Drew Weitz (03:17):

What we ended up doing was reconfiguring our lineup, so that now we have our Hickory Fund which is our midcap strategy, we have our Value Fund, which is managed by our colleague, Brad Hinton, that’s our large cap strategy, and then Partners Value retains that legacy, go anywhere, flexible mandate. Partners III Opportunity Fund also has that same go anywhere, all cap strategy, but it also has a number of extra tools that it deploys. Maybe, we’ll talk about that a little bit later. So you’ll see, particularly in Partners Value and Partners III, a cross pollination of companies within those strategies, as they’re meant to I think try and focus in on a collection of businesses that come together in what we hope to be a best of breed way. Again, we’re trying to be responsive to what the market has asked of us in terms of being able to give stripe-specific funds as well as being true to our legacy and potentially offer a one-stop shop.

Clay Finck (04:17):

Taking that a step further, could you guys walk through your overall investment process at Weitz. You guys have grown a lot over the years. So, I’m curious how that has maybe changed and evolved.

Barton Hooper (04:30):

I think I can take that, Drew. I think, first of all, like any good company or any good investment firm, we’re focused on continuous improvement. And so, it’s not as if you can look at our investment process today versus say, 15 years ago, and go, “Oh wow, large change. You must have had this Big Bang moment or something like that.” This is a cliche, but cliches sometimes are there because they’re true: we’re always constantly looking at how can we do a little bit better each day. I always look at it from the director of research standpoint of what would our investors pay for if they had to pay for every action that we did, and try to eliminate all the things that I don’t think they would pay for and focus on the things that they would. It goes back to our founder Wally’s mantra of, think like private owners, but then how does that translate into what we do today and how do we end up with investments or companies that we look at to fit into portfolios?

Barton Hooper (05:35):

To start off with the main or the first principle is here at Weitz, we’re business analysts. We’re not stock pickers. We really have an emphasis on understanding all the underlying pieces of a business, and then we look to see is it available from a price perspective of what we like. When I’m recruiting or talking to people about prospectively joining our team, I’m always really focused on do they have a passion for looking at all the elements of a business and really digging into that, because if you’ve come here or if you want to be involved in the quote, “markets,” and you’re an adrenaline junkie and you really like trades and that, we’re not a good fit for you. But if you like to do what I just discussed, then you’re going to have a great time. It’s nerdy, but we like that.

Barton Hooper (06:24):

How does that all end up, day-to-day research process, and how do we have a consistent manner of looking at businesses? That manifests itself in what we call our Quality at a Discount framework or QuaD. You’ll hear Drew and I mention that a lot, maybe too much. QuaD is really six attributes of investing the way we look at a quality business. Everybody talks about, “Well, we invest in quality companies and we only look at quality.” We do too and we’ve said that, but over the years, we asked ourselves, “What constitutes quality and why?” And so, we’ve come up with these six attributes that go into the QuaD framework and I’ll just briefly run through them. Three of them are highly quantitative: financial leverage, cash flow consistency, and what we call return on invested capital efficiency.

Barton Hooper (07:16):

With the power of Koyfin or Sentio or Bloomberg or what have you, access to financial information is ubiquitous and really cheap. When I started in the business too long ago, only people that paid $25,000 a month for Bloomberg… Or $25,000 a year for Bloomberg could really get access to that information. Now, it’s everywhere. Those are critical to understanding the quality of the business. I don’t want to diminish them in any way, but we can allow computers to do that work for us to sum up quality. And then, there are three other elements in our quality score, competitive positioning, management, and reinvestment runway, that are really highly qualitative and require judgment. That’s where it goes back into understanding the holistic nature of a business. All that rolls up into a quality score that we rank from one to seven, with one being the highest quality. We really try to spend our time on quality scores one through three. So, anything that’s an above average business flows into that. A long-winded answer, but that’s how we look at things and do stuff day-to-day.

Clay Finck (08:21):

Thinking about your guys’ business, I think of the way Warren Buffett structured his business over the years. I think many people would say one of the keys to his success was the way he’s structured Berkshire Hathaway. What I really mean by that is that he’s not at the whims of the investors’ pulling out at the wrong time and putting money in at the exact wrong time. For example, when stocks run up, people want to invest their money with them because the company’s been doing so well. And then when stocks crater and crash, the opposite where people are pulling money out. So, they’re buying and selling at the exact wrong time.

Clay Finck (08:56):

It makes me think of what happened to Bill Miller during the great financial crisis. I don’t remember the exact numbers, but his assets under management just totally collapsed. It’s just really sad to see and it’s really not his fault to some degree. So, I’m curious how you guys manage that at Weitz and that are you susceptible to investors having these investor biases and tendencies of putting money into the fund at the exact wrong time and pulling money out at the wrong time?

Drew Weitz (09:25):

Yeah. I mean, we manage open-ended mutual funds. We are open for business every day. Daily liquidity is a feature, not a bug in that sense. But you’re right. I mean, I think if the same is true for companies when Warren talks about companies get the shareholders they deserve, the same I think is principally true for money managers as well. I think we have certainly seen our share of times when our short-term performance has been really strong, and so you have some fast money come in the door, and then perhaps a quarter or two later, they get disappointed and they leave. To date, that’s not been a disruption for actually executing the investment strategy that we put forth. When those clients come in, we want to do a good job for them and hope that if they didn’t know who we are and what we do when they came in the door, hopefully, they actually learn it and stick around for the right reasons.

