Wallace Weitz's Fund and Top Holdings: AON, LINTA, MSFT, DELL, WFC
The mission statement of the firm is “an unwavering commitment to our shareholders and a focus on finding strong, well-managed companies priced significantly below true business value.” To emphasize this mission, the firm utilizes a long-term approach to investing and has their employees invest significant portions of their personal capital to align their interests with that of the shareholders they serve. With their mission in mind, they have one objective for all of their funds, simply to “earn superior investment returns on our clients, and our own capital without taking unnecessary risks.” To do so, the fund initially focuses on four primary qualitative factors:
1. Simple business model that can be understood and is continuously growing.
2. Niche, franchise, or moat that protects the business from competition and allows the business to have some degree of control over pricing.
3. Business that generates excess free cash flow that exceeds capital expenditure needs.
4. Honest and intelligent leadership that works in conjunction with investors rather than against them.
If the four aforementioned criteria are reached, Weitz then calculates the market value that an informed buyer would realistically pay for the entire business. Valuation is conducted with the view that the value of the firm is the cost of the right to own to all future cash flows. To do so, a special focus is placed upon asset values, potential earning power, and intangible values such as franchises. Once a price is rendered, the firm will capitalize upon said opportunity if a significant margin of safety can be reached, with a holding horizon of 3-5 years. Positions will be shed as they approach or exceed the estimated market value of the firm.
The Value Fund will be utilized as the focal point of representation due to its investment profile. A look at fund’s returns yields mixed outcomes in terms of performance. For the long-term horizon, the fund has significantly outperformed the S&P 500. Since the fund’s inception in 1983, the fund has a cumulative return of 1077.4%, and an annualized return of 10.3%. Comparatively speaking, the S&P 500 has returned a total of 891.4% with an annualized return of 9.5% for the same period. The 10 and 15 year data presents results of similar proportions. However, recent performance has been largely negative, when compared against the benchmark. The five-year cumulative return of the fund is a meager .4%, while the benchmark returned 15.6%. In terms of 2010’s performance, the fund returned 27.3%, while the S&P 500 returned 30.7%, yielding an underperformance of 3.4%.
In Weitz’s Q2 shareholder letter, Weitz reaffirms his belief that the recession and bear market of 2007-2009 has ended, but admits to not having a particular expertise to economic forecasting. He notes that the housing market is still weak, and in conjunction with budget problems across all levels of governments, a complete economic recovery is yet to be realized. However, Weitz notes that seemingly, there is a notable amount of public companies that are cutting costs, refocusing efforts on profitable lines, and generating continuous profit growth in face of all of the odds. The firm has particularly adjusted to recent conditions by focusing on large capitalization companies with strong balance sheets. Weitz notes that while many problems still exist in the world, and conditions are always changing, especially in the short run, he feels that the firm’s holdings are “very likely to generate good investment returns for us over the next several years.”
The following charts and tables demonstrate the sector breakdowns and the aggregate top five holdings of the firm as of Q2 of 2011 per the firm’s 13F’s filing. As of Q2, the firm managed a total of $2.26 billion in approximately 80 equities through their mutual funds alone. In terms of their top sector holdings, 28.80% is invested into consumer services, 16.70% into technology and 15.30% in financials. In terms of notable rebalancing changes between Q1 and Q2, the firm move 4.50% of their portfolio into financials, while shedding 3.40% and 2.60% from health care and industrials respectively. When considering the top five holdings of the firm, they comprise 24.89% of all of the firm’s equity holdings. 3 of the top holdings saw a decrease in holdings, while Aon Corp saw a small increase in shares held. Wells Fargo is one of the newest and largest holdings of the firm, now comprising 4.40% of all equities held. Weitz feels that Aon, Microsoft, and Dell are “companies (that) offered reasonable growth prospects in an uncertain economy and balance sheets that would protect them in a downturn and allow them to expand and/or buy back stock if conditions warranted.” As such, though recent performance has not been exceptional, Weitz, like most value investors, believes that his holdings will outperform in the long run.
Aon Corporation (AON)
The Aon Corporation provides services ranging from human resources, insurance, risk management, to outsourcing consultancy. Their shares currently trade at $43.27, with a market capitalization of $14.14 billion. The average cost of Aon shares in the portfolio is estimated at $40.52, yielding a potential 6.78% capital gain. The overall holdings of Aon Corporation increased by 1.96%, which in turn, elevated Aon’s position to become the largest holding of the equity portfolio totaling at 5.41% of all equities held.
Aon has a P/E ratio of 16.43, a P/B ratio of 1.64 and a P/S ratio of 1.56. Aon reported revenues of $8.51 billion with a net income of $759 million, yielding a profit margin of approximately 8.9% for the fiscal year of 2010. Earnings were $2.63 per share, with a dividend yield of 1.39%. Over the last 10 years, AON has, on average, grown its earnings and free cash flow by 13.1% and 7.1% annually.
Aon Corporation, in conjunction with Zurich Financial Services has launched a new insurance product to manage reputational risks. 19 different categories of damages will be covered, with a limit up to $100 million in damages. Analysts at Barclays Capital recently lowered their price target on Aon Corporation to $49, a premium of 13.24% from its current trading price.
GuruFocus rated AON with the business predictability rank of 1 star.
