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Called "Omaha’s Other Sage" by Forbes and "Omaha’s New Value King," by Louis Rukeyser, Wallace Weitz’s Mutual Funds have generated 11%-13% in average annual returns since the mid-1980s, slightly ahead of market index returns. His best new conviction buys include Target Corp. (NYSE:TGT), Southwestern Energy Co. (NYSE:SWN) and CVS Caremark Corp. (NYSE:CVS).

Omaha, Nebraska-based Weitz Funds manages $4 billion in assets and is headed by Founder, President and Portfolio Manager Wallace Weitz. Mr. Weitz founded the firm in 1983 and has been in the investment management business since 1970. Of the $4 billion, about $2.2 billion includes equity assets, and the rest is in bonds and money market funds. The three largest equity funds, namely the Value Fund, Partners Value Fund, and the Partner III Opportunity Fund, together account for most of the $2.2 billion in equity assets, and have returned 10.4%, 12.7% and 13.6% in average annual returns since fund inception in 1983 to 1986, in-line with the 11%-13% average annual return for the S&P 500 (NYSEARCA:SPY) during the same period.

Mr. Weitz has been called as Omaha’s Other Sage by Forbes and as ‘Omaha’s New Value King’ by Louis Rukeyser. His consistent performance has earned him a spot in Forbes’ Honor Roll recognizing Mutual Fund managers who perform well in both bull and bear markets. For example, his fund returned 19.6% in 2000, when the S&P 500 declined 9.1%. Like Warren Buffett, Weitz is a deep value investor and a disciple of the Benjamin Graham philosophy. However, he combines Graham's price sensitivity and insistence on a "margin of safety" with a conviction that qualitative factors that allow companies to have some control over their own destinies can be more important than statistical measurements, such as historical book value or reported earnings. Like Buffett, he also invests only in companies that he understands well and as a result is not as diversified across Sectors as many other Mutual Fund managers. Generally, he prefers companies that provide a service over product-based companies.

The fund holds a moderately diversified portfolio of 77 equity positions, about 60% of that in large caps, 20%-25% in mid caps and the remaining 15%-20% in small-cap equities. The portfolio turnover is 25-30% implying an average holding period approaching three to four years. Based on the most recent SEC 13-F filing for the March 2011 quarter, we determined that the portfolio is over-weight the Services Sector, and it is under-weight Consumer, Energy, and Utility Sectors.

Within Sectors, at a more disaggregated level, our prior analysis of the SEC 13-F filings for the December 2010 quarter had revealed that it was over-weighted in the Semiconductor Manufacturing Industry, the Construction Industry, the Medical Services Industry Group, the Outsourcing and IT Services Industry Group, and the Internet Group.

Based on a review of the most recent SEC 13-F filing for the March 2011 quarter, we determined that it has increased the weighting in the Construction Industry Group by accumulating more Martin Marietta Materials (NYSE:MLM) stock, that has also increased the weighting in the Internet Group by buying more Google Inc. (NASDAQ:GOOG) and Knot Inc. (KNOT), and that it probably is no longer over-weight the Outsourcing and IT Services Group as it sold a portion of the position in Accenture Plc (NYSE:ACN). Furthermore, we determined based on the recent 13-F filings that it significantly reduced its weighting in the Semiconductor Manufacturing Industry by selling a portion of the Texas Instruments (NASDAQ:TXN) position, and that it reduced its weighting in the Medical Services Industry Group by selling a portion of the Omnicare Inc. (NYSE:OCR) position; however, it continues to be over-concentrated in both of those Industry Groups.

