The Hickory Fund returned +8.71% in the first quarter, compared to +8.14% for the Russell Midcap Index. For the fiscal year ending March 31, 2021, the Fund returned +59.17% compared to +73.64% for the benchmark.
The "reopening" trade that began in earnest with positive vaccine trial results in November continued into the first quarter of the new year. Cyclical businesses that depend on a stronger economy, as well as industries that depend on the customers' ability to be physically present (travel, hospitality, and live events to name a few), have been leading the market higher. At the same time, the stronger economic outlook and potential for faster inflation has forced investors to contemplate an increase in interest rates. As we wrote last quarter, higher interest rates diminish the present value of future cash flows and reduce investors' appetite to pay up for faster growing companies.
With these market dynamics on display within the portfolio, the Fund delivered strong results in the first quarter. Beyond the benefit of "reopening," gains were led by companies experiencing positive, company-specific developments. Used car dealer CarMax (KMX, Financial) was our top contributor, as the nationwide roll-out of its omnichannel car buying experience (at a dealership, online, or a combination of the two) continues to win fans in the form of new customers and investors alike. Summit Materials (SUM, Financial) shares rallied as the market began to anticipate how the new presidential administration's infrastructure plans may result in healthy incremental demand for years to come. And shares of LabCorp (LH, Financial) rose after management announced it would review the company's structure and capital allocation strategy, acquiescing to pressure from an activist shareholder.
The broad rally resulted in very few portfolio holdings with a negative return for the quarter. Enterprise software providers CoStar Group (CSGP, Financial), Black Knight (BKI, Financial) and Guidewire Software (GWRE, Financial) lagged as software companies generally fell out of favor, while Liberty Broadband's (LBRDA, Financial) modest decline reflects investors' general belief that a government controlled by Democrats (specifically, the Federal Communications Commission) may create a less friendly regulatory environment for cable/broadband providers. Broadband providers have been a popular "political football" for many years, but we judge drastic regulatory changes that negatively impact our investments to be unlikely.
With the benefit of hindsight, we can see the recent fiscal year began near the pandemic market trough. Given the powerful market rally, twelve-month returns across nearly the entire portfolio were very strong. Our top 12-month contributors feature four investments that nearly, or more than, doubled in the past twelve months: CarMax, LabCorp, Qurate Retail (QRTEA, Financial) and Ingersoll Rand (IR, Financial). Liberty Broadband's largest position size magnified its more modest return making it a top quarterly contributor as well. EverArc (LSE:EVRA, Financial) experienced a very modest decline. As an acquisition vehicle holding cash and without an operating business, its shares did not participate in the COVID-induced sell-off and have remained largely unchanged during the subsequent recovery. We sold Liberty Formula One (FWONA) at a slight loss as we opted to reinvest that capital into more attractive investment opportunities as the economy began to show signs of recovery.
As the rally has continued, portfolio activity skewed modestly toward trimming our strongest performers (including CarMax, Summit Materials, Qurate Retail and First Hawaiian (FHB)) and our larger portfolio holdings (including Liberty Broadband, LabCorp and LICT Corp (LICT)). On the buy side, we modestly increased our positions in LKQ (LKQ), Box (BOX) and Markel (MKL), but most notably we initiated a new position in AutoZone (AZO), a specialty retailer of auto parts and accessories. AutoZone continues to have success with its traditional do-it-yourself customers, and it is still in the early stages of rolling out its commercial account business that reaches do-it-for-me customers. We believe both efforts have significant growth potential for years to come and are led by a management team that has demonstrated a consistent ability to grow the per-share value of their business. Investors can learn more about our investment thesis in Jon Baker's upcoming Analyst Corner feature.
Looking ahead, we remain encouraged by the prospects for our portfolio. Trading at an estimated price-to-value ratio in the low-to-mid 90's, it seems likely to us that the pace of returns may slow as the economic recovery plays "catch up" to the stock market. Nevertheless, we feel our businesses can still generate acceptable returns. Meanwhile, our Quality at a Discount investment philosophy remains hard at work; our investment team continues to investigate additional high-quality businesses, and we will be ready to acquire those companies' shares when they trade at a discount to our value estimates.
The opinions expressed are those of Weitz Investment Management and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through 04/22/2021, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor's specific objectives, financial needs, risk tolerance and time horizon.
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.
