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Steve’s June Outlook: “Great Capital Allocators”

June 22, 2020

It’s no coincidence that one of my largest long-term personal holdings is also a prime example of a superior capital allocatorMarkel (NYSE: MKL).

In case you’re unfamiliar, Markel is a financial holding company that generates shareholder value in much the same way as Warren Buffett has with Berkshire Hathaway: Through a three-tiered combination of its insurance businesses, its investment portfolio, and a diversified group of other acquired businesses to be held under its Markel Ventures segment.

Effectively managing that structure can be a challenging undertaking. But it helps that Markel’s leadership is simultaneously methodical and opportunistic when it comes to allocating capital between them.

Markel co-CEO Tom Gayner most recently offered a reminder during their second-quarter call last year regarding their stance and preferred order for capital allocation:

As we’ve discussed for many years, our rank order for allocating capital is first to invest in and support our existing businesses when we have reinvestment opportunities to help them achieve profitable growth. Second, we look for acquisitions that add to our existing businesses or create new fields for us to plan. Third, we build our portfolio of publicly traded equity securities. And fourth, when appropriate, we repurchase Markel stock.

Markel does not pay a dividend, and it has no near-term debt maturities. Incidentally, in the interest of conservatively maintaining liquidity given uncertainty surrounding COVID-19, last quarter Markel suspended repurchases of its stock and temporarily paused purchases of equity securities. But it didn’t completely seize its capital allocation ambitions; Markel is also in the middle of acquiring a majority stake in Lansing Building Products, a national supplier of professional building products and materials that generated roughly $1.1 billion in revenue last year.

In any case, Markel management has done a breathtaking job at effectively allocating their capital in the best interests of shareholders. The stock has gained more than 11,000% (not a typo) since its IPO in 1986 as of this writing – and that’s after plunging more than 40% from its all-time highs in February as investors (in my opinion) overreacted to its pandemic-related risks. With shares trading at a reasonable 1.3 times book value today, I’m seriously considering adding to my own stake in the company.

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