The Hickory Fund returned -1.31% in the third quarter compared to -0.93% for the Russell Midcap Index. Year-to-date, the Fund has returned +12.93% compared to +15.16% for the index.
After a string of strong quarterly results for our portfolio and the index, investors caught their breath in the third quarter. We believe the tailwind of a broad economic recovery is still at our backs, but the progress will not be as blatantly apparent compared to the rapid bounce-back aspects of the economy experienced after the worst months of the pandemic. Slower growth rates were expected (inevitable, really) and not likely the cause of recent investor anxiety/distress. Instead, investors are grappling with a host of issues, including shortages of workers, raw materials, and other finished goods. These shortages are resulting in supply chain disruptions and are feeding fears that the Fed’s promised “transitory” inflation may turn out to be “structural.”
Companies that can successfully pass these higher costs on to customers are said to have “pricing power” and, therefore, possess the ability to blunt inflation’s impact on profit margins and earnings. Our Quality at a Discount investment framework favors businesses with strong competitive positions and the ability to responsibly adjust price. (The word “responsibly” is key as we believe companies that engage in “price gouging” of customers rarely prosper in the long run.) Of course, no company is completely immune to inflationary pressures, but given our longstanding focus on pricing power, we believe our portfolio companies are well-positioned to navigate potentially choppier waters and maintain more resilient valuations.
Quarterly returns across the portfolio were muted, placing greater focus on the year-to-date results. LICT Corporation (LICT, Financial), a telecom operator serving secondary and tertiary markets in the U.S., has been the Fund’s top performer of 2021 so far as the company continues to benefit from investor enthusiasm for connectivity providers. Labcorp (LH, Financial) has also been a year-to-date contributor as the company’s traditional lab business continues to recover and as it becomes clear that COVID-related demand will remain elevated for an extended period. A trio of auto-related businesses rounds out the top five year-to-date contributors: used car dealer CarMax (KMX, Financial), recycled parts purveyor LKQ Corp (LKQ, Financial), and new parts seller AutoZone (AZO, Financial) (also the Fund’s top quarterly contributor). AutoZone’s sales have exceeded expectations as the company has taken share from competitors throughout the pandemic with drivers taking on more vehicle maintenance themselves. The company’s new commercial business initiative has continued growing accounts, too. Although we anticipate above-average sales may slow to a more normal cadence, these results have translated into elevated cash flow, bolstering management’s ability to compound per-share value through share repurchases.
Dun & Bradstreet (DNB, Financial) was the Fund’s top quarterly and year-to-date detractor. Last quarter, we introduced Dun & Bradstreet to the portfolio and described some of the actions already taken to improve its operations and enhance the value delivered to customers. We remain confident in management and their strategic direction, but we acknowledge that this process will take time. Other year-to-date detractors include Black Knight (BKI, Financial) and Guidewire Software (GWRE, Financial), two businesses that have traded lower as investors’ enthusiasm for software companies has ebbed and flowed throughout the year (notably, however, Guidewire was a top contributor in the quarter). Both are leading providers in their specific markets, and we believe their long-term futures remain bright. Bank software provider
ACI Worldwide (ACIW, Financial) saw its shares decline as expectations of an activist-investor-led sale of the company dissipated. We trimmed our position as the stock price rose in response to the sale speculation. Shares have now returned to their pre-activist-inspired levels. Finally, year-to-date detractor EverArc’s (LSE:EVRA, Financial) modest negative return is in keeping with investors’ change of heart regarding special purpose acquisition vehicles (SPACs). Nevertheless, we look forward to Everarc’s announced purchase of Perimeter Solutions, a global provider of firefighting products, and we will share more in future updates when the deal closes.
Portfolio activity was modest during the quarter. Of note, we added to last quarters’ new positions, Dun & Bradstreet and MarketAxess (MKTX, Financial), and we exited our remaining shares of First Hawaiian Bank (FHB, Financial). We did not add any new businesses to the portfolio in the third quarter.
The opinions expressed are those of Weitz Investment Management and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through 10/19/2021, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed.
This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor's specific objectives, financial needs, risk tolerance and time horizon.
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.
