Earningspalooza: Highlights From Berkshire, Square, and Markel

Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.26%) hosted its annual meeting a few weeks ago. The company also reported earnings, but the meeting, as always, overshadowed that. Don't worry, though; we've got you covered on both fronts.

On this week's episode of Industry Focus: Financials, host Jason Moser and Motley Fool contributor Matt Frankel look at earnings reports from three companies in two very different businesses. Find out the most important numbers and trends for Berkshire, Square (SQ -1.68%), and Markel (MKL -0.78%) and what this quarter says about their long-term pictures. Plus, on this week's Between Two Fools, Jason chats with new Motley Fool analyst T.J. Piggott about his investing history, race car experiences, and an under-the-radar company T.J. really likes.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on May 13, 2019.

Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, May 13th. I'm your host, Jason Moser. And on today's Financials show, we're talking the latest quarters and prospects for Berkshire Hathaway, Markel, a little company people are probably familiar with, Square. As always, we'll have One to Watch. But we begin this week with another installment of Between Two Fools.

As I mentioned last week, we recently brought four new analysts onto our investing team here at The Motley Fool. We wanted to take the opportunity here on Industry Focus in Between Two Fools to introduce you to these analysts. Last week, we had Maria Gallagher. This week, I had the opportunity to sit down with T.J. Piggott. I hope you enjoyed our conversation!

[...]

Moser: OK, T.J., first things first. For our listeners, tell us who you are and how you got here to The Fool.

T.J. Piggott: Hi, Fools! My name is T.J. Piggott, and I've been with The Motley Fool for the past four years. Prior to joining the investment team, I was managing the trade desk for Motley Fool Wealth Management.

Moser: That was a little bit different than what you're doing now. Your job description down there managing that trade desk, I think was a bit more process-oriented versus digging into companies. You weren't doing a lot of research down there, or not as much as you're doing now.

Piggott: Correct. Mostly what I did is, I would implement the portfolio manager's strategy. When a client would entrust us with some of their capital to invest, my team and I would execute those transactions for them.

Moser: That's kind of pressure-packed. I mean, if you fat finger something, you're putting someone's financial lives in jeopardy, right?

Piggott: Yeah. The Motley Fool would make the client right, so I'd be putting our company in jeopardy. So, yeah, a fat finger is a bad thing to do.

Moser: [laughs] In any walk of life, I think.

Piggott: Absolutely!

Moser: Well, you get coming here every day like we do, and you get to look at these stocks, and you get to find good ideas and communicate them out to members. Given your investing background, I know you've been investing for a while, one of the challenges I think we all face as investors is trying to figure out what kind of investor one actually is. I know when I got here back in 2010, I had been investing for a long time. My dad introduced me to it when I was a kid. But I didn't really know what kind of investor I was until I actually got here and started doing it for a little while, and was able to take some input and lessons from all of these folks on our investing team.

That said, what kind of investor do you consider yourself today? Has that changed? Are you still not sure? Value, growth, somewhere between?

Piggott: I've evolved over time, so it's hard to box me into a corner, per se. My portfolio is pretty well diversified. But if you must put me into a style, I'm a growth-oriented investor, focusing more on the small-cap space.

Moser: Nobody puts T.J. in a corner.

Piggott: No, no way! It's kind of a funny progression. When I first got into the business back in 2006, my mentors were large-cap value managers. It's kind of weird going from that to big growth.

Moser: Here especially for a long time, most investors here were of that value nature. There was a tremendous lean toward the value side definitely when I got here back in 2010. I think over time, that's changed. I think a lot of us have seen the merits in growth names. Obviously, technology has changed a lot of things in a short amount of time. Growth is a little bit more of a risky style of investing, perhaps, but frankly, I mean, if you're looking to invest and grow your money, I mean, growth companies are going to represent typically those best opportunities. I always found value investing to be really difficult. You not only had to call the right price to actually get into the stock, but then you had to call the right place to actually sell out of the stock. You essentially had to be right twice. Growth investing, you kind of just have to be right once. But what do I know?

Piggott: Time will tell.

Moser: I guess we'll see! Since you got here, and this can be before you even came up here to the investing team, it could apply to when you were downstairs as well, what have you learned in regard to investing? Something you've learned that you either weren't expecting or something that surprised you a little bit?

