In preparation for his eventual departure, Warren Buffett has selected two investors to help manage Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B)’s portfolio until they eventually handle it on their own. The search is still on for a third manager. Todd Combs, hired on October 25, 2010, and Ted Weschler, hired September 12, 2011, have each bought several securities for the Berkshire portfolio, and enough time has passed to get a glimpse of the performance of those who will eventually fill the very large shoes of the greatest investor of all time.
It is speculated that two of Berkshire Hathaway’s new stocks, Davita (NYSE:DVA) and DirecTV (DTV) were purchased by Ted Weschler, as he used to own them in the portfolio of his former hedge fund, Peninsula Capital Advisors LLC. In his 11 years at Peninsula, Weschler delivered a return of 1,236%. He scored the job with Buffett after paying a total of $5.2 million to dine with him in a charity auction.
Describing his investing style, Morningstar says, “Peninsula manages a pool of capital that, on behalf of its clients, makes substantial long-term investments in publicly-traded companies possessing both strong prospects and outstanding management teams.”
Berkshire bought 2,684,500 shares of Davita in the fourth quarter of 2011 at an average price of $71. It was their largest new buy in the quarter and accounts for 0.31% of the portfolio. Since then, the stock has appreciated 22% and trades for $86.62 per share.
Davita, a Fortune 500 company, provides kidney care and dialysis for patients with chronic kidney failure and end state renal disease. At year-end 2011, it operated 1,809 dialysis facilities in the U.S. which served approximately 142,000 patients, as well as 11 international outpatient dialysis centers. It has an $8.1 billion market cap.
Davita is an outstanding business with a track record of solid growth. Its 10-year revenue growth rate is 18.6%, EBITDA is 17.8%, and free cash flow is 10.8%. Over the last 10 years it grew revenue each year and reached its record free cash flow of $780 million, increased from $566 million in 2010. In September 2011, it closed on the acquisition of DSI Renal Inc., which operated 106 dialysis centers and generated revenue of approximately $360 million.
DirecTV, another likely Weschler choice, was added to the portfolio in the third quarter, which ended shortly after he joined on September 13. Berkshire bought 4,249,400 shares at approximately $46 per share initially, then added 16,099,000 shares in the fourth quarter at approximately $45 per share.
The stock is up 6% from the average price paid and trades for $48.88 on Wednesday. It accounts for 1.3% of Berkshire’s portfolio.
DirecTV has a similarly pristine financial history as Davita. It grew revenue at a rate of 17% over the last 10 years, EBITDA at 33.4% and free cash flow at a five-year rate of 18.7%. However, the company has been increasing its debt burden in recent years. It now has $16.5 billion in long-term liabilities and debt and $3.3 billion in cash.
DirecTV continues to grow, increasing its market share in both the U.S. and Latin America in 2011 despite an intensely competitive market. It also had its largest annual net customer gain in its history, adding 3.7 million new customers in the U.S. and Latin America. In the maturing pay-TV market, DirecTV is aiming to shift the balance between acquiring and retaining customers to improve its bottom line going forward.
Liberty Media (LMCA) formerly occupied 11.2% of Ted Weschler’s portfolio when he was an independent manager. He bought 1,701,400 shares of the company for Berkshire’s portfolio at about $75 per share in the fourth quarter, which is just 0.2% of Berkshire’s total portfolio, although at last count he owned 1,900,000 shares before leaving Peninsula. The stock has gained 17% since his Berkshire investment.
Liberty Media is a media conglomerate controlled by John C. Malone, a Johns Hopkins Ph.D., who owns most of the voting shares. It owns interested in an array of media , communications and entertainment businesses, such as Starz LLC, SiriusXM (NASDAQ:SIRI), Barnes & Noble (NYSE:BKS), Time Warner and Viacom.
For the fourth quarter 2011, the company increased revenue 96% to $1 billion and 48% to $3 billion for the full year, primarily due to a one-time recognition of previously deferred revenue and costs at True Position. From November 1, 2011 through November 28, 2011, the company repurchased 485,900 shares of Series A Liberty Capital common at an average cost per share of $76.72 for total cash consideration of $37.3 million (LCAPA). From November 29, 2011 through January 31, 2012, the company repurchased 1.1 million shares of Series A Liberty Media common stock at an average cost per share of $76.84 for total cash consideration of $86.8 million (LMCA).
Other small holdings that newly joined Berkshire’s portfolio were likely purchases of Todd Combs. Buffett said in his annual shareholder letter that “each [of the new managers] will be handling a few billion dollars in 2012.”
Todd Combs is 41 and managed his own firm Castle Point from 2005 to 2010, where he achieved a 34% cumulative return. He attended Florida State University and Columbia Business School. Buffett hired him at Berkshire in 2010 at age 39.
These are his 2005 to 2010 returns:
The smaller buys from the fourth quarter likely attributed to Combs are Intel (NASDAQ:INTC), Visa (V), General Dynamics (GD) and CVS Caremark (CVS).
Berkshire bought 9,333,000 shares of Intel in the third quarter of 2011 at about $21 per share, then added 2,126,000 shares in the fourth quarter at about $24 per share. To date, the stock has increased 27% above his average purchase price.
Berkshire bought 2,291,708 shares of Visa Inc. in the third quarter of 2011 at about $87 per share, then added 573,300 shares in the fourth quarter at about $94 per share. To date, the stock has increased 35% above his average purchase price.
Berkshire bought 3,064,422 shares of General Dynamics in the third quarter of 2011 at about $63 per share, then added 812,700 shares in the fourth quarter at about $64. To date, the stock has increased 13% above his average purchase price.
Berkshire bought 5,661,000 shares of CVS Caremark in the third quarter of 2011 at about $36 per share, then added 1,445,500 shares in the fourth quarter for about $37 per share. To date, the stock has increased 23% above his average purchase price.
Buffett said of Combs and Weschler in his 2011 annual letter that, “They have the brains, judgment and character to manage our entire portfolio when Charlie and I are no longer running Berkshire,” and so far he has been right. Together, they have achieved an approximate average return of 20% since the third quarter 2011 (when most of the stocks were bought), compared to 6% for the S&P. However, considering the generally positive investing climate, it is yet to be seen how their companies will hold up when the markets inevitably have a mood swing.
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