Drew Weitz (10:16):

Because at the end of the day, I think our responsibility as stewards of these investors’ capital is to help make sure they understand who we are, how we invest, and to be transparent to them because I think ultimately, the thing that we need to make sure we do is to execute on our strategy and not change our stripes. Barton I think very appropriately pointed out that over long periods of time, we’re focused on having continuous improvement in our investment processes and disciplines. But at the end of the day, our philosophies haven’t really changed. It’s really underpinned by this idea that we believe that these are real businesses and that we should approach them as true owners of that business. We believe that really good ideas are probably few and far between.

Drew Weitz (10:59):

So, we’re going to build concentrated portfolios where we think no individual security’s going to sink the ship if it goes against us, but where every holding can make a difference to the portfolio. And then, we just fundamentally believe that human behavior and human psychology gets in the way in the short-term of investors or traders or whoever it might be can get in their way. And so, if we’re focused on the long-term and thinking about what are these businesses really worth three to five years from now, then we can actually use those bouts of volatility to our advantage. Again, if we are transparent with our shareholders and we create that alignment around values and process and discipline, I think our belief is that we’ll get the shareholders we deserve.

Clay Finck (11:42):

I really like that answer and it leads me to ask you guys how you guys measure success at Weitz. I think there are a number of different ways to measure. Maybe, business performance, you have things like assets under management, or your assets returns relative to some benchmarks. So, how do you guys measure success at Weitz?

Drew Weitz (12:01):

I’ll take a crack at that and Barton, if you want to add on. I mean, I think perhaps you heard it in my last answer, we think of ourselves as being a client-focused firm. And so for us, that means that our number one priority in success measurement will be delivering superior, risk-adjusted, absolute returns to our shareholders. That’s job number one through 10. In that way, we don’t tend to think about having specific AUM targets that we want to hit. I mean, I think it’s always fun to be part of a growing organization. You want the arrow to be pointing in the right direction and furthermore, I believe that what we provide is a valuable service and that it can do good for others. So we want our client base to grow, but again, our focus isn’t on, how do we make sure we get more AUM? How do we make sure we get more clients? Our focus is always on, how do we make sure we’re delivering returns to our shareholders? And if we do that well and we’re transparent about how we do it, we think the rest will take care of itself.

Barton Hooper (12:58):

I think I would add to that, Drew, a little bit. When I mentioned continuous improvement with our research team, it’s really a firm-wide approach. We on the research team, re-investment team are obviously the tip of the spear when it comes to delivering returns, but we can’t do it without the rest of our colleagues in the organization, whether that’s operations, accounting, marketing, compliance. All of those teams are also looking at, what are ways we can just get a little bit better each day? How can we lower the cost for our investors, and how can we deliver a return on time? Because this is a human capital intensive business and time is our most precious natural resource. So, every part where we can save time for our team and the investment research team is just more time we can spend on behalf of our shareholders.

Drew Weitz (13:46):

Yeah, that’s a really great point. I would just like to reiterate, again, I mean, I think so much of the interactions that we have with our clients and the opportunities to share who we are and what we do, that those efforts are carried so much more by our folks who are on our client services team, our marketing teams. Our folks who are out meeting with advisors, they do a terrific job of articulating our story and helping people know what we’re up to here in Omaha.

Clay Finck (14:13):

Before we dive in to talk about individual companies in particular, I’m curious if you guys target some return when you’re analyzing an investment. Say, you do the math on what you can expect from a company. Are you using some hurdle rate or targeted return in your guys’ analysis?

Barton Hooper (14:35):

Yeah, that goes back to that QuaD framework. First of all, you think about it. We’re looking for the highest quality businesses as we measure them and I walked through those attributes. We use a consistent discount rate when we’re projecting out cash flows for business, free cash flows, and we discount that back. The reason why we use that, it’s 9%, is because we think that’s just an acceptable level of returns if you’re an investor. If we can make 9% over time, it should be happy. That’s the discount rate that we use for cash flows. And then, we want to buy at a margin of safety to that. Your actual returns, if we do our jobs correctly, are higher.

Barton Hooper (15:20):

But that’s not the only measurement that we use. Wally’s always famous for calling DCFs Hubble Telescopes, because if you just change one little thing, you get… I guess, we should just call it the Webb now, right? Because the Hubble’s no longer the best telescope. But it opens up a galaxy of new possibilities and alternatives. DCF is a tool, not the source of truth. And so, we also look at things like internal rate in returns, comparable multiples. All of that rolls up to say, “Here’s what we’re buying.” I used to have it in front of my screen before I moved offices, but I always look at it as, what are we buying? What is it worth? And what are the alternatives? I think that’s how, if you boil a lot of stuff down, portfolio managers and the team as we look at investments do that. That’s how we approach it. We do use a consistent discount rate, but we use it in the framework of a whole bunch of other things.

Clay Finck (16:13):

A number of value funds I’ve looked at have added Alphabet and Meta to their funds, which I think initially took a lot of value investors by surprise. It seems to be becoming more of a theme where obviously, these companies have large moats, they’re growing like weeds especially post-COVID, and have these long-term secular trends behind them. For alphabet, for example, you have the digital advertising trends. They’re ahead of the curve on that. Both those companies reported earnings this week. So, I’m curious if you guys could touch on maybe what you saw from the earnings reports or if anything surprised you or maybe speak to the companies in general.

