Wallace Weitz

Wallace Weitz

Last Update: 2014-08-14

Number of Stocks: 62
Number of New Stocks: 2

Total Value: $3,311 Mil
Q/Q Turnover: 9%

Countries: USA
Details: Top Buys | Top Sales | Top Holdings  Embed:

Wallace Weitz Watch

  • Wallace Weitz Comments on Precision Castparts

    Precision Castparts (PCP) is a global, diversified manufacturer of complex metal components and products sold primarily to aerospace, power and industrial customers. CEO Mark Donegan is a first-rate operator, sound strategic thinker and highly skilled acquirer / integrator. Concerns over the health of the new commercial aircraft cycle provided us an opportunity to establish an initial position at what we believe is an attractive discount. We have been heartened by management’s more recent decisions to repurchase stock and look forward to the prospect of additional value-accretive M&A in the future.

    From Wallace Weitz (Trades, Portfolio)'s Value Fund Q3 2014 Commentary.  


  • Wallace Weitz Comments on Discovery Communications

    Discovery (DISCA) is a world-class provider of global pay-tv programming including ‘must-carry’ channels (Discovery, TLC and Animal Planet) as well as emerging and niche networks (ID, OWN and Science, among others). Non-fiction content is a wonderful business – it is cheap to produce and portable across geographies, driving excellent margins and cash flows. Discovery is especially well positioned to benefit from the long-tailed wave of increasing pay-tv adoption outside the U.S. The company generally owns the full rights to its content, providing bargaining power as the distribution ecosystem evolves. We project per-share cash flow growth in the high teens over the next several years, fueled by the international business. From today’s price, we think the stock’s return potential is adequate-to-exceptional with solid downside protection.

    From Wallace Weitz (Trades, Portfolio)'s Value Fund Q3 2014 Commentary.  


  • Wallace Weitz Comments on Microsoft

    Microsoft (MSFT) reported strong fiscal fourth quarter results in late July with attractive growth across its core franchises accompanied by sound cost discipline. Investors appear to have finally taken notice of Microsoft’s numerous strengths after several years of disproportionate focus on its flaws.

    From Wallace Weitz (Trades, Portfolio)'s Value Fund Q3 2014 Commentary.  


  • Wallace Weitz Comments on eBay Inc

    On the final day of the quarter, eBay (EBAY) announced its intention to separate into two separate publicly-traded companies – PayPal and “new” eBay – during the second half of 2015. Despite some initial excitement, investor sentiment remains lukewarm and the stock undervalued.

    From Wallace Weitz (Trades, Portfolio)'s Value Fund Q3 2014 Commentary.  


  • Wallace Weitz Comments on Berkshire Hathaway Inc

    Berkshire (BRK.B) enjoyed a relatively strong start to the year operationally with non-insurance operating earnings up 12% during the first half of 2014 despite headwinds at Burlington Northern. Buffett’s willingness to repurchase Berkshire shares at or below 120% of book value continues to provide a nice and gradually rising backstop for the stock.

    From Wallace Weitz (Trades, Portfolio)'s Value Fund Q3 2014 Commentary.  


  • Wallace Weitz's Value Fund Q3 2014 Commentary

    The Value Fund’s Investor Class declined -0.1% during the third calendar quarter, compared to a 1.1% gain for the S&P 500 and a 0.7% increase for the Russell 1000. Through the first nine months of calendar 2014, the Fund’s Investor Class increased 5.3% compared to an 8.3% gain for the S&P 500 and an +8.0% return for the Russell 1000. The Fund’s conservative bent and elevated residual cash position have been the primary drivers of our relative underperformance so far this year. As we enter the fourth quarter, we are encouraged by a growing divergence between the stock prices and business values of an increasing number of the individual companies on our “on deck” list. We have been waiting patiently for opportunities and remain watchful as the Fed looks to end its quantitative easing program during October amidst softening economic conditions across much of the globe.


    Berkshire Hathaway (BRK.B) (+9%), eBay (EBAY) (+13%) and Microsoft (MSFT) (+12%) were the largest contributors to Fund performance during the quarter. Calendar year-to-date, Valeant Pharmaceuticals (VRX) (+12%) and DIRECTV (DTV) (+25%) join Berkshire (+17%) as the Fund’s most significant positive contributors. Berkshire (BRK.B) enjoyed a relatively strong start to the year operationally with non-insurance operating earnings up 12% during the first half of 2014 despite headwinds at Burlington Northern. Buffett’s willingness to repurchase Berkshire shares at or below 120% of book value continues to provide a nice and gradually rising backstop for the stock. On the final day of the quarter, eBay (EBAY) announced its intention to separate into two separate publicly-traded companies – PayPal and “new” eBay – during the second half of 2015. Despite some initial excitement, investor sentiment remains lukewarm and the stock undervalued. Microsoft (MSFT) reported strong fiscal fourth quarter results in late July with attractive growth across its core franchises accompanied by sound cost discipline. Investors appear to have finally taken notice of Microsoft’s numerous strengths after several years of disproportionate focus on its flaws.

