Why value veterans Wally and Drew Weitz focus on cash
NEW YORK |
NEW YORK (Reuters) - Veteran value investor Wally Weitz didn't have far to look when it came to picking a co-manager for his firm's mid-cap fund.
In December 2011, Weitz, 63, tapped his son Drew, 33, to work alongside him to manage the $410 million Weitz Hickory fund. Drew had previously worked as an analyst on the firm's investment team and was a co-manager of the tiny $18 million Weitz Research fund.
Since then, the father-and-son team has delivered returns of about 28 percent to investors through March 4, a performance that helped it earn the 2013 U.S. Lipper Fund Award for mid-cap core funds.
The fund still follows the same basic strategy Wally started with when he founded his firm in 1983: look for undervalued companies that generate lots of cash. Here, Wally and Drew Weitz discuss what contributed to their strong performance last year and how they are investing now.
Q: What worked for you last year?
Drew: Three buckets jump to mind. One was a series of takeouts, both real and imagined. Knology, a cable company in the southeast United States, was taken private (at a 9 percent premium), and we had a small position in Avon Products, a cosmetics company that was bid up after Coty tried to buy them.
The performance of the various Liberty companies was another - the firm owns and invests in media companies ranging from Barnes and Noble to Time Warner Cable. The last bucket was housing and mortgage-related companies like Mohawk Industries and Redwood Trust that participated in the rebound. Redwood's total return was 75 to 80 percent.
Q: What's attractive about Liberty?
Wally: Liberty has been a wonderful hunting ground over the years. They are good businesses - often subscription businesses - that generate predictable cash flow and they have management that we trust to do great things with that cash. And the bonus is that it is complicated.
Most investors that have encountered Liberty in whatever form have given up trying to understand the various pieces. You get terrific assets managed by good people that are badly mispriced from time to time.
Q: What do you look for in an company?
Drew: We tend to really like the subscription business model with lots of free cash flow. That gives (companies) the ability to play offense in a pretty meaningful way.
Q: What is your largest weighting in the portfolio?
Wally: Our biggest position is in cash. We're very focused on the intrinsic business value, and sell when companies get close to trading at 80 to 90 cents on the dollar. We ended the year at 31 percent in cash.
Q: Does that cash signal that you're bearish on the market?
Drew: We arrived at a 31 percent cash position not because we have a list of fears tacked to the trading room wall. But when Redwood is at $20 instead of $10 a year later, we can't own as much. We're finding pockets of things to do. There are a lot of investments that we like a great deal and if were 10 percent lower we'd be adding to them. We're waiting for our chance to come in with an appropriate margin of safety.
Q: What are some your recent additions to the portfolio?
Drew: In television, there are devices to make the advertisements go away - in the movie theater there is nothing like a DVR. That's why National CineMedia is an under-appreciated advertising platform. The theaters they are in will have over 700 million attendees over this year, and it's the number one unduplicated effective network available to advertisers. It has incredibly strong barriers to entry, and it's a niche product.
Q: What do you think the company is worth?
Wally: We think it has a $19 intrinsic value, and it's at $15 now. The stock trades between $12 and $17. We're happy to add when it gets in the $12 to $13 range and lighten up in the $17 to $18. It can be a great long-term holding for us. It doesn't make for good copy, but if we could have a collection of a dozen of those it would be great.
Q: Are there any companies or sectors that you won't invest in?
Wally: We tend not to have a lot of companies that are very capital-intensive and commodity-oriented. We also won't invest if we don't know what the business will look like in five years. It may be really interesting, but we are trying to take the bird in hand, and if it's not predictable enough, we won't play.
Q: That sounds like it means no Facebook or other tech companies.
Wally: Facebook has a billion people, so you'd think they'd be able to sell them plenty. It's not something we would bet against. But we can't figure out how to value that. A company like Google, which is an advertising business that is understandable and has an increasing moat, doesn't work for Hickory because we focus on smaller companies.
Q: What are you doing instead?
Drew: One somewhat-related idea we have invested in is a company called Sapient Corp that sits at the center of the chief marketing officer and the chief technology officer. It helps companies bridge the generation gap in online marketing.
Whether Facebook ends up the winner or some other platform does, if Sapient can get a royalty check on the advertising, it will be more stable. There are a lot of companies like this that we like. We're just waiting for our price.
(Reporting By David Randall. Editing by Lauren Young and Steve Orlofsky)
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