Could this be the next Berkshire?
By following Warren Buffett's strategy in this often overlooked sector, one company has managed to outpace the market year after year.
One hundred seventy thousand dollars.
That's roughly how much one share of Berkshire Hathaway Class A (BRK.A) stock is selling for these days.
Imagine if you had been one of the fortunate few to invest in Warren Buffett's young company back in 1967, when shares were trading for $20.50. Right now, you would be sitting on a total nominal gain of 829,460%.
But nowadays, Berkshire has, to some degree, become a victim of its own success. Buffett has often said that the company's current size ($278 billion market cap) has made future growth more difficult.
"Size is the anchor of performance. There is no question about it," Buffett has said. "It doesn't mean you can't do better than average as you get larger, but the margin shrinks."
Of course, having too much money is a problem most of us would like to have. And I certainly don't mean to imply that Berkshire is a bad investment.
But it does prompt a question: Are there any other publicly traded companies that could be the next Berkshire? Are there any companies currently on the market that share Buffett and partner Charlie Munger's penchant for value investing, long-term holdings and the use of insurance float to generate big returns?
While many investing firms have sought to imitate Berkshire's success over the years, I'd like to tell you about one company in particular that's on track to follow the same path.
Like Berkshire, Alleghany Corp. (Y) is an investment holding company that uses a value-oriented strategy to acquire interests in businesses and equity holdings. And, like Berkshire, it generally holds these investments for long-term periods. Through subsidiaries such as RSUI Group, Capitol Transamerica, Pacific Compensation and Transatlantic Holdings, the company sells specialty insurance and property-casualty insurance.
In 2012, the company gained exposure to the reinsurance industry through its acquisition of Transatlantic Holdings. Alleghany also owns real estate and minority stakes in energy-related companies.
While its $6.4 billion market cap is much smaller than Berkshire's, Alleghany uses a similar strategy to generate returns. It collects insurance premiums paid by customers and invests this money (called float) for its own benefit. This is the same strategy that Berkshire has successfully employed for years through such insurance holdings as GEICO and General Re.
StreetAuthority's Amy Calistri has covered the profitable opportunities from this ingenious investing strategy many times. In her October 2012 issue of Stock of the Month, she wrote:
"Reinsurance companies profit by collecting more premiums than they pay out in claims. But they can make much more money if they invest those premiums wisely."Alleghany's recent acquisition of Transatlantic Holdings has produced exceptional returns. The company doubled pretax earnings for the first quarter of this year compared with the same period last year. Core specialty insurance holding RSUI Group reported underwriting income of $57 million, up 30% from the year before.
At the close of 2012, Alleghany reported common stockholders' equity per share of $379.13, a 10.8% increase over the previous year.
These results come in spite of significant losses due to Hurricane Sandy, which cost the company a reported $268 million in claims.
For the five-year period that ended Dec. 31, 2012, the company reported that common stockholders' equity per share increased at a compound annual rate of 6.1%, compared with a compound annual rate of return of 1.6% for the S&P 500 ($INX) over the same time.
The company is trading at a forward price-to-earnings ratio of 12 and a price-to-book ratio of 1.0. Analysts predict annual revenue to grow at a rate of 6% over the next seven years. Return on equity is forecast at 10% in the short term but should rise to 12% once the Transatlantic acquisition is fully integrated.
The firm uses growth in book value as the metric for compensation in the form of restricted stock. This system helps keep management's interests aligned with shareholders'.
Management has also indicated that it plans to begin making private equity investments, which, if done correctly, could lead to additional growth opportunities.
Risks to consider: To finance the Transatlantic deal, Alleghany issued roughly $2.7 billion worth of stock. While the deal appears to have been a success, issuing new shares to pay for acquisitions (as opposed to using existing capital) can be a risky proposition if the deal doesn't work as planned. In this respect, the company differs significantly from the strategy employed by Berkshire, which doesn't issue new shares to fund an acquisition.
In addition, insurance companies are subject to unpredictable losses stemming from events such as natural disasters or terrorist attacks.
Action to take: Alleghany appears to be fairly valued at today's prices. While it may never achieve the lofty heights that Berkshire Hathaway has attained, it remains a solid, stable company that has outperformed the broader market year after year.
Chad Tracy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.
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A few years ago everyone was telling us Eddie Lampert was going to turn Sears Holdings into the next Berkshire, how's that worked out so far?
I guess the most important thing to consider, and I kinda believe the Author and "some" commentors.
are missing a little fact....Of this being "46" years ago, Warren had already made investments long before this in other Ventures...
Not following or caring completely about Buffet and Charlie Munger from the inception of BERK in '67.
I would only surmise investments or investment equivilents, very well may have yielded the same or better results...That's really where comparisons should be layed down.
And as far as witnessing the "next BERK" I really don't have 50 years left...
And other considerations, should be all the appreciation, re-investing or DRIPs and Compounding that come into play...As far as the $1000 investment in 1967..??
We bought our first home..
But bought a new Camaro in 1968, and should have bought used and put the difference into BERK.
The car would have long been gone, but the $8 mill would have looked sweet...
Yes it would have been a good savings plan, even considering ups and downs, inflation and any other little nasties.....hmmm, 8 million you say; Wish Mom&Dad would have gave us some shares on our 5th, wedding anniversary...
They were Depression Kids and had no use for the Stock Market...
It sounds a lot more impressive than it really is. PV:20.00; FV: 172,00; N: 46 Annual Return: 22.3 %
For the record, there are a lot of hedge fund managers who have earned that or more per year. Peter Lynch, while running Fidelity Magellan, averaged 28% per year. Warren Buffet's investing record in buying stocks is not that impressive. His record in buying entire companies (taking them private) is much more impressive. That is more of a speculator/private equity investor than a portfolio manager. Some of his stocks have been dogs for years. He is also more impressive as a lender of last resort. Check out his deals with GE Capital and GoldmanSachs as evidence of that.
Please MSN...Find a different "file photo" of Buffet, this one is worn.
Makes him look like he's sitting in Church and clapping for the Sermon..
How about him in a flannel shirt walking around his yard on a crisp Autumn day.
Maybe even carrying a rake....I'd like that.
Fatty Cakes as far as being impressed...You are the guy that would pay a Bundle to dine with Buffet.
Unfortunately you probably can't get enough for your "hot wheels collection."
I wouldn't either, only a fool would even, for charity...
But I would sit down and have a pie and coffee with him back home in one of his favorite haunts..
Yeah I would pick up the coffee and pie...tab.
Because I'm a nice guy..
Midnight Owl you put it well...I've thought many of their investments were putzs..
It's what has been amassed by Buffet and MUNGER that's interesting to me; Yes the deal makers and and the buyouts or controlling of entities....Seems like their are about 80 owned Companies, under the Berkshire umbrella and is where much of the cash flow might come from.
Many of their other investments are mediocre at best...He admits that occassionally..
I try to strive to meet or exceed their gains, on a straight out basis, I usually have, concerning the price of Berk year on year, only...I feel good about that...And do suscribe to many of his or their philosophys.
After all is said and done, yes they have done pretty well.
Those that are fascinated with BERK or Buffet, probably should have bought into BERK.B...
Maybe even a few shares for their kids, that could be passed on when they were 50.(the kids)
Baby Berk was going near a low of about 45 back in our "bottoms" but now near 3 times that..
Buffet is right about their "behemoth" Berkshire, but I think a lot of that prodding has come from Investors with large positions....He appeased them a little with the "B" stock...
But then again, Berkshire can make and write their own deals because of size; Few other Icons can make the same claim.
He just can't stand the thought of losing control of his "baby"...It's coming Warren, and you know it.
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