      


  • Wallace Weitz Comments on Avon Products

    We bought relatively small new positions in Willis Group Holdings and Avon Products in the third quarter. Avon (AVP) is a direct selling, branded beauty business undergoing a turnaround in the U.S. market. The overwhelming majority of Avon’s business value comes from its stronger positions in Latin America and other emerging markets. Our investment thesis is that well-run direct selling can be a decent business with solid margins and high returns, that the Avon brand is not fundamentally broken, and that the U.S. business is bottoming as evidenced by break-even results in the most recent quarter. Avon has a wider range of potential outcomes than our typical investment and is sized accordingly.

    From Wallace Weitz (Trades, Portfolio)'s Partners Value Fund Q3 2014 Commentary.  


  • Wallace Weitz Comments on Willis Group Holdings

    We bought relatively small new positions in Willis Group Holdings and Avon Products in the third quarter. Willis (WSH) is a leading global insurance broker. We have followed this attractive industry for many years through investments in Aon, Brown & Brown and others (including Willis under prior management). Organic revenue growth has been solid, and Willis has a near-term opportunity to expand margins through expense initiatives and restructuring savings that are likely to kick in next year. We think the stock should be revalued higher once management follows through on its pledged cost discipline and drives operating leverage.

    From Wallace Weitz (Trades, Portfolio)'s Partners Value Fund Q3 2014 Commentary.  


  • Wallace Weitz Comments on Interval Leisure

    Interval Leisure (IILG) (-37%) was the largest detractor and one of our few companies where business value declined. Our earnings estimates fell roughly 15% when Interval announced that four large, multi-year corporate relationships renewed at less favorable rates in their timeshare exchange business. We think the stock has overreacted to this news, and the company continues to add strategically to its platform.

    From Wallace Weitz (Trades, Portfolio)'s Partners Value Fund Q3 2014 Commentary.  


  • Wallace Weitz's Partners Value Fund Q3 2014 Commentary

    The Partners Value Fund’s Investor Class returned -1.4% in the third calendar quarter, compared to a +1.1% return for the S&P 500 and flat results for the Russell 3000. The largest companies were generally the strongest performers in the third quarter, most notably Microsoft (MSFT) (+12%), Berkshire Hathaway (BRK.B) (+9%) and Valeant Pharmaceuticals (VRX) (+4%) for our Fund. Conversely, small cap stocks fell sharply in July and again in September, with the Russell 2000 index finishing down 7.4% for the quarter. While smaller companies account for approximately 10% of our net assets, these stocks drove most of the Fund’s quarterly decline. Iconix Brand Group (ICON) (-14%), Redwood Trust (RWT) (-14%) and Interval Leisure Group (IILG) (-13%) were the primary small cap detractors. Energy holdings Range Resources (RRC) (-22%) and Apache (APA) (-6%) also impacted results as natural gas and oil prices dropped. We remain optimistic on the long-term outlooks for all five of these stocks, which trade at moderate to large discounts to our business value estimates.


    For the calendar year-to-date, the Fund’s Investor Class returned +2.9% compared to +8.3% for the S&P 500 and +7.0% for the Russell 3000. DIRECTV (DTV) (+25% on AT&T’s buyout offer), Martin Marietta Materials (MLM) (+30% on its acquisition of Texas Industries) and Valeant Pharmaceuticals (VRX) (+12%, and in the news for its hostile takeover battle for Allergan) benefited from the robust deal environment in different ways. Interval Leisure (IILG) (-37%) was the largest detractor and one of our few companies where business value declined. Our earnings estimates fell roughly 15% when Interval announced that four large, multi-year corporate relationships renewed at less favorable rates in their timeshare exchange business. We think the stock has overreacted to this news, and the company continues to add strategically to its platform. Other small-cap stocks that detracted from year-to-date results included XO Group (XOXO) (-25%) and Redwood Trust (RWT) (-11%). Broader themes behind the relative shortfall include our overweight position in consumer discretionary companies (the weakest sector in the market year-to-date), our lack of near-term big winners in health care and technology (the strongest sectors in the market year-to-date) and our conservative portfolio positioning in the first half of the year. We are not pleased with recent results. It is natural for our concentrated investing style to be out of step with the market at times.

