They concentrate on the most attractive investment ideas and hold for long term. The self-described contrarians ignore benchmarks when making decisions.
In their most recent shareholder letter, they outline their current stance:
“Most of the companies in our portfolios have outlooks that are roughly similar to that of Wells [Fargo]. They are at least moderately undervalued today. Their businesses are growing in value. They are generating more cash than they need for day to day operations so they have the options of expanding their operations, making acquisitions, paying higher dividends and/or buying back stock (making our holdings more valuable on a per share basis). There are plenty of problems in the world and managements make mistakes—anything can happen in the short-run—but we believe that our portfolio companies, as a group, are very likely to generate good investment returns for us over the next several years.”
Weitz’s Value Fund has a one-year average annual return of 27.3%, and 10.3% since inception. The Value Fund was up a respectable 6.6% at the end of the quarter on June 30.
Weitz added eight new stocks to his portfolio in the second quarter. His 5 Largest New Buys are: Wells Fargo & Co. (WFC), Mosaic Company (MOS), National CineMedia Inc. (NCMI), CNA Financial Corp. (CNA) and Kenneth Cole Productions Inc. Cl A (KCP).
Wells Fargo (WFC)
Wells Fargo & Company is a diversified financial services company providing banking, insurance, investments, mortgage and consumer finance services through stores, its Internet site and other distribution channels across North America as well as internationally. Wells Fargo & Co. has a market cap of $128.37 billion; its shares were traded at around $24.78 with a P/E ratio of 9.4 and P/S ratio of 1.4. The dividend yield of Wells Fargo & Co. stocks is 1.9%. Wells Fargo & Co. had an annual average earnings growth of 5.4% over the past 10 years.
Weitz detailed his reasons for buying Wells Fargo in his letter to investors:
An example in the "old favorites" category is Wells Fargo (WFC—$28). We have owned Wells several times over the past 25-30 years. Wells' business has evolved over time. When we first owned the stock, it was a San Francisco-based commercial real estate lender. Later, it was acquired by Minneapolis-based Norwest, though the Wells name (and Stagecoach logo) survived. Under Norwest's management, its emphasis shifted somewhat towards consumer lending, but it retained Wells' conservative approach to loan underwriting.
This lending discipline kept it out of serious credit trouble in the commercial real estate crisis of the early 1990's and during the more recent residential real estate crisis. In fact, Wells' strong financial position led U.S. regulators to allow/encourage it to acquire Wachovia on very favorable terms during the depths of the crisis. Wachovia had been an aggressive commercial lender and had acquired Golden West, a west coast purveyor of "pick-a-pay" residential mortgages. This acquisition brought with it troubled assets but it also gave Wells billions in stable, low cost deposits and a national footprint that leaves the company very well-positioned for future growth.
We owned Wells during the recent bear market, and while we made money by writing calls against our position, buying more shares during the panic selling would have been even more profitable. When the stock bounced back towards $30 in 2009, we believed that investors were expecting a little too much, too soon, from its prospective recovery and we sold our position.
Nearly two years later, we have been able to come back to Wells. At $28 per share, the stock sells for about 10 times 2011 earnings per share (EPS) and roughly 8.5 times estimated 2012 earnings. Even with a subdued housing market, a sluggish overall economy, and higher capital requirements for banks, we believe that Wells can grow earnings at a double-digit pace that should take EPS to over $4 by 2014 or 2015. We expect that, by then, Wells will have returned its dividend payment to its historic level of 30-40% of earnings. Investors are very skeptical of bank stocks today, but we believe that a few years of earnings growth and rising dividend payments will restore investor confidence and Wells' premium valuation of 12-14 times earnings.
Weitz exited Wells Fargo completely in the fourth quarter of 2009 after selling portions of his stake each quarter through the credit-crisis sell-off beginning in the first quarter 2008. His firm bought a large new position of 3,544,150 shares in the second quarter at $28.41.
Mosaic Company (MOS)
The Mosaic Company is one of the world's producers and marketers of concentrated phosphate and potash crop nutrients. Mosaic Company has a market cap of $16.65 billion; its shares were traded at around $60.93 with a P/E ratio of 13.9 and P/S ratio of 1.7. The dividend yield of Mosaic Company stocks is 0.3%. Mosaic Company had an annual average earnings growth of 21.1% over the past 5 years.
Weitz also mentions Mosaic in his shareholder letter: “The Mosaic Company produces and distributes crop nutrients, with strong positions in both potash and phosphate. The industry structure for potash is particularly attractive, with very concentrated supply. Minnesota-based Mosaic is likely to direct most excess cash flow to potash capacity expansions. These projects are extremely long-term investments that we expect to generate strong returns on capital for patient shareholders.”
Prior to 2008, the price for this fertilizer ingredient barely reached $150 per pound. That quickly changed when the price spiked to over $800 a pound during 2008. The price eventually dropped back into the $30s, but rose gradually through to August of this year.
