Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) announced that it has recruited Ted Weschler, a 50-year-old hedge fund manager from Charlottesville, to help manage Buffett’s equity holdings. Weschler’s Peninsula Capital manages about $2 billion in assets with a narrow portfolio of mostly mid-cap stocks.
But, is he a good choice?
We’ve used our proprietary tool to analyze some of Weschler’s holdings. It remains to be seen if Weschler can achieve the same type of success as Buffett. More than half of Weschler’s disclosed portfolio is in DirectTV (DTV), W.R. Grace and Co (NYSE:GRA) and DaVita (NYSE:DVA).
Our analysis shows that these stocks do not boast incredibly strong fundamentals nor are they compelling stocks to buy. DaVita may be the most promising out of the three while DirecTV is facing increased competition and W.R. Grace is preparing itself for an onslaught of lawsuits.
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DirecTV provides digital television entertainment in the U.S. and Latin America through direct-to-home digital television services as well as multi-channel video programming distribution services.
A particular concern is that there are a growing number of people who are dropping their TV subscriptions and opting for more web-based programming. Live sports and premium channels on DirecTV are motivating people to stay subscribed but these shows are slowly moving onto the web. DirecTV has attempted to staunch the migrating customers by developing an app that moves programs that are stored on DVRs onto the iPad. (source)
- Excellent cash return on invested capital. Risen from 12.96% in 2006 to 23.33% in 2010.
- Improving positive cash flow since 2001 where it has jumped from -1.55B to 2.79B in 2010.
- Grossly overvalued, if DTV cannot compete with the move toward web-based programs. Market currently assuming a 14.86% growth rate.
- Very weak balance sheet. DTV has been taking on debt since 2006 with current Tl-to-TA 1.01.
W.R. Grace and Co. (GRA)
W. R. Grace & Co. engages in the production and sale of specialty chemicals and materials worldwide. Its Grace Davison offers fluid catalytic cracking catalysts to produce transportation fuels, such as gasoline and diesel fuels and other petroleum-based products.
W.R. Grace operated the chrysotile asbestos mines in Libby, Montana, for decades and filed for Chapter 11 reorganization in 2001 to protect it from more than 100,000 personal injury claims. Once it leaves bankruptcy protection, Grace will pay creditors in full and set up a trust to pay victims of asbestos poisoning. (source)
A look at the past 10 years reveals a mixed performance.
- Slowly began reinvesting profits in 2005 and has been rising up to 2010.
- Positive free cash flow has been improving from 2007 where it reached 214.80M in 2010.
- Disappointing cash return on invested capital from 2008 (-4.57%) to 2010 (7.89%).
- Little indication of an economic moat, thin profit margins, mediocre pricing power and highly capital intensive
DaVita provides dialysis services for patients suffering from chronic kidney failure. The company operates kidney dialysis centers while providing related medical services primarily in dialysis centers and in contracted hospitals.
It has recently announced the launch of its Biorepository Services. The Biorepository contains collections of biological material and their pertinent databases for the purpose of research. This investment will allow the company to supply central laboratory services outside of renal care, which will broaden its current therapeutic offerings. (source)
- Consistently excellent return on equity and positive free cash flow since 2001.
- Profits have been reinvested year after year since 2002. As of 2010, retained earnings growth is 17.55%.
- DaVita is in a relatively competitive industry. It hasn’t been able to improve its net profit margin through the years. It has hovered around 6-10% since 2001.
- Highly capital intensive where the capital expenditure ratio has been rising over the years, it stands at 67.44% in 2010.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.