Sep 052011

Since being hired as a portfolio manager by Warren Buffett at Berkshire Hathaway (BRK.A, BRK.B) in January, 2011, Todd Combs has made investments in two stocks that have each outperformed the S&P 500.  This article is based on Form 13F filings with the Securities and Exchange Commission by Berkshire Hathaway.

In each of the first and second quarters of this year, Todd Combs purchased approximately 200,000 shares of MasterCard (MA) with a total current market value of about $130 million.  (The 13F filing does not provide information on the cost of each security that is reported.  It is assumed that these securities were purchased at its average weekly closing price during the quarter that it was acquired.)  MA’s closing price on September 2, 2011 of $320.68 is 31% above its average weekly closing price of $244.02 in the first quarter, and 16% above its average weekly closing price of $276.46 in the second quarter.  At its closing price of 1173.97 on September 2, the S&P 500 is down 7% year to date, and down 12% since the end of the first quarter.

Mr. Combs’ second investment was made during the second quarter.  This consisted of 1.5 million shares of Dollar General (DG) with a current market value of about $54 million.  At its closing price on September 2, 2011 of $36.06, DG is 10% above its average weekly closing price of $32.88 during the second quarter.

Both MA and DG exceeded analyst estimates for earnings per share in the second quarter and each has a bright outlook for growth over the near future.  This is especially noteworthy in an economic environment of slow growth and a substantial risk of a recession.

A good defensive strategy for investors at this time would be to consider the shares of both MA and DG, as well BRK.A or BRK.B.  Berkshire Hathaway appears to be undervalued by selling at a near historic low ratio of price to book value of less than 1.1.  Both DG and MA are currently selling at reasonable valuations based on their price to earnings ratios (P/E).  The P/E for DG = 19, and for MA it is equal to 20, on a trailing twelve months basis.

Until now, a very successful investment strategy has been to emulate Mr. Buffett’s investments.  Perhaps, this approach should also be extended to following Mr. Combs.  Although Todd Combs’ track record discussed here encompasses less than a 9 month period and only two investments, it would indicate that his future transactions may be well worth giving careful consideration.  If Mr. Combs should continue to outperform the S&P 500, it might provide an additional reason to invest in Berkshire Hathaway.

This article has also been published by Seeking Alpha:

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