Weitz Investment Management combines traditional value investing with a modern qualitative review of investments. Weitz just published his latest quarterly report. Before I discuss two of his interesting investments, a couple of remarkable quotes (emphasis is always mine):
"During the first six months of 2018, Amazon, Microsoft and Apple accounted for 71% of the gain in the S&P 500. Those three, along with Mastercard and four other tech stocks, accounted for 105% of the index’s gain. The other 492 stocks were, collectively, down year to date."
This actually surprised me a lot. Even though I own not one of these top gainers.
"On another note, there are some more 'mature' holdings that have been drags on our results recently, but for which we have high expectations. They will be familiar names to longtime clients and we consider them good investments which happen to be (currently) out of favor."
Peter Lynch would call these "stalwarts." Let's dive in:
"Its CEO made a very timely sale of its fading generic drug business," Weitz said.
It sold this business to Mylan (MYL), which has been under a lot of pressure lately, even spurring a Berkshire Hathaway investment. Weitz added:
" ... and [he] has been very active in positioning the company for future growth. In the meantime, investors are skeptical, and the stock sells at about 10 times earnings. Activist investors, who are often too short-term oriented for our taste, are clamoring for change. Whether the company is allowed to grow to its full potential or is pushed into a shorter-term resolution, we expect to profit from Allergan."
Allergan trades at a remarkable 8.5x free cash flow, which is very low for a biotech company. That could indicate losses of major patents but that's not really the case. About 13% of its revenue is threatened by loss of exclusivity. Its pipeline is loaded:
Growth is offset by loss of exclusivity for now, but I agree with Weitz that it's only a matter of time before I'll profit from Allergan.
Liberty Global (LBTYA, Financial)
Liberty Global is the European cable company created by John Malone.
In case you didn't know, John Malone is a genius cable operator and rancher. There's a terrific book on his story I thoroughly enjoyed and recommend called "Cable Cowboy."Â
From Weitz's quarterly report:
"Liberty has been very adept at portfolio management—buying cable systems at attractive prices, then building and selling them to eager buyers. They have also been aggressive buyers of their own stock when its price is depressed."
This and the Malone relationship is not a coincidence. I repeat: It is not a coincidence. This man is a beastly value creator. From the report:
"Growth has slowed recently due to competitive pressures and some construction missteps, but we believe that impatient investors are underestimating its value. The stock was priced at $26.61 at quarter end, and we estimate the business value at over $40 per share."
Revenue has been flagging a bit recently. I also pulled a key datapoint in debt-to-equity. It is illustratative of the Malone playbook: Load up a company with predictable, stable Ebitda (also known as a cable company) chock-full of debt. Immediately reinvest any earnings to make sure there's no profit to get taxed. Keep that growth engine going until there are no reinvestment opportunities. At that point; sell. Preferably in return for stock so there are no capital gains taxes.
Disclosure: :ong Allergan.