Barton Hooper (16:59):

Yeah, sure. I’ll take that, Drew. You want to add on. I think the way to look at it, first of all, we’ve owned Google since before 2010 which took initially a lot of people by surprise. But again, if you go back and look, what’s a quality business? And again, the way we frame things and I didn’t mention it when I talked about process is, a lot of people say this, but we look at what’s a business worth, not what multiple it’s trading at. A lot of times they’re aligned, but not necessarily always because if you have super confidence in future cash flows and you think there’s a good, predictable path where you don’t have to have multiple probabilities together to equal something, then you find something like Google where there is a good trend. There’s digital advertising and more of it’s going to move that way. They were already dominant in search.

Barton Hooper (17:46):

We invested in Google, like I said before, 2010 and then Facebook was a little later. Both of those businesses, as you mentioned, Clay, are digital advertisers. They’re the leaders. They had a tremendous tailwind from COVID. Everybody was at home. They were on their computers. They were ordering stuff. They were either searching for it or scrolling Facebook or Instagram and said, “Hey, that looks like a cool gadget. I should put that in my house.” Or maybe, they bought a house, I don’t know, but they were helped by that. But there’s this long-term trend of advertising moving from traditional formats to digital. And it’s not just advertising, right? It’s trade promotion, it’s marketing, it’s sponsorships. All of that is moving to this digital world and that’s where Google and Facebook are best positioned. They’re the best companies so far in that industry. Tremendous COVID tailwinds and now, we have this COVID boomerang. You have what Apple did with their advertising or privacy initiative, I should say, which basically cut off a lot of ways that mostly small businesses could target their customers.

Barton Hooper (18:59):

Facebook had more of that because they don’t have the search business than Google. So, Facebook’s been hurt by that plus this COVID boomerang plus war in Russia, inflation. And so, there’s lots of things that we believe are pretty temporary that are affecting both companies, Facebook right now a little bit more. But if you look over time, we think that, that will smooth out, we’ll get through this rough period, and then we’ll return to the trend. Even on a two-year stack, I don’t have the numbers right in front of me, but Google’s… I was talking with our colleague John Baker, who is the coverage analyst here on Facebook and Google, and Facebook’s and Google’s advertising revenue in second and third quarter of ’21 were at least 30%. Some quarters were closer to 50. When you look it on a two-year basis, they’re still growing pretty well. It’s just that this quarter reflects a prior quarter that was pretty high, and then all those other issues I talked about. We’re still quite happy with those investments and they’re pretty cheap right now, in our perspective.

Clay Finck (19:58):

You seem to really like Google and Facebook and I’m curious, Barton, if you have any thoughts on Amazon. I enjoy following Bill Miller’s work and he is just a massive fan of Amazon. He’s owned it for many decades. So I’m curious if you have any thoughts on them, because to look at them today and see a $1.2 trillion market cap and you look at AWS, their retail business, their advertising potential and such, I’m just like, “Man, I see a lot of potential here.” So, I’m curious what your thoughts are.

Barton Hooper (20:27):

I concur and we do own it in a couple strategies. We haven’t owned it as long as Bill Miller unfortunately. But talk about home runs, you’re right. I happen to be of the belief that Amazon’s retail business is coming down to a level that you would expect of a company that large and in so many markets. It’s still growing and it’s going to grow faster than Walmart and Target for sure. I think right now, in the first quarter they talked about how they had too much inventory and they’d overbuilt their fulfillment centers and delivery network. I thought it curious that the reaction was, “Oh my gosh, how could you not see this coming?”

Barton Hooper (21:04):

Yet, if you go back to the very beginning of the pandemic, I think in April 2020, people were up in arms that they couldn’t get their sanitizing wipes in the two days that Amazon normally promised. It was like, “How could you let this happen? You should have built more capacity.” And then they built all this capacity and they go like, “How could you not see this coming?” To put it in perspective, it’s less than a year’s worth of capacity the way I look at it. I thought they did a really good job and that lack of Cap Ex over the next, call it, five, six to 12 months is going to really bring in free cash flow. And then you have AWS, which I think we’re still, to use another worn-out cliche, early innings of all this stuff moving to the cloud. Amazon’s going to be a leader. Microsoft Azure will be. Google cloud platform. Even Oracle cloud infrastructure will get a fair share. So, we like Amazon and think it’s going to do good things.

Drew Weitz (21:56):

Just one thing I might add on top of that. I think a little bit of consistent theme with the businesses that we’re looking to own, I mean, Amazon, they did build all of this capacity. They had the wherewithal to do that and it’s not as though it’s not going to be utilized. It’ll just be on a little bit longer time horizon. And so, here’s a company that whether it’s the next six months or the next two to three years, they’re building capacity in the way that they know will be utilized. They’re able to invest and make their own break as it goes. As we think about the portfolio, those are the businesses that we want to own. I mean, there’s various different examples of companies that are willing to invest in their short-term for very long-term opportunities and that can sometimes dent the stocks. That’s just fine with us. Those are the opportunities that we like.

Clay Finck (22:41):

Let’s transition to talk about a couple of other individual stock picks you guys have at Weitz, the first being Liberty Broadband. Walk us through your thesis on this company and maybe a little bit about their story.

Drew Weitz (22:55):

Liberty Broadband itself is a holding company. They own roughly about 50 million shares of Charter Communications. That’s a 26% stake in the company. And so really, if we’re talking about the story of Liberty Broadband, we’re really talking about the story of Charter. I’ll come back to Liberty maybe in a moment, but Charter is the second largest broadband provider in the United States. It is in its current configuration the culmination of a merger of companies. I think it was 2016 when they bought Time Warner Cable and Bright House Networks and really built this scale player in that industry. For a long time, we’ve been investing in the cable industry as a firm. General principle is we really like businesses that have clear, predictable, growing cash flow streams and subscription businesses like Broadband clearly fit that bill.

