Large-Cap Value Strategy : Commentary

Portfolio Manager: Bradley Hinton

Click below to read Portfolio Insights: Annual Overview of the Large-Cap Value Strategy
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As of 3/31/2016

The Large-Cap Value Strategy returned +1.17% (gross of fees), +0.88% (net of fees) during the fourth quarter, compared to +7.04% for the S&P 500® and +6.50% for the Russell 1000®. The Strategy’s calendar year returned -3.33% (gross of fees), -4.43% (net of fees) compared to +1.38% for the S&P 500® and +0.92% for the Russell 1000®.

Fiscal Year Contributors

Martin Marietta Materials is a producer of sand, gravel, aggregates and cement (products for the construction industry). During the trailing twelve months, Martin’s aggregates volumes, pricing, and incremental margins exceeded investor expectations, as non-residential and public construction showed broad-based strength. The outlook for public volumes over the next several years improved with the passing of the 5-year federal highway bill, dubbed Fixing America’s Surface Transportation (FAST) Act, and with state Department of Transportation budgets expanding. Martin also increased, for the third time, its synergy cost-savings target for the 2014 Texas Industries acquisition from the original $70 million to $120 million. They sold their California Oro Grande cement operation for $420 million the proceeds of which will be used towards their 20 million share repurchase program. The culmination of these positive events pushed Martin Marietta’s stock price above our estimate of intrinsic value, and we exited our position during the third quarter of 2015. 
Alphabet is a multinational technology company generally specializing in Internet related services and products. Alphabet’s core search business (Google) delivered strong operating results which eased investor fears that the company’s primary search advertising products would not be as relevant on mobile phones as on desktops. Alphabet’s shares rose, as investors priced in a higher rate of long-term growth, renewed operating expense discipline and the announcement of the company’s first capital return program. We opportunistically trimmed our position, as the stock price approached our estimate of business value.
Motorola Solutions is a global leader in commercial radio systems and public safety communication infrastructure products and services. Motorola Solutions’ shares benefited from board membership and capital infusion by respected technology private equity firm SilverLake Partners, and reduced fears that the company’s core public safety radio products were becoming obsolete. Furthermore, Motorola’s aggressive share repurchase throughout the last 12 months increased per share value. We believe Motorola Solutions will continue to repurchase shares as long as the stock price remains at attractive levels. 

Fiscal Year Detractors

Endo International is a specialty healthcare company engaged in developing, manufacturing, marketing and distributing branded and generic pharmaceutical products and medical devices. Several developments contributed to a difficult 12-month period for Endo’s stock.  Growth in the company’s branded drug division has been disappointing, owing in part to poor results from several drugs Endo inherited from its acquisition of Auxilium Pharmaceuticals roughly a year ago. In addition, pricing pressure in the company’s legacy Qualitest generics business increased, muting the segment’s near-term (and potentially long-term) growth trajectory.  Finally, liabilities relating to the company’s legacy vaginal mesh products increased, following an influx of claims late in 2015.  While our business value estimate for Endo has come down, the stock price has declined far more significantly.  Using conservative assumptions for the company’s business over the next several years, we believe Endo has significant upside potential if management can execute on its growth plans for XIAFLEX (attractive injectible franchise) and BELBUCA (pain patch).          
Valeant Pharmaceuticals is a multi-national, specialty pharmaceutical and medical device company that develops, manufactures and markets a broad range of brand name, generic and over-the-counter products in over 100 countries.  We closed our position in Valeant toward the end of October last year.  The stock came under heavy selling pressure as a result of increased political scrutiny around drug pricing and possible wrongdoing at one of its “alternative fulfillment” pharmacy partners.  Our decision to sell was ultimately based on a combination of important questions we had difficulty answering regarding potential long-term reputational damage to Valeant’s business, the likelihood of difficult payer negotiations, future business model uncertainty and financial leverage.  While our investment in Valeant ended on a disappointing note, it was a healthy multi-year contributor to Strategy performance.   
Liberty Global is the largest international cable company, with operations in 14 countries providing video, broadband Internet, fixed-line telephone and mobile services to its customers. Liberty Global’s portfolio of businesses produced mixed results during the fiscal year.  Continued strong results in the UK and Belgium were partially offset by continued competitive pressures and merger integration missteps in Holland, and a poorly received price increase in Germany. Furthermore, the continued strengthening of the US Dollar put a damper on Liberty’s results (reported in US Dollars).  We believe the company is restoring investor confidence by learning from these missteps, taking actions within the portfolio as needed (e.g., moving the Dutch business into a joint venture with Vodafone-See Quarterly Detractors) and outlining an achievable three-year growth plan.

