Since mutual funds were first invented in 1924 and regulated by the Securities and Exchanges Commission (SEC) under the Investment Company Act of 1940, individual investors around the world have gained exposure to the stock market through a professionally managed and diversified platform.
But that professional management does come with a cost as the average annual mutual fund expense ratio has hovered around 1%. Exchange-trade fund (ETF) competition has brought that average fee down in recent years, but it’s still an important cost to investors — particularly if average investment returns are in the single digits.
However, there may be a way to avoid those fees by buying stocks whose management team has a solid track record of capital allocation and investment prowess. These companies hold both public and private securities both as wholly-owned subsidiaries or as minority shareholders.
Some of these names are very familiar to investors and a few of these have very little name recognition at all. They are:
- Berkshire Hathaway (NYSE:BRK.B)
- Fairfax Financial (OTCMKTS:FRFHF)
- Graham Holdings (NYSE:GHC)
- Loews (NYSE:L)
- Otter Tail (NASDAQ:OTTR)
- Icahn Enterprises (NASDAQ:IEP)
- Markel (NYSE:MKL)
Now, let’s dive and take a closer look at each one.
Stocks to Buy: Berkshire Hathaway (BRK.B)
The investment portfolio of Berkshire Hathway is likely well known to most active investors. Large holdings include Apple (NASDAQ:AAPL), Bank of America (NYSE:(BA)C), American Express (NYSE:AXP) and Kraft-Heinz (NASDAQ:KHC). Berkshire owns 100’s of publicly traded securities, much of them sourced by his two investment management lieutenants Todd Combs and Ted Weschler. Private holdings range from Dairy Queen to Precision Castparts to insurance giant GEICO. The combination of smart capital allocation and a time horizon that can only be described as “forever” has made Warren Buffet on of the wealthiest humans on earth for many years.
Currently, Berkshire trades near all-time highs and a price-book value of 1.4x. Berkshires disparate group of holdings and various equity stakes distorts true GAAP earnings and the company is usually valued based on book value per share. Berkshire has been buying back shares at a higher rate than any time in its history, in 2020 buybacks totaled $25 billion. And the buying binge has continued in 2021, according the 2020 Annual Shareholders Letter.
In turn, these moves reflect not only that there is very few companies to purchase at a fair price in the stock market today, but that Buffet sees his own company selling below his estimate of intrinsic value.
Fairfax Financial (FRFHF)
Often called the Berkshire Hathaway of Canada, Fairfax Financial is led by legendary value investor Prem Watsa. Although primarily an insurance company that operates over a dozen different subsidiaries, Fairfax also uses it insurance float to invest in a number of non-insurance businesses. Public holdings includes stakes in Blackberry (NYSE:BB), Kennedy Wilson (NYSE:KW) and Leon’s Furniture (OTCMKTS:LEFUF). Private holdings include such diverse operations as ag tech company Farmers Edge, entertainment company Boat Rocker Media and sporting goods company Peak Achievement.
Fairfax is also a great emerging market play with operations in India and Africa. Prem Watsa, being of Indian origin, has invested heavily in that country. Investments in India include sectors such as insurance, transportation, chemicals and banking. Fair value of these investments at the end of 2020 totaled $5 billion.
Fairfax is trading slightly below book value at this time, which makes a great entry point for long-term investors. We can rest assured that during the next market downturn, Prem Watsa will take advantage of the panic selling and pick some quality companies selling at incredible discounts.
Stocks to Buy: Graham Holdings (GHC)
Although not a household name, Graham Holdings was formerly known as The Washington Post Company with a history dating back to 1877. After selling the actual Washington Post newspaper to Jeff Bezos back in 2013, the name was changed to its current form and now is a loose conglomerate of about 16 businesses — some of which have been part of the company for decades.
These businesses cover sectors such as education, broadcasting, manufacturing and healthcare. For example, GHC owns Kaplan, the diverse education company, seven local television stations, auto dealerships, and Slate.com, the left-leaning online magazine.
The company’s acquisition and ownership strategy strikes a similar tone to Berkshire Hathaway and Fairfax Financial in terms of long-term ownership and faith in a strong management team for each business. At one point, Berkshire Hathaway owned 28% of The Washington Post Company.
Book value per share (BVPS) at 2020 year-end was approximately $732, and GHC stock has traded well-above book value for much of the past five years. And as the stock declines further below book value, this may be a great entry point for investors.