Drew Weitz (23:41):

We also like businesses that have some network advantage. So in the case of the broadband networks here, you have local or regional monopolies where adding one more incremental customer to the network comes on at really high incremental returns. There are other examples of that as well. We’ve been around this industry for a very long time and it’s had its share of controversies over the years. I mean, I think the current form of these companies passed through the period of time where people were concerned about cord cutting and the video business going away. And now, people really do understand that these are broadband companies first and broadband’s simply a better business. If you think about adding a video customer, you’ve got to take 45 or 50% of the money that comes in every month and hand it over to the content companies that provide the video. You’re not doing that with broadband.

Drew Weitz (24:30):

Similarly, if you’re signing up a video customer, you’ve got to put set top boxes on all the TVs that are going to use it. That’s capital expenditures that you’re putting into that home that you’re hoping to generate a return on. The broadband business, you give them a cable modem and you’re done. And then lastly, the cost to serve for that business is much lower as well. Traditionally, when people have trouble with their cable service, it’s the video side of the equation. Broadband’s been a much more resilient process. And so, we’ve been going through this period of time where an already good business has just been getting better. The margins have been expanding, capital intensity has been coming down. Charter itself I think has been an interesting just case study within the industry where they have really stuck in their lane of saying, “We’re not going to diversify in the media. We’re going to sit in our lane and we’re going to grow this business based on volumes, not on price.”

Drew Weitz (25:20):

They’ve actually, potentially counterintuitively, reinvested back into the business to bring all of their customer service in-house and to really focus on delivering faster and faster speed to their customers. All of that together creates an environment where your customer service, your cost to serve, even though what you are doing is more labor-intensive and higher cost labor, you’re reducing service transactions from the footprint. And so, your actual cost to serve, the number of times you’re sending trucks to someone’s home, or the number of times you don’t have a first call resolution in the call center, all of that comes down. And so, Charter’s really had a pretty unusual, or I shouldn’t say unusual, but by design, faster than industry growth rate, particularly in the broadband business.

Drew Weitz (26:02):

That’s the operational story there, but it’s also important to think about what have they done from a capital deployment strategy. There, Charter is engaged in this levered equity repurchase story. So, they’ve consistently levered the balance sheet at about four to four and a half turns of leverage and used both the growing free cash flows that they have on hand, as well as the proceeds from incremental issuance of debt to repurchase just a massive amount of stock. Since September 2016, they’ve bought in over 40% of the shares outstanding. We really like the business there. We may talk about some of the challenges they’re facing from competition and new entrants, but that’s the basic investment thesis around Charter.

Drew Weitz (26:46):

Liberty Broadband, as I mentioned before, is a holding company that has 50 million shares, or give or take, of Charter. They also own an Alaskan telecom company, but it’s a small part of their business. But investors tend to, or the street tends to, look at that and say, “That’s a layer of abstraction that I don’t need, I don’t want.” And so, the market hasn’t valued those shares appropriately. It’s tended to trade, depending on the environment, somewhere between a five and 10 or 15% discount to the actual underlying market value of the Charter shares. We have a base case value for Charter, and then there’s this extra potential monetization that we think of as being a double discount.

Clay Finck (27:27):

When I’m looking at Charter specifically, because like you mentioned is the main driver of Liberty Broadband’s valuation, I couldn’t help but notice the difference between the market cap for Charter and enterprise value. A lot of companies I look at tend to be fairly close. Maybe, you could explain why there’s such a drastic difference. I see a market cap of around 83 billion today in an enterprise value of 176 billion. So maybe, discuss why there’s a difference and then what investors should be more focused on.

Drew Weitz (27:59):

That difference really does come down to that levered equity return strategy that I was talking about a moment ago. Charter’s point of view mathematically is if we can borrow at four or 5% and use that to buy in our own stock that has a free cash flow yield depending on when it was taking place of 10 or 12%, that’s pretty accretive. And so, we’re going to do that all day. I think from the point of view of an investor though, you do need to be focused on both, right? I mean, the value creation potential for any investment, whether it’s Charter or anything else, is what’s the value that can be derived from the actual operating of the business itself and then how is management utilizing its balance sheet and deploying capital to supplement that?

Drew Weitz (28:42):

If you are running your business at four turns of leverage or whatever it is, 4.4 in the case of Charter, you are taking the gearing of your business up to deliver that extra return. Now, not every business can or should support four turns of leverage. Obviously, if you are running your balance sheet at that rate, you really want to make sure that you have really dependable, rock solid cash flow streams that will enable you to either roll or refinance or whatever it is you need to do. We think that’s true at Charter. I think, if you look at the tenure of the maturities that are coming, of that debt, I think the weighted average life is 14 years, the average cost of the debt is an incredibly low 4.3%, and a little more than 90% of the maturities are out 2026 and beyond.

Drew Weitz (29:33):

So, this is a company that has been very thoughtful and mindful about how they have structured the tenure of that debt too, which I think is something investors should pay attention to, right? When we were back in the financial crisis and debt markets were shut, a lot of companies would talk about their maturity towers as they were coming due in 2009 or 2010 or the maturity wall or whatever pickier metaphor, I think the treasury departments of the world out there have taken that lesson to heart. Again, we think Charter is managing that appropriately.

