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Q&A with Gurus: Chuck Akre Takes Your Questions

Holly LaFon

Holly LaFon

276 followers
GuruFocus readers now have the chance to get answers to their investment questions from revered investor Chuck Akre. Chuck is the founder of the $2.6 billion Akre Capital Management LLC, where he achieved returns in the range of 20%, 30% and 40% on a regular basis, and even as high as 52.5% in 1995. He beat over 99% of his peers for a decade.

To have Chuck answer your question, post it in the comments section below. We will send it to him and post his response shortly.

Investing Philosophy

Chuck is a classic “bottom-up” value investor and employs a “three-legged stool” paradigm, meaning he chooses companies that earn high rates of return, have management teams with proven track records of upholding their shareholders’ best interests, and can reinvest capital at high rates of return.

He is usually interested in companies with a return on owners’ capital over 20% but due to the economic environment, he has been looking at companies in the high teens. The best businesses right now, he says, are those that have very strong balance sheets, with the majority of capital being the owners’ capital and not debt capital.

Portfolio

Chuck’s investment portfolio is quite concentrated and usually contains around 20 stocks, most of which are financial and consumer service companies. His top-five holdings are:

· American Tower Corp. (AMT), which comprises about 8% of his portfolio. American Tower owns and operates wireless towers for cell phone, video and data antennas. [13.98%]

· Markel Corp. (MKL), an insurance company, which he believes is distinguished among its peers because it operates at an underwriting profit which, along with reporting honest evaluations of its reserves, allows it to be more venturesome in its investments. [9.02%]

· Lamar Advertising (LAMR), an outdoor advertising company that has exposure in the United States, Canada and Puerto Rico through billboards, bus shelters, benches and buses. [9.02%]

· Enstar Group Ltd. (ESGR), which acquires and manages insurance and reinsurance companies in runn-off. It also offers consulting services to insurance and reinsurance companies. [8.9%]

· Ross Stores Inc. (ROST), a Fortune 500 off-price retailer with 988 stores in 27 states and Guam. [8.73%]

He has also invested a great deal in retail stores, particularly those that he believes will continue to have high traffic even if consumers have less discretionary income to spend due to economic factors. Other retail stocks he holds are Dollar Tree (DLTR), TJX Companies Inc. (TJX), O’Reilly Automotive Inc. (ORLY), and Carmax Inc. (KMX).

Since the first quarter of 2010, Chuck has been buying shares of the only company Warren Buffett bought in the first quarter of 2011, Mastercard Inc. (MA).

A complete list and history of Chuck’s holdings are available here.

Modified Value Investing Outlook

Chuck hit a speed bump in 2008, losing 42.92%, slightly more than the S&P 500’s 37% loss. This, he said, forced him to rethink his former guideline of ignoring the market and economy and focusing only on valuations – a guideline that had served him well in the past. He told Bloomberg in 2010 that he should have recognized the seriousness of the housing collapse and the effect it would have on the economy. He now takes the macro picture into account far more.

We are thrilled to have Chuck share his investment wisdom and insight with us! He looks forward to reading your questions, which you can post below in the comment section.

Rating: 3.0/5 (39 votes)

Comments

jmac634
Jmac634 - 3 years ago


I have a couple of questions for Chuck on LAMR.

What does he think the ultimate ratio of digital billboards to total billboards will be for the company? I have heard anywhere from 3%, 5%, or10% over the next decade. Also does he think smart phones hurt billboards or enhance them? I believe this important because an iPhone is really just a mini personal billboard. It could hurt the overall appeal of billboards or could be used to enter act with them. Lastly on capital allocation, the Reilly’s seem very capable but at the top of the last cycle they paid a special dividend and bought back stop at prices above today’s stock price. Does you think they learned a lesson and that capital allocation going forward will be different? Would love to hear his thoughts. Thanks.

valueseeker24
Valueseeker24 - 3 years ago
Chuck,

How much do you think your returns would have increased in 2008 if you considered the macro picture into your stock selection?

Matt

luishernadez
Luishernadez premium member - 3 years ago
Hi Chuck,

I also own Markel shares and I really like the company and consider it a permanent holding (unless it trades at 3x BV).

