Who is the Next Berkshire Hathaway?
Like any great empire, it's time for Berkshire Hathaway to fall from the top and relinquish the throne of SuperStock to a contender. Berkshire is simply too big to sustain the kind of growth seen in previous decades as evidenced by flattening returns over the past few years. Although Buffett and his team may find a second wind to their astronomical past success, it would seem that as Buffett readies to pass on the crown, it may be time to consider a new ruler altogether in the multinational conglomerate superstock competition.
There seem to be a number of contenders for the next gold medalist in the fight to become the Goldilocks stock story of this new century. The top candidates mentioned most frequently by financial analysts, writers and researchers are Markel (NYSE: MKL), Sears Holdings (Nasdaq: SHLD), Fairfax Financial (TSE: FFH.TO), Leucadia (NYSE: LUK), Brookfield Asset Management (NYSE: BAM), Alleghany (Y), and Harbinger Group (NYSE: HRG).
Markel (MKL): Located in the US, Markel Corporation markets and underwrites specialty insurance products and programs to a number of niche markets. It operates in three markets: excess and surplus lines, specialty admitted, and the London markets.
Markel's chief investment officer, Tom Gayner, is a conservative investor like Buffett who has returned 14% annually over the past 10 years compared to the sideways trading S&P 500. Gayner is a long-term value investor, investing in companies with high return on equity, low price over book and low price over cash flows.
Sears Holdings (SHLD):
Sears Holdings Corporation, through its subsidiaries, operates as a retailer in the United States and Canada. The company operates through three segments: Kmart, Sears Domestic, and Sears Canada.
Man at the top, Edward Lampert started his own hedge fund in his 20's, with an investment style similar to Warren Buffett's, averaging returns of 29% per year.
Fairfax Financial (FFH.TO):
Fairfax is run by Prem Watsa, another long-term value investor dubbed “the next Warren Buffett”. Watsa is best known for his most famous calls include selling half his stocks before the 1987 crash and buying S&P puts before the index dove in 2000. He also bet against the Japanese Nikkei but his biggest success came just recently when he bought credit default swaps on the premise that banks and financial institutions would struggle if a credit and liquidity crisis arose.
Since 2005, Fairfax revenue has stayed at roughly $5 billion. Net earnings, however, have grown at 100% compounded annually, from $53 million in 2005 to $856 million in 2008. The market price of Fairfax shares listed on the NYSE has doubled in value over this period. According to filings, Watsa has returned a compounded 23% annualized return in book value between 1993 and 2008.
There are very few who can match a record like that. Over the last ten years, Fairfax’s wholly owned investment management company Hamblin Watsa Investment Counsel has produced a common stock investment return of 19.1% compounded annually, against a (1.4%) decline for the S&P index over the same period.
Leucadia (LUK):
Leucadia National's Ian Cumming and Joseph Steinberg have their hands in every sector, invest fearlessly, and buy good companies at low prices. Invested in a diversified portfolio of stocks and businesses, Leucadia has generated impressive returns and gained dedicated fans amongst value-oriented investors.
Leucadia is considered to resemble the Berkshire Hathaway of 20 years ago. But unlike Berkshire, Leucadia tends to focus on speculative companies rather than operating businesses and presents an attractive play on its depressed investments and on the ability of Cumming and Steinberg to continue to find new investments.
Brookfield Asset Management (BAM):
Brookfield Asset Management Inc. is a global asset manager focused on property, renewable power and infrastructure assets with over $100 billion of assets under management. The company's investment guidelines include investing in areas of competitive advantage, aquiring assets on a value basis with a goal of maximizing return on capital, building sustainable cash flows and recognizing that superior returns often require contrarian thinking.
The company's remarkably consistent objective over the years simply has been to earn a 12% to 15% compound annual return per share. 45 year old Bruce Flatt runs a conglomerate that manages $108-billion worth of real estate, utilities and infrastructure across the planet. In the nearly a decade Flatt has been in charge, Brookfield has emerged as the world's biggest owner of prime office space, and its 165 power plants constitute one of the largest hydroelectric portfolios.
But more impressive is how Brookfield weathered the 2009 flashcrash that crippled many of its rivals. Over two years, as its stock plunged by two-thirds along with the markets, the company quietly added to its capital and waited out the storm.
Alleghany (Y):
Alleghany has found its comfort zone in property/casualty insurance with real estate mixed into the formula. Its goal is to create stockholder value through ownership and management of a small group of operating businesses and investments.
Alleghany’s subsidiaries include Capitol Transamerica and RSUI Group. In its last quarter, the company beat EPS estimates by 1.19 (4.85 actual vs. 3.66 estimated). Alleghany Corporation has had an average earnings growth of 1.9% over the past 10 years. As of the end of February, Alleghany holds $825 million in cash for use in future investments and has no debt to note.
Harbinger Group (HRG):
Harbinger's strategy is to buy controlling and significant equity stakes in companies competing in six industries: Consumer products, insurance and other financial products, telecommunications, agriculture, power generation and lastly, water and natural resources.
Harbinger Group Inc. is a holding company with approximately $144.8 million in consolidated cash, cash equivalents and investments as of June 30, 2010. HGI's principal focus is to identify and evaluate business combinations or acquisitions of businesses. HGI continues to review acquisitions and business combination proposals with the assistance of its advisors. A majority of HGI's outstanding common stock is owned by investment funds affiliated with Harbinger Capital Partners LLC.
Have a look at these companies for yourself.My current favorites are Leukadia, Brookfield and Fairfax.
Disclosure: the authors owns shares of BRK.B.
