Like many other value investors, Wally Weitz is having rough times lately. Known as the other Oracle of Omaha, Weitz sees opportunities in the current beaten down market. This is a review of his commentaries on some of his holdings.
Being a long term investor of Berkshire Hathaway, Weitiz has been a close follower of Warren Buffett. His approach to value investing has evolved over the years. It combines Graham's price sensitivity and insistence on a "margin of safety" with a conviction that qualitative factors that allow a company to have some control over its destiny can be more important than statistical measurements, such as historical book value or reported earnings.
Like Buffett, Wally Weitz runs concentrated portfolios with his funds. Overall, his top 10 holdings are responsible for more than half of his $4 billion stock holdings. His is heavily invested in financials like Berkshire Hathaway, AIG, Redwood Trust, Fannie Mae and Freddie Mac etc. Many of them are at the center of the current financial crisis.
Weitz’s latest performances have been hurt by his holdings in financials. However, over 10-yar, 15-year, and 20-year periods, his funds still beat the S&P500 by wide margins.
We like to review his commentaries on the some of these stocks. Many of these stocks have further declined since Wally Weitz’s writing. Are these stocks bargains or just value trap?
“Berkshire Hathaway is the epitome of the company one would like to own in a period of distressed financial markets. Its excess liquidity and ability to generate billions in free cash flow every year make it uniquely well-suited to buy individual assets and whole businesses and to expand existing businesses. The stock has appreciated nicely in the past year, but we believe it is still reasonably priced.”
“American International Group (AIG) is an enormous insurance company with a global franchise. It owns and insures some mortgages and corporate bonds, but its insurance business is quite diversified and its balance sheet is sound. It sells for less than 10 times current earnings, and we expect significant earnings growth and P/E multiple expansion over the next several years.” Since the time of his writing, AIG shares declined more than 10%. AIG shares are at multi-year low.
“American Express (AXP) represents a royalty on consumer and business spending, which is slowing, and it extends credit (albeit to a “prime” clientele). While the market focuses on rising credit losses which are real, we emphasize the company’s ample growth opportunities in the U.S. and abroad, and the significant cash flow it generates even after investing in its future. Its 4th quarter earnings report was mildly disappointing, but the stock seems, to us, to have over-reacted. At about 13 times expected 2008 earnings, we consider the stock under-valued.” Since the time of his writing, AXP shares declined more than 10%. AXP shares are at four-year low.
“Redwood Trust’s (RWT) management foresaw and prepared for the current credit crisis and has a substantial portion of its capital in liquid reserves. It plans to use these reserves to buy assets that will enhance returns (and dividends) for years to come. In spite of Redwood’s strong financial position and excellent prospects, the stock is down over 50% from its high. We believe Redwood has $4-5 per share earning power and 90% of earnings will be paid out in dividends. Are turn to previous price levels over the next few years seems very plausible (and would mean a doubling of the current price).” RWT shares have further declined since the writing. The share price are lowers than it was five years ago. There were considerable amount of insider buys over the past months at about current prices.
“Fannie Mae and Freddie Mac own and guarantee mortgages, so their earnings will be impacted by rising credit losses over the next few years. Fannie and Freddie are “Government Sponsored Entities” (GSE’s) meaning that they were created by Congress to make mortgages more readily available to U.S. homeowners. While their debt is not guaranteed by the U.S. government, they enjoy unique access to global capital markets. With the secondary market for mortgages virtually shut down, they are in a position to earn higher than usual returns on new business. Over the next 2-3 years, as losses on older mortgages run off and the higher returns on new business flow into earnings, we believe investors will recognize their higher earning power and the stocks will appreciate.” Both FNM and FRE lost about a third of their values since the time of writing. The share prices are at levels only seen more than 10 years ago, before recovering from the bottom recently.
Weitz also mentioned UnitedHealth Group (UNH) and WellPoint (WLP),“(both) were strong contributors to 2007 results but are still very reasonably priced at 13-14 times expected 2008 earnings.” The share prices of both companies are hit hard lately as the companies expect weak earnings for the coming year, losing more than a third of values.
To Wally Weitz, all of these companies but Berkshire are undervalued. If they were, they are even more undervalued.
His outlook: “However, much of the bad news seems to be priced into the stock prices of the most obvious victims of the current mortgage crisis/U.S. economic slowdown. Panic selling can take stocks to unimaginably low levels (I remember 1974 all too well), but prices do not stay at ridiculously low levels for long. We believe that if we buy shares of businesses at deep discounts to their underlying intrinsic values, the eventual rewards will be great. For investors with courage and patience, we think this is a great time to be a contrarian stock investor.”