The most surprising thing about the recent stock market volatility is that we haven’t seen more of it, according to Bradley Hinton, manager of the $770 million Weitz Partners Value Fund Ticker:(WPVLX).
“We’ve been surprised by the general level of complacency in the market right now, and I’m surprised we have not seen more big swings like Monday’s decline,” he said.
With the increased market volatility in mind, Mr. Hinton said he has increased his cash weighting to 20%.
“That much cash is more conservative than normal for us, but we’re playing much wider market swings right now,” he said.
The fund, which grew out of a private partnership 28 years ago, is an all-cap strategy that is designed to invest like a potential business owner.
“We’re business analysts first and stock analysts second,” Mr. Hinton said.
That means much of the bottom-up research starts with a five-year outlook for each company in an effort to identify and value the excess free cash flow.
“Cash flow is the underpinning of all business value, because you need that kind of value creation to build the business,” he said.
The fund is concentrated with about 40 stocks, the top 10 of which make up roughly 40% of the portfolio assets.
The turnover rate historically has hovered around 20% per year but has spiked up closer to 40% over the past 18 months due to the current environment, according to Mr. Hinton.
Specialty recreational retailer Cabela’s Inc. Ticker:(CAB), for example, was being sold out of the fund this year when the stock price was in the low $20 range.
But as it dipped into the low teens, Mr. Hinton started adding to the position and ultimately liquidated the position in the spring when the stock price spiked up to the $30 range.
The stock, which has gained 6.8% from the start of the year, is currently trading at around $23 per share.
“Cabela’s represents a fairly discretionary category,” Mr. Hinton said. “The underlying business is not that volatile, but people’s perception of it was.”
This is the kind of market environment that he believes gives stock pickers like himself an advantage.
“We like to think of it as an all-weather strategy, but we might be more suited for today’s market,” he said.
One stock that has been gaining favor in the fund is Target Corp. Ticker:(TGT)
The appeal, according to Mr. Hinton, is “a compelling multiyear outlook” that includes the addition of more groceries and other consumables, a branded discount card and expansion into Canada.
The strategy is generally sector-agnostic, but the fund has shown some preference for large-cap information technology stocks “that have been left for dead,” he said.
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