 200% since Buffett’s 75th birthday in the late Summer of 2005.
And Berkshire had a good year in 2016, too — it’s a stock I’ve owned for a long time and have no intention of selling, so I follow it pretty closely. For what it’s worth, the Motley Fool folks have endorsed Berkshire itself, even as they also search for the next “baby Berkshire” — this same Stock Advisor newsletter also pitched Buffett’s holding company just last Summer — it’s since up about 14% versus the market’s 9% return during that same time period, though Buffett himself would note that six months doesn’t mean much… and that Berkshire isn’t likely to beat the S&P by a big margin in most years, given its large size.
So what’s the spiel this time out? The pitch is from Rex Moore, one of the Fool’s writers:
“But where is the next Berkshire Hathaway? Why hasn’t someone duplicated Buffett’s disciplined, common-sense approach of leveraging the insurance business to buy other stocks, bonds, and entire companies? Led by a charismatic investor with a gift for finding winners in ‘obvious’ places that most people miss?
“Luckily for us, we think someone has. And while Berkshire is now probably too big to achieve the massive gains it saw in the past, this new company is not: It’s only 1/30th Berkshire’s size!
“In fact, the secret is starting to get out about this ‘mini-Berkshire.’ The Motley Fool just issued its second Stock Advisor buy alert for the stock. And when the Fools re-recommend a stock, they say it’s ‘a sign of extra confidence in a company we already know well.’
“The charismatic investor I spoke about earlier is a proven winner: Since the business started 30 years ago, his company’s stock has risen more than 10,000%!”
So what is this? Thinkolator sez that the Fool is almost certainly teasing Markel (MKL). Which has indeed been recommended by Motley Fool newsletters in the past, their Inside Value letter was pitching it back in 2006 and 2007, for sure, and on many occasions after that, also using this “next Berkshire” theme, though I don’t know when Tom Gardner might have first recommended it to Stock Advisor subscribers.
And this is also a stock I’ve owned for longer than Stock Gumshoe has been around — Markel, like Berkshire Hathaway, is one of my top five holdings and has been for most of the past decade, though that has certainly fluctuated with the price and the market sentiment.
The 30 years bit refers to Markel’s life as a public company (they went public in 1986 though they had been around for more than 50 years before that) and to Tom Gayner, who was named co-CEO a couple years ago but has been running Markel’s investment portfolio for roughly 30 years (and yes, MKL shares are up by roughly 10,000% since the late 1980s).
Markel’s organic growth has slowed markedly, but under several leaders (and the continuing watch of of the founding Markel family — founder Sam Markel’s grandson Steve is the active Vice Chairman) it has continued to expand into new businesses, acquire other insurers, and grow the book value per share that is Markel’s established metric of choice (and over time, book value correlates closely to share price — book value per share is up 550% since 2000, the share price is up 490%).
I’ve personally been a bit cautious on Markel lately — mostly because the stock has experienced a strong revaluation over the past couple years, following the dip that hit when they acquired Alterra (over the past two years, the book value per share has risen only 7.5%, but the price has jumped up by as much as 40% (currently up 32% since January of 2015). That’s not terribly different than the broad market, which has climbed mostly because of PE inflation, not actual growth (meaning, the growth has come more from PE ratios getting larger, from investors being willing to pay more for each dollar in earnings, than it has from the actual earnings growing), so it’s not that Markel is shockingly overvalued… it’s just more expensive than it has been most of the time over the past decade, and it’s not at prices where you’d easily conclude that it’s worth making a big purchase.
Here’s a little bit of what I wrote to the Irregulars when I was doing my annual review of my insurance stocks a couple weeks ago, FYI:
“I don’t expect Markel to continue to have a price/book valuation of 1.5 into the foreseeable future. They have continued to be profitable, they have continued to expand their investment strategy by putting more money into the “Markel Ventures” division that buys out operating companies (again emulating Berkshire, though on a dramatically smaller scale), and they continue to take risks with their value investing strategy by allocating more of their portfolio to equities than most insurance companies. The operating results offer no real reason for criticism, they haven’t even really had any bad spates of underwriting losses or bad quarters of combined ratio to note… it’s just that they’re a great company that’s currently valued as a great company, and I think they’re likely to go through a bad period or bad news flow at some point that causes them to be valued as merely a good company again, which is when I’d want to buy more shares.
“Part of my unease about the current valuation is because I think the company has changed — I suspect that it can’t grow as much or as profitably as the Markel of the 1990s and early 2000s could, because it’s much larger and has more exposure to less-special lines of business (where there are more competitors), and because other insurance companies are also getting better. I think the period from 2008-2014, during which Markel typically drifted between 1X book value and 1.3X book value, is a safer benchmark to base your assessments on than the 20 years before that, when Markel was much smaller and its valuation varied from 1.5X book to almost 3X book value.
“You still would have done well buying Markel during those earlier times when it traded at a big premium, but you would have had to be patient — buying in 2006 near what were then all-time highs, for example, would have meant you paid more than 2X book value for MKL shares… and you’re sitting on a profit today, but that’s only because you patiently waited for seven years, from 2006-2013, before that position went into the black for you and started to show a profit. Most people aren’t willing to sit through those kinds of declines, which is why Markel’s huge surge over the past couple years on a re-valuation has scared me a little bit. Not enough to make me sell, but enough to make me fortify myself to resist buying more until the shares fall to what I think will be a more defensible valuation.”
So yes, Markel is a great company, and a great investment. It’s just not currently at a price that makes me perk up my ears and get excited, and it hasn’t been at those “cheap enough” levels for quite a while (I said much the same thing a year ago, and again in August when Nicholas Vardy was teasing the stock for his Alpha Investor Letter).
I expect Markel shareholders who buy here at $900+ will probably do just fine if they have ten or twenty years to let things play out, but that’s paying a historically pretty high multiple of 1.5X book value, which doesn’t leave much margin for error. At 1.3X book value I’d have a lot more confidence that I wasn’t seriously overpaying and would consider a bigger purchase — right now book value per share is about $610, so that would mean looking more seriously at the shares if they dip below $800 — though book value per share changes each quarter, of course, and can fall as well as rise in any given quarter.
Markel’s book value as of December 31 may be positively impacted by the rise in their stock portfolio at the end of the year… but they also hold a lot of bonds and those bonds will have to be written down as their value has reacted to the sharp rise in interest rates we saw at the close of 2016, I’m not sure how that will wash out but it is certainly possible that book value per share could drop, and I remain hopeful that the stock will sell off someday on a bad quarter and give me another buying opportunity. Markel will report their fourth quarter at some point within the next two weeks, most likely (I haven’t seen a date announced, but the report is typically filed in the second week of February for them), so… fingers crossed.
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