David Rolfe

David Rolfe

Last Update: 2014-12-18

Number of Stocks: 21
Number of New Stocks: 0

Total Value: $6,187 Mil
Q/Q Turnover: 9%

Countries: USA
Details: Top Buys | Top Sales | Top Holdings  Embed:

David Rolfe Watch

  • Another Guru Goes for Oil - David Rolfe Buys Core Labs

    David Rolfe (Trades, Portfolio) is the latest guru to dip his toe in oil as more value-conscious investors eye the commodity’s 45% price slump from June peaks. Rolfe picked up shares of Core Laboratories NV (CLB), a global reservoir optimization technology company that enables its clients to extract more oil and gas from wells.

    Rolfe acquired 2,226,741 shares of the company reported Dec. 18 by GuruFocus Real Time Picks. His holding represents about 5% of the company. Core Laboratories shares traded around $121.68 per share on Friday, after a 36% decline year to date.


  • David Rolfe's Wedgewood Partners Q3 2014 Portfolio Commentary

    Review and Outlook Our Composite (net-­of-­fees) was basically flat (+0.30%) during the third quarter of 2014. This rounding-­error gain is below both the gain in the Standard & Poor’s 500 Index of +1.13% and the gain of +1.49% in the Russell 1000 Growth Index.

    Our Composite year-­to-­date gain of +3.8% has lagged substantially the gains in the Standard & Poor’s 500 Index and the Russell 1000 Growth Index of +8.3% and +7.9%, respectively. A somber fact: Over the past six months, nearly two-thirds of our current portfolio has underperformed the S&P 500 Index. In the never ending zero-­interest rate environment of Quantitative Easing the chase for return and yield continues to reward the stocks of poorer quality (i.e. low/no profits), higher debt-­ leveraged company stocks and reward company stocks that pay out higher 2 percentages of earnings in the form of dividends. Individual stock selection mistakes aside, we believe that our investment focus on higher quality growth companies at reasonable valuations is simply ill-­suited in the current ebullient environment. In fact, 2014 may well go down as one of the worst years for active equity managers in the past two decades. According to The Leuthold Group: Last year provided managers not only with huge gains but also with comparatively favorable odds of beating the S&P 500. In 2013, about 60% of the issues in the 1500 composite topped the +29.6% gain in the S&P 500. That percentage has been cut in half over the last nine months. The latest reading of 30.2% compares to those recorded in the late 1990s’ “bifurcated bull” – an excruciating time for active managers that ultimately ended badly for all.


  • David Rolfe Comments on Apple

    Apple (AAPL), circa 2012-2014, is Exhibit A on how investing with the conviction of a successful business owner is a prerequisite for repeatable investment success. Before we explain, we would like to offer up pop quiz. Quick, off the top of your head, what is the 1-year, 2-year and 3-year return (roughly) of Apple stock (and the S&P 500 too) as of the end of the second quarter? Here is a graphic hint:


  • David Rolfe Comments on Coach

    Coach (COH) shares significantly declined during the quarter and have been a relative detractor since we first began purchasing shares in July 2012. With clearer hindsight, where did we go wrong on our initial timing? Our view then was that the Company's lackluster North American sales slump was largely due to a pause in creative new product. Thus, our initial investment in these shares came far too early in the Company's efforts to reinvigorate their iconic brand.

    Of course, the journey in our ownership in Coach, thus far, has been long...and wrong. When we initiated Coach, we recognized that there was increasing competitive encroachment in the North American handbag and accessories market. However, we underestimated the aggressive expansion of Coach’s competitors, as well as the pernicious effects of brand underinvestment during the previous business cycle. The core risk of Coach has been centered on its North American business, which has been losing share over the past, roughly 3 years. Competitors Michael Kors, Kate Spade and Tory Burch have all successfully copied key aspects of the high return on capital Coach playbook, and now the original progenitor of "accessible luxury" now finds itself at the crossroads of not only redefining and rebuilding its own brand, but fighting off it's well entrenched progeny. We still think Coach has a sustainable competitive advantage, and we do not think that the competitive inroads of Coach's peer group are sustainable over the next 3 to 5 years.


  • David Rolfe's Wedgewood Partners Q2 2014 Commentary

    Review and Outlook


  • David Rolfe Comments on Mead Johnson Nutrition

    Mead Johnson Nutrition (MJN)

    Edward Mead Johnson: founder of not one, but two great companies in his lifetime. Now, how many of us can say that?! In 1885, after graduating from the University of Michigan with a degree in law, he and his two brothers, Robert Wood Johnson I and James Wood Johnson, would found Johnson & Johnson, the consumer healthcare products company in Brunswick, New Jersey. With no lack of success, Edward soon 15 decided he wanted to do more. Ten short years later, he broke off from Johnson & Johnson and founded American Ferment Company in Jersey City, N.J., making nutritional products. Fast forward another ten years, in 1905 American Ferment re-­‐ established itself as Mead Johnson and Company and the +100 year history of the Mead Johnson Nutrition Company begins. While Mead Johnson's name has remained intact throughout its history, the company – with sales then of $131 million – was acquired in 1967 by Bristol-­‐Myers for $240 million. Bristol-­‐Myers Squibb owned Mead Johnson as a wholly owned subsidiary for the next four decades until they announced in April 2008 plans to sell 10-­‐20% of Mead Johnson to the public through an IPO in order to better focus on its burgeoning biopharmaceutical business. Bristol-­‐Myers Squibb would proceed to split off Mead Johnson and by February 2009 the IPO was complete. Shortly thereafter, in November of 2009, Bristol-­‐Myers would spin out the rest of their ownership of Mead Johnson in a stock swap, valued at $7.7 billion. Mead Johnson Nutrition would operate as a fully independent public company going forward.