Quarterly Contributors

Range Resources is an independent producer of natural gas and natural gas liquids (NGLs) based in Fort Worth, Texas.  Range shares rallied during the quarter, as the company reduced its debt load by roughly $1.0 billion following the divestiture of two non-core assets (Nora and Bradford County).  The company is continuing to pursue a sale of its central-Oklahoma oil properties, which will likely be used to retire additional long-term debt. Other positives included improving natural gas price sentiment (for 2017) and a general thawing in the high yield debt markets. Falling drilling activity in the Marcellus and Utica shales (collective rig counts are down from 170 at peak to 40 at present) and the continued drop in domestic oil production, in time, should bring both oil and natural gas prices up closer to their marginal costs of production.  In the interim, Range has 80% of its 2016 gas production hedged at $3.24/MMBtu and is locking in additional 2017 production with the current gas strip close to $2.85.  We continue to believe Range will emerge from the downturn a significantly more efficient–and more valuable–company.           
Liberty Broadband holds a 26% ownership interest in Charter Communications in addition to a minority equity interest in Time Warner Cable. Charter shares have risen as continued improvement in operating results, including net subscriber additions in its legacy video business, demonstrate that management’s operating plan is generating positive momentum.  Investors are also gaining confidence that the Federal Communications Commission (FCC) is leaning toward approving Charter’s proposed acquisitions of Time Warner Cable and Bright House Networks.  We believe Charter’s operating momentum is sustainable and that the proposed deals are likely to be approved, representing additional upside to our business value estimate for Charter on a stand-alone basis.  
Berkshire Hathaway is a conglomerate holding company owning subsidiaries engaged in a number of business activities. Berkshire shares were helped by the closing of the Precision Castparts acquisition and improved operating performance at its Burlington Northern railroad subsidiary. Berkshire’s insurance unit continues to show excellent discipline in underwriting, which results in temporary declines in premium, but means the company will have significant capacity when insurance pricing returns.

Quarterly Detractors

Express Scripts is the largest stand-alone pharmacy benefits manager (PBM) in the United States, helping health benefit providers improve access to (and the affordability of) prescription drugs. Negotiations with Anthem, Express Scripts’ largest customer, hit an impasse early in the quarter. Anthem elected to bring the details of the disagreement public at a widely attended industry conference in January, providing the investment community a lens into how far the two companies were apart on the economics of their existing contract.  Since then, Anthem has also filed a lawsuit against Express Scripts.  While we hope a mutually agreeable solution will eventually be achieved, it remains possible (some believe likely) that Anthem will choose not to renew its contract with Express in 2019. We have run scenarios encompassing a range of different outcomes, and we believe Express Scripts’ shares are undervalued in all but the most dire.  We continue to monitor contract-related developments and are otherwise heartened by improved execution across the other 84% of Express Scripts’ enterprise. 
Endo International Please refer to the Fiscal year synopsis.  
Liberty Global is the largest international cable company, with operations in 14 countries providing video, broadband Internet, fixed-line telephone and mobile services to its customers. Its shares price fell early in the quarter after an influential Wall Street analyst downgraded his outlook for the stock, principally due to concerns over continued competitive struggles in Holland (one of Liberty’s largest markets).  Since that time, Liberty announced it would move its Dutch operations into a 50/50 joint venture with Vodafone.  The joint venture structure allows Liberty to combine its strong cable and broadband businesses with Vodafone’s mobile offering to create a more competitive, “converged” offering.  Liberty also provided Wall Street with an attractive three-year growth outlook during its fourth quarter earnings call, helping shares recover some of the earlier declines.  We remain confident of continued growth for Liberty’s cable offerings and management’s abilities to deliver on their outlook. 

