Hedge Fund Manager Charles Akre’s Top Stock Picks Include Mastercard

Chuck Akre has been managing money through one vehicle or another since 1989. For some time Akre operated the FBR Focus fund before relaunching as the Akre Focus fund in 2009. Oddly, the fund is based not in New York or Greenwich or Chicago but in Middleburg, Virginia- a town with a population of 632 in the 2000 Census.

Akre’s investment philosophy centers on finding companies with high returns on equity which should be able to sustain those high returns for the next several years. This means that the company in question has to have plenty of growth opportunities and managers must be able to reinvest capital generated from current operations into these opportunities without substantially affecting the return on equity. If Akre can find these kinds of companies, it is fairly open to paying moderate multiples on cash flow- Akre and his team prefer free cash flow metrics to earnings metrics- and would prefer these opportunities to those which have fewer growth opportunities but cheaper multiples.

Mastercard Inc (NYSE:MA)

When we look at his 13F filings over the last year, investments tend to be weighted towards services, financial, and technology stocks and this makes sense as companies in these sectors will generally have lower marginal costs to growth than, say, a manufacturer of consumer or industrial goods which might need twice as many plants and workers to generate twice as much revenue. Read on for our quick take on his five largest holdings by market value or see the full list of Akre’s stock picks.

Mastercard Inc (NYSE:MA). Akre increased its holdings of Mastercard to about 340,000 shares as of the end of the end of September. The credit card issuer was one of the two most popular services stocks in our database of 13F filings behind rival Visa (see the top ten services stocks). At an EV/EBITDA multiple of 13x and a forward P/E of 19, it’s difficult to call Mastercard a value stock; however, return on equity is above 30% and we could see the company benefitting from higher payment volume.

Ross Stores, Inc. (NASDAQ:ROST). The discount apparel store boasts an ROE of 47%, and net income was up 11% in its most recent fiscal quarter compared to the same period in the previous fiscal year. The enterprise value comes out to a little more than 8 times EBITDA, which does seem high but it’s possible that the company offers “growth at a reasonable price.” Renaissance Technologies, whose founder Jim Simons is now a billionaire, added shares in Ross Stores last quarter (check out Renaissance’s stock picks).

American Tower Corp (NYSE:AMT). Akre has long been an investor in the cell phone tower operator, saying that it is a fantastic business model as it costs little for these companies to lease more capacity on their towers. It is still one of the fund’s top picks as Akre reported a position of 1.7 million shares at the end of the third quarter. Billionaire Ken Griffin’s Citadel Investment Group was buying the real estate investment trust in the third quarter (find more stocks Griffin likes).

Markel Corporation (NYSE:MKL). The fund also liked the $4.1 billion enterprise value property and casualty insurance company, owning about 200,000 shares; that EV figure comes out to a little over 8 times Markel’s trailing EBITDA. The company seems to be a bit of an exception to Akre’s strategy as the ROE is only 7%. Net income was actually down 7% in the third quarter compared to the same period in 2011, though revenue was up.

Moody’s Corporation (NYSE:MCO). Akre’s 1.8 million share position in the ratings agency was essentially unchanged from three months earlier. Warren Buffett’s Berkshire Hathaway had over $1 billion invested in Moody’s according to the holding company’s most recent 13F, compared to the $11 billion market capitalization (research more of Buffett’s stock picks). Return on assets here is 20%, so Moody’s certainly qualifies as a high return business. The EV/EBITDA multiple is a little over 10x.

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