Under Todd Combs’ management, the Castle Point hedge fund’s asset base grew from $35 million at inception in 2005 to $400 million in October 2010. The 39-year-old manager met Buffett by sending a letter Charlie Munger, and apparently impressed him enough that he hired Combs as the first of three new investment managers at Berkshire Hathaway (BRK.A)(BRK.B) after a three-year search. Combs showed uncanny ability to avoid losses during the financial crisis and shift gears into retail investing to make sizable returns in his brief time at Berkshire, boding well for the future for its shareholders. Combs’ Castle Point was founded in 2005 and focused mainly on the financial sector. He navigated relatively well through the ensuing economic challenges, with a 34% cumulative net return since inception compared to a negative 46% for the XLF. When Buffett discussed his plans to hire investment managers in 2006, he said risk aversion was one of the most important factors in hiring: “Over time, markets will do extraordinary, even bizarre, things. A single, big mistake could wipe out a long string of successes. We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered. Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions.”
Most of Combs’ experience is in financials. In his first public 13F, for the quarter ended Dec. 31, 2007, his largest holding was Discover Financial Services (DFS). He owned 975,000 shares then valued at $14.7 million, or about $15 per share. When the company went public in June 2007, shares traded for about $30 per share. Combs had sold out about half of his holding in the third quarter of 2008, just before the stock travelled down below $5 in the first quarter of 2009, avoiding major losses.
At that point of its lowest price in the first quarter of 2009, Combs purchased 100,000 shares, and another 100,000 in the second quarter of 2009. By the third quarter of 2009, when the stock reached over $15, he sold out his entire holding. By selling, he missed out on a large gain. From the beginning of 2009 to his departure from Castle Point in October 2010, the stock increased about 79%.
More recently, Combs’ portfolio was composed 70% of financials before joining Berkshire. His largest holdings were U.S. Bancorp (USB), MasterCard Cl A (MA), RenaissanceRe Holdings Ltd. (RNR), Chubb Corp. (CB) and Western Union (WU). His largest, U.S. Bancorp, is also owned by Buffett. It makes up 2.75% of his portfolio and he owns 3.62% of the shares outstanding.
Combs bought 600,000 shares of U.S. Bancorp in the fourth quarter of 2009 at about $23.25 per share, and added 200,000 more in the first quarter of 2010 at about $25 per share, and 220,000 in the second quarter of 2010 at about $25 per share. He sold 20,000 shares in the third quarter of 2010 at about $23 per share. The stock has increased 9% over the last year.
Though most of Combs’ portfolio is in financials, he owns just four banks, like Berkshire, which owns just three. Berkshire’s largest, Wells Fargo (WFC), is also in Combs’ portfolio, but only a small portion, 50,000 shares, which he bought in the third quarter of 2010, the same quarter in which he accepted the position at Berkshire.
Combs has added few financials since arriving at Berkshire, and his stocks have done quite well. Buffett has said that the smaller purchases in Berkshire’s portfolio are likely to be Combs’. Therefore, he probably purchased new holdings CVS (CVS), DirecTV (DTV), Dollar General (DG) and MasterCard (MA). To pick stocks, Combs keeps a “watch list” of 200 of his favorite companies, according to a friend of Combs. When one becomes cheap enough, he buys it.
Combs bought 5,661,000 shares of CVS Caremark in the third quarter of 2011 at about $36 per share. The third quarter was a good and particularly cheap time to buy CVS, which has gone up 19% over the last year and trades at $42 per share on Wednesday. CVS has had trailing-12 month revenue of $104 billion, its highest ever, and free cash flow of $5 billion, a record by far.
DirecTV also must have hit Combs’ price target when it fell from about $53 to $42 per share from July to August 2011. Combs bought 4,249,400 shares in the third quarter of 2011, and the price has risen to almost $44 on Wednesday. Identically to CVS, DirecTV is at record revenue of $26 billion for the trailing-12 months, and had record free cash flow of 2010, at $2.3 billion. It is also trading at a near-historical low P/E ratio of 13.6.
Dollar General has turned out to be one of Combs’ most prescient buys. He bought 1,497,800 shares in the second quarter of 2011 at about $33 per share, then added 2,999,447 shares at about $34 per share, for an average gain of almost 20%.
The stock he added from the financial sector, MasterCard (MA), advanced almost 49% over the last year and made Berkshire shareholders a sizable profit. He bought 216,000 shares in the first quarter of 2011 at about $243 per share, then added 189,000 in the second quarter at about $275 per share. His MasterCard buys so far have given an average return of 35%.
Buffett’s latest investment in Combs has so far yielded good returns for Berkshire, though time will tell if he can measure up to his legendary employer.