“Baby Berkshire” the Berkshire Hathaway Clone Warren Bufett’S Discliples Built

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“Baby Berkshire” The Berkshire Hathaway Clone Warren Bufett’s Discliples Built

Hiding In Plain Sight… Built Like Berkshire Hathaway… And Trading For $.50 On The Dollar…

The “Baby Berkshire” Stock You’ve Never Heard About

When it comes to compounding your investment, few companies come close to the long-term track record of this Canadian rock star.

In fact, investors have handily beat the S&P 500 by locking in 11.4% annual returns since 1969...

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When it comes to investments, no one in the world can hold a can- dle to the track record of Warren Buffett.

He is the single greatest value investor of all time, and since 1965 has built the former textile company, Berkshire Hathaway (NYSE:BRK.A, BRK.B), into a $510 billion behemoth.

But while his track record in finance is unparalleled, his outstanding record of beating the S&P 500 has practically disappeared in recent years.

That’s because, due to the sheer size of Berkshire, it’s practically im- possible to duplicate the high-flying returns the company enjoyed in the 80s and 90s.

So for the average investor today, the question then becomes, is there another Berkshire Hathaway out there today that can similarly out- perform the market on a consistent basis?

The quick answer of course is no.

Berkshire is a one-of-a-kind holding company that boasts incredible businesses with strong economic moats – companies that are built so well that they will continue to generate boatloads of free cash flow for generations to come.

But there are some companies out there that have tried to mimic some of BRK’s greatest attributes and have found varying degrees of success.

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For example, Fairfax Financial Holdings Ltd. (TSE:FFH, OTCPK:FRF- HF) is a diversified insurance provider with a significant portfolio of common stock investments and is often called the Berkshire Ha- thaway of Canada. Its CEO, Indo - Canadian billionaire businessman Prem Watsa, has also been called the Warren Buffett of Canada as well.

Unfortunately, although companies like Fairfax will continue to do well over time, they are rarely undervalued.

Fairfax is researched and written about ad nauseam, which often sig- nifies that its market price reflects its intrinsic value.

Furthermore, although Fairfax is a great long-term investment, its record of outperformance against the S&P 50 has all but disappeared over the last 10 years – similar to Berkshire Hathaway.

So then the question becomes… are there any companies that are out there today that are:

1. Undervalued; 2. Still flying under-the-radar; 3. Built like Berkshire Hathaway; and 4. Poised to deliver gigantic gains?

Enter E-L Financial (TSX:ELF) – a mini BRK clone that can be bought for $0.50 on the dollar.

▶▶A Sexy Insurance-Powered Company

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As most people know, Berkshire is essentially powered by its sizable insurance operations.

From Geico, to General Re, to National Indemnity, to the many other insurance subsidiaries that fall under Berkshire’s umbrella, Buffett has amassed a massive portfolio of insurance companies that produce the fuel that powers the company’s engine.

You see, insurance companies produce what’s called float, or money paid as premiums but that has yet to be paid out to cover any claims. These funds technically don’t belong to the insurance company, but they remain on hand and can be invested any way its investment managers see fit.

By utilizing float, Buffett has been able to allocate huge amounts of capital into other investments – especially into companies with superior returns.

But unlike Berkshire, E-L Financial is powered by the float produced from its life insurance operations.

ELF is the parent company of one of the largest life insurance companies in Canada, Empire Life Insurance Company.

Empire Life has been in business since 1923 and was founded by Mil- ton Palmer Langstaff in Toronto, Ontario. E-L Financial owns a 99.3% interest in Empire Life, which means its financials are consolidated into the parent company. The Empire Life operating segment un- derwrites life and health insurance policies and provides segregated funds, mutual Funds, and annuity products.

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Although not a “large” company, Empire Life has a lot of assets.

As of the first quarter this year, the company had $17.58 billion in assets under management (AUM), up from $17.27 billion last year. These assets were divided up between general fund assets, segregated fund assets, and mutual fund assets.

Of course, with billions in assets, it’s also a cash generating machine. In the first quarter, Empire Life generated$302 million of net premiums and fee income for the first quarter, of which $43 million was net income for shareholders.

For the year ended December 31, 2018, Empire Life generated $1.1 billion of net premiums and fee income of which $136 million was net income for common shareholders.

Now, let’s be clear...

Empire Life is a mature, yet steadily growing life insurance company that produces a ton of income and float. It may not be the largest life insurance company in Canada, but it still provides plenty of fuel to power E-L Financial’s engine.

So what does ELF do with all the income generated by Empire? Similar to Berkshire, it pours it into investment opportunities.

▶▶E-L Corporate: Untangling a Sophisticated Web of Assets

Now here’s where it gets complicated, so bear with me.

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As I mentioned in the beginning, E-L Financial is hiding in plain sight AND is significantly undervalued.

There’s of course a reason for that, and it begins with the other main operating segment of E-L Financial, which is called E-L Corporate.

E-L Corporate’s operations includes the oversight of investments in global equities held through direct and indirect holdings of common shares, investment funds, closed-end investment companies and other private companies.

Essentially, it is the investment arm of the company.

However, underneath this umbrella is a web of assets that intertwine with each other – creating a sophisticated (yet confusing) structure that involves direct and indirect holdings of assets and companies with related parties.

I’ll break it down as simply as I can here.

Although E-L Financial owns stocks directly, it also holds a 52.2% interest in United Corporations Limited, which is a closed-end investment company that mainly invests in stocks around the globe. It is publicly listed on the Toronto Stock Exchange under the ticker symbol UNC.

Both the directly owned stocks and invested assets and operations of United are consolidated in the E-L Corporate segment under “Invest- ments – corporate”.

This segment of the company is a powerful, income-producing machine.

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As of March 31, 2019, Investments - corporate had total investments of $5.0 billion, up from $4.6 billion at the end of last year. UNC owns a diversified stock portfolio with holdings in some of the largest and most profitable companies in the U.S., Canada, and overseas. Some holdings include Amazon, Apple, Alphabet, Disney, Exxon Mobil, Wells Fargo, Adidas, Volkswagen, Alibaba, Manulife Financial, and Asahi Group.

Although Investments – corporate reported a loss of $103 million for 2018, the segment has rebounded nicely in the first quarter of this year, reporting net income of $262 million for the 3 months ended March 31, 2019.

Still with me so far?

Now in addition to “Investments – corporate”, E-L Financial also owns interests in several other companies.

These include a 36.8% interest in Algoma Central Corporation (“Algo- ma”) which trades on the TSX under the ticker ALC, and also a 24.0% interest in Economic Investment Trust Limited (“Economic”) which also trades on the TSX under the ticker EVT.

Algoma owns and operates the largest fleet of dry and liquid bulk carriers operating on the Great Lakes – St. Lawrence Waterway, including self-unloading dry-bulk carriers, gearless dry-bulk carriers and prod- uct tankers. Algoma also owns ocean self-unloading dry-bulk vessels operating in international markets and a 50% interest in NovaAlgoma, which includes a diversified portfolio of dry-bulk fleets operating -in ternationally.

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Because it is the pre-eminent provider of marine transportation services on the Great Lakes, it is a business with a significant moat that is unlikely to go away anytime soon. As it expands into international markets for future growth, we could see Algoma expand its moat and gain market share in other markets.

Algoma has grown in leaps and bounds over the last few years and recently reported record numbers. For 2018, the company enjoyed operating cash flow of $80.1 million, up from $56.7 million in 2017, and EBITDA of $128.7 million, up from $107.9 million in 2017. Furthermore, the company expects to increase earnings by 4x by 2025.

Although this company has little to do with insurance or stocks, this is an excellent business with strong economics that will continue to do well in the future for E-L Financial.

Then there’s Economic.

Similar to UNC, Economic is a closed-end investment corporation. It owns, directly and indirectly, long-term investments in the common shares of some publicly-traded Canadian companies, and a managed global investment portfolio of common shares of publicly-traded globalcompanies.

As of March 31, 2019, Economic had net assets of $855.7 million, up from $802.6 million at the end of 2018. These include stocks in a va- riety of companies including Autozone, Facebook, PepsiCo, Oracle, Heineken, Unilever, and Nestle.

