When picking stocks, the guru's Omaha, Nebraska-based firm combines Benjamin Graham's principles of price sensitivity and insistence on margin of safety with a conviction that qualitative factors that allow the company to control its future can be more important than statistical metrics like book value and earnings.
Following the decline the markets saw earlier this year in the wake of the Covid-19 pandemic, Weitz noted in his third-quarter letter that the portfolio is continuing to recover along with the economy, albeit at a slower pace than in the prior quarter.
"For our part, we anticipate the recovery will continue but may have fits and starts along the way," he wrote. "The list of things that could cause near-term volatility remains long (debates over additional fiscal stimulus, progress in fighting the virus, and the U.S. presidential election, just to name a few). But in the long term, we remain bullish on the prospects for our collection of businesses."
Keeping these considerations in mind, Weitz entered only two new positions during the quarter: Fidelity National Information Services Inc. (FIS, Financial) and First Republic Bank (FRC, Financial). He also reduced his position in several top holdings, which included Alphabet Inc. (GOOG, Financial), Liberty Broadband Corp. (LBRDK, Financial) and Facebook Inc. (FB, Financial).
Having previously exited a position in Fidelity National in the second quarter of 2017, the guru invested in 256,000 shares, allocating 1.78% of the equity portfolio to the new holding. The stock traded for an average price of $144.47 per share during the quarter.
The Jacksonville, Florida-based company, which provides financial products and services, has an $89.08 billion market cap; its shares were trading around $143.56 on Friday with a price-book ratio of 1.82 and a price-sales ratio of 28.44.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 1 out of 10 also supports this assessment since the share price and price-sales ratio are approaching 10-year highs.
In his letter, Weitz noted Fidelity National is "riding several industry tailwinds" and "has the chance to power through broader economic turbulence" over the next several years.
GuruFocus rated Fidelity National's financial strength 4out of 10. As a result of issuing approximately $8 billion in new long-term debt over the past three years, it has poor interest coverage. The Altman Z-Score of 1.74 also warns the company could be in danger of going bankrupt if it does not improve its liquidity. The weighted average cost of capital also eclipses the return on invested capital, indicating Fidelity National is destroying value as it grows.
The company's profitability fared better with a 7 out of 10 rating. Although the margins are in decline and the returns are negative and underperforming over half of its competitors, Fidelity National is supported by a moderate Piotroski F-Score of 4, which indicates operations are stable. As a result of revenue per share declining over the past three years, the predictability rank of 2.5 out of five stars is on watch. According to GuruFocus, companies with this rank return an average of 7.3% annually over a 10-year period.
Of the gurus invested in Fidelity National, Andreas Halvorsen (Trades, Portfolio) has the largest stake with 1.08% of outstanding shares. Other top guru shareholders include Daniel Loeb (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), Ron Baron (Trades, Portfolio) and Steven Cohen (Trades, Portfolio).
First Republic Bank
Weitz picked up 91,050 shares of First Republic Bank, dedicating 0.47% of the equity portfolio to the position. During the quarter, shares traded for an average price of $110.97 each.
The bank and wealth management company, which is headquartered in San Francisco, has a market cap of $22.9 billon; its shares were trading around $133 on Friday with a price-earnings ratio of 23.75, a price-book ratio of 2.37 and a price-sales ratio of 6.26.
According to the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 2 out of 10 also leans toward overvaluation since the share price, price-earnings and price-sales ratios are all nearing multiyear highs.
In his quarterly letter, Weitz noted First Republic's "ultra-high-touch service model makes it less of a commodity bank and more of a rarified luxury service organization." As such, it is able to "grow customer lifetime values and allows the company to gain new customers simply through existing client referrals. Earnings growth is therefore less of a function of market interest rates (which would be upside to our investment thesis) but through customer growth driving bank and wealth management assets."
Weighed down by approximately $4.9 billion in new long-term debt, First Republic's financial strength was rated 2 out of 10 by GuruFocus. Regardless, it is at a manageable level. The company's assets are also building up at a faster rate than its revenue is growing, indicating it may be becoming less efficient.
The company's profitability fared a bit better, scoring a 5 out of 10 rating on the back of margins and returns that outperform over half of its industry peers. First Republic has a low Piotroski F-Score of 2, however, which suggests operations are in poor shape. It also has a one-star predictability rank. GuruFocus says companies with this rank return an average of 1.1% annually.
With 1.56% of outstanding shares, Diamond Hill is the company's largest guru shareholder. David Carlson (Trades, Portfolio), Pioneer, Baron, Ken Fisher (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) also have positions in the stock.
Continuing his trend of reductions to the Alphabet holding, the guru sold 21,030 Class C shares, trimming 24.65% off the position and impacting the equity portfolio by -1.49%. The stock traded for an average per-share price of $1,525.89 during the quarter.
Weitz now holds 64,270 shares total, representing 4.46% of the equity portfolio and is his third-largest holding. GuruFocus estimates he has gained 133.60% on the investment so far.
The Mountain View, California-based tech giant, which is the parent company of Google and YouTube, has a $1.18 trillion market cap; its Class C shares were trading around $1,748.41 on Friday with a price-earnings ratio of 33.66, a price-book ratio of 5.54 and a price-sales ratio of 7.33.
