“Mini-Berkshire?” Motley Fool Issues Rare Triple-Buy Alert

by Travis Johnson, Stock Gumshoe | July 27, 2021 1:01 am

What's being pitched in Motley Fool Stock Advisor ads?

There’s a new take from the Motley Fool[1] that a lot of folks are asking about recently, a “rare triple-buy alert” for a “practically perfect ‘mini-Berkshire'”, all in an ad to entice new subscribers to their flagship Motley Fool Stock Advisor[2] newsletter (currently $99 for the first year, “list price” $199), and for those of us who’ve long admired Warren Buffett[3]’s long-term returns at Berkshire Hathaway (BRK-B)[4], that kind of promise is overwhelmingly appealing.

But that “triple buy” business sounds awfully familiar…. So is it the same “triple buy alert” that they’ve been touting on and off for years? They imply that this is brand new and urgent, and every time you look at this ad it will have a current date on it… but yes, the basic spiel is the same, and the “triple buy” part (“we’ve already recommended it three times”) has been true since at least 2018.

But don’t let me spoil the surprise, hang on for a moment and we’ll get into the details.

Let’s start with a little taste of the latest version of the ad (previous versions often highlighted Tom Gardner[5], the founding Fool brother who was the one who actually recommended this stock for Stock Advisor, but this current version does not include a signature or any names… with Tom’s brother David stepping back from picking stocks, maybe they’re trying to be a little less star-driven).

“… anyone who got in early on Buffett’s company and held on turned a mere $1,000 into more than $16 million!

“… what if we could find the next Berkshire Hathaway… a company with the same smart leadership that uses Buffett’s disciplined, commonsense approach of leveraging the insurance business to buy other stocks, bonds, and entire companies? A company with a knack for finding winners in ‘obvious’ places that most people miss?

“Well, I believe we have found a practically perfect ‘mini-Berkshire.’

“And I’m so confident in this company that we’ve already recommended it three times to members of The Motley Fool investing service… and that’s something that just doesn’t happen very often.”

So I guess if they’re using that first-person language this is a repurposing of one of Tom Gardner’s old promo letters. What else do they drop by way of hints?

“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 the size of Berkshire… and therefore I believe has much more growth potential.

“What’s more, this mini-Berkshire’s CEO is a charismatic investor and a proven winner: Since the business started 30 years ago, his company’s stock has risen more than 13,000%!

“But I must again state the electrifying part of all this: They’re still tiny compared to Berkshire.

“With its nearly $550 billion market cap, Berkshire Hathaway is gigantic… It’s simply too big to grow the way it has in the past. But our mini-Berkshire, on the other hand, is just 1/30th the size!”

And, of course, that’s what we all want — the chance to put up a small investment and someday own a baseball team and get our alma mater to name a building after us… is that too much to ask?

OK, fine, we’ll settle for helping our kids go to College and retiring without panic… who knows, just that might cost $12 million by the time I’m ready to toss my keyboard in the trash and enjoy my golden years.

We’ve seen these kinds of promotions for years — lots of folks promise you the chance to get in early on the next Warren Buffett, and they’ve been doing it for longer than Stock Gumshoe has been around… some of my first articles in 2007 were about “next Berkshire” ideas, and it wasn’t a new notion then.

But hope springs eternal… so what’s the stock getting the Berkshire Baby treatment today?

This is, sez the Thinkolator, our old friend Markel (MKL)[6]. Which I expect I’ve probably owned for about as long as Tom Gardner has been recommending it, perhaps longer.

Markel is a specialty insurance and reinsurance company (reinsurance is “insurance for insurance companies” — a second-level way of spreading out risk), and the comparisons to Berkshire Hathaway come because they make some effort to emulate Warren Buffett’s insurance conglomerate — they allocate much more money to investing in equities than more conservative insurance companies do, using the value investing philosophy of co-CEO Tom Gayner[7], who is widely admired as an investor, and they also, again like Berkshire, been using their cash flow from insurance sales to buy up smaller operating companies to diversify (they call this Markel Ventures, and it’s been slow-building but those operating non-insurance subsidiaries have grown pretty meaningful over the past decade).

They also are good at communicating fairly with shareholders, and they have much better employee incentives than most companies (they have typically base incentive bonuses not on the share price or the quarterly returns, but on the rolling five-year growth in book value per share, a far superior measurement for an insurance company that’s trying to grow rationally and profitably in the long run).

There’s nothing in this latest promo to suggest that RIGHT NOW is the ideal time to buy Markel, the text is essentially the same as it has been for at least three or four years (and during much of that time, frankly, Markel was overvalued and buying even giant Berkshire Hathaway was a better bet), and they don’t mention valuation or anything like that.

So I’ll share with you the last note of substance that I included about Markel in the Friday File[8] for our Irregulars, just to update you on my thinking… this is from April 30, 2021, following Markel’s last earnings update (they report again later this week, so things could change meaningfully in a few days):

Markel (MKL) popped in with its earnings update as well, and Markel Ventures continues to get more and more interesting (as they said on the call, “it’s starting to look as good as it is” after a long period of digesting the purchase accounting for a lot of the businesses they’ve bought over the years). It has required a lot of patience, but that’s now no longer a weight on the company and a way to invest some excess cash at a time when bond yields are low… it has become a nicely profitable conglomerate of operating businesses, led by a few pretty big operations like Costa Farms and Lansing Building Products, both of which had extraordinary years last year as the building/landscaping booms took off with the pandemic and are still doing very well now — Markel Ventures hit $700 million in revenue in the quarter, which is a pretty big deal.

