Weitz: The Right Amount of Caution
Weitz Funds' Wally Weitz discusses balancing the bear market's lessons learned with being too cautious and details opportunities arising from the firm's Liberty Media stake.
Michael Breen: Two general questions about last year, where a balance sheet risk sort of decimated a lot of shares in some firms, if you had any kind of even modest debt. Now things have bounced back. So how do you avoid trying to win the last war? You want to be cautious, but you don't want to--there is a certain level of debt that's perfectly fine in a company, and a certain level of operating leverage, which is good. Everybody sort of wants Procter & Gamble now, but they didn't want it before '08. So how do you kind of balance the lessons learned versus being too cautious?
Wally Weitz: I think that's a really good question, and we do a lot of debate among ourselves about whether we're leaning to the cautious side too much sometimes. I think in companies that really never had too much debt but had questions raised about them because of the capital markets just being shut down--companies like Liberty, the various Liberty entities for example--I think we trust the management. Again, we've been with them 15-18 years. We trust them to understand what risks they're taking, to be very careful not to cross over the line to too much risk, and in cases like that, we're happy to double up on the way down.
With other companies that maybe were a little over-leveraged and depend on the capital markets reopening and capital being relatively cheap within a year or two, I think we decided we better not play, in case.
Breen: You guys added American Express at one point in the last year. Is that accurate? And if so, how did you get comfortable where that is, sort of a long-term business versus the short term? I wouldn't call it noise--there are some real issues and challenges--but they do seem to be short term. How do you get a comfort level, and feel what timeline is appropriate with that type of a name?
Weitz: Well, we have owned them for years, actually. I think we gritted our teeth and held our breath slightly at times last year. There are various parts of their business that don't depend on credit in the same way that Capitol One, say, would. Again, we believe that the basic underlying business, the transaction business and the processing, will remain intact even if the charge business was dramatically different coming out of this.
Breen: There have been a lot of those sort of misunderstood stories, with the sort of market fog last fall. I know you've mentioned Liberty Media, and I apologize. I can't ever keep all the components straight, and you probably have a hard time. But it was a particular one, I think LMDIA is the ticker that owns the stake in DirecTV, and just sort of almost an arbitrage where you could do the assets sum and you're getting quite a bargain.
Weitz: Yeah, that was wonderful. Well, we still are involved, but basically you would get one share of DirecTV and some other assets, including Starz Entertainment, when you buy a share of LMDIA. Last fall I think there was a combination of fear and flight to the Treasury bills, or whatever, and for selling--by some hedge funds maybe, that brought the price of LMDIA to $11, while DirecTV was $21. So you were getting something worth more than DirecTV for $11, and we bought a lot more of it down there for all the funds.
But in Partners III, we were allowed to sell short. We actually bought more of that and sold short the DirecTV, locking in what we thought was at least a $10 spread. Now that converged, and we covered that in the last month or so. Then they decided they were going to actually spin-out the DirecTV separate from the Starz and the other pieces.
So we put the spread back on in Partners III to create the Starz stub, so to speak, that we thought was probably worth $4 to $6, might trade at $2 to $3, and we created it for a negative 30 cents. I mean that's sort of picking up quarters on the sidewalk. It's not a big, long-term investment, but it's something the market gave us, and we decided to take it.
Breen: Yeah, probably job security for your Liberty analysts. [laughter]
Breen: You need nine of them now to cover this end of the company. [laughter]
Breen: Well, I appreciate your time and best of luck.
Weitz: OK, thank you.
Michael Breen has a position in the following securities mentioned above: AXP. Find out about Morningstar’s editorial policies.