What is your estimated range for the BVPS growth rate over the next 10 years?

What´s your opinion on the companies that conform Markel Ventures? Have you verified the prices paid? How about the quality of the individual businesses and their competitive advantages?

Thanks,

Luis Hernandez
paulwitt
Paulwitt - 3 years ago
Hi Chuck,

I noticed you scaled back your position in Penn Gaming. What are your thoughts of this company going forward?

Thanks,

Paul W.

Bartvp
Bartvp - 3 years ago
Dear Mr Akre,

As a student dreaming of a carreer like yours, I was hoping that you could give me some advice in finding some good topics for writing a thesis/essay about. Of course I'm looking for topics that would help me in a stock-picking carreer.

Thanks in advance,

Bart V.P., economics student in Belgium.
Devonshire11
Devonshire11 - 3 years ago
Chuck,

Recently I have been watching stocks with absolutely no company revenue take off on "Paid promotions". Most notably LEXG went from .10 to over $10 & back down. Jammin Java was similar

in it's performance to a high of 6.35 from below $1. What do you consider to be the single most important factor in considering investing in stock, technical analysis, due diligence or news. If news is the most important, how can one "predict" that a stock will run or is it simply risk.
LHY
LHY - 3 years ago


Hi Chuck.

I'm planning to take CFA and learn to become a good value investor. I'm about to start my job at PwC which after 3 years,to enter into an investment bank and was wondering will auditing help me achieve my goal? Thank you
ASosnowitz
ASosnowitz - 3 years ago


Chuck,

In a past shareholder letter, you expressed concerns about the so called recovery (high unemployement & weak consumer). Woud you please share your current view on this topic & how it relates to market expectations moving forward... Also, would you relate this same question to your expectations for the portfolio's performance?

Thank you.
ken_hoang
Ken_hoang - 3 years ago
HI Chuck,

Now you r beginning to think of macro economic factor, what the most key factors you are looking at?
rru2s
Rru2s - 3 years ago
Having lost a bundle this year on a delisted stock, I have to be very cautious of both company-specific risk and macroeconomic risk. In your opinion, should a risk-averse investor wait to see if the FED ends QE2 in the next weeks/month before deploying cash that is quite limited? I am also of the age (mid-50s) where I should have a much smaller percentage invested in riskier equities compared to someone 20 years my junior. I am thinking of staying in cash for at least a month, then venturing back depending on the outcome of FED changes before the end of summer. I will never make up for the 90% downside I experienced, but if I catch a bottom in commodities just after a QE3 (if such happens) or after the market is finished worrying about the ramifications after QE2 ends, 2012 might be a good year for another oil stock run since it is a presidential election year.

rgosalia
Rgosalia - 3 years ago
My first question is on portfolio management. You run a very concentrated portfolio with a very low turnover - 24 stocks with 75% of assets in top 10 holdings with an average turnover of 12%. How do you manage to maintain such a low turnover concentrated portfolio when your assets are growing without compromising the price discipline required of a value investor? Put another way, I imagine that when a new position is initiated, the margin of safety is large. But, say, as new assets roll-in over time, your top 10 positions have moved up. Then adding to these positions lowers the margin of safety; and adding a new position dilutes the portfolio concentration. You have managed such a portfolio very well. Can you give us your thoughts on this topic.

I recently heard you say that you believe that MasterCard has the potential to be a 5-10x bagger over the next decade. Can you tell us more about your thoughts on MasterCard and why it has the potential to be a multi-bagger?

Can you tell us about another one of your favorite multi-baggers that you held in the past but you do not hold anymore or is now a smaller position. Why did you decide to lower the position size (or eliminate the position)?

Lastly, can you tell us about one of your larger positions in the past that did not work out as expected? What went wrong?

Thanks
rgosalia
Rgosalia - 3 years ago
Teenage clothing is a tough business. Significant market shares are gained and lost based on merchandising decisions. How did Aeropostale fit the "three-legged stool" model of Akre Funds? Can you tell us more what attracted you to this business

Thanks
ken_hoang
Ken_hoang - 3 years ago
Hi Chuck, I just begin to know about your new fund and your positions and the three legged stool in investing. I would appreciate to know more about it

1) How you can define the integrity and capability of management? By reading their writing and watch their actions? Do you often talk to them or use scuttle-butt approach (like Phil Fisher)

2) How do you decide that the company has reinvested the excess cash profitably with high return?

