A Smaller Version of Berkshire Hathaway: Markel Corporation

Markel Corporation markets and underwrites specialty insurance and have been doing business since 1930. They are not a big well known company except in the value investing community. This might be due to them being in a rather boring industry- insurance. Wall Street seems to push everything in vogue and the retail investor seems to follow along. Berkshire Hathaway was not well known either 25-30 years ago, and Warren Buffett had already been involved with Berkshire for nearly 20 years. I must admit when I first heard of Berkshire back in the mid 1980's it was trading around 1500 a share. The only reason I noticed it, was that it had a high price tag or so I thought at the time. Hear it is almost twenty-five years later and another high priced insurance stock has got my attention. Well actually I've known about this one for a few years now. Did I say high priced at $342.00 dollars a share. Well for some of you new folks the stock price does not have anything to do with true value of the company. The reason why you see Berkshire Hathaway(BRKA,BRKB)and Markel(MKL)trading so high is because they don't split the stock, like most companies often do.

As stated in the title Markel Corporation is a smaller version of a Berkshire Hathaway. It operates in the same fashion as well. That is it's primary busi

ness is insurance. Most insurance companies have whats called float. Float is the money taken in (insurance premium) less the claims paid out. The difference or "float" is reinvested in fixed income and equities. Of course we all know that Buffett has been a master of this...taking the float and buying well known financially strong companies such as Coca Cola(KO), Johnson & Johnson(JNJ), Proctor & Gamble(PG), Wells Fargo(WFC) and Kraft Foods(KFT). Markel has also done quite well over the last twenty years by doing the same thing. Since August of 1990 Markel has risen over 2100% while Berkshire has risen over 1500%. Currently Markel is trading at $MKL a share. They have over 132 million per share in cash and a debt/equity ratio .34. Markel has over 70 companies in its portfolio with Berkshire Hathaway(BRKA, BRKB), United Parcel Service(UPS), Diageo(DEO), and Carmax(KMX) being some of the larger holdings.

What others are saying about Markel: 5 Star Stocks Begging To Be Bought

Author currently long as of this writing BRKB,WFC,JNJ,MKL,KFT,KMX

Concentrate On Value Part III - Debt/Equity Ratio

As I wrote in my previous two Post, Ignore the headlines and stick with the facts at hand, not the B.S. that is hyped in the media or the tips you hear at a party. Investing, although not so simple can be enjoyable and profitable if you approach it in the right manor. As mentioned in my previous two posts book value, free cash flow and return on equity are just some of the tools used to finding the right business to invest in. Another tool to help guide you is the debt/equity ratio which is simply liabilities divided by the stock holders equity. A simple example of this would be: Take your homes current market value, say it is $200,000 dollars and lets say you owe the bank $100,000 dollars, your debt-to equity ratio is 1.0 or 100 percent. Lets also take your neighbors home current value of $200,000 dollars and suppose he/she owes $150,000 dollars. The debt/equity ratio is $150,000/$200,000 3.0 or 300 percent. In this formula we are looking for low debt/equity ratio's. The lower the better. However keep in mind that some industry's will have higher figures than others. Also take note that this is how many company's finance their growth,however if the debt/equity ratio gets to be to high this could be a warning sign to get out or stay away altogether. Also let me reemphasize that you should never take just one of these methods all on its own. Choosing a stock using a combination of these methods can yield some profits for the patient investor with an eye for value.

Plenty Of Stocks To Fit Warren Buffett's Criteria!!!

With over $25 billion in cash to deploy it looks as if the worlds greatest investor Warren Buffet could put some of that to work according to a recent Bloomberg article. Buffett looks for companies who have high returns on equity(ROE), low debt/equity ratio, competent management and stable cash flow. This is only the second time since 1965 that the book value of Berkshire Hathaway $BRKA has wound up in the negative column. Even after one of the worst years in recent history, Buffett's Berkshire Hathaway has still managed to compound its book value at over 20% per year annually during the course of the last 44 years. Three stocks high lighted in the article are Sysco $SYY, VF Corp. $VF, and Danaher $DHR. However there are over 50 stocks mentioned here which gives the value investor a good starting point to further research and possibly invest in some of the same stocks as Buffett himself.

The Dhandho Investor Buys Into ZINC!

Back in early November I  wrote a post on Horsehead Holdings Corp.(ZINC) .  Horsehead is  the largest zinc producer in the United States and the leading manufacturer of value-added zinc products including zinc oxide and zinc powder. Zinc has many uses such as a protective coating to various fabricated products, it is found in  tire and rubber products, chemicals, ceramics, plastics, paints, lubricating oils, and pharmaceuticals it is also used in brake linings for automobiles.