Piggott: Working in the financial services business for essentially my whole career, you're exposed to many different disciplines and styles and approaches to investing. But what surprised me about coming to The Motley Fool and investing style here is the emphasis that's placed on the quality of management and corporate governance. While that's important to a lot of investment professionals, earnings and price targets, usually with short-term mindsets, and margin expansion, that seems to dominate the narrative in the news. Here, that's just noise. It's all about, how's the management doing? What are they doing to grow the business for the long term? And a focus on, are they aligning their interest and shareholder interests together? I think that's the most important thing, which is really great!

Moser: One of the things we did in my analyst development program was a deep dive into a CEO of our choice. It was really to learn more about the CEO, the company that he or she was running. Everything about it. Kevin Plank was the one I chose, Under Armour. There's just a lot to learn. I think that you really hit on something there. The focus on management here is big. I don't think that'll change, either. Even bad management can run a good product into the ground. We've seen that many times. This is always an interesting perspective I get, when I ask people this -- if you had the opportunity to meet management versus not meeting management of a company that you've recommended, what would you prefer? Would you rather meet them or not meet them?

Piggott: I would love to meet them. Yes, they're born salesmen in a lot of ways. They're kind of groomed to give off this persona. But being able to sit down directly and ask questions that are unscripted, I think you could tell a lot about a person and what their fundamental values are. If you can extract that from them, you can really make a good influence if these guys are really good people, and they're doing the right things for their shareholders, or not.

Moser: Yeah, I think that's a really good point. I was always a little bit stumped by that question. But I think I ultimately looked at it the way you do. Yeah, they're born salesman. Their job is to tell you how good the company is and how great of a job the team is doing.

But if you can look past that, and just try to find the other qualities that you could glean from that conversation, it can give you a better idea of what kind of people they are, what kind of thinkers they are, short term versus long term.

Piggott: Yeah. It doesn't have to be about the company specifically. You can just ask them about their background, where they came from, how they developed in their careers. That might give you also a good sense of what their work ethic is like, how they've overcome adversity in their lives. That's important.

Moser: Yep, I agree. Given that you've been investing for a while, what is the best piece of investing advice you've ever gotten?

Piggott: Gee, I've heard all the quotes that everybody here has heard.

Moser: [laughs] "Be careful when others are greedy..."

Piggott: Buffett, of course. Bill Miller, one of them I received was, "lowest average cost wins." Shelby Cullom Davis. I don't know if anybody here on the show might know, it's from the Davis Advisers. Pretty much, he said that you make most of your money in a bear market. You just don't realize it at the time.

Moser: That's a good point!

Piggott: Those are all great! I love those quotes, great investment advice! But my mentor, when I first got in the business, he told me, and it's always stuck with me, pay yourself first. All these things that we do here about growing wealth and investing, you have to have capital to do that. And a lot of times, people get caught up in, I want that fresh new toy or that nice iPhone or the expensive car. Those are short-term-gratification things. Those things feel good, but the reality is, you don't really need that. You need to be invested in yourself and your family and your financial future. Pay yourself first. Put that money away. Invest it. And over the long term, you'll be able to get whatever you want.

Moser: I like that! I've always considered myself very fortunate. I'm not much of a stuff guy. If I run into a windfall, I'm not going to go buy stuff, I'm going to go buy stocks. I would much rather own the stocks. My dad always taught me, you're never going to buy at the bottom and you're never going to sell at the top, so just get used to it and start investing. That was something that always stuck with me.

Tell us and our listeners, beyond investing, we'll talk about T.J. for a second here, tell us something interesting about you. Tell us something that has happened in your life, something unique, something you think people should know.

Piggott: I'm an adrenaline junkie.

Moser: Oh, yeah?

Piggott: Yeah, I don't know if that comes across.

Moser: What, like, bungee jumping and stuff?

Piggott: I haven't done that yet. But I love to go fast and I love to live a little bit on the edge. Not so much nowadays because I have a child. But thankfully, my wife embraced that before we had our kid. I got some really cool gifts, experiences. One is, I was able to take off and fly a single-engine Cessna.

Moser: Oh, wow!

