Business

A Look At Chuck Akre’s Search for Compounding Machines

Chuck Akre is an illustrious investor with a 29-year track record and is the founder, chairman and chief investment officer of Akre Capital Management. I take a closer look at Akre’s investment strategy and the firm’s most undervalued stock holdings below.

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Chuck Akre
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The Search for Compounding Machines

Akre Capital prides itself on being extremely discerning when selecting stocks. The investment team obsesses over the quality of the people running a business and the rate of return.

In a 2014 interview, Akre said he looks for companies that he thinks are ‘compounding machines.’ At the time the firm owned Mastercard Inc (NYSE: MA) and Visa Inc (NYSE: V) which he pointed out have margins of over 30%, which is around three times that of the average US company.

Akre and his colleagues also refer to what they call the ‘three-legged stool’ approach to finding compounding machines. The three requirements are exceptional people running the business, reinvestment acumen and opportunities for reinvestment. The last point is important because even if the management team is good at allocating capital, they can’t generate returns if there are no opportunities.

In 2015, Akre wrote an article in which he asserts that rate of return is the most important metric to use when evaluating an investment. He said that in most cases this can be measured by the growth in the book value of a share.

Because Akre focuses on rates of return and the ability of a business to compound those returns, he is not interested in dividends. He believes if a business has a high rate of return it should reinvest all of its profits.

Akre capital often holds positions for over ten years. As long as a company is able to keep increasing its economic value, the firm will hold a stock. Although the firm is a long-term investor, Akre doesn’t attribute its success to ‘buy and hold’ investing, but to the quality of the companies they buy. Some of the companies’ long-term holdings have included Markel Corporation (NYSE: MKL), Dollar Tree, Inc. (NASDAQ: DLTR) and Enstar Group Ltd. (NASDAQ: ESGR).

American Tower Corp (NYSE: AMT), a real estate investment trust that owns cell phone towers, has also been one of Akre’s most successful investments. Akre has owned shares in the company on and off since 2003. Akre believes American Tower is the ‘bottleneck business’ within the wireless telecom industry. Regardless of advances in technology within the industry, network operators are reliant on the towers, giving the owners of cell phone towers the only effective monopoly in the industry.


Akre Capital's Latest Form 13F Filing

On February 14th, Akre Capital filed its quarterly Form 13F regulatory filing. I reviewed the filing to gain a glimpse into the firm's large portfolio.

Akre Capital's stock portfolio totals $7.2 billion according to the latest filing. The list value of stock holdings is up 5.6% when compared to the last quarter. As a benchmark, the S&P 500 was up 6.1% over the same period.

Quarter-over-Quarter Turnover (QoQ Turnover) measures the level of trading activity in a portfolio. Akre Capital's QoQ Turnover for the latest quarter was 6.0%, so the firm likely has high conviction in these holdings as indicated by the low turnover ratio.

The Ideas section of finbox.io tracks top investors and trending investment themes. You can get the latest data on the holdings discussed below at the Akre Capital page. The following table summarizes the firm's largest holdings reported in the last filing:

Akre Capital Largest Holdings
Ticker Name Holding ($mil) % Of Portfolio
AMT AMERICAN TOWER CORP NEW $969.0 13.4%
MCO MOODYS CORP $839.5 11.6%
MA MASTERCARD INC $806.6 11.2%
MKL MARKEL CORP $585.4 8.1%
V VISA INC $557.4 7.7%
DLTR DOLLAR TREE INC $519.4 7.2%
ORLY O REILLY AUTOMOTIVE INC NEW $455.7 6.3%

The seven positions above represent 65.5% of the fund's total portfolio. American Tower Corp (NYSE: AMT) is its largest holding with a long position in the company worth $969.0 million.

Moody's Corporation (NYSE: MCO) is Chuck Akre's second largest position and represents 11.6% of his firm's total portfolio. Mastercard Inc (NYSE: MA) is Akre Capital's third largest position and represents 11.2% of his firm's portfolio.


Akre Capital's Most Undervalued Holdings

To determine which stocks are trading below their intrinsic value, aka "fair value" I used the finbox.io Fair Value estimates. I also wanted to blend in some indication of which stocks might be ready to make a move up soon because they're popular with Wall Street analysts.

I calculated an average using the finbox.io fair value upside and analyst upside to create a blended upside which I then used to rank the most undervalued holdings.

Here are the top 6 stocks based on my calculations:

Akre Capital Most Undervalued Holdings
Ticker Name Upside (finbox.io) Upside (Analyst Target) Blend Upside
PRMW PRIMO WTR CORP 2.2% 60.0% 31.1%
KMX CARMAX INC 18.1% 17.6% 17.8%
BRK.B BERKSHIRE HATHAWAY INC DEL 14.8% 16.2% 15.5%
LAMR LAMAR ADVERTISING CO 12.9% 13.7% 13.3%
ORLY O REILLY AUTOMOTIVE INC NEW -2.0% 28.6% 13.3%
AMT AMERICAN TOWER CORP NEW 2.9% 15.3% 9.1%

Primo Water Corporation (Nasdaq: PRMW) appears to be the most undervalued stock in the fund. The company has a blended upside of 31.1% relative to its current trading price.

CarMax, Inc (NYSE: KMX) is the second most undervalued stock in the portfolio. The company's blended upside of 17.8% is very intriguing.

Berkshire Hathaway Inc. (NYSE: BRK.A) appears to be the third most undervalued holding at the moment. Note that Akre started buying Berkshire for his own account at $105 a share in the 1970s. He still owns some of those shares which are now trading at $296,000. Not bad!

Three additional stocks that value investors may want to take a closer look at includes Lamar Advertising Co (Nasdaq: LAMR), O'Reilly Automotive Inc (Nasdaq: ORLY), and American Tower.


Why Follow Chuck Akre's Portfolio?

Akre began working in the securities business in 1968. He held various positions at Johnston, Lemon and Co until 1989 when he started Akre Capital Management.

Akre Capital was run as a subsidiary of Friedman, Billings, Ramsey and Co (FBR) from 1993 until 1999 when it once again became independent. Akre continued to manage the FBR Focus Fund until 2009 when he started his own mutual fund. When Akre managed the FBR Focus Fund he earned a five-star rating from Morningstar and the fund won several awards.

Akre Capital manages private and segregated accounts and a mutual fund, the Akre Focus Fund. Over the last five years, the mutual fund has generated average returns of 15.2% versus the S&P 500 index return of 13.0%.

Managers with more than $100 million in qualifying assets under management are required to disclose their holdings to the SEC each quarter via 13F filings. Qualifying assets include long positions in U.S. equities and ADRs, call/put options, and convertible debt securities. Shorts, cash positions, foreign investments and other assets are not included. It is important to note that these filings are due 45 days after the quarter end date. Therefore, Akre Capital's holdings above represent positions held as of December 31st and not necessarily reflective of the fund's current stock holdings.

However, most can agree that with thousands of stocks traded on U.S. exchanges, doing thorough research on each one is nearly impossible for smaller investors. Leveraging the resources of the largest hedge funds on Wall Street can be a powerful way to narrow down the list.

Article by Andy Pai, Finbox.io