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The Best-Performing Stocks from Wallace Weitz’s 4th Quarter Portfolio

Holly LaFon

Holly LaFon

250 followers
Wallace Weitz has not yet released his fourth quarter portfolio, but his fourth quarter letter issued today provided insight into the value investor’s portfolio. The quarter capped off a strong year for Weitz, whose Value Fund just trailed the S&P 500’s 16% advance with a 13.2% return, and whose Partners Value outpaced it with a 17.9% return.

Weitz held a high level of cash at year-end (18% to 31% across his funds), as too many stocks he wanted to buy were overvalued. He entered 2013 prepared to wait patiently for more discounted options, and expecting plenty of “seismic activity” in markets and an economy that will “muddle through” by political maneuvering. As a guard, he says: “The trick is to hold portfolios of strong companies that can compound value over long periods of time and to minimize permanent loss of capital in the down markets.”

The stocks that contributed the most to Weitz’s funds during the fourth quarter 2012 were Redwood (RWT) Trust and Liberty Media (LMCA).

Weitz first bought Redwood Trust, a dividend-focused financial institution structured as a REIT, for his portfolio before 2008. Its stock price that year plunged about 60%. Since then Weitz has been trading the stock at its lower prices, mainly buying. He last reported in the third quarter 2012 to owning 6,601,009 shares.

Over the past 12 months, Redwood Trust’s stock has climbed approximately 70%, to a price of $19.52 a share in afternoon trading. This represents a 45% increase on Weitz’s average purchase price of $13.39 a share.

Financially, Redwood Trust has stumbled over the past five years. Its revenue declined at an annual rate of 44.6%, and EBITDA at 55.6%. Both revenue and EBITDA per share have been growing since over the past year, however.

Weitz commented in his fourth quarter letter that Redwood has staged a furious comeback and is well-poised for 2013: “Redwood has been diligently investing and building out flexible loan platforms, and these efforts are paying off for the company and its shareholders. Both the residential and commercial businesses have clear momentum heading into 2013, and we think Redwood remains squarely on its path, as they put it, to ‘deliver a growing stream of attractive, sustainable earnings and dividends.’”

The company has been focused in the last several years since the global deleveraging began in 2008 on building out its residential and commercial loan platforms to have steady sources of investments and to generate fees. This took longer than expected, but could be paying off now.

Redwood said in its third quarter shareholder letter that it expects catalysts in the economy to provide a jolt to the private loan market, such as: QE3, raised guarantee fees from the Federal Housing Finance Agency for Agency-conforming loans, new mortgage regulatory initiatives and the housing recovery.

Its third quarter results evinced improvements in its business. The company reported earnings of $40 million, versus $20 million in the second quarter of 2012, due to higher mortgage banking income and gains from selling securities.

Book value also increased $0.88 from the second quarter to $12.88 per share, as the prices on the loans on its balance sheet increased.

A dividend of $0.25 per share was paid in the fourth quarter, the company’s 54th consecutive quarterly dividend payout. Improvements at its business, earnings and cash flows enabled Redwood to raise the dividend to $0.28 for 2013.

Redwood has a P/E of 17.1 and, both at three-year highs, a P/B of 1.25 and P/S of 6.23.

Weitz’s other top achiever, Liberty Media, contributed 49% to the fund’s return for the year. Its offspring contributed as well: Liberty Global (LBTYA) up 49%, Liberty Interactive (LINTA) up 37%, Liberty Ventures (LVNTA) up 51% and Ascent Media up 22%.

Liberty Media Corp owns stakes in a number of media businesses, such as SiriusXM, Barnes & Noble, Time Warner and Viacom.

In the third quarter the company increased revenue 3% to $555 million primarily due to an increase at Starz and ANLBC. Its Starz business is preparing to be spun off from Liberty Media. It also reported a net income improvement to $1.01 billion, from a net loss of $43 million the previous year. Cash on its balance sheet substantially declined to $1.17 billion from $1.94 billion the previous year.

Liberty Media is increasing its ownership of SiriusXM (SIRI) satellite radio to 49.2%, and intends to possess over 50% of that company once it receives approval from the FCC.

Learn more about Wallace Weitz’s investments in his portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Wallace Weitz.


Rating: 3.4/5 (5 votes)

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