Berkshire's New Blood Proves Itself

A shift is coming in the value investing world that we all know and love.

As one of the true disciples of the "Dean of Wall Street," Benjamin Graham, Warren Buffett is synonymous with the value investing. But as his retirement gets closer and closer, value worshipers are looking closely to see if the new money managers in residence at Berkshire can live up to their predecessor. It's too soon to say, as two of the eventual three have only recently begun putting the company's capital to work, but a few of the picks they've made are looking great and could bode well for the future of the world's highest-priced stock.

Buffetts in training
Todd Combs and Ted Weschler, two former hedge fund managers, are the first and second Buffett-appointed investment officers set to take over once the man himself leaves the office. Talk about high expectations -- these two men have to live up to what many people consider to be the greatest investor of all time.

It's a waste of time to try and compare the two men to Buffett, even the Buffett of yesteryear when he first bought Berkshire Hathaway (NYSE: BRK.A  ) (NYSE: BRK.B  ) . Since then, the market has changed, the world has changed, and even value investing -- though with the same fundamentals as always -- has, in a way, changed. The best way to evaluate the competence of these two investors is to throw out the comparisons to Buffett and just look at what they bought, when they bought it, and why. The good news is: Things look like they've started off on the right foot. 

A masterful investment
One of the best picks so far for the two is MasterCard (NYSE: MA  ) . With consumer spending ticking back up from the recession, MasterCard was well positioned to capitalize. Berkshire bought in at an average price of roughly $258, and since then the stock has appreciated to $462 -- not a bad start for the new blood. Interbrand recently gave MasterCard a brand score of 94 and valued the name at $3.9 billion -- which equates to about 7% of the company's total market value. While this is not a tangible asset on the balance sheet, it demonstrates just how meaningful the MasterCard name is to consumers and investors. 

MasterCard is a great company, but temper your expectations before following Combs and Weschler on this one -- the stock's impressive run has it richly valued. If you want to be in on the credit card game, you're better off taking a look at American Express (NYSE: AXP  ) , which trades far cheaper on a forward-earnings basis and is a more focused credit card and customer-service play. 

Oil!
Last summer, Berkshire purchased shares of Phillips 66 (NYSE: PSX  ) (NYSE: PSX  ) stock over and above what it received when the company was spun off from Conoco (NYSE: COP  ) . Since the spin-off, Phillips has outperformed its former parent company and major indexes. Since mid-July, Phillips has gone from around $32 per share to today's $45.15. In addition to refineries, the company conducts many of the marketing operations for Conoco, including the branded "76" gas stations.

I mentioned Phillips 66 a little while back when it was a decent amount cheaper, but investors can still get in on the action at what I think is a fair price -- the stock currently trades at less than eight times forward earnings.

So far, Phillips 66 looks like another win for the Berkshire money managers and further evidence that they have what it takes to deliver shareholder value.

Everything stores
If you're like me, you spend too much time and money running in and out of drug stores -- in my case CVS (NYSE: CVS  ) . The new managers are behind Berkshire's ownership of over five million shares of the drug store giant -- which is down from its previous position north of seven million. In my opinion, CVS fits the mold of a cash generating, wide-moat business that Buffett would love.

The company's average annual earnings growth was north of 15% for the last 10 years, and like Mastercard, it has significant brand power. More recently, third-quarter profits were up more than 16% from the prior year's quarter, suggesting that this growth story isn't quite over. Management bumped up guidance for the coming year and has investors as excited as ever.

Berkshire bought in around $36 per share, compared to today's $48 per share. The stock still trades at what I think is a fair value at 12.7 times forward earnings. It's a bit richer than competitor Walgreen's (NYSE: WAG  ) 9.5, but that may be due to Walgreen's fall out with Express Scripts and subsequent loss of pharmacy revenues earlier this year. The feud has since cooled. 

Decent beginning
Things look OK for the future of Berkshire's investment officers... so far. They have a tough challenge ahead though -- whereas Buffett had the luxury of buying small companies in his earlier days, the new managers will not be able to play in this sandbox given the company's large capital base.

Buffett isn't quite done yet, and we don't know when he will be. Analysts have been talking about Buffett's elephant gun loaded and ready for a major acquisition, so keep an eye out.

Fool contributor Michael Lewis has no positions in the stocks mentioned above. The Motley Fool owns shares of Berkshire Hathaway and MasterCard. Motley Fool newsletter services recommend Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 14, 2012, at 10:40 AM, jonthebox26 wrote:

    There is no mention of their Intel trade, which I do believe they are out of now.

  • Report this Comment On October 14, 2012, at 5:30 PM, neamakri wrote:

    " the new managers will not be able to play in this sandbox given the company's large capital base." Is there a legal reason why not?

    Hey, profit is profit. Besides if it was good enough back then, then it should be good enough now. Some people have been looking at spreadsheets and formulas too long and are missing the basics.

    I foresee a new group within Berkshire specifically for the purpose of looking at smaller businesses. Let's call it "MiniBerk". Use this group to train newcomers in "the Berkshire way". They should still turn a profit, although not on the mega-billion scale of the rest of Berkshire.

    What do you Fools think?

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