The Value of Good Management
Qualitative analysis of a company can be difficult for individual investors. They often lack the resources, time or desire to engage with a company's management and produce an assessment before making a financial commitment. Companies that may appear to be brilliant on paper and attract a large amount of interest on a quantitative basis can fall victim to wiles of unscrupulous managers who are not serious about the stewardship of their minority shareholders' capital.
An individual investor can seek to mitigate the potential risks of bad management in several ways including purchasing shares in companies that have large amounts of insider ownership (thus encouraging that interests are more closely aligned), companies that have an incredibly simple and effective business model or companies that provide a compensation structure designed to reward management for achieving goals that are aligned with shareholder interests.
An Obscure Conglomerate Similar to a Famous One...
I believe that the Alleghany Corporation (NYSE:Y) represents an excellent value to an investor for several reasons. Alleghany is a conglomerate that specializes in various types of insurance through its subsidiaries. In addition, the company also has petroleum and real estate interests. At a market cap a little north of $6 Billion and priced at $363 per share against a book value of $388 and cash per share of $47 with a P/E ratio of 5.2, the company is also attractive from a quantitative perspective. Despite not paying any cash dividends, the company has had a long history of stock dividends, splitting 51:50, yet did not pay this stock dividend in 2012.
From a qualitative perspective, I believe that the company is truly remarkable because of its management and culture. Founded in 1929 as a holding company by the Van Sweringen brothers, Alleghany has a long history as a corporate entity, which is detailed on its website. The former CEO of Alleghany Corporation, John Burns, articulated an investment philosophy that Value Investors will surely appreciate: "Shun investment fads and fashions in favor of investing in basic financial and industrial enterprises that offer long-term value to the investor," the company also has a simple goal which, I believe it has performed in an excellent manner: "Our objective is to create stockholder value through the ownership and management of a small group of operating subsidiaries and investments."
By this point, many readers will be inevitably drawing comparisons to another conglomerate with an insurance business at its core, Berkshire Hathaway (NYSE:BRK.A). I believe that this comparison is valid, as both have similar business models and both retain an ethos of stewardship toward their shareholders.
Over a 10-year period, Allegheny has outperformed its gigantic cousin, something unsurprising as it is less subject to the "law of large numbers," If you are skeptical, please view a chart, which can be found here courtesy of Google Finance.
What's in a Letter?
I often read annual letters to shareholders in addition to corporate reports when making investment decisions. After reading the annual letters from the past several years, posted on the companies' website, I have been extremely impressed with the honesty and frankness with which the management approaches shareholders about both successes and more importantly in my mind, its failures.
Given the similarity between business models, I believe that Alleghany Corporation would represent a "natural" purchase for Berkshire Hathaway, especially if market turmoil caused a considerable divergence between the price of Alleghany common against its book value. Even as a standalone, I believe Alleghany is a winner for the long term.