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Stock Strategist

Eighteen 5-Star Stocks from the Markel Portfolio

We think investors can profit by learning from Markel's market-beating team.

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I'm always eager to learn from successful investors, so when I had the opportunity last month to venture out to Richmond, Va., to meet with the executives at  Markel (MKL), I jumped at the chance. For those of you who are unfamiliar with Markel, it's a niche-focused specialty insurance company that is modeled on  Berkshire Hathaway (BRK.B), and like Berkshire CEO Warren Buffett, the executives at Markel have an enviable track record investing in public equities.

Vice chairman Steve Markel and chief investment officer Tom Gayner head the firm's stock-picking, and over the last decade their equity investments have appreciated by 13.1% annually, far outpacing the S&P 500's 7.31% annual gain. To put this in perspective, $10,000 invested with the team at Markel 10 years ago would now be worth $34,251, while the same amount invested in the S&P 500 would be worth only $20,251.

In my view, Markel's success is largely due to its strict adherence to a timeless investment philosophy that seeks to invest only in profitable businesses with ample reinvestment opportunities that are also run by competent management teams. In addition, the executives at Markel have both the long-term orientation and patience to wait for these types of companies to become attractively priced. As a result, Markel rarely overpays, and its investments usually compound at least at the growth rate of the underlying business.

If all of this sounds somewhat familiar to you, it should. In our parlance here at Morningstar, this means that the team at Markel focuses on buying wide-moat businesses with an attractive margin of safety. However, I think that there are other aspects of Markel's investment style that are also appealing.

Despite holding 74 names, Markel runs a very concentrated portfolio, with the top 10 and 15 positions representing 47% and 60%, respectively, of the portfolio. In addition, Markel prefers to stay within its circle of competence when making investments, and according to Gayner, their expertise lies within the financial-services industry and, not surprisingly, the insurance sector. A quick analysis of Markel's latest form 13-F--a listing of the firm's consolidated equity investments--indicates that 49% of Markel's equity investments are in the financial-services industry, with 36% of the total portfolio in insurance stocks.

Recent Commentary
In our meeting, Gayner indicated that he thinks most credit spreads are too narrow, and that even though the higher-risk end of the market has done well in recent years, he remains comfortable being out of sync with this trend. What's more, on the company's last conference call, Gayner provided his views on the equity markets, stating "...the market is giving us a wonderful opportunity to purchase some of the highest-quality, most successful, most durable, and globally powerful businesses at the most reasonable valuations I've seen in decades."

At Morningstar, our analysts have been opining on these same topics for some time now, arguing that some of the world's best-known franchises are currently changing hands for much less than what they're really worth.  Not surprisingly, the number of stocks earning our 5-star Morningstar Rating for stocks has also more than doubled from the beginning of the year, to 172 as of June 21.

Eighteen 5-Star Picks from the Markel Portfolio
In my view, investors have two ways to profit from studying Markel's approach. Presently, 18 of Markel's 74 stocks are cheap enough to earn Morningstar's 5-Star rating, which means that our analysts think that investors who purchase these stocks are likely to earn attractive long-term returns. 

Currently, Markel holds positions in these 5-star stocks:  Anheuser-Busch (BUD),  Berkshire Hathaway (BRK.B),  CarMax (KMX),  Coca-Cola (KO),  ExxonMobil (XOM),  Fairfax Financial Holdings (FFH),  Federated Investors (FII),  Gannett (GCI),  Home Depot (HD),  International Speedway (ISCA),  Johnson & Johnson (JNJ),  PepsiCo (PEP),  Sysco (SYY),  Tribune (TRB),  United Parcel Service (UPS),  Wal-Mart (WMT),  Washington Post (WPO), and  White Mountains Insurance (WTM)

On the other hand, for investors who don't want--or don't have enough dry powder--to purchase all of these stocks, a simple investment in the shares of Markel would provide exposure to all of these companies, as well as to one of the best-managed and most-profitable insurers we cover.

The Complete Holdings
Finally, here's a complete list of Markel's stocks, along with each stock's weighting in the portfolio.

6.33%   Berkshire Hathaway B (BRK.B)
5.95%   Fairfax Financial Holdings (FFH)
5.89%   CarMax (KMX)
5.75%   White Mountains Insurance (WTM)
5.41%   Diageo PLC (DEO)
4.86%   Berkshire Hathaway A (BRK.A)
4.53%   Anheuser-Busch (BUD)
3.92%   General Electric (GE)
2.66%   Brookfield Asset Management (BAM)
2.60%   Forest City Enterprises (FCE.A)
2.58%   Citigroup  (C)
2.54%   MBIA (MBI)
2.50%   XL Capital (XL)
2.41%   RLI Corporation (RLI)
2.03%   Marsh & McLennan (MMC)
1.87%   McGraw-Hill (MHP)
1.86%   International Game Tech (IGT)
1.74%   W.P. Carey (WPC)
1.68%   General Dynamics (GD)
1.63%   International Speedway (ISCA)
1.58%   Johnson & Johnson (JNJ)
1.57%   Marriott International (MAR)
1.54%   Cincinnati Financial (CINF)
1.48%   Home Depot (HD)
1.48%   Brown Forman (BF.A)
1.44%   Golden West Financial (GDW)
1.31%   American Express (AXP)
1.30%   ExxonMobil (XOM)
1.22%   Penn National Gaming (PENN)
1.18%   Washington Real Estate (WRE)
1.08%   Aflac (AFL)
1.03%   Sysco (SYY)
0.95%   Bank of New York (BK)
0.94%   Automatic Data Processing (ADP)
0.92%   Plum Creek Timber (PCL)
0.90%   Allied Capital (ALD)
0.88%   Walt Disney (DIS)
0.81%   Brown & Brown (BRO)
0.77%   Gannett (GCI)
0.77%   Wal-Mart (WMT)
0.66%   Investors Title (ITIC)
0.60%   Corus Bankshares (CORS)
0.56%   Altria Group (MO)
0.53%   ServiceMaster (SVM)
0.52%   Charles Schwab (SCHW)
0.47%   H&R Block (HRB)
0.44%   T. Rowe Price (TROW)
0.43%   Federated Investors (FII)
0.43%   Baxter International (BAX)
0.41%   Friedman Billings Ramsey (FBR)
0.38%   Northern Trust (NTRS)
0.37%   News Corp  (NWS)
0.29%   Washington Post (WPO)
0.21%   Harrah's Entertainment (HET)
0.20%   Valley National Bank (VLY)
0.19%   Tiffany (TIF)
0.17%   Bunge Limited (BG)
0.16%   State Street (STT)
0.13%   PepsiCo (PEP)
0.12%   Leucadia National (LUK)
0.11%   Goldman Sachs (GS)
0.10%   Coca-Cola (KO)
0.10%   Bank of America (BAC)
0.08%   Progressive (PGR)
0.08%   Reddy Ice (FRZ)
0.08%   Tribune (TRB)
0.06%   Nuveen Investments (JNC)
0.06%   United Parcel Service (UPS)
0.05%   Ambac Financial (ABK)
0.03%   TCF Financial (TCB)
0.03%   Pitney Bowes (PBI)
0.02%   Wachovia (WB)
0.02%   Cedar Fair LP (FUN)
0.01%   United Mobile Homes (UMH)

Justin Fuller has a position in the following securities mentioned above: XOM, HD, SYY. Find out about Morningstar’s editorial policies.