Berkshire Hathaway (BRK.A) had a busy first quarter recently, investing over $50 billion worth of capital to fund a new stock acquisition bonanza for the Nebraska-based holding company.
While the firm added shares to seven names already featured in its portfolio, Berkshire also decided to open up new positions in another eight companies as well.
As it happens, many of the companies chosen by Buffett and his management team won’t come as much of a shock to those who’ve followed the famed investor’s career over the years.
His biggest move this time round came with a $13.2 billion stake in energy firm Occidental Petroleum (OXY), with the Oracle of Omaha no doubt desperate to increase his exposure to the hydrocarbon market as oil and gas prices skyrocket.
Berkshire’s second largest purchase was for the American multinational IT firm HP. The decision to invest in Hewlett Packard’s successor company might end up being questioned by some, not least because Buffett’s track record with tech firms hasn’t always been that impressive.
However, HP is a decent company trading at a very good price right now – which is something Buffett’s former mentor, Benjamin Graham, would say makes for a quality investment.
Other notable additions to Berkshire’s roster include the entertainment industry stalwart Paramount Global, as well as Citigroup, the only big US bank – until now – that Buffett has not had a stake in in recent years.
Markel: A Rare Low-Risk Growth Play
However, one stock pick that really turned heads was the inclusion of Markel Corporation (NYSE:MKL) on Berkshire’s new list.
The company is a specialty insurer, and is sometimes referred to as a “baby Berkshire Hathaway” due to the similarities between itself and the more famous investment fund.
Markel underwrites non-standard insurance products, and almost one-third of the assets it manages are listed as publicly-traded stocks.
What differentiates Berkshire from MKL, however, is the fact that Markel’s portfolio tends to reflect one that’s more growth-oriented rather than value based.
Indeed, MKL’s co-CEO, Richie Whitt, said during the firm’s Q4 2021 earnings call that the company’s aim in 2022 is to “optimize our profitability”, focusing on its reinsurance business, which is a segment that typically does well in times of rising inflation.
Markel’s revenues have more than quadrupled in ten years, with its EPS rising from $26 in 2012 to $177 in 2021. The company’s forward Return on Equity growth rate of 35% is also stellar, while its trailing twelve month Return on Total Assets of 3.67% easily beats the sector median at 1.26%.
One of the company’s big growth drivers is its Markel Ventures business, which is seen as entirely separate to MKL’s other core operations. This segment grew by 35% in the first quarter 2022, and is expected to perform well over the long-term due to its strong organic growth.
Because of the stable and predictable nature of cash flows associated with the insurance industry, companies that specialize in the sector have the opportunity to grow their asset portfolios with a substantially lowered risk profile.
In the case of Markel, its earned premiums – which grew 17% in the first quarter – can be combined with shareholder funds, and placed into investments that are typically related to other underwriting activities of the firm.
In fact, MKL has a BBB rating, signifying that the company has a low expected risk of default.
Source: Unsplash
Other Gems Among Buffett’s New Buys?
Going off the performance of share price appreciation alone, Berkshire’s investment in Occidental Petroleum would appear to be the winner here. Its stock has risen more than 120% in 2022 so far, and yet its forward non-GAAP PE ratio is still pretty low at 6.6x. The company’s year-on-year EBITDA growth of 157% is also good, as is its Levered FCF Margin of 31.5%.
However, OXY appears to be an outlier in Buffett’s recent portfolio picks, since most of the businesses that Berkshire chose are actually down this year.
That said, Warren Buffett probably isn’t too fazed about this: the wily investor plays a long-game when it comes to the stocks he holds, and the potential for a company to deliver returns over decades rather than months or years is usually his main concern.
Thus, the choice to include McKesson makes perfect sense. The company is a leader in the healthcare supply chain and distribution space, and its business enjoys a certain level of immunity from the vagaries of the economic cycle.
Funnily enough, McKesson’s share price has been rising almost consistently since the last quarter of 2021, and is now up 73% over the last twelve months.
But it’s MCK’s solid balance sheet that probably attracts Buffett so much. The firm pays out a small dividend yield, but it’s committed to a huge program of share buybacks. Indeed, the board announced a $4 billion increase to its repurchase scheme in December, which, at its current valuation, represents 8% of the company’s market capitalization of $48 billion.
Is Markel The Best Stock Buffett Bought?
On the face of it, Markel might not look like it can match up to the returns that a behemoth like Occidental can deliver, especially in light of the fact that the oil and gas industry is enjoying some of its highest spot prices ever right now.
However, MKL has a reputation as one of the best capital allocators in all of America, and it seems the market is just waking up to the defensive potential the company can offer in a time of rising inflation and interest rates.
Indeed, Markel’s share price exploded almost 25% at the beginning of May, and is now trading nearly 13% up since the start of the year. But now with Buffett making such a public endorsement of the business, who could guess how high MKL could go in the near future?
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