Liberty Media Corporation (LINTA)
Liberty Media provides media, communications and entertainment services through their three primary operational segments: Leisure, TripAdvisor and Egencia. LINTA trades at $14.70, with a market capitalization of $8.84 billion. Weitz acquired each share of LINTA at an approximate price of $13.02, yielding a capital gain of 12.9%. From quarter to quarter, Weitz funds increased their holdings of LINTA by 3.44%. The Liberty Media Corporation is currently the second-largest holding of the fund, at 5.33% of all equities held.
LINTA has a P/E ratio of 12.24, a P/S ratio of 1.88 and a P/B ratio of 1.35. Earnings for the year were reported at $1.20 per share, and the firm currently does not pay a dividend to their investors. Upon revenues of $8.93 billion, LINTA posted a bottom line income of $919 million, yielding a margin of approximately 10.3%. Over the last five years, Liberty Media Corporation has grown its revenues and earnings by average rates of 4.8% and 4.5% annually.
Standard & Poor recently upgraded their rating on LINTA to a BB due to their spin-off of a portion of their business lines. In other developments, The Liberty Media Corporation is in the midst of bidding for Spanish cable Telecable, whose assets are worth between $480 to $576 million.
GuruFocus rated LINTA with the business predictability rank of 1 star.
Microsoft develops and markets a variety of software products ranging from video games to operating systems such as Windows 7. MSFT closed at $25.89, with a market capitalization of $216.91 billion. Weitz paid an average price of $26.35 per share of MSFT, yielding a capital loss of 1.7%. Microsoft is the third-largest holding of the firm, at 5.16% of all equities held. From quarter to quarter, Weitz Funds decreased their holdings of MSFT by 5.94%.
MSFT has a P/E ratio of 9.59, a P/B ratio of 3.60 and a P/S ratio of 2.94. Revenues topped $69 billion, with a bottom line income at $23 billion, rendering a net margin of approximately 33%. Earnings for the year were $2.70 per share, with a dividend yield of 3.09%. Revenues and earnings at MSFT, has on average, grown by 10.6% and 4.1% respectively over the last 10 years.
Currently, there are rumors that Microsoft is looking to acquire Yahoo! (YHOO) in competition with several competitors such as Alibaba. In other developments, Microsoft has signed a partnership deal with Samsung Electronics in which they are to receive royalties from the products operating with their android platform.
GuruFocus rated MSFT with the business predictability rank of 4.5 stars.
Dell Inc. (DELL)
Dell is a multi-channeled computer hardware and software company operating through four primary segments: Large enterprise, public, small and medium business and consumer. Shares of Dell closed at $15.38, with a market capitalization of $28.06 billion. DELL was acquired at an average price of $21.83, yielding a capital gain of approximately 28.5%. From quarter to quarter, Dell’s net position decreased by 4.81%.
Dell has a P/E ratio of 8.24, a P/S ratio of .41 and a P/B ratio of 3.44. Revenues for the year totaled in at $61.4 billion, with a net income at $2.6 billion, yielding a margin of approximately 4.23%. Earnings per share were reported at $1.87, and Dell does not currently pay out a dividend to their investors. On average, DELL has grown its revenues and free cash flow by 5.3% and 4.5% annually over the last five years.
Deutsche Bank recently reiterated its “BUY” rating on DELL with a price target of $20, a premium of 30% from its most recent trading price. Dell is also in the midst of a lawsuit with MacroSolve due to an alleged patent infringement regarding the collection of information across wireless systems.
GuruFocus rated WFC with the business predictability rank of 1 star.
Wells Fargo (WFC)
Wells Fargo is a diversified bank that offers a variety of financial services to their clients via their Community Banking, Wholesale Banking and Wealth/Brokerage/Retirement divisions. Wells Fargo closed at $24.50, with a market capitalization of $129.36 billion. The average cost per share of WFC in the portfolio is at an estimated cost of $28.41 per share, yielding a capital loss potential of approximately 13.7%. As mentioned earlier, Wells Fargo is a new addition the firm’s portfolio of equities, comprising 4.40% of all held. Weitz is very optimistic about Wells Fargo and their operations as they state that they have a strong lending discipline that kept them relativity insulated from the housing crisis. Furthermore, while the acquisition of Wachovia brought a great deal of liabilities, Weitz noted that it in itself brought a great deal of low cost deposits and assets that as Weitz stated will leave the company “very well-positioned for future growth.”
WFC has a P/E ratio of 9.51, a P/B ratio of 1.04, and a P/S ratio of 1.44. Earnings for the year ending in December 2010 were $2.42, with a dividend yield of 1.75%. Revenues totaled $52.8 billion, with a net margin of 14.86%. Historically, over the last 10 years, WFC has grown its revenues and earnings by 10.6% and 4.1% respectively. Weitz estimates that by 2014-2015, earnings will be over $4 per share, with a dividend accounting for 30-40% of earnings.
Wells Fargo is currently in litigation with JPMorgan (JPM) in an attempt for JPM to buy back more than 800 mortgages sold to Wells Fargo. In other news, Wells Fargo recently acquired Procomp Benefit Resources to supplement their insurance lines.
GuruFocus rated WFC with the business predictability rank of 1 star.
For more information regarding Wallace Weitz’s philosophy and his most current portfolio, please visit:
Weitz’s Q2 Shareholder letter: http://www.weitzfunds.com/Literature/ShareholderLetters/Archive/WeitzFunds2Q2011Letter.asp