Tom Gayner (Trades, Portfolio) is a legendary value investor who is the co-CEO of Markel Gayner Asset Management Corp, an investment firm that reported $7.46 billion in equities in its most recent 13F filing for the fourth quarter of 2022, which ended on Dec. 31.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Gayner has taken his investment strategy inspiration from the legendary Warren Buffett (Trades, Portfolio) and has stated in the past he runs a “mini Berkshire Hathaway” (BRK.A, Financial)(BRK.B, Financial). In fact, the largest holding in his fund is Berkshire Hathaway itself, with Class A shares making up 7% of his most recent 13F filing and Class B shares making up 6.34%.
His investment framework has four main characteristics which he looks for in companies:
- Profitability and Good Return on Invested Capital (ROIC)
- Talent and Integrity of Management
- Great Reinvestment dynamics
- Buy Price Less than Fair value
This is remarkably similar to Buffett’s “Wonderful companies at fair prices” strategy, with a focus on “exceptional management." However, I believe it is often useful to see strategies framed in different ways.
In the fourth quarter of 2022, Gayner bought six new stocks and adding to the existing positions of ~56 stocks. In this post, I'm going to highlight my two favorite picks from among Gayner's fourth-quarter buys; let’s dive in.
1. Brookfield Asset Management
Brookfield Asset Management (BAM, Financial) is one of the largest alternative asset managers in the world with over $750 million in assets under management. Alternative investments have become immensely popular in recent years as they often provide uncorrelated return potential when compared to the general market. In this case, Brookfield specializes in five key investment areas: Renewable Energy, Infrastructure, Private Equity, Real Estate and Credit and Insurance Solutions.
So far, these strategies have worked out tremendously well for investors of Brookfield as, over the past two decades, the company has generated compounded annual returns of ~19%. This is astonishing given the S&P 500 has returned ~10% per year over the same period. Brookfield has firmly beat the market.
Its renewable energy segment is particularly promising for the future given the huge number of tailwinds behind the industry, which include U.S. President Biden's bold plans to set a path to decarbonize the U.S. power sector by 2035 and achieve a 100% clean energy economy with net zero emissions by 2050.
Brookfield has invested ~$11 billion into various renewable energy projects, including wind turbines, in which the company has achieved a 5,400 MW capacity across 105 facilities. In terms of Solar, the company has a 2,300 MW capacity across 88 facilities.
Overall, Brookfield's renewable energy projects have scored a 15% internal rate of return (IRR), which is exceptional.
Strong financials
Brookfield has generated solid rates of return internally, which has been driven by strong revenue growth. In the third quarter of 2022, the company generated $24.4 billion in revenue, which surpassed analyst expectations by over $3.5 billion and jumped by a swift 22.6% year over year.
The company’s insurance segment is a key emerging growth driver, as Brookfield has made a number of acquisitions in the space which include American National and various reinsurance blocks, which has enabled the business to grow its insurance capital to ~$45 billion.
On the credit side, Brookfield has scored a deep partnership with Howard Marks' (Trades, Portfolio) Oaktree Capital. On Brookfield’s website, the company even quotes Marks as giving a strong endorsement for it.
According to its third-quarter 2022 earnings report, the business generated funds from operations of $0.89 per share, which increased from $0.85 per share in the year-ago quarter.
Its distributable earnings before realizations were $1.2 billion in the quarter and a solid $4.2 billion over the last 12 months, which increased by 39% and 29%, respectively.
Brookfield Asset Management does not have a regular dividend payment, but it does make special dividend payments that have high variability. It has plans to pay out approximately 90% of ~$2 billion in distributable earnings in the form of cash dividends according to its most recent earnings report.
Moving forward, management announced bold plans to “double” distributable earnings over the next five years, while still paying out 90% to shareholders. Hence the company could become very lucrative for income investors.
Valuation and guru investors
Valuing Brookfield is fairly challenging as it is a complex and diverse asset owning player. On a simple basis, we can assess that the company has a non-GAAP forward price-earnings ratio of 26 based on its predictions of future earnings, which is 18% cheaper than its five-year average of 32.
Tom Gayner (Trades, Portfolio) purchased 2.19 million shares of the stock in the fourth quarter of 2022, during which the price averaged $30.09 per share. At the time of writing the stock is trading ~12% higher than this average buy point.
Mohnish Pabrai (Trades, Portfolio) purchased $7.4 million worth of shares in his most recent 13F, which was for the third quarter of 2022, during which shares traded at an average price of $48 per share.
2. Capital One
Capital One (COF, Financial) is a leading financial holding company which has a staggering $333 billion in deposits and over $455 billion in total assets.
The company offers a range of financial services from consumer focused credit cards and saving accounts to auto finance solutions. In addition, the company is known as a major player in business banking and commercial lending solutions for organizations.
We are currently going through a “recessionary” environment, thus it was not a surprise to see the stock of Capital One sell off. Between August 2021 and December 2022, its stock price plummeted by 48%. However, between mid December and throughout January 2023, its stock price has popped by a solid 32% on strong momentum.
Mixed financials
Capital One reported mixed financial results for the fourth quarter of 2022. Its revenue was $9.04 billion, which missed analyst expectations by $32 million and declined by 14% year over year.
This was mainly driven by the recessionary environment which has impacted Capital One’s credit card customers. The company has been known for offering credit to around 100 million customers with not the best credit scores in the world, thus during tough economic times these customers are more likely to default and rack up losses for the company.
A positive for Capital One is the company hasn’t reported signs of major economic effects yet. On its fourth quarter earnings call, management reported solid purchase volume, which increased by 9% year over year, in addition to ending loan balances of $22.9 billion, up 21% year over year.
Surprisingly, its charge-off rate and the delinquency rate were still below pre-pandemic levels, despite normalization. Therefore it looks as though the prior sell off in stock had been mainly driven by market fear and an unfavorable comparison with stronger revenue in prior years.
The business has also benefited from a 24 basis point increase in its net interest margin, which rose to 6.84%. This was driven by the rising interest rate environment and a greater mix of car loans with better margins.
Capital One also has a stable balance sheet, with a common equity Tier 1 capital ratio was 12.5%, this is up 30 basis points over the prior quarter and more than double the 6% legal threshold.
Management also showed confidence and authorized a repurchase of ~$150 million worth of stock in the fourth quarter, which brings the total to $4.8 billion for the year.
Valuation and guru investors
Capital One trades at a price-book ratio of 0.86, which is over 1.2% cheaper than its five-year average. Its price-earnings of 6.7 is over 41% cheaper than the financial sector average of over 11.5.
The GF Value chart indicates a fair value of $147 per share, meaning the stock is “modestly undervalued” at the time of writing.
Tom Gayner (Trades, Portfolio) purchased 7,500 shares of Capital One in the fourth quarter of 2022. During the quarter, shares traded for an average price of $98, which is 23.5% cheaper than where the stock trades at the time of writing.
Final thoughts
Brookfield is a major player in the world of alternative investing and aims to benefit massively from the growth in its areas of focus, especially the renewable energy sector. Its management has executed its strategy to a tee, gaining endorsement from many great investors. Capital One is also a solid company, but I forecast a volatile lending business throughout 2023.