Clay Finck (30:05):

I guess, part of the story in valuing a company like this, you need to think about what’s their repurchase program going to be like in the future, how’s their debts going to change in the future. And then when thinking about interest rates moving, does that make it difficult to value a company like this?

Drew Weitz (30:22):

Barton pointed out earlier the comment about DCF analysis being the Hubble Telescope, or now the James Webb Telescope, right? I’ll use this to touch on the current stock price as well. But when you have a company like Charter who’s generating that much free cash flow and using incremental debt proceeds to buy back their stock, your view of what the per share value of that business will be three to five years from now is hugely impacted by your repurchase assumptions, right? I guarantee everyone’s models who are out there, they’re all precisely wrong. And so as we approach this valuation exercise, we’re confident they’re going to repurchase stock, but we need to be mindful about how much of the value creation is coming from that? What are the sensitivities to that?

Drew Weitz (31:09):

Interest rates play into that to a certain extent as well, right? You need to be thinking about as you’re refinancing your existing debt maturities that are coming, what is that going to come on at from a cost of capital perspective? Again, for as long-term [inaudible 00:31:22] as this debt is, that doesn’t seem to be an immediate problem for Charter, but it also may incrementally inform if you’ve got a leverage target rate from four to four and a half times. As cost of debt goes much lower, you’re probably willing to flex to the higher end of that. And conversely, the same is true. All of that being said, particularly in the current environment with Charter stock down at four, I don’t know where it is at this particular moment, but 430 or something like that, the stocks really of all the cable companies have come under a ton of pressure as Verizon and T-Mobile and some others have been pushing on having fixed wireless broadband alternatives in the market.

Drew Weitz (31:59):

That’s coming and it’s a similar COVID hangover story too, as Barton was describing, for Alphabet and Google. Charter and the cable companies in general pulled forward a ton of demand, a ton of customer creation, for broadband service as COVID came into the fold. A lot of that was full-priced, paying customers as well as some who came on subsidies that were available to folks who qualified for them. Fast forward two years later, some of those programs are rolling off, people are reverting back to some of their prior behaviors, and the amount of broadband growth that the cable industry as a whole is showing has slowed a lot relative to the last couple of quarters. For as strong as the cash flows some of these businesses are, for as solid as their prospects are going forward, the only number that Wall Street cares about right now is, “Tell me how many broadband subscribers you added this quarter.”

Drew Weitz (32:52):

That’s been a challenge that the industry has been facing and I think there are long-term structural reasons why fixed wireless broadband isn’t necessarily a solution that works for every customer in every market. Similarly, with fiber deployment. We’ve been building fiber in this country in about 15 plus years, right? I think Charter’s footprint is only overbuilt by 30 to 35%. So, I think some of the competitive dynamics here are being overstated and conflated with the give back of some of the Charter… Excuse me, of some of the COVID experiences that we’ve seen. So, the stocks across the whole industry have just been disproportionately hurt. I mean, the market’s down as a whole, but they’ve been weaker than average. For a company, again, that’s growing cash flow and has demonstrated a willingness to buy back stock, it’s not been fun on the way down. But we think there’s an opportunity for them to really get after their own stock and I think that’ll be very accretive to their value.

Clay Finck (33:49):

I do agree that the stock price has definitely beaten down at, I just checked 436 bucks, today and it peaked out just over 800. I see just at a high level, free cash flows of 8 billion. Earlier, I mentioned the market cap’s just over 80 billion. Enterprise value, 176 billion. I’d like to transition to talk about one more individual stock. That’s Accenture. Talk to us about this one.

Barton Hooper (34:17):

We’ve owned Accenture for at least 10 years. I believe, Drew, that was one of the first businesses that you wrote up and ended up in our portfolios, right?

Drew Weitz (34:29):

That’s right, yep.

Barton Hooper (34:31):

That brings up an interesting point about our process in being business analysts and I’ll get to Accenture in a second, but Drew has covered it. I’ve covered it. Our colleague, John Baker, has covered it. We actually just transitioned it to one of our newer analysts that joined [inaudible 00:34:45]. That speaks to what we want to do with our team. We always want our analyst team to have capital under their coverage, meaning, committee capital in the portfolios that gives them real skin in the game. But it does another important thing. By moving coverage around periodically, we don’t do it every year, we do it very deliberately and sporadically, it gives each of our teammates experiences with different businesses and different business models. That helps them develop their own form of mental models for looking across sectors and at different businesses.

Barton Hooper (35:24):

So then, we often spend time sitting around the table at our investment meetings, talking about various companies, and that means everyone can contribute. I think Accenture’s just a good example of that. But Accenture on a holistic level is an IT consulting firm. If you were just to go look at those three quantitative elements I talked about in the beginning, financial leverage, cash flow consistency, and capital efficiency, that would screen out as the general IT sector a very good house in a pretty poor or pretty average neighborhood, right? I mean, that’s how it would look. For years, IT consulting has been talked about as in one sentence, your mess for less. We’ll take all your spaghetti works of IT stuff and we’ll move it and we’ll do it for a lower price. And so, there was price competition in that.

Barton Hooper (36:17):

Accenture has always been different in that aspect. It has strategy consulting arm, it has an operational arm, and then has an IT outsourcing business which they run better than anyone. That then speaks to another advantage that I don’t see other investors talk about too much. It relates to their human capital management, which I really think is one of their real strategic advantages and there are others. It’s really what I call the three Rs of talent, which is, recruit, retain, and retrain. Accenture is essentially the best at it and it goes all the way back to its heritage when it was part of Arthur Anderson and they had this campus in St. Charles, Illinois, where they would bring people in every year and train them for a week or two weeks. When Accenture split off from Arthur Anderson, they actually retained the campus.