3) for the famous position of your fund in American Tower, I have scan their performance over the last 10 years using Morningstar . Their return on equity is not high, the long-term debt level is nearly double the amount of equity and now the free cashflow stays at $670mil. It definitely is not very attractive at the first look.How do you calculate the return on owner's capital for AMT? and with this price valuing the company at $21bil, is that too expensive? What's the calculation to determine it?

Thanks a lot

cyrano
Cyrano premium member - 3 years ago
Chuck,

I know that you are a "bottom-up" investor, but do you think that there are any companies that you would look at more closely due to the "baby boomers" shifting their money into retirement accounts or spending their money?

Thanks,

Mark
Adib Motiwala
Adib Motiwala - 3 years ago
Hello Sir,

Quite impressed with your approach to investing where you look at Growth and Value both. My questions are:

1) How does a retail investor conduct the kinds of research you do in terms of talking to management, suppliers, competitors etc.

2) If you have a business that historically generated high returns on invested capital and is available for reasonable or cheap price but the management has made some expensive acquisitions in the recent past. Also, its re-investment efforts have either failed to produce results or the management appears clue less about this. I am sure you can guess many names that fit this description. Would you pass on such a company ? What would you recommend to management of such a company ? Buy back shares like crazy. Pay out 75% of FCF in the form of cash dividends?

3) What kind of moat / pricing power / competitive edge do you see in the discount retailers in your portfolios like ROST, TJX, ARO ?

4) Coming to American Tower which has been a multi-bagger for you. Does valuation come into the picture in terms of selling...or as long as you see the growth and re-investment opportunities, you are a patient share holder?

5) Why did you sell ESV?

Thanks

rgosalia
Rgosalia - 3 years ago
Can you tell us how you get comfortable with Lamar's huge indebtedness of 5x Debt/EBITDA? As management is reviving back its capex to 100m, it seems unlikely that paying down debt is a high priority going forward.

The long-term opportunity from digital billboards is huge - only 1200 off the 146K billboards are digital today. Lamar can probably get to 5% or 7300 of these boards being digital over the next 5-10 years. That is about 6x. The economics of digital are amazing with about 10x higher revenue, break-even in less than a year, and very high incremental EBITDA margin relative to traditional billboards. My question is - is this similar to your take on Lamar? And if so, what is Mr. Market missing here?

To play the devil's advocate - what are your thoughts on new technology impacting Lamar's local advertising business. Unlike the national advertisers (McDonalds et al), local advertisers have limited budgets. They want to use their $ prudently via the most targeted medium - groupon + google + facebook. Could this mean that Lamar with its predominantly local business may see a secular decline through lower occupancy of their billboards? Lamar is trading at EV/EBITDA of ~10x and Google at ~11.5x. What are your thoughts on Google relative to Lamar?

Thanks
c.kugel
C.kugel - 3 years ago


I would like to know your opinion of the stock market future for the next six months. I see signs of deterioration in the S & P for the month of June. I forecast in the month of June we will see

400 point drops on two occasions, during the month of June.

I would like to know your opinion for the next six months.

Thank you for your time, and knowledge.
jbell
Jbell - 3 years ago
Hi Mr. Akre,

What type of investing literature (magazines, newspapers, newsletters, websites) do you consider must reads? Thanks.
ValueStockPicer
ValueStockPicer - 2 years ago
Thanks for the interview Chuckie. Saw your music video on youtube. Amazing someone like yourself is so multitalented.

http://www.youtube.com/watch?v=1iK_bu_z6Bk
AKANNI
AKANNI premium member - 2 years ago


Mr Akre

I would like your view on Primowater (PRMW). I noticed you added about 300,000 shares last quarter. I have followed the companyand own 200000 shares of the stock. I was forced to add more recently whe it fell to $1 after it last earninhg report. I think it is a good business and the water business is doing well but this Flavorstation idea to me is taking more than it can chew.

what do you see in Primo future and can Mr Primm deliver again as he did for thr Blue Rhino?

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