Value Investor Tom Gayner’s Top Stock Picks
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Tom Gayner has been the president of Market Gayner Asset Management Corporation, a subsidiary to Markel Corp (NYSE: MKL), since December 1990. He is also currently the president and Chief Investment Officer of Markel Corp. The company manages approximately $2 billion and is one of the largest companies in the property & casualty insurance industry. Under Gayner’s management, Markel generated a cumulative return of over 100% over the past decade, versus 16.4% for the S&P 500 index.
Recently, Gayner released the latest holdings of Markel in a 13F filing. Let’s take a closer look at the largest positions in his portfolio and decide whether these positions are worth investing in at this moment.
Carmax Inc (NYSE: KMX) is the largest position in Gayner’s 13F portfolio at the end of last year. As of December 31, 2011, Gayner had $158 million invested in this stock. A few other hedge fund managers were also bullish about Carmax. At the end of 2011, there were 15 hedge funds with Carmax positions in their 13F portfolios. For example, John Thaler’s JAT Capital Management had $54 million invested in Carmax. Jeffrey Vinik’s Vinik Asset Management also had over $40 million invested in this stock.
Carmax has a current P/E ratio of 18.92, relatively higher than the 17.69 for its peer AutoNation Inc (AN) and 12.74 for Penske Automotive Group Inc (PAG). The stock trades at a slight premium to its peers even when we look at its forward valuation multiples. This may be a result of Carmax’s slightly higher profit margins. The company also plans to open five used vehicle stores in 2012, 10 in 2013, and 10 to 15 annually from 2014 to 2016. This will result in rising capital expenditures, higher depreciation and amortizations, and growing SG&A expenses in the next few years, which might limit its earnings growth. Even though Carmax is investing for the future, we aren't really positive about upside potential. The stock is expected to grow its earning by 15% annually but its peers are expected to grow at a 25% clip. Even though we are bullish about the economy and auto sales, we don't think these estimates are realistic. We actually prefer automakers to auto dealers. General Motors is priced as if auto sales will decline in 2012. Its trailing PE ratio is only 5.6. It definitely offers a much better risk-return combination than Carmax and the other dealers.
Diageo Plc (NYSE: DEO) is another large position in Gayner’s latest 13F portfolio. Gayner also had over $100 million invested in this position at the end of last year. There were also 15 hedge funds reported owning Diageo at the end of 2011. Among them, Tom Russo was the most bullish. Gardner Russo & Gardner had $180 million invested in Diageo as of December 31, 2011. Bill Miller and Wallace Weitz were also bullish about this stock.
Diageo has been successful with its “14 strategic brands” in recent years. Diageo considers certain brands, such as Johnnie Walker scotch and Tanquerary gin, to have the highest current and future earnings potential and markets these brands globally. The company outperformed the US spirits market and achieved improvements in various areas over the past few years. It also has large exposure to emerging and developing markets. About 40% of its revenue is derived from emerging markets, which posted double-digit growth rates in the past couple of years. Over the past year, organic sales growth was 10.3% in Asia Pacific area and 22.4% in Latin America and Carribean. Diageo’s current P/E ratio is about 23, in line with the average of its peers. But the company has above-average growth prospects. In 2012, it is expected to make $5.81 per share, so its forward P/E ratio is 16.67. Its EPS is estimated to be $6.43 in 2013 and grow at around 10% annually over the next few years.
Some other large positions in Gayner’s portfolio include Brookfield Asset Management Inc (BAM), ExxonMobil Corp (NYSE: XOM), Wal-Mart Stores Inc (NYSE: WMT), Walt Disney Co (DIS), and United Parcel Service Inc (UPS). We do not think it is a good time to purchase Brookfield Asset Management as its forward P/E ratio of 23 is relatively high. On the other hand, the other four stocks have attractive valuation levels, especially Exxon and Wal-Mart. Wal-Mart’s forward P/E ratio is 12 and Exxon’s is about 10. Gayner was actually imitating Warren Buffett on Wal-Mart, UPS, and Exxon as Buffett’s Berkshire Hathaway also invested in these three positions at the end of the third quarter. But Buffett sold out his ExxonMobil shares over the fourth quarter. Gayner is clearly a Buffett follower as he also invested over $200 million in total in Berkshire Hathaway Inc (BRK-B and BRK-A).
Motley Fool newsletter services recommendDiageo plc (ADR), Markel and Wal-Mart Stores. The Motley Fool owns shares of Markel and Wal-Mart Stores. Fool blogger Meena Krishnamsetty does not own shares in any of the stocks mentioned in the article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.