      


  • Wally Weitz Q3 2014 Shareholder Letter

    Dear Fellow Shareholder:

    The U.S. economy continues to gradually expand, building on the 5+ year recovery from the Great Recession. Employment levels are improving, though progress has been slower than expected. Inflation, for now, remains subdued. As signaled and on cue, the Fed has been weaning the economy (and investors) off of the extraordinary ‘quantitative easing’ stimulus. Investors have generally shrugged off world events that might otherwise cause high anxiety (ISIS and the Middle East, Russia and Ukraine, etc.). As attention now turns to when the Fed will raise short-term interest rates, it seems plausible that volatility may intensify as the stimulus security blanket is removed.

    In the meantime, companies are taking advantage of the artificially low interest rate environment and sanguine investor sentiment. Merger activity remains robust, fueled by cheap and readily available credit. The IPO market has been very active, headlined by the successful Alibaba offering in September. Corporate treasurers continue to issue loads of debt on attractive terms, locking in generationally low interest rates for long terms. While these conditions will not last forever, they have helped opportunistic managers accelerate equity value growth at many companies.

    Investment Commentary and Outlook

      


  • Wallace Weitz's Partners Value Fund Q2 Commentary

    June 30, 2014 The Partners Value Fund returned +2.0% in the second calendar quarter, compared to +5.2% for the S&P 500 and +4.9% for the Russell 3000. The Fund’s consumer discretionary stocks contributed to returns, led by DIRECTV (DTV) (+11%). After plenty of speculation, AT&T agreed to acquire DIRECTV at a modest premium to our stand-alone valuation. Energy stocks also rose strongly during the quarter as crude oil prices remained above $100 per barrel. While Apache (+22%) participated, the Fund did not have enough energy exposure to keep pace. ADT Corporation (+17%) delivered better-than-feared quarterly earnings against low expectations.


    Interval Leisure (IILG) (-16%) was the largest detractor from quarterly results. Interval’s stock declined when the company announced that four large, multi-year corporate relationships renewed at less favorable rates in their timeshare exchange business. We estimate a one-time, roughly 15% impact to earnings in 2014 from these renewals. We think Interval’s long-term outlook remains more favorable, as the company continues to strategically add to its footprint. The Fund’s health care stocks also detracted from returns as both Valeant Pharmaceuticals (-4%) and Express Scripts (-8%) declined modestly. Valeant is embroiled in a high-profile, hostile takeover battle with Allergan (AGN), while Express Scripts lowered 2014 guidance. Both remain large, core holdings in the Fund.

      


  • Wallace Weitz's Value Fund Q2 Commentary

    The Value Fund returned +2.3% during the second calendar quarter, versus gains of 5.2% for the S&P 500 and 5.1% for the Russell 1000. Through the first six months of calendar 2014, the Fund increased 5.4% compared to gains of 7.1% and 7.3% for the S&P 500 and Russell 1000, respectively. Residual cash declined from 29.8% of net assets at the end of the first quarter to 26.5% of net assets at June 30 as we took advantage of buying opportunities in several of our existing holdings.


    Apache Corp (+22%), DIRECTV (+11%) and Pioneer Natural Resources (+23%) were the largest contributors to Fund performance during the quarter. Roughly a year ago, Apache (APA) began a significant reshaping of its business with the goal of streamlining its disparate portfolio of oil and gas assets and unlocking latent value in its stock. CEO Steve Farris and his team have made significant progress, generating a total of $9.5 billion in pre-tax proceeds from largely non-core asset sales to-date. In recent months, management has expressed confidence in its ability to further reduce the company’s exposure to its two large liquefied natural gas (LNG) projects. Investors are gradually beginning to take notice of the new and improved Apache, and we believe a more consistent and attractive self-funding growth profile is likely to help further narrow the stock’s discount to intrinsic value.

      


  • Weitz Investment Management Comments on DIRECTV

    DIRECTV (DTV) is on the receiving end of a takeover offer—it is the target of an acquisition by AT&T. DIRECTV had grown its business steadily over the years and had increased its value per share significantly by making very large share repurchases. AT&T is offering roughly twice the price we paid for our first shares about three years ago. We have mixed feelings about giving up our holdings but it has been a good investment for us.


    From Wallace Weitz (Trades, Portfolio)'s Q2 Shareholder Letter.

      


  • Weitz Investment Management Comments on Berkshire Hathaway

    Berkshire Hathaway (BRK.A)(BRK.B) is also an active acquirer, both at the parent company level and through its various subsidiaries. Warren Buffett (Trades, Portfolio) is holding cash reserves of $40-50 billion and has expressed strong interest in making more very large acquisitions. Berkshire recently agreed to swap its long-time holdings of the Washington Post Company (now called Graham Holdings) for a TV station and Berkshire shares held by that company. When completed, this tax-efficient transaction will reduce the number of Berkshire shares outstanding and add another cash generating asset to the fold. Berkshire is constantly growing and evolving as a group of operating businesses but also, in extreme stock market dislocations like 2008, Warren has the courage and capacity to make bold investment moves. Berkshire has been a holding in our stock funds continuously since our firm opened in 1983.


