The Hickory Fund returned +2.69% in the third calendar quarter compared to +4.74% for the Russell 2500 Index (the Fund’s primary benchmark). On a year-to-date basis, the Fund returned +9.84% compared to +11.00% for the Russell 2500.
Given a backdrop of what we believe to be an expensive market environment, coupled with an elevated residual cash position, we would describe our quarter and year-to-date performance as solid on an absolute basis. However, relative to our benchmark, the Fund has toggled from being a modest outperformer for the year to a modest underperformer during the third quarter. As always, we remind our fellow shareholders that we invest with an eye toward generating superior absolute returns over the long term. That said, we are only human and liked it better when the shoe was on the other foot.
The quarter and year-to-date periods benefited from the same top performers. Despite no Wall Street analyst coverage of its stock, telecom provider LICT Corp (+24% Q3, +111% YTD) has more than doubled this year as investor appreciation grows for LICT’s network and position as a provider of broadband services to less competitive, rural markets. Liberty Broadband (+10% Q3, +29% YTD) was also a top performer thanks to the rise in value of its stake in Charter Communications. Lately, Charter has been rumored to be an acquisition target for several buyers, most notably cable competitor Altice USA and SoftBank (owner of wireless carrier Sprint). Nothing stirs the animal spirits quite like the perception of a good, old-fashioned “bidding war,” and Charter’s share price responded accordingly. Although deal speculation can create short-term stock gains that may ultimately reverse, we remain comfortable with the long-term opportunity at Charter and have maintained our holdings of Liberty Broadband.
Wesco Aircraft (WAIR, Financial) (-13%) was the top detractor for the quarter. Execution woes continue to plague the aerospace parts distributor, leading to another disappointing quarter of results and stock performance. Wesco’s current struggles are frustrating, but we don’t believe permanent, and we’ve opted to use the stock’s volatility to lower our average cost by purchasing new shares and harvesting tax losses through sales of higher-cost lots. Quarterly results were also impacted by modest stock price declines at Murphy USA (-7%) and QVC Group (-4%) in an otherwise rising market. Detractors for the full year include Wesco (-37% YTD) as well as last quarter’s laggards National CineMedia (-49% YTD) and Fossil Group (-64% YTD). The strong box office performance of It and enthusiasm surrounding upcoming releases (Thor, Justice League and Star Wars: The Last Jedi to name a few) has helped NCM recover from recent lows, and we’ve elected to remain patient with our small stake as we monitor the company’s progress in dealing with AMC’s ownership transition. During the quarter, however, our patience ran out on Fossil, and we sold our remaining small position.
The Fund’s relative performance figures continue to be hampered by higher levels of residual cash while we await compelling investment opportunities. Portfolio activity tilted toward “buys” this quarter, and cash levels declined from 27% to 22% (a size we still describe as elevated.) We added to our existing holdings of ACI Worldwide, continued building our initial position in Compass Minerals, and initiated two new positions in Axalta Coating Systems and Manitowoc Company. Axalta (AXTA, Financial) manufacturers paint and other coatings and designs systems for their application in automotive and industrial end markets. We are attracted to Axalta’s scale position as the #1 or #2 player in most of its business lines and the “sticky” nature of its customer base (once designed into a manufacturing line or aftermarket repair facility, the costs to switch to a new provider are very high). We believe the company has ample opportunity to grow organically through market share gains or thoughtful acquisitions.
Manitowoc (MTW, Financial) designs and manufactures cranes used in a variety of applications. Manitowoc (and the industry, generally) has struggled in the aftermath of the Great Recession. Nevertheless, we believe new management, led by the highly regarded Barry Pennypacker, has a unique opportunity to stabilize and improve the company’s operating results though the application of a Lean Manufacturing culture. Our thesis is that investors underappreciate the company’s potential to improve margins even in the absence of a strong cyclical recovery.
We continue to face the challenges presented by an expensive market environment and are generally less sanguine than others about politicians’ abilities to deliver on legislative priorities like tax reform within investors’ expected timelines. Nevertheless, as demonstrated by the recent additions to our portfolio, our investment team’s response has been to collectively “keep our heads down,” learn about new businesses and hunt for the next investment opportunity. We will remain patient and disciplined in the application of our valuation-driven approach to deploying your (and our) investment capital, and we appreciate the opportunity to invest alongside you.
Performance data represents past performance, which 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. 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 weitzinvestments.com.