Demand for potash seems to be insatiable and prices high currently. “The latest industry data indicate that at the end of June, North American potash inventory levels at the producer level were 26 percent below the average of the last five years,” says Potash Investing News.
Mosaic reported that in quarter ended May 31 their potash operation was running at 95% of operational capacity, up from 90% in the prior-year period. Phosphate production was up slightly, 86% of operational capacity over last year’s 85%. The company is focused on expanding its potash production, investing over $600 million for the year, completing two other projects, and receiving approval for another site development.
reported fourth quarter net earnings of $649 million, or $1.45 per diluted share, for the quarter ended May 31, 2011. These results compare to net earnings of $396 million, or $0.89 per diluted share, for the fourth quarter ended May 31, 2010. Mosaic's net sales in the fourth quarter of fiscal 2011 were $2.9 billion, a 54 percent increase from $1.9 billion in the same period last year.
Weitz bought 100,000 shares of Mosaic at an average price of $70.27.
CineMedia Inc. (NCMI)
National Cinemedia Inc. operates the largest digital in theatre network in North America that allows them to distribute advertisements and other content for our advertising, meetings and events businesses utilizing our proprietary digital content network. National Cinemedia has a market cap of $679.7 million; its shares were traded at around $12.49 with a P/E ratio of 19 and P/S ratio of 1.5. The dividend yield of National Cinemedia stocks is 6.5%.
CineMedia has been public since 2007. Its cash flow has increased each year since then. Last year they saw $137 million in free cash flow. The company has long-term liabilities and debt of over $1 billion, as well as cash of about $65 million. In 2010, Cinemedia derived 89% of its revenue from advertising, and 11% from fathom events.
CineMedia received four 5-star ratings and one 4-star rating from top analysts of the media industry.
Weitz bought 278,149 million shares of Cinemedia at $17.15. The stock has since dropped 27%.
CNA Financial Corp. (CNA)
CNA Financial Corporation is an insurance holding company whose primary subsidiaries consist of property/casualty and life insurance companies. CNA Financial Corp. has a market cap of $6.28 billion; its shares were traded at around $23.57 with a P/E ratio of 13.3 and P/S ratio of 0.6. The dividend yield of CNA Financial Corp. stocks is 1.7%.
CNA Financial is 90% owned by Loews Corp. (L), a holding company. After reporting fairly consistent free cash flow for most of the decade, it dropped from $1.2 billion in 2009 to a loss of $142 million in 2010. Net operating income in 2010 was $660 million, or $2.17 per common share, compared with $982 million, or $3.20 per common share, in 2009. Net income in 2010 was $690 million, or $2.28 per common share, compared with $419 million, or $1.10 per common share, in 2009.
Weitz bought 135,632 shares of CNA Financial Corp. at $29.77.
Kenneth Cole Productions Inc. Cl A (KCP)
Kenneth Cole Productions, Inc. designs, sources and markets a broad range of fashion footwear and handbags. Kenneth Cole Productions Inc. Cl A has a market cap of $246.4 million; its shares were traded at around $13.08 with a P/E ratio of 168.6 and P/S ratio of 0.5.
For 2010 Kenneth Cole generated 13 million in free cash flow, marking a significant increase over $5.24 million in 2009. Revenues have been not had dramatic changes for the last decade but have been down in the last three years. Revenue for 2008 was $492 million, for 2009 was $410 million, and for 2010 was $457 million. Book value per share has also declined, from $11.17 per share in 2008, to $7.9 in 2009, to $8.05 in 2010.
Earnings for the fourth quarter 2010 were reduced by approximately $7.2 million of non-recurring charges for professional fees, severance, and lease terminations related to accelerated store closings. The Company closed eight full-priced stores in 2010, has since closed an additional seven stores in the first quarter of fiscal 2011, and plans to close two more stores in the first half of 2011 for a total of 17 stores. While the accelerated closure of these stores, including the Company's Rockefeller Center location, carries a negative, short-term financial impact in the form of charges and inventory liquidation activity, the Company noted that, beginning in the second quarter of fiscal 2011, it expects to realize an annual recurring benefit of approximately $8 million, or $0.40 per share pre-tax.
For the second quarter 2010, the company reported operating income of $1.1 million, flat versus the year-ago quarter. Revenues declined 5.3% to $102.2 compared to the prior-year quarter, wholesale revenues were flat at $52.0 million, and consumer director revenues declined 11.5% due to the closing of unproductive full-priced stores and comparable store sales decline of 1.7%.
Kenneth Cole’s balance sheet as of June 31 2011 had $56 million in cash with no long-term debt. They bought back 143,800 shares for approximately $1.7 million, leaving approximately 3 million shares available for repurchase under their current authorization.
The company underwent a change in leadership in February 2011. Jill Granoff left her position as CEO and resigned as director of the board, and Chairman and Chief Creative Officer Kenneth Cole served as interim chief executive officer. Paul Blum, former CEO of luxury jeweler David Yurman Inc., was appointed new CEO in June.
Weitz bought 100,000 shares of Kenneth Cole at $12.58.