Calendar Year-to-Date Contributors
Liberty Broadband holds a 20% ownership interest (25% aggregate voting power) in Charter Communications. Charter Communications reported quarterly results for the first time since closing on its mergers with Time Warner Cable and Bright House Networks. As such, investors had their first look at the combined entity, even if Charter had only operated these assets for 43 days. Results from the legacy Charter footprint remained strong, and management provided a helpful overview of the combined company as well as their integration and synergy plans. We, and other investors, are excited by the opportunity to run the “Charter playbook” with the newly combined company. Charter shares were also aided by the company’s September inclusion into the S&P 500 Index.
ADT Corp (ADT, Financial) is a provider of monitored security, interactive home and business automation, and related monitoring services in the United States and Canada. After reaching a 2016 low of $24.94, ADT shares rose on February 15, 2016, in response to the announcement that private equity firm Apollo Global Management had agreed to acquire ADT for $42 per share, a slight discount to our mid-$40s estimate of business value. Apollo plans to combine ADT with its own alarm monitoring business, Protection One. We exited our roughly two year position at the end of February for a modest gain.
Range Resources (RRC, Financial) is an independent producer of natural gas and natural gas liquids (NGLs) based in Fort Worth, Texas, with operations in the Marcellus shale and emerging Terryville field. Range’s stock cooled some during the third quarter following a strong rebound during the first half of the year. As expected, Range completed its purchase of Memorial Resource Development during mid-September, adding another sizeable low-cost, high-return natural gas asset in northern Louisiana to its prolific Marcellus acreage position. An improved balance sheet and the opportunity to produce significant quantities of natural gas near growing demand centers at rates of return similar to the Marcellus are clear positives from the Memorial transaction. Overall, we believe the backdrop for the most efficient natural gas producers remains favorable in the intermediate term; though weather continues to pose near-term risks, given elevated gas storage levels. We believe Range shares are worth between $48-50 share.
Calendar Year-to-Date Detractors
QVC Group is owned by Liberty Interactive. QVC is an American television network and multinational corporation specializing in televised and online shopping experiences. Shares of QVC Group fell after management indicated that its U.S. business had experienced significant sales headwinds, which are likely to continue into the next quarter. QVC’s U.S. business, which has not seen a sales decline since the Great Recession, appears to be tracking down in the mid to high single- digits, as its fashion business has slowed and a large beauty vendor is dealing with customer complaints on its hair care products. Importantly, we don’t view these issues as a sign of the QVC model suddenly being broken. QVC’s customer retention and loyalty remain strong, as does viewership of their network. Additionally, the international businesses appear unaffected by the current U.S.-centric slowdown. Although the decline in QVC shares is disappointing, we believe management will take advantage, growing their per share business value by continuing to execute their share repurchase strategy.
LiLAC Group is a tracking stock distributed by Liberty Global during the third calendar quarter of 2015 designed to provide an avenue to tap growth opporutnities available in Latin America and the Caribbean. In May of 2016, Liberty Global closed its acquisition of Cable & Wireless Communications and attributed the operations to LiLAC Group. The consideration paid included new shares of both the Latin American and European tracking stocks. To compensate the European tracker stockholders, Liberty Global received a 67% intergroup stake in LiLAC. In an effort to remove this complexity and restore the Latin America tracker to full public ownership, Liberty Global announced on June 2 the intergroup stake would be distributed directly to shareholders. Shares were subsequently pressured, as many shareholders either sold short the new LiLAC shares before they were received or sold outright after the distribution. As the selling pressure abated, shares fell again after LiLAC missed earnings expectations in the most recent quarter.
Fossil Group (FOSL, Financial) is the fourth-largest producer of watches and the largest licenser of watches and jewelry globally. Following a strong first quarter earnings report, Fossil reported disappointing results in the second quarter due to a tough consumer environment and weakness in the wholesale channel in North America and Europe. The main drivers of the wholesale channel weakness were weak foot traffic, inventory destocking and continued moderation at their largest licensed brand, Michael Kors. This difficult environment led management to cut guidance for the full year. The retail channel and Fossil’s owned brands continued to outperform, with Skagen growing double- digits and the Fossil brand posting growth in a difficult environment. Despite low visibility through the end of the year, we expect a rebound in 2017 led by strategic investments and a large pipeline of product introductions, including wearables launches across 10 brands. Furthermore, investments in brand building and omni-channel initiatives should also benefit 2017 results.
Quarterly Contributors
Liberty Broadband - Please refer to the Calendar Year-to-Date synopsis.
