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Investing Specialists

A New Pick from Morningstar's Small-Cap Superstars

We highlight one new 5-star stock held by leading small-cap fund managers.

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As we discussed in previous articles, one of the best and easiest ways to screen for new investment ideas is by monitoring the activity and holdings of successful fund managers. The aim of Morningstar's Small-Cap Superstars is to combine some of the best ideas from our favorite small-cap fund managers with our fellow analysts here at Morningstar.

Deciding which stocks to highlight is simple: First, the stock must have a Morningstar Rating of 5 stars, and second, it must be held by at least a handful of the 25 small-cap fund managers on our watch list (see below). We also consider the size of the holding in the respective funds as a way to further refine our selection process. After running our screens and analyzing the respective merits of the Superstars' holdings, we'd like to highlight our latest pick,  Markel Corporation (MKL) (which is technically a mid-cap company, with a market capitalization of $3.6 billion).

According to Morningstar equities strategist Justin Fuller, Markel's strong underwriting and disciplined investment approach garner this insurer a narrow moat. The firm's underwriters focus on developing expertise in specialty insurance products that are too small or too difficult for larger rivals to underwrite. This helps to avoid fierce pricing competition. Fuller also likes the fact that Markel's underwriters' total compensation is contingent on the product generating underwriting profit, which means underwriters are compelled to refuse business that doesn't meet the firm's rigid pricing criteria. The company generates significant float (temporary cash holdings that accrue because premiums are received well in advance of claim payment), which it invests to boost shareholder returns. The firm has a successful long-term track record in public equity investments and has started making private-equity investments as well, a move that Fuller endorses. Risks for the company include the prospect of management overpaying for a large insurance acquisition, exposure to asbestos claims, and increased competition from Bermuda startups.

John Owens does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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