By Matt Doiron
Tom Gayner, who manages the investment arm of insurance company Markel, is one of the managers who we track in our database of quarterly 13F filings. Our research on 13Fs has found that the most popular small-cap stocks among hedge funds outperform the S&P 500 by 18 percentage points per year on average (learn more about our small cap strategy) and our own portfolio based on this technique beat the market by 33 percentage points in the last 11 months. We also track these filings as a source of potential investment ideas. Markel recently filed its 13F for the second quarter of 2013, disclosing many of its long equity positions as of the end of June. Read on for our thoughts on five of Gayner's largest holdings by market value, see the full filing on the SEC's website, or research Markel's stock picks over time.
One of the insurance company's favorite stocks was Carmax (KMX) which serves as an auto dealer of used vehicles. In its most recent quarter (its fiscal Q1, which ended in May), the company recorded roughly 20% increases in both revenue and earnings compared to the same period in the previous fiscal year. The stock price is up about 70% in the last year, however, as investors express confidence in Carmax's prospects. This has driven its earnings multiples above 20 on both a trailing and forward basis, though we might still look into how sustainable its recent growth could be.
Gayner sticks to his guns as a value investor: another of his top picks is Berkshire Hathaway (BRK.A) (BRK.B), suggesting that whatever is good enough for Warren Buffett is good enough for him. Of course, investors in Berkshire should be somewhat concerned regarding succession plans for the holding company, and in addition the stock price currently trades at 1.4 times the book value of the equity. Because Buffett and his team tend to invest in a diversified portfolio with many defensive stocks and privately held companies, the beta is only 0.3.
Markel disclosed ownership of 1.2 million shares of Diageo (DEO), the alcoholic beverage giant whose brands include Johnnie Walker and Crown Royal. Diageo is another company whose valuation has already incorporated some further growth in earnings per share, with trailing and forward P/Es of 20 and 15, respectively. Depending on how analysts adjust for currency factors, revenue growth in its most recent fiscal year (which ended in June) was 5-6% from its levels a year ago. Even with net margins improving that seems like slightly aggressive pricing.
Gayner and his team included Brookfield Asset Management (BAM) among their top five picks. Brookfield is another holding company whose interests include real estate investments and power generation - it is managed by Bruce Flatt. It is valued at earnings multiples in the high teens, though recent reports do show large increases in the company's profits. We would note that Brookfield is valued at a heavy premium to book as well (the stock's P/B ratio is 1.6) and that Wall Street analysts seem to be expecting earnings per share to be about flat in 2014 compared to the trailing numbers.
Walt Disney (DIS) rounds out our list of Markel's top stock picks as the company reported a position of 1.5 million shares in the media and entertainment company. Its trailing earnings multiple of 19 is in line with where many of its peers are trading, though the industry as a whole has been doing decently according to recent results. Disney specifically has grown its net income by 7% in the first nine months of its fiscal year (the company has a September fiscal year end) versus a year earlier, although growth does seem to have slowed in its fiscal Q3.