History: Ted Weschler
Intro
Ted Weschler, one of Berkshire’s investment lieutenants, joined the company in 2012. Prior to that, in July 2010, he was the top bidder at $2,626,311 in a Glide Memorial Church auction to win a private lunch with Warren Buffett. Next year, in 2011, he again won a second lunch when he upped his bid by $100 more… to $2,626,411.
Aside from winner 2 lunch charity auctions to eat with Buffett, this man had a ridiculous investment record of turning $70,000 into $131,000,000 in his IRA account over 22 years by only buying publicly traded securities.
Weschler graduated from Wharton in 1983. He went to work for W.R. Grace in New York City at an yearly salary of $22,000. Weschler’s salary deferrals along with employer matching and stock appreciation led to an account balance of $70,000 at the end of 1989.
At that time he left W.R. Grace and began managing the IRA himself. Over the next 22 years, Weschler grew the account at a 41% CAGR to $131,000,000.
But this IRA achievement was just one of many examples of his investing prowess.
Quad-C
In late 1989, Weschler co-founded Quad-C. The company mainly invested in private equity siutations, but also deployed capital in publicly traded securities. Weschler was tasked with deploying money in the public securities, where he had incredible success.
Over a 10 year period, he only made 20 investments. And out of these 20, he’s quoted as saying:
19 of the 20 worked out really well. And I had a nice track record because of that.
We don’t have public information about Quad-C returns, but it’s fair to imply that if 19 out of 20 investments “worked out really well”, it meant that they crushed the index.
By 1999, Weschler left Quad-C and went on to start another investment firm.
Peninsula Capital Advisors
At the start of 2000, the market was frothy with the dot.com craze and Weschler started his new firm Peninsula Capital Advisors.
During those times, value stocks were out of favor, yet Weschler stayed committed to his value based strategy.
Then just 8 years later, the financial markets would grapple with the Great Financial Crisis.
When Weschler left Peninsula in 2010, before joining Berkshire the next year, the 10 year performance of his fund was stunning: Peninsula 22.6% (net of fees) versus S&P500 index 0.5%!
His track record from 1989 to 2010 is an incredible achievement, we will explore one of his investments in 2008 and try to breakdown his thought process.
Valassis Communications
Markets were in free fall in the second half of 2008. The S&P500 fell 12% in the first six months of the year. But things were about to get much worse. In the second half of the year, the index would decline another 26%. For 2008, it was the worst year since the 1930s.
With disaster, comes opportunity. Weschler bought the bulk of his Valassis shares in the 4th quarter of 2008. See here for his commentary in 2011 during the dissolution of Peninsula.
Valassis was a direct mail marketing company. It made the coupons that come in the daily paper along with the other marketing material sent directly to your mailbox. You can call it junk mail, it’s not a business that would get you excited.
But this junk mail has a reasonably high conversion rate. There’s a reason it shows up in the mailbox daily.
In early 2007, Valassis had purchased ADVO, the direct mail business. The purchase of ADVO doubled the revenues of the company, from $1b to $2b. ADVO was acquired for $1.2b, financed almost entirely by debt. Prior to the ADVO acquisition, Valassis operated with only ~$115m of net debt. Post acquisition, Valassis levered up aggressively, and debt grew by 10x.
In 2008, Valassis recorded non-cash goodwill impairment of $245m related to ADVO. Two main reasons for this write off:
Valassis stock fell 94% from $16.8 to $1.05 in just 6 months!
ADVO was a capital light business. It had very little tangible assets. So when ADVO was acquired, most of the purchase price was recorded to goodwill. Any perceived decline in the future prospects of ADVO would result in goodwill impairment.
Combine this with the large debt liability and investors were rushing for the exit.
Enter Ted Weschler
While people were dumping shares, Weschler began buying in Q4 2008. The stock price at that time ranged from $1.05 to $8.73. We don’t know exactly what he paid, but he was able to purchase 6.24% (3,000,000 shares) of Valassis.
These are the stats during that time:
Market cap: $144m
Net debt: $1,076m
Operating income: $131m
Net loss: -$207m
Free cashflow (FCF): $72m
So this was a cheap situation, price to FCF was only 2x. However, we need to look at the debt structure since its obviously a big liability.
There were 2 main sources of debt:
8.25% note due 2015 of $540m.
Senior Secured Term “Loan B” of $459m.
The 8.25% loans were due in 2015, so Valassis had 7 years to repay it and no principal repayment was scheduled before that.
The second Loan B had a 7-year term and also had favorable terms with principal repayment every quarter at a rate of 1% per year for the first 6 years.
Valassis had only $12.4m of debt payments in years 1 to 3. And $15.4m for years 3 to 5. In short, they have lots of time for FCF generation before reconsidering the debt financing. EBIT, even in the depths of the recession, was enough to cover interest expense. At the end of 2008, Valassis was in compliance with all of its covenants.
Weschler purchased another 1,000,000 shares in late 2009.
Valassis Capital Allocation
In 2009, Valassis generated $183m of EBIT and $178m of FCF. They used this cash to pay down $200m of debt.
Then in 2010, they continued to pay down another $305m of debt.
Valassis reinstated its stock repurchase program in 2010. That year, it repurchased 1.7 million shares at $33.57.
Weschler adds another 800,000 more shares in late 2010. This time paying ~$33/share.
More good things developed, in 2011, Valassis spent $215m on buybacks, reducing the share count by 16%!
Investment Results
The situation was not as bad as people thought and by the end of 2010, Weschler would’ve been up ~10x on his original purchases. The stock price was approaching $40.
In February 2014, Harland Clarke Holdings acquired Valassis for $34.05/share.
Assuming he held his shares until the end, the result would have been stellar for a short 6 years time frame.
Cheap Pays Off
We can only guess the reason for buying Valassis was the combination of an extremely cheap price, favorable debt repayment schedule, and consistent cashflow. He increased his stake later, after it was clear that management was doing smart things with the cashflow.
It would be easy for an investor to say that Valassis was a dying business. Its legacy business was destined to shrink as physical newspaper circulation decreased over time. But the ADVO segment was growing at a reasonable rate.
With the progress of the internet and the birth of distributed media, advertising changed. Consumers were no longer concentrated in the same few spaces. Valassis offered one of the last remaining methods for brands to reach each household. It was the only way to ensure every resident in a zip code got exposure to product ads.
In any case, this was not a business that will endure for decades, but it was at some moments a very cheap asset.
This goes back to Mark Howards:
No asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough.