The #1 Stock In Buffett’s Portfolio

How would you identify the #1 stock in Buffett’s portfolio? Is it the fastest growing stock, the biggest by market cap, the largest by weighting or the most undervalued?

We decided to pick the latter for this article and do a deep dive into all his positions to figure out which one is most undervalued across his whole equity portfolio. And wouldn’t you know it, the stock that comes to the surface is an insurance company, one of Buffett’s favorite types of firm. So much so that he regularly cites Berkshire’s own insurance business as a primary driver of profits over the decades.

But in his equity portfolio, the standout insurer is a company called Markel. It was sufficiently compelling for Buffett to invest almost $240 million in it, but is it worth following in his footsteps?

Key Points

• Markel is an insurance company that trades at a low price-to-earnings ratio, low price-to-sales ratio and attractive valuation.
• It doesn’t pay a dividend at this time so it’s not appropriate for income-seekers.
• The stock has underperformed the market but its fundamentals remain strong, particularly with growing cash flows over the past decade.

Why Does Buffett Like This Insurance Firm?

What is it about Markel that Buffett likes? Let me count the ways. It’s widely believed that Buffett likes buying big companies trading at PE ratios under 15x, and that’s where Markel earns the first green checkbox because its earnings multiple is just shy of 10%.

It’s also looking very attractive when levered free cash flows are analyzed. We went back a full 10 years and, extraordinarily, FCF was positive in every single year, and better yet, it was growing. That’s the kind of fundamental thesis Buffett can surely get behind it, a steady grower no matter what the market conditions.

Those cash flows are instrumental in arriving at a valuation calculation and, as it turns out, Markel appears substantially undervalued using a DCF forecast analysis. It appears Markel is, in fact, 16.9% undervalued to fair value of over $1,620 per share.

Why Buy Markel Now?

Interestingly, Markel has not had a great year despite posting impressive numbers. The share price is up by just 5.5% year-to-date, lagging the S&P 500 by a considerable margin.

But with a return on capital just south of 13%, suggesting a strong competitive position in the marketplace and a book value of 1.4x, Markel is an attractive business across key financial metrics. The company also has revenues across the globe on just about every major continent, so the odds are the predictability of its revenues will sustain for the foreseeable future.

It’s quite possible that a topsy turvy 2024 will lead to an opportunity for investors to leap back into the slow and steady growers, and away from the tech titans. If so, Markel stands to benefit tremendously and so too, Berkshire shareholders.