Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) Chairman and CEO Warren Buffett (Trades, Portfolio) has been unable to praise his hires to succeed him at portfolio management, Ted Weschler and Todd Combs, highly enough. At his shareholder meeting in May, Buffett called them “extraordinary managers” and said the company was “enormously better off because the two are with us.”
Weschler joined Berkshire in 2012 after buying a charity lunch with Buffett twice at $2.6 billion each. He brought with him a tremendous record. Weschler achieved 1,236% returns at his former fund, Peninsula Capital Advisors over 11 years.
The investor’s approach was a relatively mystery, though. He appeared to prefer a concentrated portfolio, listing only nine stocks in his final portfolio filing in 2013. The largest sectors represented were basic materials at 32%, communication services at 28% and consumer cyclical at 18%. He also appeared to favor stocks he knew well – as his largest holding at more than a third of the portfolio he had W R Grace & Co. (GRA, Financial).
Since then, at Berkshire, he has made deals, spearheaded investments and purchased common stocks. Both he and Combs’ portion of the portfolio has expanded to $13 billion each, Buffett said in an interview with Yahoo Finance. The two have “total discretion” over their investing, he added, though he checks over their activity at the end of each month.
Both also performed about on par with the S&P 500 index’s 16% gain for the year through April, with one “modestly ahead” and one “modestly behind.” “They’re doing better than I am,” Buffett said.
While Berkshire rarely discloses which managers purchased each of its stocks in a given quarter, there is strong evidence for some of them. Three that are widely or specifically attributed to Weschler are: Home Capital Group (TSX:HCG, Financial), Optical Cable (OCC, Financial) and DaVita (DVA, Financial).
Home Capital Group (TSX:HCG, Financial)
Buffett named Weschler as the originator of the Berkshire’s investment in Canada’s Home Capital Group, calling what he did “remarkable” and “appreciated in the Toronto area.”
Berkshire purchased $400 million Canadian dollars of the company’s shares and provided a $2 billion line of credit on June 21, 2017. At that point, its stock price had plunged by more than 50% since the start of the year. In Buffett’s words at his shareholder meeting, Weschler’s investment “stabilized a financial institution that was under attack and experiencing runs in Canada.” The company also called it “a vote of confidence.”
"Home Capital's strong assets, its ability to originate and underwrite well-performing mortgages, and its leading position in a growing market sector make this a very attractive investment," Buffett said in a statement at the time.
Berkshire came to the bank’s aid when investors began withdrawing money after the Ontario Securities Commission accused three of its former executives of not disclosing problems in its mortgage business in 2014 and 2015. The rescue of the bank parallels Buffett’s lucrative investments in other distressed financials, such as Bank of America (BAC, Financial) and Goldman Sachs (GS, Financial).
Shares of the bank shot up 10% the day it announced Berkshire’s involvement.
Berkshire decided to “substantially exit” its investment and end further engagement with the company on Dec. 19, several months after shareholders rejected its proposal to increase its holding to 38.4% from 19.9%. The stock fell 8.5% the day of the announcement.
Though Weschler moved on, the stock recovered and has performed well. With a 26% gain year to date and 33% rise since he announced his stake, it traded around $18.92 Canadian dollars Monday.
Optical Cable (OCC, Financial)
Optical Cable does not appear in Berkshire’s portfolio because Weschler owns it personally. He disclosed a 5.25% passive stake in the company dated Sept. 14. Its price at the time had climbed to $3.45, about 40% from the previous year. In February 2019, he disclosed that as of Dec. 31, when the price was around $3.81, his position had increased to 9.99% of the company.
The $26.63 million market cap company, which is too small for inclusion in Berkshire’s vast portfolio, provides fiber optic cable services to Forbes 500 companies, the military and other industries.
For the first quarter, reported March 12, it announced a 4.6% year-over-year decrease in net sales to $16.8 million. The results included a decrease in its enterprise and specialty markets segment due to a $1.2 million military project in the previous year that did not recur. The company also had a net loss of $3.3 million, of 44 cents per diluted share, compared to a net loss of $410,000, or 6 cents per diluted share, in the same quarter a year prior.
It ended the quarter with $420,000 in cash and $10.89 million in long-term debt. The company has a price-book ratio of 1.24 and price-sales ratio of 0.37.
DaVita, a kidney dialysis company, is one that followed Weschler from his Peninsula fund to Berkshire Hathaway. At Peninsula, it occupied 17.6% of his portfolio as his third-largest holding. At Berkshire, it represents 1.05% of the portfolio as the 16th largest holding.
Weschler began the position in the fourth quarter of 2011 as he joined Berkshire when the price averaged $36 per share. He added to the position throughout much of 2012 and 2013, and last added shares in the first quarter of 2015 when the price averaged around $77.
So far, DaVita has not delivered strong gains to the portfolio. GuruFocus estimates that Berkshire has a loss on the position around 3.65% based on average quarterly prices and the stock’s trading price Monday around $47.99.
Year to date, share of the company have declined by about 8%. Over the past five years, they lost roughly 33%.
For the first quarter, reported May 7, DaVita posted revenues of $2.74 billion, compared to $2.85 billion in the same quarter a year prior. Net income totaled $149 million, or 90 cents per share, compared to $179 million, or 98 cents per share, the prior year. Its total dialysis treatments performed increased 2.9% year-over-year.
See Berkshire Hathaway’s portfolio here.
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