Cash-Flush Weitz Value Fund Is Ready to Pounce

Cash is no longer a four-letter word for some mutual fund managers, especially as stocks continue marching to new highs and bargains become few and far between. But few funds are as fond of the green stuff as Weitz Value( WVALX ). At the end of the first quarter, the fund had nearly 30% of its $1.2 billion in assets in cash.

Why so much? One word: discipline. "Fear of missing out in up markets can lead to an erosion of price discipline," says co-manager David Perkins. "We're trying to be prepared for the emergence of more meaningful discounts." Perkins is wise to prepare--U.S. stocks haven't had a correction (defined as a downturn of 10% to 20%) since October 2011 and haven't experienced a full-fledged bear market (a decline of at least 20%) since the last one ended in March 2009. Because corrections occur roughly every two years, on average, it's safe to say that the market is due.

The fund owns only 29 stocks, and its contrarian managers--Perkins works alongside Wallace Weitz and Bradley Hinton--seek to buy out-of-favor stocks that sell at a discount to what they think the business is worth.

The managers aren't concerned about holding a diverse mix of stocks or industries, or hewing to a particular asset allocation. Instead, they favor a stock-by-stock approach, searching, according to fund documents, "for companies that are in control of their own destiny that have honest, intelligent management."

For the most part, the formula works for patient investors. The fund's long-term record is solid. Over the past 15 years, Weitz returned 6.3%, beating Standard & Poor's 500-stock index by an average of 1.7 percentage points (all returns are through June 2). More recently, it has lagged the index, perhaps hurt by all that cash. Over the past year, Weitz earned 16.6%, lagging the S&P 500 by 4.0 percentage points.

For now, the bull market has shrunk the pool of stocks that appeal to the bargain hounds at Weitz Value. "Many of the stocks we follow appear to have baked in perfect operating scenarios over the next few years," Perkins says. "That's a difficult backdrop."

Don't get him wrong; Perkins isn't calling for a bear market or even a meaningful correction in stock prices. "We shy away from making short-term predictions," he says. "We're not bearish on the economic prospects for the U.S. or for the globe." But if trouble comes--be it company-specific or to the broader market--"we're not afraid to move quickly or decisively."

At any given time, the fund has a watch list with 40 to 50 names on it. Those companies have been thoroughly analyzed and valued, so when the price is right, Perkins or his colleagues can pounce. Stocks on the watch list tend to fall into three buckets, says Perkins. The first contains "more of what we own and love," he says.

The second contains companies that can deploy excess cash and buy assets at attractive prices, taking advantage of disruptions in the market to buy back their own stock or make profitable acquisitions. "In that bucket, we've been looking at a number of companies in the media, health care and aerospace sectors," says Perkins.

The third bucket contains businesses that lead the competition and can produce steady returns over long periods. Examples include payment processors, such as eBay ( EBAY ), which owns PayPal.

Naturally, Perkins is most willing to chat about stocks in the first bucket--the ones he already owns. Roughly one-third of the stocks in the fund are within 10% of a price at which the managers would buy more, he says. One example is Valeant Pharmaceuticals International ( VRX ), a Canada-based drug and medical-device maker with an aggressive mergers-and-acquisitions bent. Valeant acquired Bausch & Lomb last year and is currently pursuing Allergan.

Other health care holdings on the watch list include Express Scripts ( ESRX ), the giant pharmacy-benefits manager, and Endo International ( ENDP ), a specialty drug maker that is developing medicines to manage pain and treat cancer, among other conditions. The Food and Drug Administration recently approved the company's drug for the treatment of low testosterone. Media companies on the watch list include Liberty Media ( LMCA ), which owns a variety of media and entertainment properties, including SiriusXM radio and the Atlanta Braves baseball franchise.

Perkins will buy when investors become disenchanted with any of the stocks on his list for the wrong reason. But for now, that mountain of cash remains largely undisturbed. Says Perkins: "We've found opportunities, but they've been very one-off in nature, as opposed to being able to back up a truck to a specific sector or the market in general."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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