Berkshire Hathaway (BRK.A -0.81%) (BRK.B -0.62%) has added eight new stocks to its portfolio in 2022, according to the company’s SEC filings. Some are rather large positions that have received quite a bit of coverage, such as the massive stake in Occidental Petroleum (NYSE: OXY) that CEO Warren Buffett and his team have accumulated in just a few months. Berkshire’s investments in HP (NYSE: HPQ) and Citigroup (NYSE: C) have also been discussed extensively in the investing community.
While these have been the headline investments Berkshire Hathaway has made during this year’s market downturn, of the new stocks added to Berkshire’s closely watched stock portfolio in 2022, my top pick is one that has largely flown under the radar.
Here’s my favorite out of Berkshire’s newest stock positions
In the first quarter of 2022, Berkshire Hathaway added just over 420,000 shares of specialty insurance company Markel (MKL 0.09%) to its portfolio. In the second quarter, Berkshire’s stake was increased to 467,611 shares worth $605 million – roughly 3.5% of the company’s outstanding shares.
To be sure, we don’t know if Buffett himself was behind this move, or if one of his investment managers, Todd Combs or Ted Weschler, initiated the position in Markel. After all, when it comes to investments in the tens of billions of dollars, we can be quite sure Buffett had personal involvement, but for Berkshire’s standards, a $600 million investment is small and could have come from one of the others.
Having said that, Markel is a perfect fit for Buffett’s investment style. For one thing, Buffett loves insurance. Berkshire Hathaway itself is an insurance company at heart, with Buffett having built Berkshire into its current state by using the float from GEICO and Berkshire’s other insurance operations to acquire businesses and common stocks.
Buffett also loves companies that operate in profitable niches, and Markel certainly qualifies. Markel primarily operates in the specialty insurance business (known as excess and surplus in insurance terms), and has an excellent track record of underwriting profitability.
A mini-Berkshire with a key advantage
Perhaps most significantly, Markel is one of the few insurance companies in the world that uses Buffett’s approach to its investment strategy.
If you’re not familiar, insurance companies make their money in two main ways – underwriting and investing. On the underwriting side, Markel’s combined ratio, which is its operating expenses plus claims paid as a percentage of premiums collected, has averaged 95.5% over the past 10 years. This means that Markel’ underwriting profit margin has been 4.5%.
This may sound low, but underwriting is typically a secondary source of profits for insurers. The bulk of most insurance companies’ profits comes from investing the float, or the premiums collected but not yet paid out for claims.
In most cases, insurers invest their float into safe income-generating instruments, such as Treasury securities and corporate bonds. But Markel and Berkshire both take a different approach by investing in businesses and stocks.
Markel invests in businesses through its Markel Ventures division and owns a portfolio of stocks worth about $7 billion. And in the ultimate sign of mutual respect, Markel’s largest stock position is none other than Berkshire Hathaway. Other top positions include Brookfield Asset Management (NYSE: BAM), Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), and Home Depot (NYSE: HD), just to name a few.
Markel actually has one big advantage over Berkshire Hathaway when it comes to its investing strategy – its size. This is especially true on the Markel Ventures side of the business, which invests primarily in early stage businesses that are too small to move the needle for Berkshire.
A near-perfect fit for Berkshire’s portfolio
In a nutshell, Markel uses a very similar business model to Berkshire Hathaway, but is in a significantly earlier stage of building out its non-insurance investment portfolio. If management can continue to execute on its investment strategy, this is a high-potential business that could generate market-beating returns for decades to come.
Citigroup is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Matthew Frankel, CFP® has positions in Berkshire Hathaway (B shares) and Markel. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Berkshire Hathaway (B shares), Brookfield Asset Management, HP, Home Depot, and Markel. The Motley Fool recommends Brookfield Asset Management Inc. CL.A LV and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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