Coffee can stocks
After finishing the book 100 Baggers, by Christopher Mayer, (a fantastic read btw), Simon posed the question to me, “what would be your coffee can stock to hold for 10 years without looking at it?”
For context, Mayer’s research shows that to achieve 100x returns on a stock, the journey is likely to take 20–25 years. To hold a stock for that long, you need to “defeat your own worst instincts — the impatience, the need for action, the powerful feeling that you need to do something.” This is where the 10-year coffee can question comes in. It forces you to extend your time horizon.
It’s a fascinating question to ponder, and you can approach it in a myriad of ways. Mayer’s book highlights some of the important qualities to look for, but ultimately you will never find a company that has all the boxes ticked.
Do you want reliability? I would be shocked if Telstra, Nike, or Berkshire Hathaway and its collection of businesses (Apple, Coca-Cola, Bank of America) didn’t exist in 10-years’ time.
Do you want earnings growth? Consequently, you might pick a technology firm that you think has a decade of tailwinds behind it. My mind went to Microsoft and how well placed they are for the AI wave, others may go to faster growing software firms.
Do you go for innovation and a company that you think will continue to reap the rewards of its research and development pipeline? CSL or Idexx Laboratories comes to mind.
Do you want an owner-operator that you know will run the company with a focus on the long-term? L’Oreal and LVMH are front and center. With children of each of the founding families still leading their businesses, it’s fair to assume that these companies will be run in a way to protect the family’s wealth.
After thinking it through though, we both ended up landing on two of perhaps our most boring but special compounders.
Markel and Brookfield Corporation.
In their simplest form, both companies are value-based compounders of capital. Markel came to it as a specialty underwriter of insurance. Brookfield has done it off the back of an asset management earnings stream. They both share similar philosophy’s, both have long and successful histories and both have similar competitive advantages.
BRANDS
While Markel will rarely be the cheapest provider on an insurance brokers lists, they will generally provide the most coverage, and brokers know they are reliable, approachable, and able to solve for complex risks. This reputation has helped them attract many top fortune 500 companies as clients.
No asset allocator at a pension fund or family office is going to lose their job for investing in Brookfield’s funds. Their trusted reputation and track record attracts more assets, which generates more fee revenues, which brings in better talent, better deal flow and partners, and ultimately leads to better performance. That’s a tangible fly wheel.
EFFICIENT SCALE
By design, Markel are not the biggest writer in any particular market, but they’ve still managed to compound to a size that gives them a number of advantages. Its their diversity across their books. It allows them the funds to invest in technology. But ultimately, it gives them a bigger float to invest as they choose. Markel Ventures, their collection of private businesses, is reaping the rewards of this scale.
In the market of trophy real assets that Brookfield owns and controls, there are only a select few that have the financial firepower ($124bn of “dry powder”) to compete and bid for them. Additionally, managing an additional $1bn once you are at $800bn of AUM doesn’t require any extra staff or resources. That fee revenue just drops straight to the bottom line.
QUALITY MANAGEMENT
This page is taken from Markel’s IPO documents in 1986.
These 6 paragraphs of guiding principles remain as relevant today as they did nearly 40 years ago, and not one sentence mentions insurance.
Saurabh Madaan summarises it (we will share the podcast episode below), “you could describe Markel as a collection of systems and values.” Ultimately, the Markel style is what is going to dictate what you find when you open your coffee can in 10-years’ time.
CEO Tom Gayner, who has been at the helm since 1990, has mainly directed the investment operations of the business. He describes Markel as a publicly traded family office. Importantly, his track record has outperformed the S&P500 over this period.
Similarly, Brookfield and its CEO Bruce Flatt have been guided by a set of principles that has led to its 19% p.a. of total shareholder returns over 20-years.
When Flatt entered Brookfield (then called Brascan) in the early 1990’s, the company was over leveraged and left exposed by rising interest rates. “That was quite impressionable on us to how we run the business today — never put yourself in a situation where you have to sell something in an environment where you should be buying.”
After gaining control of the company, Flatt has done just that, accumulating many of the firm’s trophy assets in periods of market stress. Peers like Blackstone and KKR have more traditional private equity buy to sell approaches. We think Brookfield’s long-term value investing philosophy gives them an edge.
Brookfield also own 64% of Oaktree Capital Management who embody a similar philosophy of contrarian and value-based investing. It too is run by similarly impressive managers, co-founders Howard Marks and Bruce Karsh.
In answering the coffee can question, on the front of our mind was the fact that you want to sleep well for the next 10-years, and you want to start from a reasonable valuation.
If Mayer’s 100 baggers book teaches you anything, it’s the power that comes from the combination of starting from a cheap multiple and then having excellent growth. This way you get the extra boost that comes from a valuation re-rating as well.
We believe Markel and Brookfield both offer that. You can buy both at discounts to net asset value, and we trust management to continue to harness the power that comes from milking an earnings stream and compounding a capital base.
In its simplest form, Brookfield Corporation consists of:
- An Asset Management Business (BAM) with a high margin recurring revenue stream. This is now a separately listed entity, so their 75% interest has a clear market value.
- A collection of extremely high quality investments across renewables, infrastructure, private equity, real estate, insurance, cash and other financial assets.
BAMs listing allows us to separate its value from the corporation’s market capitalisation. This leaves us with an implied value of only 3.9x / 26% FCF yield for the remaining balance sheet assets.
We think this is an incredible margin of safety for a compounder of the highest quality.
We have just finalised a round of work on Brookfield and are happy to share our long form research memo if you were interested.
The information provided in this newsletter is for general information purposes only and does not take into account your personal circumstances. It is not intended to be a substitute for professional advice, so please seek the advice of a licensed financial advisor before making any investment decisions. The author and publisher of this newsletter may hold positions in the stocks mentioned. The author is a representative of Lugarno Partners Pty Ltd AFSL №508934.
