Ted Weschler and Valassis
A Homerun Investment
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Ted Weschler and Valassis
Ted Weschler turned $70,000 into $264,000,000 in his IRA in 30 years!
Who is Ted?
He is one of Warren Buffet’s investment managers (alongside Todd Combs), and may just be Berkshire Hathaway’s future Chief Investment Officer.
I recently came across a very cool case study about one of Ted’s home run investments made during the financial crisis. Source Dirt Cheap Stocks:
It is a real world example of what I wrote about recently: Seed Investing in the Stock Market.
Ted invested in a company called Valassis Communications.
Weschler’s was buying shares in 2008: If you were investing at the time, you’ll recall how dire a time that was. 2008 was the worst year for the S&P since the 1930’s. Markets were in free fall and it is an understatement to say that investors were scared. Financial media made it worse.
In hindsight, it was the investment opportunity of a lifetime.
Background on Valassis
The combination of a bear market, such a large debt balance, and a large GAAP loss (the company took a $245mm non-cash goodwill impairment) sent the stock from a high of $16.80 in Q2 all the way down to a whopping $1.05 in Q4!
Although P/EBIT and P/FCF were both very cheap, the debt was the big open question.
Digging deeper, it became clear that the majority of debt payments were not due for another 7 years (~2015). So the company had 7 years of cash flow before it would need to reconsider its debt.
Now, think about this for a minute…remember the debt markets were pretty much frozen. Even Goldman Sachs needed Warren Buffet’s vote of approval. The world seemed like it was ending…but Ted Weshler was willing to put $9M into a tiny micro cap that was down 94% in 6 months. Can you imagine?!
The Follow-On Investment
I’m not sure what Ted’s capital base was at the time, but I have to imagine Ted viewed the Valassis investment as a seed investment (via the Equity Method) as described above.
In 2009, Weschler made a follow-on investment: he purchased an additional 1,000,000 shares! Dirt assumes Ted paid ~$17/share. Based on his assumptions, this purchase was almost twice the size of his initial $9M purchase!
Clearly, the company must have de-risked itself.
How?
Well, in 2009, Valassis generated $183MM of EBIT, about 40% more than in 2008, and used FCF to retire $200MM of debt, about ~20% of its long term debt. I’d call that de-risking…
In 2010, it further de-risked by generating a whopping $436MM of FCF (helped from a one time gain), and paid down $305MM of debt.
Ted bought even more shares, specifically 800,000 more for ~$33/share (that’s $26M, almost 3X the original purchase, and 1.5X his second purchase), bringing his total purchase to more than $50MM. Notice how he bought more, at higher prices, which is rarely discussed when it comes to the stock market.
By the end of 2010, the stock was approaching ~$40/share. Operating cash flow was consistently positive, which was redirected into debt repayments and stock buy-backs. In 2011, the company spent $215M on buybacks alone (remember Ted’s initial purchase was at a market cap of ~$145M!) reducing share count by 16%.
It’s tough to say what Weschler saw in Volassis, especially since it would have been very easy to misconstrue Valassis as a dying business.
But he had the conviction to buy when things looked dire, and then buy more (at higher prices) as the company de-risked.
And lastly, he was not in a hurry to sell. He likely held the stock for 6 years until the company was acquired.
That’s classic Venture Capital Investing in the Stock Market.
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