Buffett's New Buffett-Like Manager

By Greg Sushinsky | September 12, 2011 AAA

Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) announced it has hired another investment manager to manage a portion of its holdings. Ted Weschler, who runs the Peninsula Capital Advisors hedge fund, will join Berkshire in 2012. Weschler will become a possible successor to Buffett when Buffett retires.

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Line of Succession
Weschler, 50 years old, of Charlottesville, Va., is the second professional investment manager Berkshire has hired as the company prepares to one day replace the legendary Buffett when he retires. Berkshire hired Todd Combs in 2010 to take over management of part of the stock portfolios of its insurance subsidiaries after Lou Simpson, who managed GEICO's equities, left. Combs did not have as high of a money manager profile as many had expected Buffett to hire, and neither is Weschler.Weschler's results, however, speak to the kind of approach and results Buffett likes. Weschler's total return on his fund since 2000 is 1,236%. (For related reading, see Build A Baby Berkshire.)

Weschler's Buffett-Like Style
In addition to Buffett-like results, Weschler, who won the annual charity auction for $5.3 million to meet Buffett and have dinner with him in 2010, has a Buffett-like style. His hedge fund, with roughly $2 billion invested as of a recent filing, had more than half its position in two stocks, WR Grace (NYSE:GRA) and DirecTV (Nasdaq:DTV). The use of such large, concentrated positions is in the tradition of Buffett, who was able to apply that even more when he ran his smaller funds years ago. Other companies in Weschler's fund include Lubrizol (NYSE:LZ), now owned by Berkshire after purchase by the fund earlier in the year. Other notable names in Weschler's Peninsula Fund are Cincinnati Bell (NYSE:CBB) and commercial lender WSFS Financial (Nasdaq:WSFS). Weschler also holds large positions in Liberty Media (Nasdaq:LCAPA) and dialysis company DaVita (NYSE:DVA), which together amount to around 30% of the portfolio.

A Closer Look
A quick look at one of the two largest holdings, chemical company WR Grace, shows the company achieved $2.9 billion in sales in the last 12 months with net income of $229.8 million. While sales growth was down by slightly more than 5%, income growth had zoomed up 190%. The stock sells at a P/E ratio of just over 11, with a forward multiple of 9, so the specialty chemical maker has some of the value metrics Buffett or a Buffett disciple like Weschler would like. (For related reading, see How To Use The P/E Ratio And PEG To Tell A Stock's Future.)

Grace's investment ratios are below industry averages, however, both for the year and the five-year period. Its return on capital is 6.3% compared to the industry average of 12.6%, while its five-year ROC is 3.5% compared to 6.8% for its competitors. From here it looks like Weschler's bottoms-up pick is a concentrated bet on the fundamentals of a deep value play for Grace. Grace's revenue has been uneven or flat in the last five years, although its net income has picked up substantially in the last year. Rather than so much undervalued now, these numbers indicate Grace is really an ongoing turnaround story playing catchup in its industry. It's hardly an exciting stock but perhaps a fascinating insight into the investing style of Weschler. Grace's stock price has appreciated from $1.55 a share in December 2001 to $45.63 recently, an increase of more than 3,000%.

The Bottom Line
Weschler, just like Combs, very likely won't have the opportunity to manage in exactly the same way at Berkshire as he has at his Peninsula Capital. Berkshire is no longer the concentrated holding company to the extent that Weschler's fund was, so outsized returns from even mediocre companies such as Grace will be hard to come by. But Weschler's deep value approach and conviction on large stakes is well in line with the Buffett methodology. If he succeeds enough to become Buffett's successor one day, we'll know clearly his approach worked. (We look at the Sage of Omaha's methodology for evaluating value stocks. For more, see Warren Buffett: How He Does It.)

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