Barton Hooper (37:10):

That culture of constantly learning has helped them over time to manage all these different shifts in IT trends, if you will. I mean, in the middle of 2000s, all companies could talk about was their digital front end and being interactive with their customers. Accenture pivoted to that as part of their business and really became a share leader with what was a time called Accenture Interactive and they just changed it to Song, which I’m sure they pay themselves well in coming up with that name, but they continually are able to see trends and invest behind them with people. In a time where companies and consultants, all you hear is, “We have trouble finding, retaining people,” Accenture, they have turnover a little bit higher than they’ve had in the past but much less than their peers. What that allows them to do is go to very large businesses and say, “We could be consistent. And not only that, we’re a thought leader.”

Barton Hooper (38:09):

When you add all that up, you just have a business that grows pretty predictably, generates lots of free cash flow, it has high ROIC because it turns it more than it has super high margins. We’ve just really liked it. There are times when it’s probably been fairly valued or a little bit ahead of itself, and then there are the times where it’s cheaper than that and we’ve added and trimmed over time, but it’s been a core position for at least 10 years for us. Drew, you want to…

Drew Weitz (38:37):

No. I mean, I think that’s exactly right. I mean, one of the other things too that I guess I will add is I think Accenture’s always occupied this space where they’re also technology-agnostic, right? So, they have the ability to always skate to where the puck is going and they’re not beholden to any particular vendor or platform or any other compute modality. I mean, when you think about the migration to the cloud, they’ve I think been really helpful in accelerating business transformations, getting companies and investors to think about moving their infrastructure into the cloud, thinking about how do they get workloads into the cloud, and how do they select vendors that are really best of breed for what it is they need to do. I mean, I think that’s been an advantage relative to whether it’s an in-house IBM management consultant who’s got the latest and greatest systems [inaudible 00:39:29] they’re looking to play somewhere.

Barton Hooper (39:31):

That’s an important point. I cover software for the team and all the software companies, they want to have an element of professional services so that they can make sure they get good reference clients and they get several implementations done really well. But ultimately, they’re looking for partners like Accenture to build a Workday practice, build a Salesforce practice, build an Oracle practice. Accenture is all of those. And so, it can truly be agnostic. It’s not going to choose Workday because it has more consultants in Workday than it has in SAP or Oracle. It’s just going to help customers go through that vendor selection process and pick the one that works for them. They really are a trusted partner to large enterprises.

Drew Weitz (40:14):

I mean, I don’t know if this is necessarily as relevant too, but I think it speaks to the holistic way that we think about our portfolios as well. When we’re thinking about potential software investments, vertical software providers, whatever it might be, I’m thinking of an example where Accenture had an in-house offering within a vertical software field that they ultimately decided to get rid of in order to build a systems integration practice for the best provider in the industry. That is about as strong an endorsement as you’re doing due diligence on a potential new investment that you can find in that space.

Clay Finck (40:47):

From a high level, I agree that it seems like a very high quality business. You look at the revenues, the earnings, whatever metric you want to look at, it’s straight up into the right. I think there’s something a little bit different about Accenture than some of your other holdings because it’s trading at what seems to be a much higher multiple. So, what is it about Accenture that allows them to fit into your fund despite being at a higher multiple?

Barton Hooper (41:14):

I think that’s a good point. Accenture is certainly not the cheapest business that we own at the moment, but it is trading at a discount to what we believe is our base case value. We do see upside returns there. Part of it is our history with the business. Part of it is the fact that it’s growing in the twenties and no one’s giving them credit for it. Their book to bill has been above one in both strategy and operations. That means that you take this growth rate here, it’s going to grow at least double digits year out. Again, we don’t necessarily pay attention to the current multiple or even the next multiple. We say, “What’s the cash flow generation over five to 10 years, depending on the business?” And we discount that back. We talked about our discount rate.

Barton Hooper (42:04):

When you look at that, yes, it also trades at a higher multiple than its peers, but that’s because it deserves it, right? I’ve looked at many other businesses in IT consulting and have unpleasant experiences with some of them. I will tell you, Accenture grades out high on our quality score, whereas those others don’t. That’s why you have to look at those three quantitative elements. But then when you look at especially reinvestment runway for Accenture, but also competitive positioning where I talk about their human capital, that gives us confidence in understanding the longer term growth rate, free cashflow conversion, which then discount that back today. Like I said it’s not the cheapest business we own but we do see a pretty good return from here for sure. So, we’re happy to own it.

Clay Finck (42:51):

I’d like to chat a little bit just about the overall market environment as well. The way everything that’s happening with rising rates, higher inflation, I think part of me says that, that should play some part in our investment strategy because it affects maybe growth rates of your businesses, maybe earnings in the next few years. Could you guys talk about how the overall market environment plays into your process, or do you focus just solely on the bottoms-up investment approach?

Drew Weitz (43:25):

Maybe, I’ll start with that and Barton, you can add on. I think at a high level, I would start that answer by saying as we entered into this year, we maintain a base case valuation for all of our investments. We then look at our portfolios on a rolled-up basis to say, “Okay, on a portfolio basis, where’s our portfolio trading relative to our value?” Coming into this year, depending on the portfolio, it was in the high eighties or low nineties price to value ratios. So to us, things we’re approaching, fairly valued, not particularly dangerous or concerning, but after a three to five year period of whatever it was, 17% compounded annual returns, it just seemed very reasonable to think that forward looking returns from there would be more muted.

