Finding undervalued companies can be very difficult in a bull market like the one we’re currently experiencing. Even with the market cooling off over the past two weeks, many stocks look overvalued. However, it’s when the market is up that Foolish investors should remember Charlie Munger’s words: “A great business at a fair price is superior to a fair business at a great price.”
Let’s take a look at three companies in the financial services business, looking for both value and opportunity.
Back from the dead
CEO Robert Benmosche has led American International Group Inc (NYSE:AIG) back from its “too big to fail” days as a bloated giant in the center of the financial collapse, to a lean organization that is focused on its core insurance businesses. The latest quarterly results emphasize this, as key earnings numbers continue to show positive results. Add in the announced $1.5 billion in share buybacks and a reinstituted dividend, and there is a lot to like about what’s happening at American International Group Inc (NYSE:AIG).
However, it’s not clear who will replace Benmosche, 69, when he steps down. He came out of retirement to run American International Group Inc (NYSE:AIG), and at some point in the next few years, he will leave. It’s important that whoever replaces him maintain the culture of responsible, conservative underwriting and capital management, and keep the company from betting on financial instruments that create too much risk, like the Credit Default Swaps that nearly crippled the company and destroyed decades of wealth for many shareholders.
The aforementioned Charlie Munger and Warren Buffett have steadily guided Berkshire Hathaway Inc. (NYSE:BRK.B) through decades of growth in both the core insurance businesses like GEICO and General Re, and through the process of allocating the excess capital generated, or “float,” to build an incredible stable of wholly or partially owned companies (more than 50) like Fruit of the Loom, MidAmerican Energy, and Heinz, as well as significant positions in a handful of publicly traded companies like IBM, Coca-Cola, and American Express.
The consistent income generated by these businesses is a testament to Buffett’s process of investing in companies that have a solid competitive advantage, talented managers, and predictable profitability. This simple process had led to decades of outsized returns.
The concern over Buffett’s mortality is important, but overblown. At nearly 83, the Oracle will step away from the business at some point in the not-so-distant future. However, if there’s one thing that’s been central to the company’s success, it’s the culture. Fifty-five different companies operate under the Berkshire Hathaway Inc. (NYSE:BRK.B) umbrella, and all are led by talented, driven leaders that aren’t micro-managed by the parent company. This should aid an easier transition to whomever assumes the mantle of CEO, as will the likely expansion in responsibility for Todd Combs and Ted Weschler as managers of Berkshire Hathaway Inc. (NYSE:BRK.B)’s investment portfolio.
An upstart a quarter-century in the making
Founded in the 1920s, and a public company since 1986, it may seem like a stretch to call Markel Corporation (NYSE:MKL) an upstart. However, the company’s Markel Ventures business unit is less than a decade old, preceded by Markel-Gayner Asset Management Corp. And much like how Buffett has spent decades investing the float into a diversified range of businesses, both wholly owned and in positions in public companies, Chief Investment Officer Thomas Gayner uses what the company calls its “permanent” capital in much the same manner.
And while it’s unfair to expect the 50-year old Gayner to be the next Buffett, there are certainly comparisons to draw between investing in Markel Corporation (NYSE:MKL) today, and Berkshire Hathaway Inc. (NYSE:BRK.B) in 1980. Without reaching too far, here are two characteristics that make Markel Corporation (NYSE:MKL) such a compelling investment.
1). The company has a powerful dedication to writing profitable insurance business, one of the hallmarks of Berkshire Hathaway Inc. (NYSE:BRK.B)’s insurance subsidiaries. This means a willingness to walk away from business it doesn’t see as profitable, resulting in an underwriting profit in 14 of the last 20 years.