Wally Weitz: Finding Value in Growth Stocks
Longtime value manager Wally Weitz has unperformed many of his peers in recent years, in part because he has been keeping a lot of his powder dry. Concerned about equity valuations, Weitz Investment Management has close to 20% of its holdings in cash in its long-only funds. Although its flagship $1.1 billion Weitz Partners Value Investor fund (ticker: WPVLX) has trailed the Standard & Poor’s 500 in recent years, it has good long-term performance. The fund’s 15-year annual return of 7.17% bests the S&P’s by more than 2.5 percentage points and places it in the top 15% of its Morningstar peer group. Based in Omaha, Neb., Weitz, 65, and his team oversee about $6 billion. Barron’sspoke by phone with Weitz and Brad Hinton, 46, the co-manager of Partners Value.
Barron’s: How tough has it been to find attractive value stocks?
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Wally Weitz: It is not the very hardest, but most of the stocks that we’re interested in are trading nearer their business values, as we measure them, than usual. The weighted average price-to-value of the stocks in our funds is around 85%, and we certainly would prefer to buy them at 50% to 65% of their business value. When it starts to get up to 85% or 90%, it is not dangerous, because we can still have upside over time from that level. But the odds of good returns in the near term are less than they were when we started at a cheaper level of valuations. Most of the companies we invest in are based in the U.S. They do quite a bit of their business globally, so it does matter what is happening in the rest of the world. But the American economy is OK, and the vast majority of our companies are showing reasonable growth. And the value of these businesses has been going up pretty steadily over time. However, stock prices seem to be generally going up faster than business values.
Hinton: We have seen more dispersion in valuations in the fourth quarter than we did coming into 2014. We had elevated price-to-value levels at the start of the calendar year, and there wasn’t much variability around that high average. But with some of the market volatility in October and the macro concerns, there’s more dispersion in valuations, in our portfolios, and in the on-deck list of companies we are thinking about investing in. Energy has been very out of favor, as have some media stocks and small-caps.
With stocks at these valuations, are you putting more growth stocks in your portfolios?
Wally Weitz: For us, the pace of cash-flow growth is a factor in valuing businesses. So we’re happy to look at companies that others might label as growth stocks. If they are predictable enough that we can assign a business value and then we can buy them at the discount we want, we are happy to buy that type of stock. Over the past year or two, the flavor of our overall portfolios may have tilted toward faster-growing and higher-quality companies, some of which might get labeled growth stocks, such as TransDigm Group [TDG]. We want the best companies we can get at the cheapest prices, and if it’s a faster-growing company, so much the better.
Let’s hear about a few of the stocks in your portfolio.
Wally Weitz: Liberty Media [LMCA] is what we refer to as the mother ship of the Liberty complex. It is a holding company that’s a collection of various public and private businesses, including the Atlanta Braves Major League Baseball team. But 80% of the gross asset value is Sirius XM Holdings [SIRI]. Liberty got those shares by making a loan to SiriusXM when it was in distress during the financial crisis. Facing bankruptcy, SiriusXM had taken on way too much debt. The two companies, Sirius and XM, had merged, so they had a monopoly on satellite radio. Liberty lent them about $500 million at a very high interest rate, and took an equity kicker convertible into 40% of the company. SiriusXM got over the hump with that loan, and paid it back quickly. So, virtually for free, Liberty got 40% of the company, which now has a market cap of $19 billion.
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