Drew Weitz (44:09):

Obviously, what we’ve seen in the seven months since then has been a pretty massive re-rating within the market. Our view of that has been our fundamental business performance, the actual performance of the businesses that we own, hasn’t been that far off the mark. And so, what’s happened is that some of the stock price risk that was embedded in those securities has come out and that’s not pleasant to go through. Certainly, it’s painful for us and for our clients. But the underlying fundamental business values have been about what we expected. And so in the current market environment, we see our portfolios trading at something closer to 70 cents on a dollar now.

Drew Weitz (44:48):

But as we look ahead, none of us are macro economists. None of us are Fed watchers. None of us are sitting around Monday mornings guessing at whether it’s going to be 75 basis points or a hundred, right? That’s just not what we do. It could be the case that if the economy performs a little bit worse from here, then our base case expectations would be our evaluations might come down a little bit. But that’s why, as Barton pointed out at the top of the conversation, we’re always looking to buy companies where we’ve got a margin of safety. We can absorb some of that knowing that we’re still wanting to own these businesses for three, five years, even longer and that the short term’s going to be whatever it is, but if we’re right about the quality of our businesses and the opportunities that they’re attacking, that’s what we’re focused on.

Drew Weitz (45:33):

And so again, anything can happen in the short-term, but I think we’re certainly more constructive about the valuation environment that exists today. And again, I think part of our focus on quality businesses is that if there is economic chop to come, we think we’re investing in companies that not only are going to make it through without any major hiccups, but that can also actually take advantage of that volatility as it comes, whether it’s in the form of M&A, whether it’s in the form of taking market share. Whatever that might be, we want to be investing in companies that can make their own bricks.

Barton Hooper (46:12):

In that last part, Drew talks about a concept within our competitive positioning element that what’s durability? And resiliency is one of the things that we look for, which is what Drew talked about. When you have something, the economy goes down, things out of a company’s control because I think we should be clear we’re of the mind that no business escapes a macro downturn. I’m sure there are. 2008’s a great example. Everybody thought energy companies were the greatest thing to invest in as we rolled into the year. Then by November, they were the worst things you could ever imagine. Now, we don’t invest in energy companies. We don’t believe we have an edge in them and their commodities ultimately. So, we don’t touch them. That’s just an example. If you have a resilient business and you can then focus on another element of durability, which is adaptability, meaning, if you have a long enough runway and your industry is undergoing changes or there’s a disruptor, do you have the ability to then change and re-pivot a business to be adaptive?

Barton Hooper (47:11):

And so if you have both of those strong elements, then you have a durable business and that speaks to that competitive advantage. That’s why we’re not cheering for a macroeconomic downturn because it hurts everyone along the spectrum. But at the same time, we know we can’t control it. That’s why I smiled when you mentioned at the beginning, because as much as we tell ourselves, “Don’t focus on the macro,” it’s so easy to be seduced into saying, “Well, what if this happens? And that happens?” When myself or someone, a colleague, who raised their hands and go like, “Is this really worth our time?” The answer is always no. That goes back into our concept we talked at the beginning of this return on research time invested and just an element of trying to be better in developing your process every day. I think we can’t predict the future. We especially can’t predict the next nine, 12 months. Once you let go of the fact that you can’t do that, it’s a lot better. But it’s so easy to believe you can.

Drew Weitz (48:08):

You mentioned Mr. Miller earlier in the conversation, Clay, and I believe it’s his quote or paraphrasing him anyway that, “The secret to investing is time, not timing.” Trying to guess what the next three, six, nine months is all about timing. But if you can build a portfolio of durable, resilient, high-quality growing businesses, time’s on your side.

Clay Finck (48:31):

Drew, when I was looking at your opportunity fund that you co-manage, I noticed that you had a little bit of a short position on SPY, which is the S&P 500. That might be a position that some Fed watchers have, but I don’t think you have the same thesis that they do. Talk about your thought process on why this is a part of the portfolio.

Drew Weitz (48:54):

I mentioned, I think at the outset, about our funds, that Partners III Opportunity Fund is a long biased fund that has a couple of extra tools. One of them is the ability to short. We have maintained an index short position typically against the SPY SPDR, or the Triple Q, the NASDAQ 100, and have done that for a number of years. That’s been a consistent feature of the portfolio. On the very highest level, easy to look at that as being a portfolio ballast position, market spells off, it’s going to give you some amount of buoyancy. That’s certainly a function of why it is there, but we also use it for a number of different reasons. As we see the valuations of what we own approaching a fair price or fuller price, we can effectively take equity risk out of the portfolio by increasing our short position.

Drew Weitz (49:46):

That allows us to do a couple of different things. One, again, reduce the equity position in a period of time where valuations feel a bit stretched, but it allows us to do that without actually selling individual companies that we own. If you sell a business that you really like, you’re making two timing decisions, right? You’ve decided that this is the right time to sell and in the future, I’m going to have to know for sure when’s the right time to get back in. As I said a second ago, paraphrasing Mr. Miller, “It’s time, not timing.” By using the shorts to flex our equity position in that way, we can retain these really high quality businesses that we own and let the management teams continue compounding their value per share in our favor. That helps us do that.

