Mini Berkshire Hathaway – 6 Companies that maybe the Next Berkshire Hathaway

It is always instructive to try and find stocks of companies that are in some way or other similar to Berkshire Hathaway (BRKA). Ask any value investor about what they consider as mini Berkshire Hathaway, and their picks will likely be different depending on how they interpret Mr Buffett’s investments.

For this list, I have tried to find companies that fit one or more of the following criteria

• Insurance Companies with Active Investment Portfolios – These companies invest the insurance float conservatively, often trying to find solid undervalued stocks that they can hold for a length of time and generate superior returns
• Mini-Conglomerates where Managers Actively Allocate Capital – These companies typically operate lines of businesses that are easy to understand and asset rich. Managers try to maximize their overall profit by proper capital allocation.
• Unconcerned with Dividends or Stock Splits – This may not be entirely accurate as you go through the list but all these companies are more focused on growing capital than returning it back to shareholders as dividends. Some of these stocks do split in a way to encourage long term share holding.

The Mini Berkshire Hathaway Stocks

These companies vary in size and the industries they operate in but they are all focused on long term shareholder value creation.

1. Leucadia National (LUK) – The company run by the duo Joe Steinberg and Ian Cumming has a terrific record of finding value in unusual situations and negotiating their way to profit. Leucadia owns a variety of assets/companies in its portfolio including mining, wineries, insurance and financial companies. Twice Leucadia has done deals together with Berkshire (using Berkadia entity), first when they bought Finova and later Capmark. Now the company is again in the hunt to purchase Citi’s oneMain (what used to be CitiFinancial) unit together with Mr Buffett.

Just how good is Leucadia? If you had invested in LUK and BRKA stocks in Jan 1990, you can now sell your BRKA stock for 15 times what you paid in 1990 and LUK stock for about 30 times your original investment. It has outperformed Berkshire Hathaway 2-1 in the last 20 years.

2. Brookfield Asset Management (BAM) – Brookfield manages power generation, real estate and other assets. Originally called Brascan, the company is often dubbed as Canada’s Berkshire Hathaway (BAM trades on NYSE). With $20 Billion in market cap, Brookfield manages close to $150 Billion in assets.

3. Markel (MKL) – Markel is a specialty property/casualty insurer with an investment portfolio run by the well respected value investor Tom Gayner. It was often speculated that Gayner will eventually succeed Mr Buffett at Berkshire as the Chief Investment Manager. At Markel, Gayner has built up a 21 year track record by compounding at 11.7%, comfortably beating S/P 500 during that period by over 2.5%. As an insurance company, Market underwrites coverage for niches that are difficult to insure and require specialized knowledge and is disciplined enough to turn away unprofitable business. The company has historically grown its book value by 19% a year.

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4. Allegheny (Y) – Allegheny is primarily a property and casualty insurer but has other interests in land investments and oil & gas exploration. Its investment portfolio is heavily weighted towards energy and includes names such as Exxon, ConocoPhillips and Hess. This company has a habit of splitting its shares in ratios such as 102:100 or 50:49, most likely as a way to force small shareholders to sell their shares back to the company.

5. Otter Tail (OTTR) – Otter Tail is a $770 M mini conglomerate that operates in 6 different segments: Electric (power generation and distribution), plastics (pvc), manufacturing (stamping and metal working), health services (diagnostic equipment), food ingredient processing (potatoes), and other miscellaneous business. The company came to limelight when it was disclosed that Bill Gates had taken a stake through his Cascade Investments. The company pays a good 5.6% dividend.

6. Seaboard (SEB) – Seaboard is not your typical company. With just 1.22 million shares outstanding, it has a very thin float. I have no idea why Fidelity Low-priced Stock Fund owns 4% of Seaboard stock, given that its shares change hands at $2600 a piece! The company itself is primarily in the pork business and owns 50% of Butterball turkey operations, but they also run shipping vessels, process Jalapenos, trade and distribute grains and other commodities, process sugar, and generate alcohol and electricity.

I have owned all of these companies in the past with varying levels of success. I have also been a fan of Leucadia and its managers for a long time. Just because a company exhibits a tendency to invest in undervalued assets, it does not mean that its own stock may be a great value so do your due diligence before you purchase any of these stocks.

There is of course a difference between how Berkshire Hathaway invests today versus how Warren Buffett bought stocks when he ran his original investment partnership. Buffett is on the record stating recently that were he not constrained by the large size of his investment capital, he would invest with a different strategy that could generate as much as 50% returns per year. The strategy he talks about is a simple 2 step strategy that quickly shortlists the best stocks to buy today while avoiding would be value traps. We have now augmented this strategy to include an intelligent position sizing and risk management process and we constantly innovate with new ideas to improve the investment process and returns over time.