Value Investor Tom Gayner’s Top Stock Picks

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Insurance company Markel invests much of its cash in the market under the management of Tom Gayner. Insider Monkey tracks Markel Gayner Asset Management’s quarterly 13F filings in our database, which we use to develop investment strategies. We have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy).

We can also go through individual filers’ top picks and treat them as free investment ideas, with investors then doing further research on any stocks which seem like they might be good values. Read on for our quick take on Markel’s five largest holdings as of the end of March, or see the full list of stocks the insurance company reported owning.

The largest position in Gayner’s portfolio was Berkshire Hathaway; he reported a position of 1.6 million Class B shares and a little over 1,000 Class A shares as well. Warren Buffett’s holding company (check out Buffett's stock picks) trades at a significant premium to the book value of its equity with a P/B ratio of 1.5.

To some degree, this can be justified to the extent that Buffett is an excellent investor and the managers of Berkshire’s subsidiary companies are top performers as well, but investors should be somewhat concerned about how effective Buffett’s successors will be.

Markel owned 5.1 million shares of CarMax (NYSE: KMX) as of the beginning of April. The used vehicles retailer has seen its stock price rise over 80% in the last year, and business has been booming with revenue and net income both up about 20% in its most recent quarter compared to the same period in the previous fiscal year. Some further growth is priced in at a trailing P/E of 24, but given the company’s good results, it seems worth it to learn more about CarMax anyway.

The fund had 1.2 million shares of Diageo (NYSE: DEO) in its portfolio at the end of Q1. The alcoholic beverage company, whose brands include Johnnie Walker and Crown Royal, has been recording high earnings growth numbers, though improvements in the top line have been more modest.

Generally, growth derived from much higher net margins rather than from revenue or a combination of the two should be thought of as less sustainable. Still, given where the stock is currently trading, moderate growth could make Diageo attractive.

Brookfield Asset Management (NYSE: BAM) was another of Markel’s top picks with the filing disclosing ownership of 3.1 million shares. The $23 billion market cap company develops real estate, produces power, and invests in private investment funds among other activities. It is also valued at something of a premium to book value; with the sell-side forecasting a decline in earnings per share in 2014, it trades at 30 times forward earnings estimates. That valuation seems high, particularly if EPS is in fact on a downward trend.

Gayner and his team had Fairfax Financial (NASDAQOTH: FRFHF.PK) among their top picks as well. Fairfax is managed by Prem Watsa, a value investor who has become known as “the Warren Buffett of Canada.” Markets are considerably less faithful in Watsa than they are in Buffett, however: the price-to-book ratio here is 1.1, so while the stock is priced at a small premium to book, the premium is not nearly as high as it is at Berkshire Hathaway. Fairfax has paid a $10 per share annual dividend each of the last four years for a yield of 2.5%.

CarMax and Diageo do need to continue decent levels of earnings growth for the next few years in order to prove to be good “growth at a reasonable price” stocks, but each of these two names seems to be worth a closer look from investors. Berkshire does offer a way to invest with Buffett (albeit at a considerable premium to book value) though any potential buyers should be satisfied that future managers of the holding company will also prove to be capable value investors.

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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 CarMax and Diageo plc (ADR). 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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