Piggott: They didn't let me land it. That's a little bit more dangerous.

Moser: Difficulty's a little bit higher.

Piggott: Yeah. But still, that was pretty cool! Also, I got to drive a NASCAR at Richmond International --

Moser: No way! How fast were you able to get it going?

Piggott: Here's the thing, they don't put the speedometer in the car. Nor do they put the rearview mirror in there, either. They want you just listening to your spotter. You're going so fast, one, day they don't want you to try to go as fast as you possibly can to one-up your buddies, because you'll put yourself in the wall. That's not good. Those cars are expensive. Two, you could hurt yourself. But it was an amazing experience!

One thing that I realized, also, is these guys are much, much crazier than I am. Because as I'm driving, it's a live course, so it's not just me on the track, it's everybody else, and they stagger you out so you can't catch up. Well, they do ridealongs, ridealongs with a professional driver. And all of a sudden, my driver says, "Hit the apron." And I go down the apron. And as I'm turning down, here goes two cars speeding past me like a fighter jet. And I was like, "And I thought I was going fast, wow!"

Moser: [laughs] You got a life insurance policy, T.J.?

Piggott: Absolutely!

Moser: Good! Just checking!

Piggott: Not sure if it covers that, but, hey!

Moser: [laughs] Let's wrap this up today, you're here to talk stocks, to learn about stocks, to communicate those ideas and your learnings to our members. It's a lot of fun to do. Normally we like to wrap these interviews up with a book recommendation, but given that I've got you here today, and you're an analyst here on our team, what is a stock that you like today, and why?

Piggott: OK, I have a goodie for you. You guys ready?

Moser: Ready.

Piggott: OK, I'm really excited about a company called Globant. It's a global technology and digital consultant firm that's bringing its A game against some of the best=known consulting firms in the world. Their goal is essentially to help their clients remain relevant in the digital age by creating what they called meaningful digital journeys to end customers.

Moser: Globant, never heard of it.

Piggott: It's great! It hits a lot of things that The Motley Fool cares about. It's founder led and still controlled by four Argentinians who saw an opportunity to tap the excellent source of Latin American IT professionals, who a lot of people weren't leveraging. They have client relationships with some of the most recognized brands in the world, such as Disney, Coca-Cola, American Express, Southwest Air, EA. The list goes on and on. I think you guys get the point of who they're impacting. They've built over 300 mobile apps for smartphones and wearables. They've developed streaming platforms where billions of videos have been watched.

Moser: Smaller company, too. Looks like about a $3 billion market cap. So maybe there's a nice growth story there to tell.

Piggott: A great growth story. And let's talk about growth, because we can't forget about that. Revenue's been growing at a healthy clip. About 27% compound annual growth rate on revenue since 2014. This past year, they brought in about $522 million with a net income of around $52 million. So they're not large yet, but they're getting there.

Moser: All right, good stuff! I'm sure that's one that most of our listeners probably haven't had a chance to dig into. That's neat. They got a good idea to this thing. T.J. Piggott, thanks so much for stopping by!

Piggott: Thanks for having me!

[...]

Moser: Joining me now in the studio via the magic of technology and Skype, although, I wonder, with Skype, Matt, maybe we need to be using Zoom. I don't know. But, Matt Frankel, Certified Financial Planner. Matt, how's it going?

Frankel: Pretty good! How are you up there?

Moser: Oh, we keep on keeping on here! I was thinking, Zoom is now public. It's a company that a lot of us have dug into and we like it a lot. I wonder if we're going to integrate that into our services here and start using that one day for these shows. Not that we've had any problems with Skype. Skype is working wonderfully. Skype, part of the Microsoft family, of course. It's nice to have options, right?

Frankel: Definitely. Do you have any experience with Zoom? I do not.

Moser: Yeah, we use it a decent bit here at HQ. As a matter of fact, I just had to use it the other day. We were putting some windows in, putting a lot of windows in, in our house, which meant I had to be at home all day, and I had a meeting at work at nine o'clock. So I Zoomed in from home. It's just very slick, easy. It always works. I think that's one of the things they've always sold themselves on. It's a cloud-based solution built for video conferencing as opposed to one of these tech companies that added video conferencing to the mix there. The technology's slick, it always does seem to work, and it's easy even for a dummy like me. So I've got that one on my watch list of stocks to keep an eye on. But hey, listen, we'll continue with Skype. Like I said, it works just fine.

