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Wally Weitz's Hickory Fund 4th-Quarter Letter

Discussion of markets and holdings

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Jan 28, 2022
Summary
  • The Hickory Fund returned +6.54% in the fourth quarter.
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The Hickory Fund returned +6.54% in the fourth quarter compared to +6.44% for the Russell Midcap Index. For the calendar year, the Fund returned +20.32% compared to +22.58% for the index.

The tailwind of 2021’s global economic recovery remained in place during the fourth quarter. Corporate earnings generally ranged from good to great, sending stock prices to new highs, capping off a year of robust returns for equities. The Fund’s absolute performance, our primary focus, was strong in 2021. On a relative basis, returns against the index were slightly stronger in the fourth quarter and within striking distance for the full calendar year. While this commentary will touch on the top contributors and detractors to performance, we note that these returns are the result of strength broadly across the full portfolio.

Despite the portfolio’s strength over the past year, we note the economic backdrop facing investors in 2022 appears more challenging. Inflation has reared its ugly head, the Federal Reserve has outlined a program to reduce its stimulus programs, interest rates look set to rise, and the highly transmissive Omicron variant of the COVID-19 virus is disrupting global economic activity. These and other potentially unknowable risks leave investors to navigate uncharted waters. It would not surprise us to see more volatility in the coming year. But guided by our Quality at a Discount investment framework, we will look to take advantage of the opportunities volatility creates. Our process is designed to produce all-weather portfolios composed of high- quality companies and led by management teams capable of navigating an uncertain future while growing the value of their businesses. We feel good about our prospects for the coming year.

The Fund’s investments in auto-related businesses were consistent top performers in 2021. Shortages of new vehicles have driven buyers into the used car market, where dealerships like CarMax (

KMX, Financial) are seeing higher unit volumes and a spike in used car prices. Shortages and supply chain challenges have also benefited our auto parts businesses, such as LKQ (LKQ, Financial) which has seen increased demand from repair shops for recycled or refurbished parts. AutoZone (AZO, Financial) has won new customers who need to maintain vehicles they now plan to own longer (and federal stimulus checks have given car owners some extra cash to spend on car maintenance). LabCorp (LH, Financial) is another repeat top contributor. During the quarter, management concluded a strategic review by initiating a quarterly dividend and announcing an increase in their share repurchase intentions. The Biden administration’s infrastructure bill was (finally) signed into law in November, providing further clarity on opportunities for building materials companies like Martin Marietta (MLM, Financial), while Ingersoll Rand’s (IR, Financial) continued excellent execution rounded out the list of quarterly contributors.

Liberty Broadband (

LBRDA, Financial) (26% owner of cable operator Charter Communications (CHTR, Financial)) shares suffered a modest decline in the quarter, though the company’s relatively large position size within the Fund magnified its impact on overall results. After several quarters of pandemic-induced outsized growth, new broadband connection growth has slowed for Charter (and other U.S. cable operators). This slower growth has coincided with a renewed push by competitors like Verizon and AT&T to offer high-speed data (either via wireless connects or by building new fiber-optic networks). We remain confident that Charter’s infrastructure and technology roadmap allows them to compete effectively. Liberty Latin America (LILA, Financial), whose business tends to be more economically sensitive, saw its shares weaken as a resurgence of COVID-19 cases took hold in Latin America. Retail sales at Qurate’s (QRTEA, Financial) QVC and HSN businesses were more impacted by supply chain issues than investors anticipated, but the company continues to trade at an unassuming valuation. We view Liberty Global’s (LBTYA, Financial) modest quarterly decline as less material considering its nearly +19% return for the year.

In the second half of the year, resurgent inflation and higher interest rate fears reined in investor appetite for higher-growth assets trading at premium multiples. Within our portfolio, this has included commercial real estate information services and rental marketplace CoStar Group (

CSGP, Financial), enterprise software providers Guidewire (GWRE, Financial) and Black Knight (BKI, Financial), and electronic bond exchange MarketAxess (MKTX, Financial) – our chief detractors from calendar year performance. Each is a leader in its respective, specific market, and we continue to have a lot of confidence in the long-term outlook for each. We also note that our investment thesis has always contemplated a higher-interest-rate environment. While this rotation may reasonably bring some market “highflyers” back to Earth, we continue to watch for opportunities to add to these terrific businesses should further pressure yield attractive prices. Finally, this year’s new investment in Dun & Bradstreet (DNB, Financial) has been off to a slow start. Less than one year into our ownership, we remain encouraged by the progress management has made in returning the business to organic growth, and we believe our patience will ultimately be rewarded.

Portfolio activity was relatively balanced in the fourth quarter. We trimmed top performers AutoZone, LKQ, Martin Marietta and Labcorp to manage their position sizes. These sales were offset by opportunistic additions to ACI Worldwide (

ACIW, Financial), CarMax, MarketAxess, and CoStar Group. There were no new companies added to the portfolio nor outright sales, however, investors may note that Everarc has adopted the corporate name Perimeter Solutions (PRM, Financial) after closing on its acquisition of the firefighting and fire prevention business.

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 01/19/2022, 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.

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I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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