No this is not the hardware store chain, but instead Loews Corporation is the holding company and investment platform for the Tisch family out of New York City. The family started buying hotels in the 1950’s and have used that as a platform to diversify into other investments.
Loews is quite a bit easier to understand than the previous companies discussed as there are only 4 underlying holdings. Loews owns 89.6% of publicly traded CNA Financial (NYSE:CNA), 100% of Boardwalk Pipelines, 100% of Loews Hotels and 99% of Altium Packaging.
Taking Loews current market capitalization of $14.4 billion and subtracting its $11.3 billion stake in CNA as well as net cash of $1.2 billion leaves an implied private market of $1.9 billion for the remaining three private companies. However, Boardwalk Pipelines, a natural gas pipeline company has EBITDA of $819 billion last year, the 27 hotels have normalize EBITDA of approximately $220 million, and Altium Packaging has sales of over $1 billion. It seems obvious Loews is undervalued on a sum-of-the-parts basis.
Keeping with the price-book value theme, Loews year-end BVPS was $66.34, 17.5% above todays price. The company has been buying back shares below book value for quite some time — a surefire way to create shareholder value.
Stocks to Buy: Otter Tail (OTTR)
Otter Tail is a small cap utility provider that provides electricity to approximately 250,000 customers in Minnesota, South Dakota and North Dakota. The reason OTTR fits into this category is they also own four other non-regulated entities. These include a metal fabricator, a plastic parts manufacturer and two PVC pipe manufacturers.
In 2020, the electric utility platform generated $446 million in revenues and $147 million in operating income. Meanwhile, the manufacturing division generated $444 million in revenues and $54 million in operating income.
This unique mix of businesses offers the steady dividend paying ability of a highly regulated electric utility combined with income growth opportunities from the manufacturing side of the company. The current yield is 3.3%, a full 1% higher than you can get risk-free from the government for 30 years.
Icahn Enterprises (IEP)
The name Carl Icahn is familiar with most investors (at least those over 30), but not many still realize he has publicly traded vehicle. One of the original corporate raiders from the 1980’s, at 85 years old, Icahn is still active in the investing world. Icahn Enterprises is an master limited partnerships (MLP) with interests in investment, energy, auto parts, food packaging, metals, real estate and fashion.
These holdings usually employ Icahns traditional activist strategy which involve taking large controlling stakes and influencing the direction of the company through new management or board seats. The three key segments that drive IEP stock are investments, energy and automotive. Investments is a collection of publicly traded securities such Newell Brands (NASDAQ:NWL) and Navistar (NYSE:NAV). The attributed equity value of all investments was $4.3 billion. The energy segment is largely composed of a 71% stake in CVR Energy (NYSE:CVI) which is involved in petroleum refining and nitrogen fertilizer businesses. The automotive segment is comprised of businesses in the retail and wholesale distribution of after-market with auto parts with normalized revenues approaching $3 billion.
Being an MLP, Icahn is required to distribute available cash to unitholders. IEP currenting pays a $8.00 distribution to unitholders which is currently a 14% yield. The tax implications of an MLP are different than those that result from normal stock transactions and dividend payments so check with your accountant before buying IEP. Nonetheless, letting Carl Icahn handle your money will likely work out over time.
Stocks to Buy: Markel (MKL)
Markel is a diversified insurance company (again) with an investment portfolio managed by renown value investor Tom Gayner. He is also co-chief executive office of the company. MKL has a large equity portfolio within it insurance operations Markel Ventures is the companies business and investments separate from the insurance segments. These companies involve industries such as bakery equipment, transportation, furniture, fire & security and building products. The Market Venture companies have combined revenues of $2.1 billion and EBITDA of $264 million in 2020.
Markel’s equity investment portfolio has 10-year annualized returns of 15.2% by investing in a “disciplined, tax efficient, conservative, and low cost” manner. Equities represent 35% of Markel’s insurance investment portfolio.
MKL’s current price-book ratio is 1.3x, which is below historical averages. MKL stock has often traded at pric-book ratios well above 2x. When mathematics and value investing come back to the forefront after the next bear market, investing alongside Tom Gayner may be one of the best bets in the market.
On the date of publication Tom Kerr did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Kerr, CFA, is an experienced investment manager and business writer who has worked in the investment and securities business since 1994.