New Holdings

McKesson distributes drugs, equipment, and health and beauty products throughout North America and portions of Europe. The company also delivers software solutions and outsourced services to hospitals, pharmacies and other healthcare organizations.  Merger-related customer losses (McKesson accounts Omnicare, Target Pharmacy and Rite Aid are moving to competing wholesalers after being acquired), the return of generic drug deflation and concerns of lower future branded drug inflation combined to drive McKesson’s stock down nearly 40% from its high last summer.  Having done detailed work on the company roughly nine years prior, we sharpened our pencils again late last year and initiated a position at $150 in January.  The drug wholesaling business is an attractive oligopoly characterized by intense but rational competition, stable growth, healthy returns on capital and consistent excess cash generation.  While McKesson’s business faces some near-term headwinds, we believe it is an attractive investment over the long term.
Comcast is the largest operator of cable delivered Broadband and Pay-TV service in the United States and, through its NBC Universal subsidiary, is a global entertainment company.  After abandoning its bid to acquire Time Warner Cable, Comcast has refocused on execution in its core cable business–investing in higher broadband speeds and introducing a new best-in-class user interface for its Pay-TV customers (dubbed X1).  The Company is aggressively rolling out X1 across its footprint, driving higher customer satisfaction and improved customer retention.  At NBC Universal, results continue to positively surprise investors thanks to box office hits like Jurassic World, and new attractions like The Wizarding World of Harry Potter driving record attendance at its theme parks.  Despite investor concerns over “cord cutters” and “skinny bundles,” we believe the Pay-TV business is more resilient than feared, and thanks to its position in broadband and content, Comcast is well positioned for the future. 

Eliminated Holdings

Precision Castparts – We sold Precision Castparts at a gain when Berkshire Hathaway completed its acquisition of the company.

Quarterly Top Performers

Range Resources Corporation
Liberty Broadband Corp. Class C
Berkshire Hathaway Inc. Class B
Aon plc
Motorola Solutions, Inc.

Quarterly Bottom Performers

Endo International plc
Express Scripts Holding Company
Liberty Global plc Class C
Allergan plc
Monsanto Company
Contributions to performance are based on actual daily holdings. Securities may have been bought or sold during the quarter. Return shown is the actual quarterly return of the security or combination of share classes. Source for return shown is FactSet Portfolio Analytics. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. The holdings identified do not represent all of the securities purchased, sold or recommended for Weitz Inc.’s advisory clients. Contact Weitz Inc. to obtain the methodology for the calculations above. You may reach Weitz Inc. at 1125 S 103rd Street, Suite 200, Omaha NE 68124, at 1-800-304-9745 or at

Performance information in this letter is the weighted-average performance of accounts managed by Weitz Investment, Inc. (“Weitz Inc.”) under its Large-Cap Value Strategy (the “Strategy”). Performance of particular securities in this letter is shown for an entire time period. All other portfolio holdings information is for a particular “Representative Account” in the Strategy.

Index performance is hypothetical and is shown for illustrative purposes only. The returns above also include fee waivers and/or expense reimbursements, if any; total returns would have been lower had there been no waivers or reimbursements. Contributions to performance are based on actual daily holdings. Comparative returns are the average returns for the applicable period of the S&P 500® and the Russell 1000® Indexes. The S&P 500® is an unmanaged index consisting of 500 companies generally representative of the market for the stocks of large-size U.S. companies. The Russell 1000® Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership.
Investors should consider carefully the investment objectives, risks and charges and expenses of the Strategy before investing. Past performance does not guarantee future results. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk.