Allan Mecham has been dubbed the 400% man, an accolade he received after continued and consistent outperformance of the S&P 500. The Buffett-style value manager runs a concentrated value investing portfolio at Utah's Arlington Value. The fund is large enough that it must report its holdings to the SEC, which provides fertile ground for diligent investors to search for ideas.
In investing, unlike almost every other field, there are no points for originality. An investor who achieves above average returns by mimicking moves of super-investors earns money that is just as spendable as those who unearth opportunities themselves. This is not true for bands (it's hard to make it big playing covers), technology companies (due to patents) or just about every other field.
The fund is extremely concentrated, with only 10 positions (counting the two Berkshire share classes as one position). The turnover also is low, with the fund changing only a few positions each quarter. For an investor looking for ideas, these are both important points. Because of the concentration, it is likely in my opinion that each idea represents a strong conviction buy from the manager. Because of the low turnover and long-term orientation, it is likely that the thesis for buying still holds, and that fund still holds the position even though the information is reported with a delay.
This article presents the changes in Arlington Value's portfolio since my previous article on the firm, which is available here. I will focus on the changes to the portfolio, which are the most likely in my opinion to represent new, actionable ideas.
Since that article the fund has added two new positions: Alleghany Corp (NYSE:Y) and Copart Inc (NASDAQ:CPRT). The remainder of the fund's positions according to its most recent disclosure are shown below.
Source: SEC Filings
Alleghany is the larger of the two new positions, at approximately 8% of the fund. The company has often been referred to as a baby-Berkshire, with property and casualty insurance operations funding other investments. The company writes mostly specialty and reinsurance lines of business, which have a greater potential for profits as they are less competitive. The company is currently trading at book value, which for insurance firms generally approximates liquidation value. As the company has consistently generated combined ratios below 100, the assets should be worth more than book value. A combined ratio below 1 indicates that the insurance operations make money independently of the investments. Thus, it is completely reasonable to pay book value for the investments and essentially receive the profitable insurance operations at no charge. This is especially true when goodwill and intangibles represent less than 1% of total assets as is the case here.
Source: Corporate Presentation
The second position added in the most recent quarter is Copart. The company is a vehicle salvage and auctioneering firm. The company sells used, scrap and salvage vehicles, mainly for insurance companies. The company does not typically own the vehicles, which allows it to use a minimal amount of capital while growing its business. Earnings have been growing, increasing approximately 20% over the last 3 years. The company has been continually repurchasing its own stock, with shares outstanding decreasing approximately 25% over the last three years. This outstanding record of earnings growth (and even greater earnings per share growth) justifies the relatively high P/E ratio of 26.
The company has a high (>20%) return on equity, which means the company should be able to continue to grow its business with the application of a relatively small amount of capital. This should allow buybacks to continue, as the capital-light nature of the business allows for capital allocation decisions to be made independently of the business needs.
Although I have presented a rationale behind each of the new selections in the fund, I have no insider information on what rationale Mr. Mecham used to select these companies. However, I do believe that studying the record and choices of successful investors is an excellent way for investors to learn new analysis techniques and source new ideas.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.