Is Stanley Bergman a Better Capital Allocator Than Warren Buffett?

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U.S. stocks are little changed in the run-up to tomorrow's Brexit referendum in the United Kingdom, with the benchmarkS&P 500and theDow Jones Industrial Average (DJINDICES: $INDU)up 0.08% and down 0.08%, respectively, at 2:30 p.m. EDT. For long-term fundamental investors, I bring you an antidote to Brexit mania: a company in a decidedly un-sexy sector that has produced outsized returns for its shareholders, healthcare products distributor Henry Schein, Inc.

Is Stanley Bergman a better capital allocator than Warren Buffett?


Stanley Bergman is the South African-born accountant who has run healthcare products distributor Henry Schein, Inc. for over a quarter of a century. Don't feel bad if you hadn't heard of him before -- neither had I, until I read Barron's profile (subscription required) this past weekend.

As Barron's pointed out, "since taking the company public in 1995, Bergman has produced a 1,400%-plus return for investors, more than double the performance of Warren Buffett'sBerkshire Hathaway." Now, that comparison is not entirely fair: After all, at the end of 1995, Berkshire Hathaway's market capitalization was $38 billion -- more than twice that of Henry Schein'stoday. Nevertheless, returns to Henry Schein's shareholders have been impressive by any standard:

HSIC Total Return Price data by YCharts.

The Russell 2000 (green line) is the benchmark index for small-capitalization stocks, one of which Henry Schein was when it came public in Nov. 1995 at a valuation of $586 million (it was added to the S&P 500 only last year -- the market value had by then grown nearly 20-fold to $11.6 billion).

Not a bad result for a company whose CEO stated flatly at the beginning of 2015 that "Henry Schein does not exist for the investors." I wish more CEOs cared less about their shareholders, the way Bergman does! He's clearly a bit of an original among corporate chieftains (a quality stock-pickers ought to look for in a CEO -- conformists do not produce exceptional results), but he is quite clear on his responsibilities. Here is an expanded version of the quote above:

During that period, Henry Schein has become the largest provider of healthcare products and services primarily to office-based dental, animal health, and medical practitioners in the world. But more impressive than its growth, perhaps, is the company's profitability in a sector that is highly competitive: With limited leverage, it has achieved an average 16% annual return on equity over the past five years.

Not surprisingly, then, Henry Schein appears to have a solid grasp on the sources of its competitive advantage (there's a two-page discussion of "Competitive strengths" at the beginning of the company's 10-K report).

At 26 times this year's earnings-per-share estimate, Henry Schein's shares looks richly valued with regard to peers' and their own trading history. Nevertheless, Stanley Bergman(who signed a three-year extension to his contract in April) ought to be on every stock-picker's watchlist. Furthermore, for students of business and investing, this is an excellent case study on high-performance leaders and organizations. Bergman may not be Warren Buffett, but he has a flock of very satisfied shareholders, too.

Quote of the day

It's rare to find an intelligent quote on the topic of uncertainty and probability in the financial press, so I had to include this snippet from this morning's Financial Times:

Incidentally, there is a very interesting discussion of what President Obama meant with that statement in Philip Tetlock's excellent Superforecasting: The Art and Science of Prediction (full disclosure: I was a volunteer on Professor Tetlock's team in the Good Judgement Project, on which Superforecasting is based).

If you don't think this relates to investing, I invite you to reconsider. As Berkshire Vice-Chairman Charlie Munger once said: "If you don't get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one-legged man in an ass-kicking contest."

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Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). 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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