A Buffett-backed IPO that's beaten S&P 500 — and Berkshire

While the era of big data may still be in its infancy, one company that has been whipping the S&P 500 got into the big data game early — and thanks in part to a push from Berkshire Hathaway CEO and chairman Warren Buffett.

Long before Berkshire Hathaway became the acquisition behemoth it is today, Buffett was primarily involved in the insurance business. He still is — it's the largest piece of Berkshire's conglomerate — and these businesses have been some of his biggest and most successful ventures. Buffett has referred to property and casualty insurance as "the engine that has propelled our expansion since 1967."

Warren Buffett held on to his stake in post-IPO Verisk, which has earned a hefty 207 percent return since October 2009, as of the close of business Sept. 30.
Adam Jeffery | CNBC
Warren Buffett held on to his stake in post-IPO Verisk, which has earned a hefty 207 percent return since October 2009, as of the close of business Sept. 30.

Back in the 1970s, when Buffett was trying to lay a strong groundwork for his operations, he thought it would be a good idea to create a data analytics business to provide the information necessary to run a profitable insurance business. So he joined a consortium of insurance companies to create Verisk Analytics, a number-crunching operation whose mission was to dish out risk data.

Outperforming everything

Verisk stayed under the radar for years as a kind of proprietary "lab" supporting Buffett's insurance businesses as well as those of the other group members. But when restrictions between insurance and banking were lifted (Congress repealed the Glass Steagall Act in 1999), Verisk's business grew. And when the financial crisis hit years later, Verisk's robust operation seemed ripe for the public picking, so the group decided to spin it off in an effort to bolster ailing balance sheets.

Buffett's deep pockets, however, allowed him to hang on to his stake in post-IPO Verisk (Berkshire owns 2.1 percent of the company), which has earned a hefty 207 percent return since October 2009, as of the close of business Sept. 30. While Berkshire's $128 million stake in Verisk is extremely modest compared to Buffett's entire stock portfolio and the size of Berkshire Hathaway, since going public, Verisk has significantly outperformed Berkshire, the S&P 500 and the core holdings in Berkshire's portfolio, such as American Express, Wells Fargo, Coca-Cola and IBM.

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In the case of Verisk, not only was necessity the mother of invention, it also led to robust profits for Buffett. In co-creating a company to support his insurance businesses, Buffett laid the foundation for a fundamentally strong and, eventually, extremely profitable investment.

Verisk (whose name combines the Latin word for truth "veritas" with "risk") has a business model that allows it to "build it once and sell it many times," just the type of company the Oracle of Omaha would warm up to. It's a steady, solid business with a durable competitive advantage, low capital-investment needs and good economies of scale.

Over the past few years, Verisk has done something Buffett likes to do himself—acquired and sold businesses as follows:

  • March 2015: Signed an agreement to purchase Wood Mackenzie, a Scotland-based data analytics company for the energy, chemicals, metals and mining sectors.
  • April 2016: Agreed to sell its health-care services business to Veritas Capital for $820 million.
  • July 2016: Announced plan to acquire Greentech Media, an industry-leading information services provider for the next-generation electricity and renewables sector (as such, it will become part of the Wood Mackenzie business acquired in 2015).
  • August 2016: Announced acquisition of the data and subscription business of Quest Offshore Resources, which supplies market intelligence to the offshore oil and gas sector.

At Validea, we use a Buffett-based stock-screening model — based on the book "Buffettology" — which gives high marks to Verisk for its competitive prowess as well as for its low capital-expenditure requirements. Our model also likes the company's stable and continually growing earnings — 10-year average earnings-per-share growth of 18 percent.

Based on analysts' consensus estimated long-term growth rate, earnings growth is expected to be nearly 12 percent per year going forward. Management's reinvestment of earnings over a 10-year period shows a favorable return of 16 percent, and our model likes the company's 10-year average return on assets of 10 percent.

By John Reese, co-founder of Validea Capital Management, which manages the Validea Market Legends ETF (VALX). The ETF uses computer models based on legendary investor strategies for stock selection, including a Warren Buffett model.

Disclosure: At the time of publication, John Reese was long Verisk, although holdings can change at any time.