The following summarizes the most significant new picks and pans in the latest reported 13-F filing for the March 2011 quarter, and updated based on any 13-G filings since the end of the quarter:
  • Target Corp. (TGT) operates 1,750 Target and SuperTarget Stores across the U.S. offering everyday items, food and fashionable merchandise. The position was initiated in the spring of 2010 in the mid-$50s, so the doubling on that position by adding another $34 million to the $35 million position at slightly lower prices in the low-$50s conveys a high conviction in the buy decision.
  • Microsoft Corp. (NASDAQ:MSFT) develops operating systems, business software, and other applications for servers, PC’s and intelligent devices. It initiated this position in winter of 2008 in the $30 range, and it has been on the wrong side of the trade since then as the stock has continued to be weak, so the addition of another $29 million to the prior $92 million position does not indicate conviction.
  • Sandridge Energy Inc. (NYSE:SD) is engaged in the exploration and production of crude oil and natural gas. It initiated this position in the spring of 2010 in the $7 range, so the selling off a third of the prior quarter position in the $12 range just a year later is most likely just profit-taking and does not indicate conviction in the sell decision.
  • Southwestern Energy Co. (SWN) is engaged in the exploration and production of oil and natural gas primarily in AK, OK, TX and PA. This position was initiated in the December 2010 quarter in the high-$30s, so the addition of another $27 to the prior $11 million position as the stock climbed into the $40 range indicates a high level of conviction.
  • CVS Caremark Corp. (CVS) operates 7,182 pharmacy drugstores in 41 states and D.C. This is a significant new position in the current quarter and indicates a high conviction level.
  • Omnicare Inc. (OCR) provides pharmacy distribution and consulting services to long-term care centers and hospitals in 47 states and D.C. This position was initiated in the summer of 2004 in the low-$40s, so the selling of $20 million of a $142 million position in $30s range seven years later does not indicate conviction in the sell decision.
  • ConocoPhillips (NYSE:COP) is engaged in exploration, production, mid-stream, refining and marketing of crude oil and natural gas worldwide. The position was initiated in the spring of 2010 in the low- to mid-$50s, so the selling of $17 million of a $101 million position is not that significant.
  • Cabelas Inc. (NYSE:CAB) operates 31 outdoor equipment stores in 22 states and Canada offering camping, fishing, and other products. This position was initiated in the spring of 2010 in the high teens, so the selling of $16 million of the $17 million as the stock traded into the $30s could be just profit-taking and does not indicate a high degree of conviction in the sell decision.
  • Aon Corp. (NYSE:AON) brokers insurance products and offers risk management and consulting services worldwide. The position was initiated in spring of 2010 in the low-$40s, and it is the largest holding in the portfolio. The fact that it sold only a minor $1.6 million position as the stock traded into mid-$50s is an indication of the conviction in the buy decision.
  • Redwood Trust Inc. (NYSE:RWT) is a REIT that invests in securitized residential and commercial real estate loans and securities in all 50 states. The position was initiated in the 1990s, and even after the insignificant $2.7 million sell this quarter, it continues to hold a significant $98 million or 8% of the total outstanding shares of the company.
  • Dell Inc. (NASDAQ:DELL) provides desktop PCs, mobility products, servers and networking products to individuals, businesses and governments. This is among the top five holdings, and the fund added more in the quarter indicating the confidence in this position.
Table
Company
Ticker
Action
Market Value at end of March 2011 Quarter
Change in Value from Prior Quarter
Percent of Portfolio
Percent Shares Owned
Target Corp.
TGT
Add
$ 35 million
$34 million
1.60%
0.10%
Microsoft Corp.
MSFT
Add
$ 121 million
$29 million
5.53%
0.06%
Sandridge Energy Inc.
SD
Cut
$ 73 million
($27) million
3.35%
1.40%
Southwestern Energy Co.
SWN
Add
$ 38 million
$27 million
1.73%
0.25%
CVS Caremark Corporation
CVS
New
$ 25 million
$25 million
1.16%
0.05%
Omnicare Inc.
OCR
Cut
$ 122 million
($20) million
5.56%
3.50%
ConocoPhillips
COP
Cut
$ 84 million
($17) million
3.85%
0.07%
Cabelas Inc.
CAB
Cut
$ 1 million
($16) million
0.02%
0.03%
Aon Corp.
AON
Add
$ 124 million
$2 million
5.66%
0.71%
Redwood Trust Inc.
RWT
Cut
$ 98 million
($3) million
4.47%
8.01%
Dell Inc.
DELL
Add
$ 95 million
$4 million
4.33%
0.34%
Texas Instruments Inc.
TXN
Cut
$ 88 million
($13) million
4.01%
0.22%
Accenture Plc
ACN
Cut
$ 81 million
($5) million
3.70%
0.23%
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are my ‘opinions’ and I may be wrong. I may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to my thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.
Source: Top New Buys and Sells of Omaha's Other Sage Wallace Weitz