Wally Weitz's Hickory Fund 3rd-Quarter Commentary

Discussion of markets and holdings

Author's Avatar
Oct 22, 2019
Article's Main Image

The Hickory Fund returned +1.71% in the third calendar quarter compared to +0.48% for the Russell Midcap Index (the Fund’s primary benchmark) and -1.28% for the Russell 2500. For the calendar year to date, the Hickory Fund returned +27.65% compared to +21.93% for the Russell Midcap and +17.72% for the Russell 2500.

Although the pace of gains slowed, the Fund’s positive third quarter return (both absolute and relative) added to an already strong calendar year. The “rising tide” environment that amplified returns in the first half of the year receded, resulting in more varied returns across the market and the portfolio. We believe this is a positive development—stock price movements should reflect the economics of their underlying businesses. Markets are generally healthier when investors price assets based on company-specific stimuli, rather than speculating on the timing and magnitude of government stimulus.

The Fund’s year-to-date results gravitated around two common themes. First, after the broad sell-off at the end of 2018, many of our holdings traded at valuations we felt were simply too low, and we added to new and existing positions at attractive prices. Second, as 2019 has progressed, we have enjoyed stock price recoveries that have outpaced the market, led by several of our large and high-conviction holdings, including Liberty Broadband (Q3: +1%, YTD: +45%), rural telecommunications provider LICT Corp. (Q3: +20%, YTD: +36%), and cement and aggregates provider Summit Materials (Q3: +15%, YTD: +79%). Recycled auto parts distributor, and new portfolio holding, LKQ Corp also got off to a fast start, landing a spot in the quarterly honor roll. Investors are encouraged to read this quarter’s Analyst Corner, in which our colleague Jon Baker provides greater detail on our LKQ investment thesis.

Against this backdrop of overall positive results, we acknowledge that Qurate Retail (Q3: -17%, YTD: -47%) has been a notable detractor in 2019. The QxH segment’s (combined QVC US and HSN) second quarter sales were down less than 2% (a modest improvement compared to the first quarter sales decline) and profit margins remained healthy. Nevertheless, investors have taken a myopic view of retailers, broadly categorizing the industry into the “haves” (e.g., Amazon.com) and the “have-nots” (e.g., nearly everyone else). We believe this “have not” mentality drastically undervalues Qurate, and its shares represent an attractive value. That said, we are clear-eyed about the challenges facing retailers and factor that uncertainty into our portfolio weighting decisions.

Gardner Denver was the top detractor to quarterly results (Q3: -18%, YTD: +38%). After enjoying strong gains upon its announced combination with Ingersoll Rand’s industrial operations, the stock took a breather this quarter as investors began to worry about its more cyclically exposed energy end markets. The stock remains an outperformer for the calendar year.

LKQ was the lone portfolio addition this quarter, while we closed our positions in Compass Minerals and Wesco Aircraft. Signs of a turnaround at Wesco were encouraging, ultimately attracting a “take private” bid that led us to sell our shares. In contrast, Compass’s turnaround efforts remain in the early stages, and we decided to exit our remaining position to reinvest in higher-conviction opportunities. Additionally, we trimmed positions like Formula One, Marvell Technology and Summit Materials on strength, while adding to Qurate and ACI Worldwide on weakness.

Despite the strong calendar-year appreciation, our estimated portfolio price-to-value ratio remains in the low-to-mid 80s. This result is a function of having started the year at lower valuation levels, business value growth and the impact of the new entrants to the portfolio. We remain confident that our portfolio of businesses can continue to generate healthy returns from these levels. Our team remains very active in seeking out additional attractive opportunities. We appreciate your confidence in us and the opportunity to invest alongside you.

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.