Based on the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 3 out of 10 also leans toward overvaluation since the share price, price-book and price-sales ratios are all close to 10-year highs.
GuruFocus rated Alphabet's financial strength 8 out of 10, driven by a comfortable level of interest coverage as well as a robust Altman Z-Score of 10.42. The ROIC also surpasses the WACC, indicating value is being created as the company grows.
The company's profitability scored a 9 out of 10 rating. Although the operating margin is declining, Alphabet is supported by returns that outperform a majority of competitors, a moderate Piotroski F-Score of 4 and consistent earnings and revenue growth. It also has a four-star predictability rank. GuruFocus data shows companies with this rank return, on average, 9.8% annually.
Dodge & Cox is Alphabet's largest guru shareholder with a 0.39% stake. Other guru investors with large positions include PRIMECAP Management (Trades, Portfolio), Pioneer, Al Gore (Trades, Portfolio), Chris Davis (Trades, Portfolio), Spiros Segalas (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio), Tom Russo (Trades, Portfolio) and David Tepper (Trades, Portfolio).
With an impact of -1.02% on the equity portfolio, Weitz curbed his holding of Liberty Broadband by 22.17%, selling 163,800 Series C shares. The stock traded for an average price of $137.22 per share during the quarter.
He now holds 575,000 shares total, which account for 3.88% of the equity portfolio and is his sixth-largest holding. GuruFocus data shows the guru has gained an estimated 191.28% on the investment.
Headquartered in Englewood, Colorado, the holding company, which is involved in the cable, broadband and mobile location technology businesses, has a market cap of $27.11 billion; its Series C shares were trading around $152.02 on Friday with a price-earnings ratio of 123.06, a price-book ratio of 2.6 and a price-sales ratio of 1,700.43.
The Peter Lynch chart suggests the stock is overvalued.
Liberty Broadband's financial strength was rated 5 out of 10 by GuruFocus. Although the cash-to-debt ratio is underperforming versus competitors as well as its history, the Altman Z-Score of 7.17 indicates the company is in good standing despite recording a decline in revenue per share over the last five years.
The company's profitability did not fare as well, scoring a 3 out of 10 rating on the back of a negative operating margin that underperforms a majority of industry peers. Its returns, however, are strong and outperform over half of other companies in the space. Liberty Broadband also has a moderate Piotroski F-Score of 5.
Of the gurus invested in Liberty Broadband's Series C stock, George Soros (Trades, Portfolio) has the largest holding with 2.9% of outstanding shares. Ruane Cunniff (Trades, Portfolio), Philippe Laffont (Trades, Portfolio), Baron, Jeremy Grantham (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies, Mario Gabelli (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Pioneer and Cohen also own the stock.
Impacting the equity portfolio by -0.95%, Weitz reduced his Facebook position by 24.7%, selling 83,300 shares. Shares traded for an average price of $257.89 each during the quarter.
The investor now holds 253,900 shares total, which make up 3.14% of the equity portfolio and is his 10th-largest holding. He has gained 42.76% on the investment so far based on GuruFocus data.
The Menlo Park, California-based social media company has a $785.70 billion market cap; its shares were trading around $275.85 on Friday with a price-earnings ratio of 31.42, a price-book ratio of 6.67 and a price-sales ratio of 10.06.
According to the Peter Lynch chart, the stock is overvalued.
Facebook's financial strength and profitability were both rated 9 out of 10 by GuruFocus. In addition to comfortable interest coverage, the company is supported by a high Altman Z-score of 18.76. The ROIC is also significantly higher than the WACC, indicating good value creation.
The company is also being supported by an expanding operating margin, strong returns that outperform a majority of competitors and a moderate Piotrsoki F-Score of 6. Revenue per share growth has slowed down over the past year, however.
With a 0.31% stake, Chase Coleman (Trades, Portfolio) is Facebook's largest guru shareholder. Other top guru investors include Pioneer, Segalas, Steve Mandel (Trades, Portfolio), Frank Sands (Trades, Portfolio), Dodge & Cox, Ken Fisher (Trades, Portfolio), Davis, First Eagle Investment (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio), Tepper, Laffont and Bill Nygren (Trades, Portfolio).
Additional trades and portfolio composition
Other positions Weitz reduced during the quarter included Berkshire Hathaway Inc. (BRK.B, Financial) and Redwood Trust Inc. (RWT, Financial). He also boosted his holdings of Aon PLC (AON, Financial), Qurate Retail Inc. (QRTEA, Financial) and Charles Schwab Corp. (SCHW, Financial), among others.
Roughly half of the guru's $2.12 billion equity portfolio, which is made up of 65 stocks, is invested in the financial services and communication services sectors.
According to its quarterly letter, the Weitz Partners III Opportunity Fund returned 7.59% in the third quarter, slightly underperforming the S&P 500 Index's return of 8.93%.
Disclosure: No positions.
Read more here:
- Richard Snow's Top 3rd-Quarter Trades
- John Rogers' Firm Extends Meredith Subscription
- Mario Gabelli's Top 5 Trades of the 3rd Quarter
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.