Don’t wait for the stock market crash to buy this valuable stock

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Although the stock market is near all-time highs and its cyclically adjusted price / earnings (P / E) ratio is near the dot-com peak, it is still possible to find attractive value stocks. Since it is almost impossible to time the market, buying a consistent compounder at a fair valuation is a better strategy than waiting for a crash.

It’s there that Markel (NYSE: MKL) comes into play. The specialist insurer has been compared to Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) because he uses insurance premiums to invest in stocks and acquire companies.

Image source: Getty Images.

It is a winning formula in the long term. The stock has returned around 700% since 2000. That’s double the S&P 500 Index. For long-term investors, waiting for a stock market crash will likely cost more than just buying and holding stocks. This is especially true given the reasonable valuation at this time.

Baby Berkshire’s nickname

Markel is made up of three business units that create a cycle of cash, investments and returns. Its insurance segment is not typical. Unlike life insurance or health insurance, or even traditional property insurance, the company writes policies in underserved areas where it believes it has expertise. This reduces competition and allows it to be successful based on policy and service availability rather than price.

Insurance for skilled trades, business properties exposed to earthquakes, and horse risks are just a few of the quirky niches the company has carved out for itself. If he feels the portfolio is out of balance, he will sometimes underwrite those risks and sell them to other investors to generate income. It is a small part of the business but useful in maintaining the desired risk profile at all times.

The premiums that its customers pay generate a float – money for a service (insurance claims) that the company does not yet need to provide. This free float is equivalent to an interest-free loan. Management uses some of this money to invest in stocks.

These investments represent the second segment of the business. The industry is highly regulated and Markel must invest a significant portion of the premiums in ultra-secure bonds. However, what he was able to invest in stocks has consistently outperformed the broader index over the past two decades.

Period Year-by-year returns of Markel shares S&P 500 Annual Returns Annual outperformance
2016 to 2020 15.5 15.2% 3 basis points
2011 to 2015 13.7% 12.6% 11 bp
2006 to 2010 6.2% 2.3% 390 basis points
2001 to 2005 ten% 0.5% 950 bos

Data sources: Markel, YCharts; bps = basis points.

The third business unit is called Markel Ventures. It is through this segment that Markel holds majority stakes in companies other than specialized insurance. Similar to Berkshire Hathaway, Markel allows local management teams to manage them independently once acquired. The business portfolio reported $ 2.8 billion in revenue last year and is split roughly evenly across physical products and services.

Fair value and potential inflation hedging

Warren Buffett once said that it is better to buy a good business at a fair price than a fair business at a good price. In valuing the price of his own shares, he has historically used book value as a measuring stick. Book value is simply the assets of a business minus its liabilities.

Like Berkshire, Markel’s management uses the book value compounds of rates to assess their own performance. This makes it a useful way to analyze evaluation over time. Outside of the pandemic, the stock has traded between 1.35 and 1.75 times its book value over the past five years. Right now, it’s at the bottom of that range. In this regard, investors don’t need a stock market crash to get a fair price on the stock.

Table of MKL price to book value

MKL price at book value of data by YCharts

There is also an interesting correlation between this price / book ratio and the yield of the 10-year US Treasury. It makes sense. Insurance companies tend to hold a large portion of their assets in bonds. Therefore, part of Markel’s profits will rise and fall with interest rates.

MKL price chart at book value (3-year median)

MKL data on book value (median over 3 years) by YCharts

Investors worried about potential inflation may see this as protection against rising rates. It’s just another way diversification helps stabilize profits.

In an expensive stock market, it’s understandable that investors are nervous. With so many companies priced for years of hyper-growth, some are doomed to disappoint. However, Markel offers investors a solid company, with proven management, at a valuation that has historically produced strong returns.

The stock may not match the wild daily swings that day traders love, but its consistent makeup has produced above-market returns over the decades. This is why now is the perfect time to buy stocks rather than waiting for a crash that could still take years.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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