Weitz Investment Looks to Visa (V), Amazon (AMZN), Others for Big Returns After Subpar 2016

Wallace R. Weitz‘s Weitz Investment Management was founded in 1983 by Mr. Weitz, with a philosophy of investing in strong businesses at discounted prices to what a savvy buyer would likely pay for the company. In the more than three decades since, Mr. Weitz has gone from managing $11 million in client money to managing about $4 billion in funds.

2016 was not an exemplary one for the fund however, as the Weitz Value Fund’s Institutional Class posted gains of 3.13%, well off the 11.96% and 12.05% gains of the S&P 500 and Russell 1000 respectively. In the fund’s latest letter to investors, Weitz co-portfolio managers Brad Hinton and Dave Perkins discussed the performance of the fund’s favorite stocks in 2016, as well as some of the fund’s biggest moves in the fourth quarter as it positioned itself for 2017. We’ll look at their thoughts on the latter moves in this article, which includes four new positions opened during the fourth quarter.

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Visa Inc. (NYSE:V)

Visa is the first of the fund’s four new positions that were discussed in its Q4 investor letter. The fund likes the company’s recent reacquisition of Visa Europe, believing that it will allow the company to increase its market share and lower costs. It’s also bullish on the credit card space in general, expecting Visa to exhibit strong growth as emerging markets transition from cash to cards. The latter view is not surprising, considering that Weitz was also heavily invested in Mastercard Inc (NYSE:MA) on September 30, owning 797,039 shares valued at $81.12 million.

The addition of Visa Inc. (NYSE:V) to its portfolio by the end of 2016 appears to have worked out well for the fund, as Visa’s posted strong gains of 10% so far in 2017. The latest surge came on February 3 after Visa announced strong fiscal Q1 2017 results of $4.46 billion in revenue and $0.86 EPS, beating estimates by $170 million and $0.08 respectively. The company also noted that its aforementioned acquisition of Visa Europe is tracking well. 115 hedge funds in our database were long Visa on September 30.

Thermo Fisher Scientific Inc. (NYSE:TMO)

Next up is Thermo Fisher, which Weitz Investment Management likes for its diversified product portfolio and recurring revenue streams (it estimates that about 75% of the company’s revenue falls under the latter category). The fund pounced on the opportunity to grab the stock at what it believes to be a discount, after 18 months of flat shares from the middle of 2015 through the end of 2016. During that time, the fund’s estimate of Thermo Fisher’s value increased, opening the door to an investment (the fund invests in stocks that it believes are trading at no more than 80% of its estimated value).

Thermo Fisher is also enjoying a strong 2017, posting gains of 7.78%. Deutsche Bank recently initiated coverage of the stock with a ‘Buy’ rating and $163 price target, while it ranks as Barclays’ top pick among U.S Life Science Tools & Diagnostics stocks. Columbus Circle Investors cut its position in Thermo Fisher Scientific Inc. (NYSE:TMO) by 19% during the fourth quarter, to 730,879 shares.

We’ll check out three other moves made by Weitz Investment Management during the fourth quarter on page two of this article.

Amazon.com, Inc. (NASDAQ:AMZN)

Another stock that was on Weitz Investment’s Q4 buying list was Amazon. The fund anticipates that Amazon is poised to carve itself a material chunk of the worldwide retail market through its dominance of e-commerce, and that it has a long path of organic growth ahead of it. The fund is also bullish on Amazon Web Services, citing its profitability and share of the growing IaaS market.

On the retail front, The New York Post reported yon Sunday that Amazon.com, Inc. (NASDAQ:AMZN) is bandying about the idea of robot-staffed supermarkets that could have as few as three human workers on duty at any given time. The tentative plans theorize that the stores could achieve profit margins north of 20% thanks to the vastly reduced labor costs. Amazon was the second-most popular stock among the hedge funds in our system on September 30, being owned by 150 of them. It’s also been another strong performer for Weitz Investment in 2017, gaining 7.7%.

CVS Health Corp (NYSE:CVS)

The final new position discussed in Weitz Investment’s latest letter to investors was CVS Health Corp, a stock which the fund first bought in 2011 but largely sold out of during 2013 (a small number of remaining shares were sold in the first quarter of 2014). The fund’s timing on the sale was a little early, as CVS didn’t peak until mid-2015. Since then however, shares have given back most of those gains and opened up a re-entry point for the fund.

While Weitz Investment suspects that CVS won’t achieve any EPS growth this year due to client losses in 2016, it nonetheless found the stock attractive at the mid-$70 valuation level. After shooting above $80 in January, CVS shares have since fallen back to the $76 mark, down by 3.6% in 2017. 58 hedge funds that we track we long 2.2% of CVS’ shares on September 30.

Express Scripts Holding Company (NASDAQ:ESRX)

Lastly, Weitz Investment’s Q4 investor letter revealed that the fund sold out of its position in Express Scripts during the fourth quarter. That position had contained just over 1 million shares on September 30, and was the fund’s 14th-most valuable position at that time, worth $70.58 million. The fund is concerned that Anthem Inc (NYSE:ANTM) may not renew its deal with Express Scripts in 2019. The two companies are currently embroiled in a number of contentious battles, including lawsuits filed against each other, as well as lawsuits brought against both of them by others, which allege that they overcharged consumers for drugs by as much as $3 billion annually.

Given the growing uncertainty regarding its relationship with Anthem, the fund elected to close its position after the stock’s post-election rally in November. Shares have since slid by over 10% and are off by 2% in 2017. Joshua Packwood and Schuster Tanger’s Radix Partners also sold out of its small position in the stock during Q4, unloading the 5,609 shares that it had owned on September 30.

Disclosure: None