One hundred seventy thousand dollars.
That's roughly how much one share of
Berkshire Hathaway Class A (NYSE: BRK-A)
stock is selling for these days.
Imagine if you had been one of the fortunate few to invest
inWarren Buffett 's young company back in 1967, whenshares were
trading for $20.50. Right now, you would be sitting on a total
nominalgain of 829,460%.
But nowadays, Berkshire has, to some degree, become a victim
of its own success. Buffett has often said that the company's
current size ($278 billionmarket cap) has made future growth more
"Size is the anchor of performance. There is no question about
it," Buffett has said. "It doesn'tmean you can't do better than
average as you get larger, but themargin shrinks."
Of course, having too muchmoney is a problem most of us would
like to have. And I certainly don't mean to imply that Berkshire
is a badinvestment .
But it does beg the question -- are there any other publicly
traded companies that could be the next Berkshire? Are there any
companies currently on the market that share Buffett and partner
Charlie Munger's penchant for valueinvesting , long-term
holdings, and the use of insurancefloat to generate big
While many investing firms have sought to imitate Berkshire's
success over the years, I'd like to tell you about one company in
particular that's on track to follow the same path.
Alleghany Corp. (
is an investment holding company that uses a value-oriented
strategy to acquire interests in businesses andequity holdings.
And, like Berkshire, it generally holds theseinvestments for
long-term periods. Through subsidiaries such as RSUI Group,
Capitol Transamerica, Pacific Compensation and Transatlantic
Holdings, the company sells specialty insurance and
In 2012, the company gained exposure to the reinsurance
industry through itsacquisition of Transatlantic Holdings.
Alleghany also ownsreal estate and minority stakes in
While its $6.4 billionmarket cap is much smaller than
Berkshire's, Alleghany uses a similar strategy to generate
returns. It collects insurance premiums paid by customers and
invests this money (called float) for its own benefit. This is
the same strategy that Berkshire has successfully employed for
years through such insurance holdings as GEICO and General
StreetAuthority investing guru Amy Calistri has covered the
profitable opportunities from this ingenious investing strategy
many times. In her October 2012issue of
Stock of the Month
, she wrote:
"Reinsurance companiesprofit by collecting more premiums
than they pay out in claims. But they can make much more money
if they invest those premiums wisely."
Alleghany's recent acquisition of Transatlantic Holdings has
produced exceptional returns. The company doubled pretaxearnings
for the first quarter of thisyear compared with the same period
last year. Core specialty insurance holding RSUI Group
reportedunderwriting income of $57 million, up 30% from the year
At the close of 2012, Alleghany reported common stockholders'
equity per share of $379.13, a 10.8% increase over the previous
These results come in spite of significant losses due to
Hurricane Sandy, which cost the company a reported $268 million
For the five-year period that ended Dec. 31, 2012, the company
reported that common stockholders' equity per share increased at
acompound annual rate of 6.1%, compared with a compound
annualrate of return of 1.6% for the S&P 500 over the same
The company is trading at a forwardprice-to-earnings ratio of
12 and a price-to-book ratio of 1.0.Analysts predict
annualrevenue to grow at a rate of 6% over the next seven years.
Return on equity is forecast at 10% in the shortterm but should
rise to 12% once the Transatlantic acquisition is fully
The firm uses growth inbook value as the metric for
compensation in the form ofrestricted stock . This system helps
keep management's interests aligned with shareholders'.
Management has also indicated that it plans to begin
makingprivate equity investments, which, if done correctly, could
lead to additional growth opportunities.
Risks to Consider:
To finance the Transatlantic deal, Alleghany issued roughly
$2.7 billion worth of stock. While the deal appears to have been
a success, issuing new shares to pay for acquisitions (as opposed
to using existingcapital ) can be a risky proposition if the deal
doesn't work as planned. In this respect, the company differs
significantly from the strategy employed by Berkshire, which
doesn't issue new shares tofund an acquisition.
In addition, insurance companies are subject to
unpredictable losses stemming from events such as natural
disasters or terrorist attacks.
Action to Take -->
Alleghany appears to be fairly valued at today's prices. While it
may never achieve the lofty heights that Berkshire Hathaway has
attained, it remains a solid, stable company that has
outperformed the broader market year after year.
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