      Since my last post on Horsehead, I noticed that Mohnish Pabrai alias The Dhandho Investor has taken a stake in ZINC.  Pabrai has made a name for himself over the last few years returning Warren Buffett SIZE returns. Pabrai by the way is a former IT guy turned money manager. Pabrai usually has 10 to 15 stocks at a time in the portfolio. I thought it was interesting that Pabrai bought into one of the stocks I followed, usually its me following the Gurus. However I'm sure Pabrai saw the same things that I did in this company. First off the company has $80mil in cash which equates to $2.28 a share. They have virtually no debt with a debt-to-equity ratio of "0". Their also trading at nearly 50% book value, which is currently at $7.93 a share. It also looks like 125,000 plus investors over at the Motley Fool have picked up on this one as well.  The company  looks as if its staying ahead of the economic downturn by running a rather tight ship. In December Horsehead  announced that it is taking aggressive steps to reduce operating costs including idling its recycling facilities for the last week of 2008 , reducing its salaried workforce, and revising the construction strategy for its new South Carolina facility. Horsehead expects that these reductions will result in annualized savings of approximately $2 million. A few more points I would like to mention that this is a cyclical stock, and with the current economic conditions it could stay depressed for a while. Also forward looking earnings (2009) are projected at an average loss of 62 cents a share. So while the short term outlook does not look rosy valueinvestors and pabrai himself are looking for the low-risk, high-uncertainty businesses.

  "Low risk and high uncertainty is a wonderful combination. It leads to severely depressed prices for businesses - especially in the pari-mutuel system- based stock market. Dhandho entrepreneurs first focus on minimizing downside risk. Low-risk situations, by definition, have low downsides. The high uncertainty can be dealt with by conservatively handicapping the range of possible outcomes. You end with the classic Dhandho tag line: Heads, I win tails, I don't loose much!"   -Mohnish Pabrai.  

 The 52 week week high was $18.31 and the 52 week low was $2.26, which as I mentioned earlier is the cash it has on hand. Currently ZINC is trading at $4.25 with a NCAV of $4.45.

*Author is neither long nor short.  

Relevent Articles

The Graham & Dodders (Forbes)

Sears Holdings, ESL Investments & Mr. Eddie Lampert

This is a follow up on my previous article on Sears Holdings (see my post "Sears Not Just Your Average Retailer!?$$$"http://stockmanmarc.blogspot.com/2008/10/sears-not-just-your-average-retailer.html) which I covered just a few weeks ago. The stock has gone down another 20% since then which is probably in anticipation of earnings that are due out on Dec. 2nd, 2008. However the intrinsic value of the company still looks to be around $81.00 per share and this does not include the Craftsman, Kennmore, or DieHard brands which most Americans are familiar with. Due understand that the estimates in value are rough estimates but conservative ones at that. Since I last posted on Sears, they have since reinstated the layaway plan which use to be quite popular many years ago. It was always very popular around the holidays. For those of you not familiar with the layaway plan, you simply put down a small down payment and the retailer holds that item until the product is payed for.

Many people are strictly looking at this company as a pure retailer, and saying that they don't have a chance against WalMart(WMT) and Target(TGT). However Sears sits on a vast amount of real estate that could be sold off or converted into a different type of store, the possibilities are many. Plus they have cash on hand to redeploy or buy back shares that have been beaten down which further increases shareholder value. Furthermore their debt/equity ratio currently is .38 which is much lower than the competition. Also remember that Eddie Lampert is not only chairman of a retail giant but a chairman of ESL Investments who has a 20+ year track record.

This is an interesting stock and situation, which I will try to follow up on at a later date.

Please remember this is not a recommendation but a business to keep an eye on and do further research.

A Cash Rich Insurer: Odyssey Re

Odyssey Re (ORH) is a leading reinsurance underwriter that provides property and casualty insurance as well as specialty insurance. Odysseys biggest shareholder is Fairfax Financial which I talked about in a previous post. Fairfax holds 66% of the outstanding common shares. Currently ORH has a market cap of 2.5 billion and its revenues are 3.2 billion. Total cash on hand is 2.5 billion, which means it only trades for 1 x cash. Very little debt with a debt/equity ratio of .18. ORH sports a 27% REO(return on equity). They pay a small dividend which yields .70% which was recently raised. With so much in cash and backing from Fairfax, Odyssey looks to be in a strong position to weather out the current financial crisis.



Author does not hold any position.

