At Stockpickr we keep track of
, a list of companies that could offer a nice fit for the acquisitive holding company.
Warren Buffett, the chairman and CEO of
, has indicated he wants to make some large acquisitions, and the names on this list -- which represent both large and small companies -- each exhibit several characteristics that the investor has found attractive in the past.
There are two names in particular that I believe are attractive not only because of their strong growth potential, but also because they have potential successors to Buffett in their management teams.
, a niche insurance company that focuses on specialty markets. It is somewhat similar to Berkshire Hathaway, although on a much smaller scale. Markel has a $4 billion market cap vs. Berkshire's $160 billion market cap.
Before I explain why Markel is a great company, worthy of Berkshire's attentions as a suitor, it's worth giving a brief overview of how the insurance company works.
Basically, insurance companies take in money (the premiums) and invest that cash with the fervent hope that they can hold on to it before all of their customers want their money back. Why would someone want the money back? They don't really -- that's the beauty of it. But if a customer of an auto insurance company, for instance, gets into a car accident, then the insurance company owes money to that customer.
The "float" is basically the amount of premium paid to the insurance company (that's a rough, simplified definition but good enough for our purposes). Most insurance companies lose a little money on their float -- anywhere from 0% to 10% is common -- meaning they pay out more than they take in from customers and make money on their investments. Berkshire Hathaway often does the remarkable and makes money on its float.
Markel's cost of float, like Berkshire's, is negative. In other words, it makes good money on its float. And it makes even better money on its investments. Year over year, its investments have been up 13%, and its year-over-year overall change in net income was 28.8%.
Markel's net investment income is driven by Tom Gayner, its chief investment officer. We keep track of all of Gayner's and Markel's investments in the
On the company's latest earnings call, Gayner reiterated his belief that today's market is cheap relative to valuations in prior decades, and he likes companies that are growing their earnings by double digits and that have great returns on equity.
He also likes drug companies paying high dividends -- like those tracked by the
portfolio on Stockpickr. Gayner also likes companies with heavy exposure to foreign countries, in particular those focused on Brazil, Russia, India and China -- the so-called BRIC countries.
Some of the large-cap companies that Gayner has been accumulating include
and, of course, Berkshire Hathaway.
I believe Markel is a strong candidate for a Berkshire acquisition. Buffett is looking for a chief investment officer to eventually take his place. He also wants someone who can handle $50 billion and who is willing to forego the extreme compensation of hedge-fund peers.
Gayner understands the ins and outs of the types of investments an insurance company can make. He currently invests $7 billion, but with a focus on large-cap equities, he would have no problem scaling up; and by already being at an insurance company, he's clearly not out there trying to start the next
At 45 years old, Gayner clearly has a couple of decades' experience but a few decades left to go in his career. In my opinion, he represents the perfect choice, and it would be easy for Buffett to test him out via an acquisition. Price-to-earnings ratios don't matter as much in the insurance world, but that said, at a P/E of 11 vs. Berkshire's P/E of 15, it would be easy for Buffett to pay even a 20% premium and still have an accretive acquisition.
The second name I believe should be on Buffett's radar is
Brookfield Asset Management
. The company, which has about $50 billion in assets under management, has a real estate division, an investment division and even a power/utility division, under which it operates everything from hydroelectric power facilities to wind power companies. Brookfield also runs private equity funds, mutual funds and income funds.
While I'm not a technical analyst, it's hard not to notice and appreciate the long-term picture of this stock's chart:
Brookfield Asset Management (BAM)
That straight line up is a reflection of the company's financials. Revenue grew 66% in the fourth quarter of 2006 vs. the same quarter in the prior year. Operating cash flow over the last year grew 35%, and in 2005 it grew 45%.
Cash flow comes from all of the company's disparate properties, ranging from its office buildings to its power facilities, its collection of timberland as well as its investments and the fees it charges on money it takes in from outside investors. CEO John Flatt focuses on long-term "forever" investments and looks for companies that can sustain annual growth of 12%-plus in cash flows.
One of the best value investors ever, Marty Whitman, who runs the Third Avenue Value fund, is a long-term Brookfield shareholder. Whitman is up 19.22% on average over the past three years. Check out all of
top holdings on Stockpickr.
Another holder of Brookfield is
, run by Ken Shubin Stein, whom I have previously mentioned as a potential successor to Buffett. Having known Stein and also looking at his portfolio, it's clear he's always on the lookout for the next Berkshire Hathaway.
Besides Brookfield, Stein also owns shares of an intriguing family-run company,
, which is almost like a mini-Berkshire -- very mini -- in its own right. Spencer Capital also owns
, the retail giant run by super investor Eddie Lampert. Lampert doesn't own a lot of positions, but we list what he does have on the
For the rest of the companies that I believe could be bought by Berkshire Hathaway and that also could potentially make strong moves upward if they aren't acquired, check out the
list at Stockpickr.
At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.
James Altucher is president of Stockpickr LLC, a wholly owned subsidiary of TheStreet.com and part of its network of Web properties, and a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of
Trade Like a Hedge Fund
Trade Like Warren Buffett
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;
to send him an email.
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