There are a lot of macro forces rattling the markets right now. Most are well-known to any investor who has paid attention to the news. The latest is the collapse of a major U.S. bank — Silicon Valley Bank, a subsidiary of SVB Financial — and the fallout that has rippled across the banking industry and beyond.
Considering all the news going on, the market has been pretty resilient in 2023, but these are still uncertain economic times. While successful investors should always be thinking about the long term, it is also important (particularly now) to focus on stocks that have a history of successfully navigating market downturns. One solid choice to buy and hold through a downturn is Markel (MKL -3.75%).
Markel is a relatively new favorite of Warren Buffett
Growth stocks got hit particularly hard in this bear market environment as a slowing economy, elevated inflation, and rising interest rates create adverse conditions for companies seeking rapid growth. But Markel is not your typical growth stock in that it is built to outperform in markets like this.
Markel has a business model that is not unlike Berkshire Hathaway. In fact, Berkshire Hathaway and the man who runs it, Warren Buffett, added Markel to its portfolio last year (if you needed another endorsement).
At its core is an insurance company that offers specialty insurance or, more specifically, excess and surplus insurance. This is more commonly known as E&S insurance. This is insurance for higher-risk businesses or ventures, ones that traditional property and casualty insurers do not typically cover. Consequently, Markel can charge higher premiums. This can be a risky proposition for an insurer, but Markel has an excellent track record as an underwriter, focusing on businesses and industries about which it is deeply knowledgeable.
A metric to determine its underwriting success is the combined ratio, which measures how much it pays out in claims against earned premiums. In 2022, it had a combined ratio of 91.6%, which means it earned more than it paid out — as anything under 100% indicates profit, with the lower, the better. That combined ratio is better than the industry average. In 2002, Markel had $7.6 billion in earned premiums, which was up nearly 17% from 2021.
In general, the insurance industry has performed well in the bear market, as insurance is something that is always needed, regardless of the state of the economy. Plus, rising interest rates help generate higher investment income, particularly among short-term investments. In 2022, Markel’s net investment income rose about 22% to roughly $447 million.
They don’t call it a baby Berkshire for nothing
Like Berkshire Hathaway, Markel has a portfolio of stocks that it invests in using the float from its earned premiums. The $27.4 billion portfolio is split pretty evenly between stocks, bonds, and cash and short-term investments. Last year, the portfolio was down 9.5%, but that’s far better than the S&P 500 or Nasdaq Composite. Over the past 10 years, as of Dec. 31, the equity portion has posted a 13.2% return, while the overall portfolio has an average annual return of 4.8%.
The third leg of the company is Markel Ventures, which is its private equity arm. It owns a controlling interest in 19 different companies, mostly in the construction services, building products, and transportation products industries. In 2022, Markel Ventures generated $4.8 billion in revenue, up 33% from the previous year. Over the past five years, it has had a compound annual revenue growth rate of 29%.
So you can see why many call it a baby Berkshire. These three businesses give Markel the type of all-weather performance that is built to navigate a market downturn. Last year, Markel’s stock price finished the year up 6.8%, when most of the market was down by double-digit percentages. This year the stock price is down about 6% year to date, but analysts are bullish on its potential, as it has a consensus price target of $1,600 — which represents a 29% increase over current levels.
This is an expensive stock in terms of its entry price, as its currently trading at $1,238 per share. But it is a solid growth stock that has a history of performing well when the rest of the market is not. It is a good option if you are looking for a solid, stable name to provide some ballast.
SVB Financial provides credit and banking services to The Motley Fool. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Markel, and SVB Financial. The Motley Fool has a disclosure policy.