4 Stocks That Mimic Buffett and Berkshire Hathaway
Editor's Note: Berkshire Hathaway's annual meeting convened on May 5, 2012. If you couldn't attend, you can still follow up on the weekend's festivities as reported on Twitter: #BRK2012. And consider these four look-alikes in honor of the gathering.
What is it that makes Warren Buffett a guru to investors—including other gurus? One simple answer is that he has an eye for a bargain and the patience to wait for it to pay off. But the CEO of Berkshire Hathaway (symbol BRK-B) since 1970 is not the only boss with Buffett-esque qualities. There is a cadre of smart executives who experts say can match Buffett at his own game. They run companies that have cobbled a mix of businesses into profitable conglomerates, or they earn impressive returns on a portfolio of securities—or both.
Given Buffett's age (81) and the mystery shrouding Berkshire's succession plan -- Buffett disclosed in his annual letter to shareholders, released February 25, that Berkshire's board had agreed on his successor but he did not reveal a name -- it's important for investors to have these Berkshire look-alikes on their radar screens. The four stocks below are worth exploring and may deserve a spot in your portfolio.
An insurance company in Richmond, Va., Markel specializes in niches; the company might insure, say, a karate studio, or perhaps an oil rig. The focus is on long-term underwriting profits rather than on quarterly growth in premiums—which takes discipline in the soft insurance market of the past several years, during which premiums have been falling. "Markel is perfectly willing to lose business to someone with a lower price," says Preston Athey, manager of T. Rowe Price Small Cap Value Fund. Likewise, the company is conservative with reserves set aside to meet claims, often overestimating what it’ll need.
But with what's left over, Markel, like Berkshire, is willing (and able, because of its strong balance sheet) to take on the risks and reap the rewards of investing in stocks. The firm's $1.9 billion stock portfolio, the market value of which increased nearly 12% in 2011, is heavily invested in global behemoths that dominate their markets, including ExxonMobil, Diageo and Wal-Mart Stores. "Those companies are as successful as anyone out there, and their prices are low and reasonable," says Markel's chief investment officer, Tom Gayner, who looks for a track record of profitability and management that is equal parts talent and integrity.
Since 2005, Markel has also been acquiring majority control of an array of companies—a strategy patterned after Berkshire's. Acquisitions involve little or no debt and are done for the long haul. At $409, Markel trades at 1.2 times book value of $352 per share, the preferred yardstick for such holding companies (share prices are as of February 3). The price-to-book-value ratio is a bit more than for other insurers, but "pretty cheap for a company as good as Markel," says Athey.
Coincidentally, Fairfax, a global property-casualty insurer based in Toronto, was originally part of Markel's holdings when Prem Watsa took over the struggling operation; Watsa reorganized it and, in so doing, founded Fairfax in 1985. Under Watsa (known as the Canadian Warren Buffett), Fairfax's book value has compounded at a stunning 25% a year, while its stock, also by coincidence at $409 per share, has returned 21% annualized. Fairfax's investment returns have been more impressive than its underwriting returns, which were in the red for the first nine months of 2011.
Watsa's particular brand of contrarian, value-oriented investing is not for the squeamish. His prescient bet on complex credit derivatives paid off handsomely during the financial crisis. More recently, he has used derivatives linked to the consumer price index to bet on deflation. In January, he doubled down on an already hefty investment in troubled Research in Motion, the maker of the BlackBerry.
It remains to be seen whether Watsa’s recent moves will pan out. But the insurance side of the business is looking up, says RBC Capital Markets analyst Mark Dwelle. Scott Phillips, head of research at Lauren Templeton Capital Management, says 6% of the hedge fund’s assets are invested in Fairfax, in part to capitalize on the growth of its insurance business in emerging markets. "First and foremost," he says, "we're interested in accessing Prem Watsa's expertise as an investor."
The New York City company is a collection of five diverse businesses, three of which are publicly traded. Its biggest holding is a 90% stake in property-casualty insurer CNA Financial, which accounts for more than half of Loews’ revenues. CNA has been disappointing in terms of underwriting, but boffo in terms of its investment portfolio. Loews also owns 50% of drilling company Diamond Offshore and 66% of Boardwalk Pipeline Partners. Wholly owned subsidiaries include an energy exploration and production company and the Loews Hotels (the movie theaters are long gone; the Lorillard tobacco business was jettisoned in 2008). Loews has been managed by members of the Tisch family since 1961, with a successful transition to the younger generation, including CEO James and co-chairmen Andrew and Jonathan. Family members hold about 25% of Loews’ stock.
Investors, of course, could simply buy Loews’ publicly traded holdings on their own. But there's no denying the Tisches' golden touch: A dollar invested in Loews in 1960 grew to $3,300 by the end of 2010, an annualized return of nearly 18%. The stock, at $39, trades at a 22% discount to Loews' estimated value, which analysts peg at about $50 a share. Sam Yake, an analyst at BGB Securities, an investment research firm in Arlington, Va., recommends the stock: "You're buying a basket of assets at a discount, and the proven track record of a CEO who is extremely risk-averse, very cautious and patient—everything you'd want in a guy managing your money."
Think of Leucadia as Berkshire's daredevil cousin. Based in New York City, the company holds a diverse collection of businesses that include lumber, plastics, wineries, energy drilling, real estate, medical products and a hotel and casino. Although Berkshire focuses on long-term partnerships with competitive, well-run businesses, Leucadia gravitates to the distressed and poorly run, with no long-term commitment guaranteed. "Leucadia is more of a turnaround investor," says Morningstar analyst Jim Sinegal.
Compare Buffett's investment in Bank of America or Goldman Sachs during the financial crisis via sweetheart deals in preferred shares with Leucadia's 30% stake in the common stock of struggling investment banking firm Jefferies Group. The latter is "definitely riskier," says Sinegal. Still, the company is held in high esteem by the Oracle of Omaha, who has several joint ventures with Leucadia, including the 2009 purchase of a commercial real estate firm, now named Berkadia Commercial Mortgage.
Chairman Ian Cumming and president Joseph Steinberg, who are largely responsible for Leucadia's annualized 20% growth in book value since 1979, are signed on until 2015. Sinegal figures that Leucadia shares are worth about $30 per share—precisely the same as the stock's February 3 price.
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