SEARS NOT JUST YOUR AVERAGE RETAILER!?$$$

Many people think of Sears(SHLD)as that old line retailer who had those big thick catalogues that came out every year that offered a zillion items inside its pages. Those days have been replaced by the internet + other big box retailers such as Walmart and Target. What many people including investors don't realize that underneath this stodgy retailer breathe a different animal. Sure Sears is still a retailer with stores everywhere. But it is not just any retailer. Sears is comprised of Sears, K-Mart and Sears Canada(70% owned subsidiary). Sears is the leading home appliance retailer as well as a leader in tools, lawn and garden, home electronics , automotive repair and maintenance. Their main brands are Kennmore, Craftsman, and DieHard. They also have several different lines of apparel such as Lands' End, Jaclyn Smith and Joe Boxer, they also offer Apostrophe, Covington Brands and Martha Stewart Everyday products. Sears is the nations largest provider of home services, with more than 13 million service calls made annually. ESL Investments Inc a privately owned hedge fund run by famous value investor Eddie Lampert is the man running the show. Lampert has a 20 year track record of 20% annually. Besides being Sears Holdings largest shareholder he has sizable stakes in AutoZone(AZO), AutoNation(AN), Home Depot(HD), and Citigroup(C). Sears is ranked number eight in the U.S. for internet retail sales. Currently Sears trades at .60 book value (48.50 per share/ 80.80 book value per share). The company made 49 billion over last 12 months with a market cap of 6 billion. The company has 1.5 billion in cash with a low debt/equity ratio compared to its pier group. The company has been buying back shares in the open market which should further strenghten shareholder value. Lastly Sears sits on a huge real estate portfolio that is valued at $50 per share to over $100 per share.
Cash = 1.5 bil
Real Estate = 6 bil + (low estimate)
Lands'End = 1.5 bil +
Service Call Unit = 1.3 bil (13mil service calls a year @ $100 per call) low estimate

Total = 10.3 bil/126.4 mil shares = $81.50 per share

These figures do not include the values of the Kennmore, Craftsman, and DieHard brands that could be sold off or sold through different chains like Home Depot, Walmart, Target and AutoZone or different distribution channels which would increase revenue and put a much higher value on the company.

The author suggest further research before investing.

STOCKMANMARC

Fairfax Financial Holdings Looking Cheap!

I recently wrote an article that mentioned Fairfax Financial(FFH). Fairfax is an insurance holding company run in the same fashion as Warren Buffet's Berkshire Hathaway. They take the float from the insurance business and re-invest it in common stock, bonds, or whole companies. Fairfax is run by Prem Watsa who is looked upon as the Warren Buffet of Canada. Fairfax has sold off with the market in general reaching a high of $355 a share. Currently Fairfax is trading at book value of $252 a share with a market cap of 4.7 billion and sales near 8 billion. With over 6 billion in cash (which represents $333 per share) and a debt-to-equity ratio of only .35 this company is looking quite attractive. They have a high REO(return on equity) of 37% with a trailing P/E of 3.25 and pays 1.9% dividend. To boot they have a stock portfolio worth 3 billion.

The author suggest further research before investing.
The author is long FHH.

STOCKMANMARC

Mohawk Industries-A Positive Spin on A Negative Industry

The housing market has been in a downward cycle since topping out in 2005 and it is anyones guess when it will end. On a positive spin their have been plenty of housing related stocks that have been sold off hard. One in particular is Mohawk Industies Inc.$MHK. Mohawk is a leading producer and distributor of flooring worldwide that has a 125 year history. They sell to both residential and commercial markets which include ceramic tile, rugs, carpet, hardwood as well as laminate flooring. Through acquisitions and internal growth Mohawk has become one of the worlds largest floor covering suppliers and the country's leading recycler of plastic soda bottles(which become polyester carpeting). At the end of 2007 Mohawk and Shaw Industries(part of Warren Buffets Berkshire Hathaway conglomerate) controlled a combined 45% of the U.S. flooring market. Since only a handful of companies manufacture flooring this gives them high pricing power. Mohawks current price is $50 and trades at 5.5 times earnings with a Debt/Equity ratio .044, REO is 14% and a current book value of $73 share. Further management has a 19% stake and to boot Fairholme Capital and the Sequoia Fund have significant stakes which are two highly reguarded money management firms.

The author suggest current research before investing.

5 Defensive Plays

Here are 5 stocks for uncertain times. Each company pays a dividend, has a PE ratio of 18 or less, a high return on equity, and debt/equity ratio of .52 or less. Four out of five companies have been in business for over 100 years.

P/E ROE Div% D/E ratio

Costco(COST) 18 14 1.2 0.25

Hormel(HRL) 14 16 2.3 0.21

Johnson&Johnson(JNJ) 13 26 3.3 0.30

Coca Cola(KO) 16 27 3.7 0.48

Proctor & Gamble(PG) 16 17 2.7 0.52

* prices as of 10/10/2008

Costco is a Big Box discounter that sells everything from, snack foods to home furnishings.
Hormel Foods sells meat products under various brand names such as SPAM, Dinty Moore, and Valley Fresh. Everyone knows Coke with its bright red cans and funny shaped bottles which serves up brands such as COKE, FANTA, and SPRITE. Proctor & Gamble is in the personal products industry and owns brand names such as Head & Shoulders, Cover Girl, and Gillette. While Johnson & Johnson has TYLENOL, BAND-AID, LISTERINE.


The author suggest further research before investing. The author does not hold positions in any of these companies except JNJ.

STOCKMANMARC