Weitz Funds released their 2007 Q2 letter to shareholders. I highlight some points below:
- Portfolio Review
- We made only minor adjustments to our portfolios during the quarter. Generally, we added to positions in building materials and mortgage-related stocks which were weak and trimmed holdings of media and other stocks that were strong.
- Credit Problems Continue to Dominate Financial News
- One of the reasons that investors bought all these securities without really knowing what they were getting is that the bonds were rated by Moody’s and Standard and Poor’s.
- It is very difficult to know how low the prices will go or who the ultimate owners of the problem mortgages and securities will turn out to be.
- What we can know about our mortgage-related companies is that subprime lending was a relatively small part of their businesses; that they have historically been better than average underwriters of credit risk; that they are long-term players who would not "bet-the-ranch" for a quick profit; and most importantly, they have strong enough balance sheets to absorb losses and avoid any liquidity problems.
- Corporate Buyout Financing
- Another aspect of the credit markets that is beginning to tremble is financing for corporate buyouts.
- Leveraged buyouts are not new, but the number and size of the transactions in recent years have been unprecedented.
- Frenzied takeover activity provides an occasional small windfall for us, but it also leads to some measure of inflation in stock prices that makes it difficult for price-sensitive value investors like us to find attractively priced investments.
- Outlook
- Human nature would eventually carry some basically sensible idea to extremes and create financial mischief.
- There are signs that serious credit problems exist and markets are reacting fearfully.
- We believe that our companies are well-positioned to withstand the volatility and to come out of this period with larger market shares and higher earning power.
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