Tom Gayner’s Markel’s Top Stock Picks Include Berkshire Hathaway Inc. (BRK.B)

Insurance company Markel invests much of its cash in the market under the management of Tom Gayner. We track Markel Gayner Asset Management’s quarterly 13F filings in our database, which we use to help us develop investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy). We can also go through individual filers’ top picks and treat them as free investment ideas, with investors then doing further research on any stocks which seem like they might be good values. Read on for our quick take on Markel’s five largest holdings as of the end of March or see the full list of stocks the insurance company reported owning.

The largest position in Gayner’s portfolio was Berkshire Hathaway Inc. (NYSE:BRK.B); he reported a position of 1.6 million Class B shares and a little over 1,000 Class A shares as well. Warren Buffett’s holding company (check out Warren Buffett’s stock picks) trades at a significant premium to the book value of its equity with a P/B ratio of 1.5. To some degree this can be justified to the extent that Buffett is an excellent investor and the managers of Berkshire Hathaway Inc. (NYSE:BRK.B)’s subsidiary companies are top performers as well, but we think investors should be somewhat concerned about how effective Buffett’s successors will be.

Markel owned 5.1 million shares of CarMax, Inc (NYSE:KMX) as of the beginning of April. The used vehicles retailer has had its stock price rise over 80% in the last year, and business has been booming with revenue and net income both up about 20% in its most recent quarter compared to the same period in the previous fiscal year. Some further growth is priced in at a trailing P/E of 24 but given the company’s good results we’d be interested in learning more about it anyway. First Pacific Advisors initiated a position of 1.7 million shares in CarMax, Inc (NYSE:KMX) between January and March.

The fund had 1.2 million shares of Diageo plc (ADR) (NYSE:DEO) in its portfolio at the end of Q1. The alcoholic beverage company, whose brands include Johnnie Walker and Crown Royal, has been recording high earnings growth numbers though improvements on the top line have been more modest; we’d generally take growth derived from much higher net margins as not sustainable. Still, given where the stock is currently trading moderate growth could make Diageo plc (ADR) (NYSE:DEO) attractive. Billionaire Mario Gabelli’s GAMCO Investors owned about 700,000 shares according to its own 13F (find Gabelli’s favorite stocks).

Brookfield Asset Management Inc. (USA) (NYSE:BAM) was another of Markel’s top picks with the filing disclosing ownership of 3.1 million shares. The $23 billion market cap company develops real estate, produces power, and invests in private investment funds among other activities. It is also valued at something of a premium to book value; with the sell-side forecasting a decline in earnings per share in 2014, it trades at 30 times forward earnings estimates which seems a bit high to us. Third Avenue Management, managed by Marty Whitman, reported owning 5.9 million shares of Brookfield Asset Management Inc. (USA) (NYSE:BAM) (research more stocks Third Avenue owned).

Gayner and his team had Fairfax Financial Holdings Ltd (OTCMKTS:FRFHF) among their top picks as well. Fairfax is managed by Prem Watsa, a value investor who has become known as “the Warren Buffett of Canada.” See which stocks Fairfax owned in its most recent 13F. Markets are considerably less faithful in Watsa than they are in Buffett, however: the price-to-book ratio here is 1.1, so while the stock is priced at a small premium to book the premium is not nearly as high as it is at Berkshire Hathaway Inc. (NYSE:BRK.B). Fairfax Financial Holdings Ltd (OTCMKTS:FRFHF) has paid a $10 per share annual dividend each of the last four years, for a yield of 2.5%.

Disclosure: I own no shares of any stocks mentioned in this article.