Matt, we wanted to get in first this week. We've had a big past few weeks here in regard to Berkshire Hathaway. We had the Berkshire Hathaway meeting. We had earnings. There's always a slew of content that comes out a little bit before and a little bit after with Charlie and Warren throwing all those bromides and their opinions around, and everybody's nitpicking and reading too much into them. Wanted to jump into Berkshire Hathaway this week, talk about the company. Earnings, the meeting, anything you want to get into. What did you think about the company's quarter? What did you think about what you took away from the meeting?

Frankel: The meeting's always fun. I'm actually making plans to go next year. I've been putting it off and putting it off. I won't have a baby at the house next year, and Warren Buffett will be about 90 at that point, so it seems like as good a time as any.

Moser: Will that be your first meeting?

Frankel: It will. I've never been.

Moser: I went once. I can tell you, you'll love it! Make sure, because you're coming from The Fool, get that Fool press badge. You will not regret it. I promise!

Frankel: It's good advice! But the meeting, it's always fun. The Q&A session lasts about six hours, so there's no possible way to cover everything they said right here. One of the most interesting developments that I noticed was that the succession plan at Berkshire has been a hot topic over the past few years. And this is the first time that it wasn't just Buffett and Munger talking. They were still the two that were on the stage, but Buffett called on his new vice chairmen, Ajit Jain and Greg Abel, more than once to answer investor questions and stand up at the meeting and run the show for a minute. That's the first time that's happened. Again, like you said, everyone always reads in way too much into what happens at the Berkshire meeting, so I'm not going to read too much into it. But every year, it seems like they're taking one more step toward having a concrete succession plan. And this is the latest step in that. That was one of the key developments I've seen. The rest of it, you can read about. I wrote an article about some of the big takeaways that I'll put out on Twitter shortly after this.

As far as the earnings, because the meeting is such a big event -- it fills up in arena, that's what all the shareholders are fixated on -- everyone forgets that Berkshire actually releases an earnings report that morning.

Moser: [laughs] Yep.

Frankel: It just becomes a side issue of the day. I wrote an article on both the earnings and the meeting. The one about the meeting got like 8 times as much traffic as the earnings article.

Moser: Oh, I believe it!

Frankel: It's definitely like an afterthought. But that's a lot of significant information. Really quick, Berkshire's earnings are kind of meaningless because they reflect the stock portfolio, which aren't really earnings until they sell anything. So don't pay too much attention to that. But, some of the key numbers. Operating earnings, which excludes the stock portfolio, rose about 5% year over year. That's solid. You don't invest in Buffett because you think he's going to grow 30% or 40% year over year. You want steady, consistent growth, and that's exactly what we're getting. The cash stockpile grew, not surprisingly. Berkshire's got over $114 billion in cash right now, not including the $10 billion investment that was announced after the quarter ended. Even after that, there's still well over $100 billion in cash sitting there. Don't discount the possibility of a big acquisition coming in 2019. If you remember, that was one of my bold predictions at the beginning of the year.

Moser: Still plenty of time to go!

Frankel: I stand by it, I think it'll happen. So far, I'm pretty accurate with those. Apple retook its trillion-dollar market cap. That was my first victory. And we're just into May. We have plenty of time.

Berkshire also, in terms of buybacks, while the company bought back less than 0.5% of its stock during the quarter, it's still more than it bought back all of last year after it changed their buyback program to let Buffett buy back more. That tells us that Berkshire considers its stock cheap, especially at the low $200s, where it was most of the first quarter.

The last thing from the earnings that I want to emphasize is what we don't know yet. In Berkshire's earnings report, they don't disclose what they've been doing in their stock portfolio, which is pretty much what all their investors want to know every quarter. What's Berkshire buying and selling? That's the big, hot topic. We don't find that out until the company releases its newest 13-F, which should happen on the 15th. In about six days, we'll get some color into what Berkshire bought and sold. It looks like they spent a few billion dollars on stock purchases this quarter. So I'm curious to see what they bought.