    From Wallace Weitz (Trades, Portfolio)'s Q2 Shareholder Letter.

      


  • Wally Weitz Q2 Shareholder Letter

    In many ways, the second quarter of 2014 was a continuation of the past several quarters. After a weather-induced first quarter dip in GDP, the U.S. economy resumed its modest recovery from the “Great Recession” of 2007-09. The Federal Reserve “tapered” its quantitative easing (QE) program but still purchased $310 billion of bonds during the first half of the year. U.S. stocks continued to drift up—the conventional wisdom being that while valuations were not compelling, as long as the Fed was providing “liquidity” and near-zero interest rates, it was safe to continue buying. In fact, failure to keep buying exposed investors to the risk of being left out of the continuing bull market.

    We have been wary for some time about the level of stock prices relative to underlying business values. We own some excellent companies and they continue to grow in value, but in many cases, their stock prices have risen even faster. Price sensitivity and investment discipline dictate that we sell the expensive and if reasonably priced replacements are not available that we hold cash. So, our cash reserve levels remain elevated in the mid- to upper-20% range. This cash “anchor” held back second quarter and first half returns, but we think the “opportunity cost” of holding out for better values is slight and that we will be rewarded for our patience.

    While QE has had an indirect effect on stocks, bond prices have been impacted directly and significantly. The resulting bond market rally has produced positive total returns (interest income plus capital appreciation) for longer-term bonds, but has left prices artificially inflated and yields suppressed. The Fed can maintain this (surreal?) situation for a long time (it already has), but eventually bond buyers will insist on being paid more (higher yields) on their investments. Our Short-Intermediate Income Fund holds a relatively short, high quality portfolio. We think it will provide reasonable protection for bond investors when reality returns to the bond market.

    Investment Commentary and Outlook

      


  • Weitz Investment Management Comments on Wesco Aircraft Holdings

    We initiated a small position in Wesco Aircraft Holdings (WAIR) during the quarter. Wesco is a distributor and supply chain manager to the commercial and military aerospace markets. The company should benefit from the multi-year commercial aerospace build-out that is underway. We expect this tailwind to provide visible growth through at least 2017. Wesco also has an opportunity to provide more services to large defense contractors as funding pressures force the industry to become more efficient. If the company can improve margins along the way, we think the resulting earnings growth could provide reasonable-to-good return potential for the stock.

    From Wallace Weitz (Trades, Portfolio)'s first quarter 2014 report.  


  • Weitz Investment Management Comments on Brown & Brown

    We also added a new position in insurance broker Brown & Brown (BRO) when the stock fell below $29 in February. The company's business model generates high operating margins and strong free cash flow. We expect management to remain disciplined acquirers of culturally compatible companies. In the meantime, Brown & Brown would benefit from an increase in insurable exposure units in the middle-market economy. Said more simply, as "Main Street" recovers, Brown & Brown should do well.

    From Wallace Weitz (Trades, Portfolio)'s first quarter 2014 report.  


  • Weitz Investment Management Comments on eBay Inc.

    Finally, eBay Inc. (EBAY) made its return to the Value Fund after a relatively brief period of ownership during 2008/2009. The company recently concluded a public battle with billionaire activist Carl Icahn (Trades, Portfolio) over whether to separate its namesake online commerce platform eBay.com from PayPal, its rapidly growing mobile payments platform. We saw merit in both sides of the argument, but believed the two businesses were worth considerably more than where they were trading regardless of outcome. Both Marketplaces and PayPal have strong competitive positions and are reinvesting heavily to protect and extend their advantages. We believe EBAY shares are worth roughly $70 today

    From Wallace Weitz (Trades, Portfolio)'s first quarter 2014 report.  


  • Weitz Investment Management Comments on Pioneer Natural Resources

    Pioneer Natural Resources (PXD) is a producer of oil and gas with significant positions in Texas in the Permian Basin and Eagle Ford shale. A relatively sharp reversal in investor sentiment toward domestic oil during the first quarter afforded us the opportunity to begin building a position in Pioneer below $170 per share. We funded our PXD purchase via the sale of Southwestern Energy (SWN), effectively swapping into a more attractively priced producer with a clearer path to per share production and NAV growth. Pioneer's main area of investment – the horizontal redevelopment of the Northern Midland basin – generates some of the highest cash margins per barrel in North America. In many ways, Pioneer is the oil version of gas producer Range Resources (RRC), another Fund holding. It boasts a tremendous amount of visible, low-risk reserves with multiple shale layers available to exploit underneath the same acreage. Its financial flexibility and the Permian's more mature infrastructure base are additional advantages. We believe Pioneer's NAV is roughly $250/share.

    From Wallace Weitz (Trades, Portfolio)'s first quarter 2014 report.  


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