26 Aug 2011 Meridian Value Fund - Q2 2011 Commentary ( Portfolio )
We continue to seek out-of-favor companies exemplified by an extended period of declining earnings. Over the past two years most earnings problems were related to poor economic conditions. During this period we invested in many high quality companies at attractive valuations. These are companies, in most cases, with leading and defensible market positions, high returns on invested capital, strong balance sheets and proven management teams. Many of these investments lagged the market during the strong rally off the 2009 market lows and continued to underperform in 2010 as the market favored smaller, higher growth companies. With some stability in the economy, we now see more companies that fit our strategy for company-specific reasons. These investments are the traditional strength and point of differentiation of the Meridian Value Fund. We are gradually shifting the portfolio to more of these investments and expect that this should bode well for a return to the Fund’s historically strong performance levels. We hold 55 positions, representing 34 industry groups. We continue to invest in companies of all market capitalizations and our largest areas of concentration are technology, retail and transportation.

During the quarter we purchased shares of GATX, Hospira, Huron Consulting Group, ICON and International Speedway. We sold our positions in Forest Oil, Gen-Probe, Northern Trust and NVIDIA.

Costco, a current holding, is the leading warehouse club in the United States with additional locations in Canada, Mexico, the UK and parts of Asia. In an environment of sluggish consumer and small business spending, Costco’s ultra-low prices should drive traffic gains versus retail peers. Membership fees, which constitute the majority of the company’s profits, continue to grow through adding new members, up-selling higher fee memberships and periodic fee increases. Additionally, Costco is expanding its units at a measured pace with greater opportunities abroad. The company has an excellent balance sheet and trades at a reasonable valuation, taking into consideration it’s over $11 in net cash per share, quality of management, leading competitive position and future growth.