Moser: We know they got Amazon in there. It took a lot of people by surprise. I mean, I guess I understand that. Buffett was very clear, it was one of the other fellows, either Todd or Ted, that actually spearheaded that purchase. I mean, I guess better late than never, right? But gee whiz, Amazon's almost a $1 trillion company. Man, it's just a shame they didn't decide to take that plunge earlier. But by the same token, it really speaks to the opportunity that they must see still exists.

Frankel: Right. Buffett has a track record of pre-announcing things that the company bought only when it wasn't him doing it, just because he doesn't want the 13-F to come out and everybody in the world says, "Oh, my God, Warren Buffett just bought Amazon!" He wants to make it very clear that this wasn't him, it was one of his stock pickers. And lately, honestly, those two have had a better track record picking stocks than Buffett has. But, the headlines that would grab... "Warren Buffett Likes Amazon," could you imagine what that stock would do the next day if everyone thought that?

Moser: I really can't, as a matter of fact. As well as it's done to this point, I could imagine there would be a nice little pop, the Buffett pop there. Every year with the Berkshire Hathaway annual meeting, typically the next morning, there's what's called the Markel brunch. I went to the meeting once. We did the Berkshire meeting, and then we did the Markel brunch the following morning. That was a lot of fun. Markel times this out to where their earnings come out generally the same basic time as well. So we'll look into their quarter really quick.

Not a whole heck of a lot to dissect there. Operating revenues for the quarter of $2.5 billion, up from $1.6 billion from a year ago. Gross written premiums were $1.7 billion for the first three months of the year versus $1.6 million last year. The combined ratio of 95% was a little bit higher than 90% from a year ago. That's the nature of insurance. We always just want to see that combined ratio below 100. Over time, Markel has done a very good job of doing that. Book value is now at $706.98, up 8% from $653.85 at the end of 2018. Book value, of course, is a measure we use to value insurance companies. I wouldn't call Markel cheap by any means. It's somewhere in the neighborhood of 1.5 times book. But listen, it's a high quality business. I can think of worse places to put your money.

If you remember, the headline a few months ago, the investigation into one of the reinsurance businesses. There is no news to this point on how that is proceeding. They just didn't have anything to release there. Nothing really to speak up there. Markel Ventures, that wing of the business, they're investing in and buying wholly owned businesses there, revenues there up $455 million for the quarter. That's really just turning into a nice revenue generator for the business. I really like it! Their investment portfolio all in all saw $612 million net investment gains in the equity portfolio. You look at some of those stocks that Markel holds, Amazon has been in there for a while. It's one of the things I've liked about Tom Gayner and team; they've been a little bit more forward-looking in that regard. Perhaps it's because they're a little bit younger. Regardless, if you look at their holdings, you see some of those tech-oriented names that really have done so well over the past several years.

With Markel, listen, I just look for the red flags to give me pause or to give me a reason not to own the stock. I don't find them in this quarter. I think we see them keep on doing what they're doing. Everything seems to be working out well. Good company to own. I own it myself. If you don't own it out there, and you're listening to this show, I encourage you to put it on your watch list. It's a nice one to look at in this environment of these really lofty valuations and unprofitable businesses.

Speaking of unprofitable businesses, Matt, let's talk a little bit about Square. While Square isn't necessarily yet to that sustainable profitability, it's coming soon. It's right around the corner. Looked like a pretty good quarter. Why don't you break down the latest in Square's earnings and what you see coming up for the business?

Frankel: Sure. On an adjusted basis, Square actually made a profit, first of all. Adjusted. Take that with a big --

Moser: [laughs] Well, I've made the argument for a while, it seems like we live in this non-GAAP, adjusted world now. No matter what, you can pretty much adjust anything at this point. It's like, "Honey, did you take the dishes out of the dishwasher?" "Well, no, but if you adjust it back to, do I wish I did it? Yes. So, adjusted, I did unload the dishwasher. But in reality, I didn't." It does feel like we live in this adjusted world now. But, I digress. Go on!

Frankel: Right. Like, if I ask my wife what she spent shopping the other day, she could say, "Well, excluding one-time purchases, I didn't spend anything!" [laughs]

Moser: [laughs] "Babe, they're all one-time purchases."

