Tom Gayner and Markel’s Top Stock Picks for 2013

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Markel (NYSE: MKL) is an insurance company that invests its capital in the financial markets and therefore reports many of its long equity in positions in 13F filings as hedge funds and other major investors do. We track 13F filings partly for their role in developing investment strategies; for example, the most popular small cap stocks among hedge funds outperformed the S&P 500 by 18 percentage points between September and January (read more about our hedge fund strategies). We also use 13F filings as recommendations from fund managers--not necessarily to follow blindly, but to research further. Incidentally, we spoke with Tom Gayner, chief investment officer at Markel, in January to learn more about his investing process. Read our exclusive interview with Tom Gayner. Here are our thoughts on five of Markel’s top picks as of the beginning of 2013:

The largest position in Markel’s portfolio was what in theory should be many value investors’ favorite stock: Berkshire Hathaway (NYSE: BRK-B). Warren Buffett’s holding company (see Buffett's stock picks) does trade at a premium to book value with a P/B ratio of 1.3, as investors believe that Buffett will manage Berkshire’s financial assets very effectively. While we of course admire Buffett’s investing ability, prospective long-term Berkshire shareholders should make sure that they are comfortable with the future investment team.

Markel owned 5.1 million shares of CarMax (NYSE: KMX), a $9 billion market cap used car dealer. We reported on an insider purchase at CarMax earlier this month (learn more about the insider purchase). When we had looked at the company compared to its peers, we had not been particularly impressed; in particular, AutoNation and Group 1 Automotive had seemed that they might be better values though we imagine that buying any of these companies is more of an industry or macro play than anything else. Carmax’s trailing P/E is 22, so at least some earnings growth is already priced into the stock.

Diageo (NYSE: DEO), the alcoholic beverage company who is responsible for (among others) the Johnnie Walker, Crown Royal, and Smirnoff brands, was another of Gayner and his team’s favorite stocks. Diageo trades at 18 times trailing earnings, with revenue up 5% in its most recent quarter compared to the same period in the previous fiscal year; net income did increase at a much higher rate, but we doubt that growth is sustainable without similarly strong improvements on the top line. Renaissance Technologies, founded by billionaire Jim Simons, had initiated a position in Diageo during the third quarter of 2012.

Markel reported a position of 3.1 million shares in Brookfield Asset Management (NYSE: BAM), the $24 billion market cap real estate developer. Analyst consensus for 2013 has Brookfield valued at 31 times its current-year earnings. The company has been experiencing growth, but that pricing does give us some pause, at least at first glance. Marty Whitman’s Third Avenue Management cut its stake in Brookfield during the third quarter but still closed September with 7.8 million shares in its portfolio.

Fairfax Financial Holdings rounded out Markel’s top five stock picks. Prem Watsa, head of Fairfax, has been called “the Warren Buffett of Canada” for his similar process of managing a holding company and for his investment success over the last 35+ years. While he is not as well known, he deserves credit for nearly doubling Fairfax’s stake in BlackBerry in the third quarter of 2012 when the stock was below $8. Fairfax is valued at about the book value of its equity, with investors giving Watsa much less of a premium than Buffett.

This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends Berkshire Hathaway, Diageo plc (ADR), and Markel. The Motley Fool owns shares of Berkshire Hathaway and Markel. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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