Liberty Ventures is a collection of investments, with its primary assets being a 23.5% stake in Liberty Broadband and a 15.8% interest in Expedia. Ventures’ shares rose in conjunction with the appreciation of its Liberty Broadband stake (as described above) as well as share price recovery at Expedia as the initial fears over the UK Brexit vote subsided. Looking into the fourth quarter, we anticipate that Ventures will complete the spin-off of Liberty Expedia Holdings prior to year end—a move that we believe will help investors narrow the discount between Liberty Ventures’ stock price and the value of its underlying assets.
Liberty Media Corporation owns interests in a broad range of media, communications and entertainment businesses. Those interests are attributed to three tracking stock groups: Liberty SiriusXM Group, Liberty Braves Group and Liberty Media Group. Shares of Liberty Media jumped after the company announced an agreement to acquire Formula One, the iconic global motorsports business. Through this acquisition Liberty Media owns 100% of Formula One, transitioning Liberty Media from being predominately an investment vehicle to now an operating company. Upon completion of the transaction (expected in the first calendar quarter of 2017), the Liberty Media Group will be renamed the Formula One Group. Investors are excited about the highly-regarded executive and newly appointed Chairman, Chase Carey, and the potential to grow Formula One under Liberty’s guidance–greater sponsorship prospects, the potential for new races and venues to grow awareness of the sport, and new opportunities to bring Formula One content to digital platforms.
Quarterly Detractors
QVC Group - Please refer to the Calendar Year-to-Date synopsis.
LiLAC Group’s shares declined after LiLAC reported third quarter results that were below Wall Street’s expectations. This was the first quarter since LiLAC closed the acquisition of Cable & Wireless Communications. Outside investors largely overestimated the newly acquired asset’s near-term contributions to the combined entity due to different accounting treatments between the two companies and a lack of general information. Missing expectations has created near-term price pressure, but we anticipate that in the coming quarters LiLAC will demonstrate the benefits they saw in this acquisition, beginning with identifying operating synergies for investors.
National CineMedia (NCMI, Financial) operates digital, in-theatre media networks selling advertising and promotions. National CineMedia’s shares posted a modestly negative return during the quarter as investors adjusted to a slightly reduced outlook from the company’s management team. Although inventory sell-through and pricing remain strong, management indicated that current quarter results were being impacted by advertisers spending more with the Summer Olympics than previously anticipated. Shares were also likely pressured, to some degree, by a slightly disappointing summer box office, with a handful of key titles underperforming expectations. We continue to believe National CineMedia’s advertising network provides significant value and opportunity for marketers looking to reach large audiences, particularly with younger demographics.
New Holdings
No new equity holdings were purchased in the third quarter 2016.
Eliminated Holdings
Avon Products - We sold Avon Products in part to realize a tax loss after the stock rebounded sharply from its lows.
The trick is to boldly take advantage of the rare, great buying opportunities and to not “give back” the profits by taking unnecessary risks when the odds are unfavorable.
Past performance does not guarantee future results. The investment return and the principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Average annual total returns for the Fund’s one, five and ten year periods ended September 30, 2016 were 11.14%, 11.93%, 5.41%; respectively. The returns above assume reinvestment of dividends and redemption at the end of each period, and reflect the deduction of annual operating expenses, which as stated in the most recent Prospectus is 1.24% of the Fund’s net assets. The returns above also include fee waivers and/or expense reimbursements, if any; total returns would have been lower had there been no waivers or reimbursements. Effective June 30, 2008, Hickory Fund adopted its current principal investment strategy of investing the majority of its assets in smaller and medium-sized companies. Current performance may be higher or lower than the performance data quoted. Performance data current to the most recent month end may be obtained at www. weitzinvestments.com/funds_and_performance/fund_performance.fs.
Comparative returns are the average returns for the applicable period of the S&P 500® and the Russell 2500™ Indexes. The S&P 500® is an unmanaged index consisting of 500 companies generally representative of the market for the stocks of large-size U.S. companies. The Russell 2500™ Index is an unmanaged index of small to mid-capitalization common stocks. It consists of the 2,500 smallest companies in the Russell 3000® index, which consists of the 3,000 largest U.S. companies based on market capitalization. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is the trademark of Russell Investment Group. Index performance is hypothetical and is shown for illustrative purposes only.
As of 9/30/2016: Fossil Group, Inc. comprised 1.8% of the Weitz Hickory Fund’s net assets; Liberty Media Group-Series A & C 2.6%; Liberty Ventures Group-Series A 3.8%; Liberty Broadband Corp.-Series A & C 6.5%; QVC Group-Series A 3.7%; LiLAC Group-Class C 1.2%; Liberty Global Group-Class C 4.2%; Colfax Corp. 3.5%; Murphy USA Inc. 3.2%; Liberty SiriusXM Group-Series A & C 3.9%; Liberty Braves Group-Series A & C 0.5%; National CineMedia, Inc. 4.0% and Range Resources Corp. 1.1%. Portfolio composition is subject to change at any time. Current and future portfolio holdings are subject to risk.