Like any great empire, it's time for Berkshire Hathaway to fall from the top and relinquish the throne of SuperStock to a contender. Berkshire is simply too big to sustain the kind of growth seen in previous decades as evidenced by flattening returns over the past few years. Although Buffett and his team may find a second wind to their astronomical past success, it would seem that as Buffett readies to pass on the crown, it may be time to consider a new ruler altogether in the multinational conglomerate superstock competition.
There seem to be a number of contenders for the next gold medalist in the fight to become the Goldilocks stock story of this new century. The top candidates mentioned most frequently by financial analysts, writers and researchers are Markel (NYSE: MKL), Sears Holdings (Nasdaq: SHLD), Fairfax Financial (TSE: FFH.TO), Leucadia (NYSE: LUK), Brookfield Asset Management (NYSE: BAM), Alleghany (Y), and Harbinger Group (NYSE: HRG).
Markel (MKL): Located in the US, Markel Corporation markets and underwrites specialty insurance products and programs to a number of niche markets. It operates in three markets: excess and surplus lines, specialty admitted, and the London markets.
Markel's chief investment officer, Tom Gayner, is a conservative investor like Buffett who has returned 14% annually over the past 10 years compared to the sideways trading S&P 500. Gayner is a long-term value investor, investing in companies with high return on equity, low price over book and low price over cash flows.
Sears Holdings (SHLD):
Sears Holdings Corporation, through its subsidiaries, operates as a retailer in the United States and Canada. The company operates through three segments: Kmart, Sears Domestic, and Sears Canada.
Man at the top, Edward Lampert started his own hedge fund in his 20's, with an investment style similar to Warren Buffett's, averaging returns of 29% per year.
Fairfax Financial (FFH.TO):
Fairfax is run by Prem Watsa, another long-term value investor dubbed “the next Warren Buffett”. Watsa is best known for his most famous calls include selling half his stocks before the 1987 crash and buying S&P puts before the index dove in 2000. He also bet against the Japanese Nikkei but his biggest success came just recently when he bought credit default swaps on the premise that banks and financial institutions would struggle if a credit and liquidity crisis arose.
Since 2005, Fairfax revenue has stayed at roughly $5 billion. Net earnings, however, have grown at 100% compounded annually, from $53 million in 2005 to $856 million in 2008. The market price of Fairfax shares listed on the NYSE has doubled in value over this period. According to filings, Watsa has returned a compounded 23% annualized return in book value between 1993 and 2008.
There are very few who can match a record like that. Over the last ten years, Fairfax’s wholly owned investment management company Hamblin Watsa Investment Counsel has produced a common stock investment return of 19.1% compounded annually, against a (1.4%) decline for the S&P index over the same period.
Leucadia (LUK):
Leucadia National's Ian Cumming and Joseph Steinberg have their hands in every sector, invest fearlessly, and buy good companies at low prices. Invested in a diversified portfolio of stocks and businesses, Leucadia has generated impressive returns and gained dedicated fans amongst value-oriented investors.
Leucadia is considered to resemble the Berkshire Hathaway of 20 years ago. But unlike Berkshire, Leucadia tends to focus on speculative companies rather than operating businesses and presents an attractive play on its depressed investments and on the ability of Cumming and Steinberg to continue to find new investments.
Brookfield Asset Management (BAM):
Brookfield Asset Management Inc. is a global asset manager focused on property, renewable power and infrastructure assets with over $100 billion of assets under management. The company's investment guidelines include investing in areas of competitive advantage, aquiring assets on a value basis with a goal of maximizing return on capital, building sustainable cash flows and recognizing that superior returns often require contrarian thinking.
The company's remarkably consistent objective over the years simply has been to earn a 12% to 15% compound annual return per share. 45 year old Bruce Flatt runs a conglomerate that manages $108-billion worth of real estate, utilities and infrastructure across the planet. In the nearly a decade Flatt has been in charge, Brookfield has emerged as the world's biggest owner of prime office space, and its 165 power plants constitute one of the largest hydroelectric portfolios.
But more impressive is how Brookfield weathered the 2009 flashcrash that crippled many of its rivals. Over two years, as its stock plunged by two-thirds along with the markets, the company quietly added to its capital and waited out the storm.
Alleghany (Y):
Alleghany has found its comfort zone in property/casualty insurance with real estate mixed into the formula. Its goal is to create stockholder value through ownership and management of a small group of operating businesses and investments.
Alleghany’s subsidiaries include Capitol Transamerica and RSUI Group. In its last quarter, the company beat EPS estimates by 1.19 (4.85 actual vs. 3.66 estimated). Alleghany Corporation has had an average earnings growth of 1.9% over the past 10 years. As of the end of February, Alleghany holds $825 million in cash for use in future investments and has no debt to note.
Harbinger Group (HRG):
Harbinger's strategy is to buy controlling and significant equity stakes in companies competing in six industries: Consumer products, insurance and other financial products, telecommunications, agriculture, power generation and lastly, water and natural resources.
Harbinger Group Inc. is a holding company with approximately $144.8 million in consolidated cash, cash equivalents and investments as of June 30, 2010. HGI's principal focus is to identify and evaluate business combinations or acquisitions of businesses. HGI continues to review acquisitions and business combination proposals with the assistance of its advisors. A majority of HGI's outstanding common stock is owned by investment funds affiliated with Harbinger Capital Partners LLC.
Have a look at these companies for yourself.My current favorites are Leukadia, Brookfield and Fairfax.
Disclosure: the authors owns shares of BRK.B.