Tom Gayner has long been a widely-followed guy in value investing circles and ran the portfolio for Markel for many years before taking over as co-CEO and shepherding Markel Ventures into life, if you’re new to Markel or want a little background on his philosophy he did a good podcast interview with the We Study Billionaires guys back in January[9] that’s worth a listen.

And the core businesses of insurance and reinsurance also did quite well in the first quarter, as we would expect given the other news that has trickled out from insurance industry peers in the past couple weeks — earned premiums continued to grow nicely thanks both to more sales and better rates, and the combined ratio (which is just a measure of claims and operating expenses measured against incoming premiums — below 100% means you have an underwriting profit, above 100% means you’re losing money), got back to where it was in 2019 at about 94%, even with the Texas winter storms and the ongoing loss reserves taken for COVID-19 coverage (a lot of which will remain tied up in courts and negotiated probably well beyond this year).

I was probably a little more worried than most about Markel’s COVID exposure, given their heavy exposure to event cancellation insurance (which they’ve already paid out in many cases, with probably more to come) and the litigation risk of business interruption coverage being retroactively forced upon them for their regular commercial property insurance policies, but now, a few quarters in, my worries seem to have been overdone. Markel has historically been fast to recognize losses and cautious in reserving for such things, and they did that last year as they were among the first to set aside a large loss reserve for COVID, so I feel better about trusting their strategy and trusting the system to work itself out… even with that lingering risk of major court cases likely to be in the headlines for much of this year over COVID coverage, particularly for restaurants and travel businesses.

Markel has historically been a good buy near or below 1.2X book value, and as the Markel Ventures businesses grow and their insurance services businesses become bigger contributors (Nephila and State National), I’d be more confident boosting that historical valuation a bit as the company diversifies and becomes a little less capital-intensive. Their growth has slowed down pretty dramatically over the past five years, relative to the dozen years or so before that, but the operating performance is still excellent, they’re still growing the right way and with discipline and long-term focus most of the time (with a few mistakes along the way, particularly Markel CatCo), and I remain very confident in the management team and their strategy, so as some of my concerns dwindle about COVID liabilities I’d be willing to be a little more aggressive and boost that buy level up to 1.3x book.

At $913 in book value per share as of March 31, 1.2X book would be $1096 and 1.3X book would be $1187. This remains a very long-term position, and one that has underperformed the market a bit now (mostly because I overpaid for a few of those shares in 2018 and 2019), but I’ll put a little more of my money where my mouth is and add slightly to MKL again here at $1,182. That’s now the highest price I’ve ever paid for a Markel share [update: until last week, I did add a little more at $1,187 on July 19, as reports from other insurers, particularly near-peer W.R. Berkley (WRB)[10], reassured about continuing strength for the sector in the second quarter], but, again, it’s a tiny buy — my goal is to be more opportunistic when there’s bad news, so I did add more meaningfully last year down in the $700-800 range on the COVID collapse, but this price seems eminently reasonable as I continue my long-running task of building a Markel position (I first bought shares 15 years ago when Markel was much smaller, but was also trading at a stiff premium of 2X book value, and there have been many years, including very dramatically last year, when Markel was a meaningfully worse investment than the S&P 500, but trust in a company and a strategy and allowing that to compound over the years can do great things for a portfolio even if a stock doesn’t beat the market each year).

This is still mostly an insurance company, just one that invests better than most of the rest and, with a continuing focus on specialty sectors in insurance, has tended to have relatively strong underwriting performance for a long time — and like all insurers they will benefit not just from rising insurance prices, a continuing hard market, but also, assuming it happens someday, from the portfolio boost that would come with rising interest rates (since most of their capital needs to be held in safer bonds — though most of that part of their portfolio is in cash and extremely short-term debt now because they don’t want to take the risks of longer-term bonds), but the kicker from Markel Ventures gradually snowballing into a profit generator and the continued emphasis on equities in their portfolio has certainly helped keep the value up even in a high-risk year. I’ll probably own Markel for at least another 15 years, and will likely continue nibbling when it’s at a reasonable valuation… and biting off a bit more if and when it gets genuinely cheap again.

And, of course, I’m “talking my book” in a big way here — the only stock I’ve owned for longer than Berkshire Hathaway (BRK-B) and Markel (MKL) is Alphabet (GOOG), and those two insurance conglomerates have almost always been among my top five holdings over the past 15 years.

So I’ll pass it back to you, dear friends — ready to buy something boring like a smallish insurance conglomerate? Still worried about COVID underwriting risks, or the impact of interest rates? Prefer other insurance companies that might be smaller and sexier (or perhaps bigger or cheaper)? Let us know with a comment below… thanks for reading!

Disclosure: As noted above, I own shares of Berkshire Hathaway, Alphabet, and Markel. I will not trade in any covered stock for at least three days following publication, per Stock Gumshoe’s trading rules.

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