Weitz Investment Management Hickory Fund Q1 2022 Commentary

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The Hickory fund returned -13.15% in the first quarter of 2022, compared to -5.68% for the Russell Midcap index. For the year ended March 31, 2022, the Fund returned -3.87% versus +6.92% for the index.

Portfolio returns for the quarter and year were disappointing on both a relative and absolute basis. At the beginning of January, the investment context was already difficult. Accelerating inflation coupled with a hawkish shift from the Federal Reserve has forced investors to recalibrate their expectations. The uncertainty was further aggravated by the outbreak of war in Europe. Already high energy prices soared as importers of Russian oil and natural gas sought alternative suppliers, further fueling the fire of inflation as supply chains not yet healed from the pandemic were under new stress. By the end of the quarter, the indices had recovered some of their intra-quarter declines, suggesting that some market participants believed the risks had started to recede. In our view, however, the investment landscape in the short term (at least) remains fluid.

Our investment philosophy centers on identifying high-quality companies that we believe are growing in value and buying their shares at prices we believe will be discounted. This approach requires a long-term perspective, measured over several years. Despite our long-term vision, we recognize that our quarterly results were unsatisfactory and weighed on the year. Yet, despite these declines, we remain optimistic about our portfolio holdings, and believe the underlying companies are healthier than recent stock price action appears to be. As several of our holdings became more attractive according to our estimates, we stepped in to buy. Most notably, this includes our new position Gartner (IT) as well as additions to CoStar Group (CSGP) and Dolby (DLB). At the end of the quarter, our portfolio was trading at an estimated price-to-value ratio in the 70s, suggesting a healthier outlook for future returns compared to the low to mid 90s at the start of the year. Lower stock prices and our cut and add actions both played a role in the more favorable forward-looking price-to-value ratio.

Our largest holding, Liberty Broadband (LBRDK, 26% shareholder of Charter Communications, CHTR), detracted significantly in the quarter and year. The pandemic accelerated adoption of Charter’s broadband service as Americans sheltered at home, but as the country reopens, customer additions have understandably slowed. At the same time, competitors have announced ambitious, multi-year goals for competitive wireless broadband offerings and fiber optic service extensions. Nonetheless, we believe Charter still has a strong hand, including a network that is already in place and can be affordably upgraded to stay competitive with fiber and its own fast growing mobile offering which is taking the share of incumbents in their core wireless business. Another positive: share buybacks at these lower prices can also accelerate growth in Charter’s per-share value.

CarMax (KMX) was also a two-time offender, proving to be a detractor in both the quarter and the year. In the first year of the pandemic, stocks more than doubled as supply chain disruptions limited automakers’ ability to deliver new vehicles to market, pushing potential buyers into the aftermarket and causing the prices of used vehicles to skyrocket. As we close out the second year of the pandemic, demand for used vehicles remains high, but dealer inventories remain tight. And as the scope of inflation has widened (which is important to include gasoline), investors are concerned about consumers’ ability to pay ever-higher prices for used vehicles. In the short term, unit volumes can be volatile, but it’s important to note that CarMax’s business model of targeting a consistent level of cash profit per vehicle sold helps protect profits from falling prices. Longer term, we remain optimistic that CarMax’s investments in its omnichannel shopping experience (in-store, online or hybrid), combined nationally, positions them for success in the future.

The top five remaining detractors for the quarter were Axalta (AXTA), LKQ (LKQ) and Black Knight (BKI), while Liberty Latin America (LILAK), Qurate Retail (QRTEA) and MarketAxess (MKTX) finished top of the exercise -five detractors.

Markel (MKL) was the only standout player in the quarter. Insurers generally benefit from a strong economy, as pricing tends to improve and the volume of risks to be insured increases. We also expect higher interest rates to translate into higher investment income as insurers recycle premium “float” into higher yielding securities. The Fund’s new position in Gartner also added to the price slightly. Gartner is a leading provider of subscription research services for IT and business professionals (i.e. senior executives). Gartner’s business model is enviable: expert analysts create research reports that are then syndicated to subscribing customers. Analysts are also available to clients for consultation. This one-to-many model gives customers access to what might otherwise be critical business intelligence and research at a prohibitive cost. Meanwhile, Gartner can reinvest in additional search capabilities while earning a very healthy margin.

AutoZone (AZO) was the Fund’s largest contributor during the year. Market forces of higher prices and the scarcity of new or used vehicle supply have led owners to invest more in maintaining their vehicles. LKQ’s recycled auto parts business also benefited, making it a contributor for the year. Markel’s strong quarter propelled it to the second-largest contributor for the fiscal year, while telecommunications services company LICT (OTCPK:LICT) and aggregates provider Martin Marietta (MLM) rounded out the top contributors.


Main contributors and relative detractors

For the TRIMESTER ending 03/31/2022

TOP CONTRIBUTORS

Come back (%)

Average weight (%)

Contribution (%)

% of net assets

Markel Corporation (MKL)

19.68

4.57

0.80

4.8

Gartner, Inc. (IT)

5.38

1.15

0.10

1.7

Liberty Braves Group-Series A & C (BATRA/BATRK)

-0.60

1.50

0.03

1.7

THE BEST DETRACTORS

Come back (%)

Average weight (%)

Contribution (%)

% of net assets

Liberty Broadband Corp. – Class A&C (LBDRA/K)

-16.52

8.18

-1.36

7.9

CarMax, Inc. (KMX)

-25.89

4.46

-1.21

4.3

Axalta Coating Systems Ltd (AXTA)

-25.79

3.54

-1.06

3.3

LKQ Company (LKQ)

-24.18

3.44

-0.84

3.4

Black Knight, Inc. (BKI)

-30.04

2.21

-0.74

2.0

The holdings are subject to change and may not be representative of the current or future investments of the Fund. Performance contributions are based on actual daily holdings. Returns shown are actual returns for the security’s specified time period. Additional securities referenced here as a percentage of the Fund’s net assets as of 03/31/2022: AutoZone, Inc. (AZO) 2.3%, CoStar Group, Inc. (CSGP) 5.2%, Dolby Laboratories, Inc. (DLB) 3.3%, LICT Corporation (OTCPK: LICT) 5.7%, Laboratory Corporation of America Holdings (LH) 4.4%, Liberty Latin America Ltd. – Class C (LILAK) 2.6%, MarketAxess Holdings, Inc. (MKTX) 3.2%, Martin Marietta Materials, Inc. (MLM) 3.3%, Qurate Retail, Inc. – Class A (QRTEA) 0 .7%, Qurate Retail, Inc. – Preferred (QRTEP) 1.6%.

Medium Annual Total Return(%)

AS OF 03/31/2022

YTD

1 year

3 years

5 years

10 years

Since the creation of the Fund

Creation date

Net expenditure

Gross expenditure

Hickory Fund

-1:15 p.m.

-3.87

8.87

6.16

7.27

9.21

01/04/1993

1.09%

1.14%

Russell Midcap®

-5.68

6.92

14.88

12.61

12.85

11.18


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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.