Frankel: [laughs] Anyway, the numbers for Square look great pretty much all around. Square raised its revenue guidance for the year, but not its earnings guidance. But the numbers look great all around. 59% increase in adjusted revenue. Even if you back out acquisitions, it's 49% year over year. That's amazing growth, especially since it's been sustained for five or six years now. Gross payment volumes up over 20%. Subscription service revenue was the big standout. It more than doubled. It was up 126% year over year. Square said one of the biggest reasons is the Cash app, which I've been saying is the biggest growth engine that Square has, and it's going to really surprise people over the long run. Square Capital made 50% more loans year over year. They're expecting similar revenue increase in the second quarter. There's really not a whole lot not to like about how Square has been doing lately.

Moser: Yeah. I was looking at that myself. I mean, I agree. I think Cash App, today, while it's not this big monetizable engine, it really is a great engagement tool. I think what it does is, it gets people into that Square ecosystem. You're doing more with the services that they're offering. We use the Cash App just with our daughters, paying them money for chores done or whatever, if I need to give them money for whatever. It's very seamless and easy to use. It's interesting to see also as Square continues, and they made the Weebly acquisition, and they're going into a little bit more on the e-commerce side. They're competing a little bit more with Shopify. Shopify, getting into the hardware game now as well. We know they use Stripe as a payment provider. It's really neat to see Shopify and Square evolving, and really starting to become market leaders in obviously what is a very big market. I noted last week, you look at Square and Shopify together, the market's essentially valuing the same, but Square brings in about 3 times the revenue of Shopify at this point. It's an interesting difference in expectations there. Both very good businesses. We like them both here at The Fool.

But, again, you look for the red flags in something like that, and we just don't see them. If you own shares of Square, you still ought to feel really good about it. It sounds like you feel that way, too.

Frankel Yeah, definitely. I mean, I bought Square shortly after its IPO, I haven't sold one share, and I don't plan on doing it. I haven't added much, just because every time I want to add, I talk about it on here and start telling everyone else to add. Hopefully some people took my advice when it dropped into the $40s late last year, when I wanted to buy it but couldn't shut up about it. Hopefully somebody took my advice!

Moser: I'm sure many did. Those pesky trading guidelines, we have to adhere to them. OK, Matt, let's wrap it up this week, as always, with One to Watch. What is a stock you've got your eye on this week?

Frankel: I'm going to change what I planned to talk about and mention Markel. After hearing what you said, one thing really stood out to me. You said Markel's not a cheap stock at 1.5 times book. But to put that in perspective, that's almost exactly where Berkshire is right now. They're trading at the same valuation. Which one has more growth potential over time? If you can get Markel for the same valuation price to book as Berkshire, I would pay that all day for the growth potential long term.

Moser: Well, I like that! I like that perspective there! I agree. Markel, clearly, as the smaller business, has more growth prospects there. That's an interesting point there on the valuation. Listen, every once in a while, you have to call an audible, man! Good call there!

I'm going to go with a company probably a lot of listeners out there have heard of to this point now. It's still relatively new on the markets. DocuSign, the cloud-based e-signature solution that probably everyone has used at this point. You may not even realize you've used it. When you have to sign any kind of a document -- and I'm talking about anything from loans to insurance papers, anything of contractual agreement -- DocuSign is one of the market leaders there in making sure that you get those documents signed, and they're able to manage the workflow of those documents. For me, that's the interesting part of the businesses, as they evolve and become more than just this e-signature business. It was a company built very much on the technology of today in the cloud, which is encouraging. Strong balance sheet there with close to $800 million on the balance sheet. We talk about unprofitable businesses; DocuSign is one of those. But again, still relatively new to the public markets. They're working their way to profitability pretty quickly. They reported another really good quarter. They added 23,000 new customers. They have a global base of now closing in on 500,000 customers. A lot of interesting things about this business. It's got a lot of qualities we like. I own shares myself. I think it's certainly one that listeners ought to take a look at as well.

With that, Matt, I guess we'll wrap it up. I appreciate you being here this week!

Frankel: Of course, always fun to be here! Remotely.

Moser: We'll get you back in here soon enough. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Today's show was produced by Dan the Man Boyd. For Matt Frankel, I'm Jason Moser. Thanks for listening! And we'll see you next week!