#1 Under the Radar Buffett Stock

Under the Radar Buffett Stock to Buy: In recent weeks, Warren Buffett has made a slew of purchases as stocks slide and worries of a bear market increase.

 

Among the most interesting of these purchases is a $620 million stake in reinsurance company Markel (NYSE:MKL).

 

Why is Buffett buying this largely overlooked insurance company in the current market environment?

Markel provides specialty and niche insurance services. The company underwrites policies for unique types of property that other insurers typically won’t cover.

 

Markel is also a financial holding company. Through its venture capital business, the company invests in a wide range of other businesses, using its large supply of floating capital to generate higher profits elsewhere.

 

Part of its portfolio is also invested in stocks of publicly traded companies.

 

While there has been no public statement about the Markel purchase so far, the company does check several boxes that historically appeal to Buffett.

 

To begin with, it operates in the insurance industry, a business space that Buffett has been heavily invested in for decades. Even in today’s high-multiple environment, Markel trades at P/E ratios of under 12, indicating possible undervaluation.

 

Markel has also followed a business practice preferred by Buffett himself by using its floating cash reserves to invest in both private businesses and publicly traded stocks.

 

This strategy has helped Buffett build Berkshire Hathaway, originally a textile mill, into one of the most valuable business empires in American history. 

 

In the most recent quarter, Markel reported revenues of $2.61 billion, down 10.1 percent year-over-year.

 

Markel’s gross margin was also down in Q1, though it remained at a respectably high 62.7 percent. This resulted in a total gross profit of $1.63 billion. In the same quarter of 2021, gross margin was 75.0 percent.

Thanks to its investment activities, Markel is sitting on a large portfolio of unrealized gains. In the most recent quarter, the total capital gain on Markel’s portfolio was reported at $5.8 billion, up 132 percent over the last five years.

 

Cash flow, long a preferred metric used by Buffett in evaluating investments, is another bright spot for Markel. In Q1, net cash flow totaled $415 million, up from $318 million in Q1 2021. This strong cash flow enabled Markel to reward shareholders by repurchasing 63,000 shares of outstanding stock during the quarter.

 

Markel’s earnings did take a hit in Q1, with the company reporting its first loss since Q1 2020. The loss was relatively modest at $6.58 per share on an unadjusted basis.

 

For reference, the previous quarter saw an unadjusted gain of $62.38 per share. Even with the Q1 loss, the trailing 12-month EPS for the stock in Q1 reflected positive earnings of $127.91 per share.

In Q1, Markel’s underwriting operations saw growth of 16 percent, while its program services operations grew by 17 percent year-over-year. Gross written premiums increased by 19 percent.

 

Overall, Markel was able to generate double-digit growth across all of the major product lines associated with its core insurance business. Although far from meteoric, this is the kind of gradual, sustainable growth in a well-established business that typically appeals to long-term value investors like Warren Buffett.

 

Currently trading at $1,330.43, Markel has a median 12-month target price of $1,575. At this price, Markel stock would have an upside of 18.4 percent in the coming year.

 

Investors should take note that this number is based on only two current analyses that offer a price forecast. However, among 8 total analyst ratings, the stock received three buys, one outperform, three holds and one underperform. This results in an overall consensus buy rating for the stock.

 

It’s also important to remember that 12-month price forecasts likely had no impact on Buffett’s decision to buy Markel. As a buy-and-hold value investor, Buffett has historically been disinterested in short-term price fluctuations.

 

Instead, the strategy that has made him arguably the most successful investor in financial history revolves around identifying undervalued businesses and holding them more or less indefinitely to realize larger long-term gains on his holdings.

 

From a risk perspective, Markel is a fairly conservative investment. Its venture capital and investment activities make it quite well diversified, and its core insurance business appears to be managed very well.

 

Specialty insurance could be facing a time of higher risks ahead, as geopolitical tensions, natural disasters related to climate change and other factors test historic risk models.

 

Overall, though, Markel seems to be a reasonably safe stock to own at the moment.

 

Markel looks to be a good buy right now, especially in light of the generally bearish sentiment covering large sections of the stock market. This company has the advantage of having exposure to many different business lines through its venture capital division. This allows it to successfully allocate cash flows from its insurance business for higher profits.

 

Markel’s core insurance business also looks quite solid. Despite some losses in the first quarter, the fact that it achieved double-digit growth in its insurance product lines is quite impressive.

 

The health of Markel’s insurance business is critical, as it generates the float needed to reinvest into stocks and other businesses. Based on current reporting, the insurance business looks to be very strong and capable of growing well into the future.

 

It is worth noting that Markel is best suited to buy-and-hold investors. If you’re looking for rapid growth over short time frames, Markel probably won’t fit your strategy. This stock has the potential to deliver solid, consistent returns over long periods of time. This makes it a natural fit for the Berkshire Hathaway portfolio and for investors who follow the long-term approach championed by Warren Buffett.

#1 Stock For The Next 7 Days

When Financhill publishes its #1 stock, listen up. After all, the #1 stock is the cream of the crop, even when markets crash.

Financhill just revealed its top stock for investors right now... so there's no better time to claim your slice of the pie.

See The #1 Stock Now >>