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Here's My Top Stock to Buy Right Now

By Matthew Frankel, CFP® – Jun 19, 2020 at 6:42AM

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This company has not one, but three ways to generate profits for investors.

Over the past few months, I've been more aggressive with stock purchases than in any three-month stretch previously. While the COVID-19 pandemic is an absolutely terrible situation, it has also created opportunities for long-term investors to put money to work at a discount.

One stock that I've added significantly to in recent months is Markel (MKL 0.40%). Markel is a specialty insurance company at its core, but there's so much more to the story. Here's why investing in Markel is like being able to buy Berkshire Hathaway (BRK.A 1.21%) (BRK.B 0.83%) in the 1990s, and why at a nearly 30% discount to its pre-pandemic share price, it could be an excellent opportunity to add Markel to your portfolio for the long run.

Man reclining in desk chair and looking at financial charts displayed on various monitors

Image source: Getty Images.

How Markel's business works

Markel makes its money in three main ways. The first is insurance. Markel is a provider of specialty insurance, known as the excess and surplus (E&S) lines in insurance terms. Think of things like liability insurance for high-risk businesses, special event insurance, etc. The company also has a large reinsurance segment, which is essentially insurance for insurance companies. For example, if a homeowners insurance provider wants to limit their losses in the event of a major hurricane, they may purchase a reinsurance policy that agrees to cover any claims above a certain amount.

These are two high-profit types of insurance, especially on the specialty insurance side of the business. Markel's specialty segment is consistently profitable. Plus, the specialty insurance industry is highly fragmented, giving Markel lots of room to grow.

Reinsurance can also be a lucrative business but is less consistent. By nature, it is very disaster-prone, and in years where there is a particularly bad hurricane season, the reinsurance business is likely to lose money. Over time, however, reinsurance has high profit potential.

In addition to its insurance operations, Markel invests some of its collected insurance premiums in a portfolio of common stocks. The company currently owns about 130 different stocks, with large holdings in Berkshire Hathaway, Carmax (KMX 2.55%), and Brookfield Asset Management (BAM 2.77%), just to name a few. Over the past 10 years, Markel's stock portfolio has produced 15.2% annualized returns.

Finally, Markel invests in non-public companies (in whole acquisitions and investments) through its Markel Ventures division. And to be clear, this is not a small piece of the pie: Markel Ventures generated more than $2 billion in revenue last year, or 22% of the company's total.

Baby Berkshire

Most insurance companies are happy to earn a profit margin in the low single digits from their insurance operation and invest their collected premiums (also known as the float) in fixed-income investments like Treasury securities.

Markel does this to some extent. While Markel's insurance business has historically been a bit more profitable than the industry average, it invests enough in fixed-income securities to cover its potential insurance liabilities.

However, Markel's willingness to invest its excess float in stocks and entire businesses can supercharge its long-term returns. In fact, this is essentially the same business model Berkshire Hathaway used to grow into a massive conglomerate worth half a trillion dollars. Plus, since it is roughly 3% of Berkshire's size, Markel has the advantage of being able to pursue smaller acquisitions. Markel is often compared to an earlier-stage Berkshire, and it's not hard to see why.

Steady growth for years to come

Markel isn't the kind of stock you should buy if you want to double or triple your money in just a few years. It is simply not built to deliver astronomical performance in short amounts of time.

Having said that, Markel is designed to generate strong, market-beating investment returns over the long run. It's a business model that's worked out quite well for Berkshire, and Markel's team has done a great job of executing on it so far.

Matthew Frankel, CFP owns shares of Berkshire Hathaway (B shares) and Markel and has the following options: short October 2020 $800 puts on Markel and long October 2020 $750 puts on Markel. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), Brookfield Asset Management, and Markel. The Motley Fool recommends CarMax and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short June 2020 $205 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Markel Corporation Stock Quote
Markel Corporation
$1,105.93 (0.40%) $4.44
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$411,607.00 (1.21%) $4,907.00
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$271.81 (0.83%) $2.23
CarMax Inc. Stock Quote
CarMax Inc.
$66.82 (2.55%) $1.66
Brookfield Asset Management Inc. Stock Quote
Brookfield Asset Management Inc.
$41.85 (2.77%) $1.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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