Drew Weitz (50:27):

And then, the third is it also is a mean to not necessarily take realized gains when you’re affecting that transaction. That’s another piece of that particular toolkit. You’ll see it flex over time. It’s particularly low. I think it was 3% total short at the end of the most recent quarter. It’s been as high as 20 plus. And again, that’ll be in reaction to the overall environment. The fund also can do individual security shorts. You won’t see it do much in the way of tactical shorting. We weren’t in there fighting the GameStop battle, for example. In fact, that’s a cautionary tale for why that might not be a game that is for the faint of heart. But we will from time to time use it in more special situations kinds of things. We don’t need to get into the specifics, but Liberty SiriusXM is another holding company that owns a huge portion of SiriusXM, the satellite radio company, but that trades it an even wider discount than Charter does within Liberty Broadband.

Drew Weitz (51:23):

So if you sell short the theory while owning the Liberty Sirius, you’ve effectively monetized that discount yourself. That’s a trade that we’ve done a number of times over the years as well. But again, I think it’s important to point out that yes, the short position has come down to about 3% of net asset. We wrote in our quarterly commentary, which has just been released, that’s not about trying to call a bottom. That’s as low as it’s been in quite a long time, but again, that’s in response to the opportunities that we see within our own portfolio and saying, “We really like these businesses. They’re trading at really attractive valuations. The markets come down, yes, a lot, but we think the forward looking returns from here look pretty good and we want more of it.” So again, that’s not to say the market can’t go down substantially from here, but our job is to pick really great businesses and invest in them at prices that we think are attractive. And so, that’s what we’re doing.

Clay Finck (52:19):

Final question I had for you guys is I got connected with you because you’re in Nebraska. I lived in Omaha for a number of years and that’s where you guys are located. You obviously read and know a lot about Buffet I’m sure. Buffet has been known to always have a cash pile to help weather through the crazy macro down trends and take advantage of those opportunities. Is that something you guys have ever utilized, or is that even an option for a fund like what you guys have?

Drew Weitz (52:51):

At various points in our history, we have maintained larger cash positions, but as I mentioned earlier as well, we’re trying to be responsive to what our clients want, right? We want to be a client-focused enterprise. What we hear from them is, “We want to make the allocations decisions ourselves and we want you to pick stocks.” We have moved a number of years ago to having more fully invested portfolio. Partners III, again, taking the short to a larger position and then having a lower net is a version of that. But we think, again, if you’re making a market call about how much cash to have on hand at any given time, you’re again making a timing decision that we’re trying to… I think we’d rather find really great businesses and hold them and let them work on our behalf, as opposed to sitting in cash which until very recently earned zero.

Barton Hooper (53:39):

I would say, just add to that, Clay, a little bit, being fully invested allows us to create competition for capital and it’s a force in function of finding the best combination of high quality businesses at an appropriate discount. We found that since we’ve moved in the last several years, especially in the funds that aren’t Partners III, to taking that approach that we’ve had much more robust discussions and we’ve high-graded the portfolios. And so, we think looking forward over time that, that is really going to pay off.

Barton Hooper (54:10):

It probably doesn’t feel that good now… Well, I know it doesn’t feel that good right now as someone who is very much invested in all of our funds. Actually, I sleep well at night. I’ve said this before is especially even with the war in Ukraine, which is horrendous, but I’ve felt better today at this time period, much better than I did in ’08, ’09 because part of it, I was new to the firm obviously, but another part of it is just I know what we own, I know the process, and I just think looking forward, it feels better. Now, that doesn’t mean it’s going to play out like I feel obviously, right? Feelings are not facts, but knowing that competition for capital is part of that reason why I feel good about it.

Clay Finck (54:49):

Yeah. I do agree with Drew’s point that having the larger short position when the market’s out going crazy, that does help to add that balance and decrease that risk. So, it’s almost like a cash position in a way and I really like how you pointed that out. So Drew, Barton, thank you guys so much for joining me. It’s really been an honor having you on the show. Before we close it out, I want to give you guys the opportunity to give the handoff to Weitz and anything else you guys would like to share.

Drew Weitz (55:18):

I think first and foremost, Clay, thank you very much for this opportunity. I mean, it’s really fantastic and enjoyed the conversation. If folks want to learn more about Weitz Investment and how we invest, great place to start is our website, weitzinvestments.com. There you’ll find obviously all of our portfolio commentary and shareholder letters. Maybe, particularly for this audience, they might be interested in our analysts corner features where generally every quarter, we pick one portfolio holding and do a deeper dive on the investment thesis. So, there’s some great material there.

Drew Weitz (55:48):

Our colleague, Nathan Ritz, has written up Danaher for this quarter. So, folks can find that there. Of course, you can also find us on LinkedIn and, or Twitter. We post anytime we’ve put a white paper up or if one of us has been in a video interview or something like that. That’ll all be there as well. Barton and I are also on LinkedIn too. So, you can find us there. And then lastly, if anyone’s interested in investing, they can, again, use our website directly or through any number of intermediaries that are out there. Just really again, want to say thank you to you, Clay, and appreciate this opportunity and a great conversation. Thank you.

Clay Finck (56:24):

Thank you guys so much.

Barton Hooper (56:25):

Thanks, Clay.

Clay Finck (56:27):

All right, I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app, so you can get these episodes delivered automatically. If you’ve been enjoying the podcast, we would really appreciate it if you left us a rating or review on the podcast app you’re on. This will really help us in the search algorithm, so others can discover the show as well. If you haven’t already done so, be sure to check out our website, theinvestorspodcast.com. There you’ll find all of our episodes, some educational resources, as well as our TIP finance tool that Robert and I use to manage our own stock portfolios. With that, we’ll see you again next time.

Outro (57:03):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin and every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.