So there you go.

Source: Charlotte’s Web

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That is a basic explanation of E-L Financial – broken down into its major segments and holdings.

Now, before we go further, I do need to mention that there is some significant overlap between these businesses – which makes the company structure even more complex.

For example, E-L Financial owns 36.8% of Algoma. It also owns 52.2% of UNC, which owns about 9.4% of Algoma.

E-L Financial also owns 24.0% of Economic, which owns about 5.5% of Algoma.

Meanwhile, Economic owns 9.6% of E-L Financial.

Again, this is very confusing for the casual observer, but all of this complexity hides the real value behind the company – which is a huge bonus for investors who are willing and able to do the grunt work to untangle the web of assets.

▶▶A Dirt Cheap Stock Trading For $0.50 on the Dollar

Now here’s the thing.

With E-L Financial, no one really knows about the stock.

Throughout its history, it’s been thinly traded without a lot of volume and averages roughly 633 shares a day.

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But that’s actually an advantage.

You see, there are not a lot of shares outstanding (4.02 million) and even fewer shares that are free trading on the market (1.01 million) – making it difficult for analysts to cover the stock.

More importantly, the rest of the outstanding shares are held by insiders and institutions, including one of Canada’s richest businessmen Hal Jackman and members of the Jackman family.

With a net worth of $1.6 billion, Hal Jackman is a legend in Canada.

His wealth started with a substantial fortune he acquired from his father, Harry Jackman, who built the Empire Life group of financial services companies, which Hal continued to expand over his decades at the helm. Hal later followed in his father’s footsteps into politics, serv- ing as the 25th lieutenant governor of Ontario from 1991 to 1997.

Today, Hal and his family are the largest shareholders of E-L Financial and his son, Duncan, now runs the business as chief executive officer, president and chairman of E-L Financial.

Throughout its history, the Jackman family have been great stewards of the company and have done an excellent job of managing the business. Since inception in 1969, E-L’s book value has grown spectacular- ly by compounding at an annual rate of 11.4% - handily beating the S&P 500’s annual rate of 10% (with dividends reinvested).

Shareholder equity has increased from a mere $21.4 million in 1969, to

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over $5.5 billion in 2018. In fact, as of March 31, 2019, E-L Financial had net equity value per common share of $1,382.18 – rebounding nicely from an off year in 2018.

That’s right.

If ELF went out of business today and sold all of its assets which includes all of its holdings and interests in other companies, each shareholder would receive $1,382.18 per share.

That’s a MASSIVE margin of safety for any investor.

Keep in mind, the stock trades at under $800 per share right now. The heavily discounted price is almost unbelievable.

Of course, book value doesn’t even value the company for its earning power – which as I’ve outlined earlier, is very powerful.

Using a quick DCF analysis, and assuming a very modest 7% revenue growth and a cost of capital of 5.7%, we get a value of around $1,188 per share.

But here’s the thing, revenue in the first quarter of 2019 has already exceeded all of 2018. I believe ELF is on pace to set a record year. If we tweak our assumptions of revenue growth, the stock could easily fly to $1,439.35 a share – representing about 93.8% upside from current levels.

And don’t forget, you’re getting a HUGE margin of safety in addition to a very powerful cash generating machine.

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What’s more, ELF will only continue to compound your investment for decades to come – as it has done since 1969.

Folks, at a price of under $800 a share right now, you’re essentially buying a dirt-cheap, rock star business for only $0.50 on the dollar.

I wouldn’t delay another second.

If you’ve been looking for a Berkshire Hathaway clone that is flying under the radar and is trading for a rock bottom price, ELF is the stock for you.

Put E-L Financial on your watchlist today.

Yours-in-profits, Patrick Justin

Editor, Inner Circle Publishing

A 10-year veteran of the financial publishing business, Patrick Justin is the editor of the In- ner Circle Publishing newsletter, which focuses on undervalued and interesting small and mid-cap opportunities that are flying under-the-radar but have great upside potential. He covers the cannabis industry, and also writes about technology, commodities, health- care, and financial services, among other industries.

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