Tom Gayner’s Markel Gayner Asset Management, one of the three divisions of successful financial holding company Markel Corporation (NYSE:MKL) has filed its latest 13F with the Securities and Exchange Commission for the reporting period of March 31. This is the fourth in a series of articles we are producing which are devoted to the portfolio of Gayner, one of the most successful investors of the past two decades. Over that time frame, his investment firm has returned an average of over 10% annually, easily beating the broader market during that time. He has continued to outperform the current bull market, returning just over 20% annually on average over the past five years. Having already covered Gayner’s top overall picks in addition to his top energy picks and top healthcare picks, we’ll now look at his top picks in the ever-evolving technology sector, which presents unique challenges for long-focused value investors like Gayner, who has just 8% exposure to the tech industry in his equity portfolio.
We’ll start with Automatic Data Processing (NASDAQ:ADP), which ranks as Gayner’s top tech stock, as well as one of his oldest tech holdings, dating all the way back to the second quarter of 2000. The position is not one of his top overall picks however, ranking just 29th in his portfolio at $45.45 million from ownership of 530,700 shares. It was a long time before Gayner realized any profits from the holding in the technology solutions company. Buying in around the $45 level, Automatic Data Processing (NASDAQ:ADP) would fall below that mark shortly afterwards and remain below it for much of the next decade. It wasn’t until mid-2010 that the stock finally started to achieve some steady upwards momentum, gaining 110% over the next five years. The majority of analysts now have a ‘Hold’ rating on the high-flying stock, with an average price target beneath its current trading levels. With earnings of $1.04 last quarter, a $0.25 increase year-over-year, Automatic Data Processing (NASDAQ:ADP) is trading at a P/E of 29.81 and forward P/E of 26.49. Value investor and author Whitney Tilson is another shareholder of ADP’s who still sees value in the stock, as does Pershing Square’s Bill Ackman.
Gayner has held Intel Corporation (NASDAQ:INTC) since the fourth quarter of 2007 and it stands as another technology stock that took several years to provide returns for the investor. It wasn’t until the stock’s strong 2014 run that it finally burst above the level he entered the stock at. Gayner holds a position of 991,000 shares of Intel Corporation (NASDAQ:INTC) worth $30.99 million as of March 31. While Intel shares suffered through a poor first quarter which dragged down the returns of some of the company’s investors like Hawkins Capital, Intel believes it is still at the forefront of the semiconductor industry and that said industry is in no danger of slowing down technologically any time soon, despite popular opinion that ‘Moore’s Law’ of exponential transistor growth can no longer be sustained.
However, Intel is still struggling to find firm footing in the mobile space, with that division of the company posting a grotesque $4.2 billion loss in 2014. Intel failed earlier this year to purchase Altera Corporation (NASDAQ:ALTR) for $54 per share and its rumored push to purchase Via Technologies of Taiwan has yet to come to fruition. Intel Corporation (NASDAQ:INTC) currently trades at a very reasonable P/E of 14.01 and forward P/E of 13.74. In addition to Gayner and Hawkins, billionaire Ken Fisher is also a major investor in Intel.
Gayner has held a position in Oracle Corporation (NYSE:ORCL) since the second quarter of 2011, with it standing at 638,000 shares with a value of $27.53 million as of March 31. The position was unchanged during the quarter, as were the two previously mentioned holdings. Also a top pick of value investors Donald Yacktman and Richard Pzena, Oracle, which is one of the biggest software companies in the World, trades at a P/E of 18.58 and a forward P/E of just 14.74. The enterprise software and cloud services provider, the latter of which being where the company is exhibiting strong growth potential, could see that potential develop even faster if it pulls the trigger on a rumored purchase of the $47.22 billion Salesforce.com, inc. (NYSE:CRM), which would be the largest ever purchase of a software company. With Microsoft Corporation (NASDAQ:MSFT) removing itself from the picture, Oracle Corporation (NYSE:ORCL) becomes the favorite to land the customer relations management and cloud services provider.
Hedge funds and other big money managers like Gayner tend to have the largest amounts of their capital invested in large and mega-cap stocks because these companies allow for much greater capital allocation. That’s why if we take a look at the most popular stocks among funds, we won’t find any mid- or small-cap stocks there. However, our backtests of hedge funds’ equity portfolios between 1999 and 2012 revealed that the 50 most popular stocks among hedge funds underperformed the market by seven basis points per month. On the other hand, their top small-cap picks performed considerably better, outperforming the market by 95 basis points per month. This was confirmed through backtesting and in forward tests of our small-cap strategy since 2012. This strategy, which involves imitating the 15 most popular small-cap picks among hedge funds has provided gains of more than 139%, beating the broader market by over 80 percentage points over the past 32 months (see the details).
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