Sometimes, doing nothing is the best option.
If we ever say we’ll never sell a stock, it means one of two things: Either management has laid out a strategy that compounds its advantages over time, or the company is benefitting from a trend that has no end in sight.
Markel (MKL) evaluates itself in five-year stints and has always had a transparent approach to deploying capital. This is a model that has proven its own worth several times over the last half century. On the other hand, Rollins (ROL) has lodged itself firmly at the heart of the climate recovery market and is riding a wave that we’re not sure will ever end. These are two stocks we’ll never sell.
Markel has built its expertise on pricing unconventional risks, such as in areas like Arabian horses, summer camps, and karate schools. If it sounds niche, that’s because it is. This is so niche a market that competition is low and this has allowed Markel to carve out a section for itself.
This expertise and nous is showing in the company’s financials and in the combined ratio. The combined ratio is the percentage of premiums collected that insurers pay as claims. It’s similar to gross margin but differs by accounting for percentages. Anything that falls under 100% means the company has made more money than it has paid out. In the last 15 years, Markel has only ever topped that 100% threshold on two occasions. For that decade and a half, it has averaged 95%, while the wider industry was only able to average 100%—breaking even.
That level of profitability has allowed Markel’s management to invest in equities and buy small businesses. So much so that the company is sometimes referred to as the baby Berkshire Hathaway (BRK.A). Both companies use book value per share as a yardstick for the company’s value, meaning that the company has grown 10.6% annually over the last decade, rising from $334 to $914. With a focus on the long-term, Markel assesses its performance in five-year spells, and can be brutally honest when it falls short of expectations.
In a recent letter to shareholders, management pointed out that the company’s stock hasn’t delivered in the last five years. At the time of writing, the company’s shares had underperformed relative to the broader S&P 500 Index by a substantial 6,680 basis points. Over the course of the year so far, the stock has held steady against the index, but it’s a far cry from what some investors had been seeing in the past.
Over a 15-year period, Markel shares are only slightly outperforming, but with broad stock market valuations near the highest ever recorded by some measures, Markel’s middle-of-the-road performance is unlikely to persist over the coming decade.
Rollins actually has its roots in a small pest control business founded in the late 19th century. These days, it counts on the support of 2.8 million customers in 900 locations around the world. Effective pest and wildlife control is more important today than it has ever been before. Thanks to surging demand, Rollins has seen 23 consecutive years of revenue growth and has averaged 20% annual earnings growth over the past two decades.
The company has a fantastic financial profile, with immense cash generation and very small debt, but what makes Rollins more attractive than either of those things is the role that this market will play as the climate continues to change.
Let’s take cockroaches. These animals adore hot, humid air during summer seasons. It’s their breeding season, and as the temperatures rise, they become more active. When the temperature edges above 100 degrees, entire migrations can happen. These creatures are more or less impervious to rising temperatures and navigate their way through arid conditions with no problems at all. They can even hold their breath for up to forty minutes while doing so.
Warmer winters and hotter summers of course mean we can expect to be seeing a lot more of these animals in the future. But we can also expect more close encounters with rats. With a gestation period of only 14 days and the ability to start producing after only a month, one pregnant rat can be responsible for more than 15,000 babies in a year. We already saw plenty of these during the various lockdowns our states passed through, and we’ll be seeing many, many more in the future.
Another result of rising temperatures has been an increase in mosquito-borne illnesses. Scientists believe that over the next 30 years, the bloodsuckers will expand their territory to reach half of the world’s population. Recent data suggests various species are spreading north at about 37 miles-per-year in the U.S. and 93 miles-per-year in Europe. Not all of these animal migrations can be put down to changing climates on their own, but this is clearly the single largest factor pushing these animals into different climates.
For these reasons, and many more on top of them, Rollins is a stock we have absolutely no intention of selling.