The Hickory Fund returned +6.58% in the fourth quarter compared to +7.06% for the Russell Midcap Index (the Fund’s primary benchmark) and +8.54% for the Russell 2500. For the year, the Hickory Fund returned +36.06% compared to +30.54% for the Russell Midcap and +27.77% for the Russell 2500.
The solid fourth quarter results put the finishing touches on very strong 2019 performance, on both an absolute and relative basis. As might be expected in a highly risk-on or “rising tide” environment, gains were broad-based, as nearly every portfolio holding delivered a positive return. That said, as managers that believe in building high-conviction, concentrated portfolios, we are particularly pleased to report that for the 1-year period ended December 31, 2019, the Fund’s 10 largest holdings (combined, nearly half the portfolio) collectively outperformed the primary benchmark. This includes top year contributors Liberty Broadband (+74%), Summit Materials (+93%), GCI Liberty (+72%), Colfax (+74%) and Gardner Denver (+79%).
Each time we deploy capital, we have a company-specific investment thesis that underpins our buy decision. But across the full portfolio, there is a central theme. We look to purchase shares in growing companies at a discount to our estimation of their underlying business value. We want to have (at least) two ways to win: through stock prices that appreciate toward our business value estimate, and through business value estimates that grow over time.
Looking at 2019 performance through this lens, on balance, our portfolio companies grew their business values in line with our expectations, but the heavy lifting came from the stock appreciation that significantly outpaced said value growth. As a result, this year, our estimated portfolio price-to-value ratio (P/V) moved from the low 70s to the mid 80s. We continue to feel our securities are attractively priced for future returns. However, from these prices, we expect the drivers of those returns will likely be more balanced between business value growth and stock price appreciation (resulting in the shrinking of the embedded discounts).
Of course, we didn’t bat a thousand this year. Top detractor, Qurate Retail QRTEA (-57%), has been a consistent laggard throughout 2019. Investors fret that QVC and HSN are no longer relevant and their digital offerings are too little, too late. Although we agree that Qurate operates in a difficult environment and that a digital pivot is required, we believe the market underestimates the company’s progress and undervalues the company’s still strong cash flows (which add additional strategic optionality). We sold Tupperware TUP in the second quarter, while modest negative returns from Expedia EXPE (-3%) and Box BOX (-1%) round out the detractors.
The Fund initiated two new positions this quarter. Recently independent First Hawaiian FHB, having been spun out from BNP Paribas, operates the oldest and largest bank in Hawaii. The Hawaiian market is attractive given low competition (mainland banks have yet to gain a foothold) and steady growth. As a result, earnings are more predictable relative to banks of similar size, with advantaged funding costs, stable fee income and excellent credit quality. EverArc Holdings LSE:EVRA is a special purpose acquisition company (SPAC) that caught our attention given the involvement of Co-Chairman Nicholas Howley. These vehicles allow companies to raise money from investors before acquiring an actual operating business (the target may be private or public), generally within an agreed-upon period. Weitz (including this Fund) has had a long (and profitable) relationship with Mr. Howley and his aerospace company, TransDigm TDG. Although SPACs are not our typical fare, our prior experience with Mr. Howley, due diligence with management and understanding of the types of businesses they find attractive, we concluded that EverArc had the raw materials to be an attractive (if idiosyncratic) investment to add to our portfolio.
Exiting the portfolio were Myers Industries MYE and Eagle Materials EXP. Eagle shares were sold as we rebalanced our portfolio holdings within the building materials area, preferring to consolidate our holdings in Vulcan VMC and Summit (SUM). Myers shares were sold upon the announcement of CEO Dave Banyard’s departure. Our investment thesis hinged on Mr. Banyard’s leadership in pivoting Myers from a disparate collection of manufacturing businesses through the implementation of Lean principles and potential acquisitions. In effect, Myers was a “jockey bet” that lost its jockey, and we elected to move on. (As an aside, Mr. Banyard is now a senior executive at portfolio holding Fortune Brands, meaning he remains “in the family.”) Overall, portfolio activity was balanced between buys and sells, and the Fund remains nearly fully invested.
Coming off the heels of a terrific 2019, it may prove difficult to replicate the same performance in 2020. That said, we continue to feel very good about our collection of businesses, their prospects and what that may mean for future investment returns.
Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Please visit weitzinvestments.com for the most recent month-end performance.
