01 Mar 2011 Meridian Value Fund - Q4 2010 Commentary ( Portfolio )
The Fund’s total return and average compounded annual rate of return since June 30, 1995, were 710.4% and 14.5%, respectively. The comparable period returns for the S&P 500 with dividends were 204.0% and 7.4%, respectively.

Our investment strategy remains unchanged. 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 traditional company-specific reasons. This is historically the strength of the Meridian Value Fund and should bode well for future performance. We hold 51 positions, representing 31 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 Arkansas Best Corporation, Alexander & Baldwin and Orbital Sciences. We sold our shares in Fidelity National Financial, Hologic and JP Morgan Chase.

Carnival Corporation is the world’s leading cruise line with over 90 ships operating worldwide under brands such as Carnival, Holland America, Princess, Cunard and several others. Earnings declined in 2009 as macro conditions impacted discretionary spending. Consumers cut back on vacation spending while cruise operators received previously ordered ships that increased supply in the face of falling demand. Earnings have since begun to rebound and the outlook for Carnival and the industry is bright. Cruise vacations are well suited for the current economic environment as they offer an excellent value proposition to customers at 20-30% the cost of land-based vacations. During the financial crisis cruise operators cut back on new ship orders, resulting in the lowest supply growth outlook that the industry has seen in several years. Cruising is also relatively under-penetrated compared to other vacations, leaving more room for growth. We believe that Carnival can reach normalized earnings of over $4 per share in the next 3 to 5 years, up from $2.47 in 2010. At $47 the stock trades at a reasonable multiple of less than 12 times this earnings level. With fewer new ships coming on line over the next few years Carnival should also see significantly improved free cash flow. The company has indicated that it is likely to use this cash to increase its dividend payout which could offer further upside to investor returns.