Stock Ideas Worth Watching From Wally Weitz's Letter to Shareholders

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Includes: ASCMA, DISCA, DISCK, IRM, SWN
by: The Keating Letter

Wally Weitz released his Q4 letter to shareholders and detailed some of his holdings. For those of you not familiar with Weitz, he’s known as that other guy from Omaha. He’s averaged more than a 12% return annually for the past 25 years. He’s the founder and president of Wallace R. Weitz & Company, which is a registered investment advisory firm that started with $10 million under management in 1983. It now has $3 billion under management. I always make it a note to read his quarterly letter and look through his holdings. His stock holdings are a good place to generate ideas.

Weitz notes that many of his holdings went from “dirt cheap” to “moderately cheap” as 2010 went on. He owns a collection of Liberty Media companies, which are John Malone’s spin-offs. Weitz owns Liberty Global (NASDAQ:LBTYA), Liberty Interactive (LINTA), Liberty Capital (LCAPA), Liberty Starz (LSTZA), Discovery Communications (NASDAQ:DISCA), and Ascent Media (NASDAQ:ASCMA). Two I’d like to focus on are DISCA and ASCMA.

Discovery owns 100 television networks in 35 languages. You’d be familiar with the Discovery Channel, TLC, and the new Oprah Winfrey Network, which took over the Discovery Health channel. The play here is an arbitrage opportunity. Discovery has different share classes and there is currently a discrepancy in their value. You’ll want to look at DISCK, which is at a 15% discount to DISCA. DISCK doesn’t have voting rights, but it doesn’t matter since an 80% approval is required for any major actions, and insiders own more than 20% of the shares. So, your vote essentially doesn’t matter anyway. You could either just go long DISCK, or pair that with a DISCA short.

I’ve followed Ascent Media for some time as well but have not pulled the trigger. The sale of most of their operations is pending, and they acquired Monitronics, a security alarm monitory company, in December for $1.2 billion. The idea was to shed their current business and buy a current operating company with proven management. Their business model right now is to manage Monitronics and find a profitable way to allocate the rest of their cash. Another acquisition is likely. It put this one in the moderately cheap category, which is a good place to buy into when management understands how to properly allocate capital.

Weitz manages the Hickory Fund and Partners III Opportunity Fund and co-manages a few other funds in the stable. The Hickory Fund profited from SandRidge Energy (NYSE:SD) and Ascent Media. Additionally, they made a large purchase of Iron Mountain (NYSE:IRM). Iron Mountain is an information management company with a stable business model and a nice 3% dividend.

The Partners III Opportunity Fund holds many of the same positions as the Hickory Fund. One highlight was the purchase of Southwestern Energy Company (NYSE:SWN). They’re a natural gas producer whose main focus is on the Fayetteville shale in Arkansas. They also have some exposure to the Marcellus shale. If natural gas prices rise, Southwestern Energy will do very well.
Weitz is unique in that he just continues to plug away year after year with market-beating returns. He doesn’t get overly excited and has a very consistent, calm temperament. He’s a good one to follow and it’s worth your time to do more research on the companies listed here. There’s an idea in this letter for everyone. My two favorites are DISCA and ASCMA. If you’re bullish on natural gas, take a look at SWN. If you think the economy is going to continue to be stuck in the doldrums, then IRM would be your play.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.