  • David Rolfe Comments on LKQ Corporation

    LKQ Corporation (LKQ) is the world's largest procurer and distributor of alternative and aftermarket collision replacement parts for automobiles and other vehicles. The Company has grown rapidly since its inception in 1998, by executing an expansion strategy that has included aggressive organic and inorganic investments. To date, LKQ's strategy has resulted in a business with unparalleled scale, at over $5 billion in revenues across three continents, compared with aftermarket and salvage parts competitors that routinely post less then $100 million in sales, usually with the largest footprints limited to regional geographies.

    LKQ has a very clear, defensible value proposition that we believe should continue to generate superior business results for many years to come. Consider vehicle owners and collision repair shops have three options when sourcing replacement collision parts: the original equipment manufacturer (also known as "OEMs" – think GM, Chrysler, Toyota or Honda), aftermarket manufacturers (generic car parts, similar in quality to OEM -­‐ "off-­‐brand") or alternative parts, which includes recycled, remanufactured and refurbished OEM parts (usually from the purchase and dismantling of salvage vehicles). LKQ specializes in procuring and distributing the latter two categories – alternative and aftermarket replacement collision parts – which is a $15 billion market opportunity in the U.S. These alternative parts are 13 typically 20% to 50% cheaper than OEM parts, with headlamp assemblies, hoods, as well as rear and front bumper covers rounding out some of the most popular products.


  • David Rolfe Comments on Berkshire Hathaway

    Although we view Berkshire Hathaway (BRK.A)(BRK.B) to be an exceptional growth and profitability machine, that doesn't mean Mr. Market agrees with us. In other words, despite our expectations for double-­‐digit BVPS growth and value-­‐added advantages, growth could turn out to be "not growth." Essentially, we could be wrong. While this might sound helpless, quite the contrary, we believe it is this admission of potential error that allows us to seek an effective cushion from the very risk of "not growth." If Chapter 20 of the Intelligent Investor just came to mind, then kudos to you! If not, we understand, particularly because Ben Graham's examples of a "margin of safety" are much more draconian than we use. But the concept of preserving capital by not overpaying for the future earnings stream of a business is very much the same.

    Berkshire Hathaway is a good example of how we expect long-­‐term value creation to drive excellent shareholder returns, provided that we do not overpay for such potential returns. Consider the Company's share repurchase strategy, which authorizes management to repurchase shares at prices equivalent to or less than 120% of book value. Berkshire currently has in excess of $40 billion in unencumbered cash on its balance sheet, relative to slightly more than $300 billion market capitalization, so there are substantial resources available for the Company to execute such a buyback strategy. Assuming book value growth falls short of our double-­‐digit expectations, we expect shares to simply not appreciate, rather than depreciate, as we estimate shares currently trade near 120% of book value, with buybacks effectively providing a valuation "floor." So we could be wrong about Berkshire's upside, but we think we have accounted for that risk by ensuring relatively limited downside. We conclude by reiterating that any business can sell $100 bills for $95 to generate billions of revenue. But that is not a true value proposition. We believe that profitability represents the existence of value creation and capture – the higher the sustained profitability the better. Further, as these profits are retained and successfully reinvested back into the business at continued high levels of profitability, the ensuing earnings growth is what drives long-­‐term shareholder returns. While not all businesses have such an explicit (and accretive) buyback strategy as Berkshire, it is a good example of why we look for businesses that not only have ample profitability and per-­‐share earnings growth but also trade at attractive valuations. We like the rewards of a rapidly appreciating stock just as much as any investor, but we also like to maintain those rewards by recognizing the ever-­‐present risk that we could be wrong.


  • David Rolfe Comments on Visa

    During the quarter, Visa (V) reported strong year-­‐over-­‐year growth with earnings up 14%, as the business continues to operate at a superior level – very much in-­‐line with the past several years. Visa has been a core holding for our clients since October 2008 and rarely has a year gone by without the Company and its partners having to contend with lawsuits and legislation aimed at limiting pricing power and 4 distribution. 2014 is no exception, though most of the news has been favorable, with a ruling for "no change" to Visa's exclusivity for high-­‐value signature transactions. We continue to see Visa's pricing power as being derived from VisaNet's superior value proposition relative to substitutes, particularly paper-­‐ based payments, automated clearinghouse (ACH), and more recently, "cryptocurrencies" (e.g. Bitcoin). While these emerging payment platforms, including PayPal and Square, represent very legitimate substitutes to traditional interchange, in our view they are not quite "good enough," as evidenced by merchant acceptance that is largely sequestered to small businesses. While we have been net sellers of Visa over the past 18 months, it has been solely due to valuation – our primary tool for risk management at Wedgewood. We believe Visa will continue to maintain its superior competitive positioning, as competitors find it difficult to achieve the network-­‐effect benefits that have compounded the value proposition of VisaNet, particularly as acceptance and issuance of the Visa brand continues to expand.

    From David Rolfe (Trades, Portfolio)'s Wedgewood Partners first quarter 2014 commentary.  

  • David Rolfe Comments on Stericycle

    Stericycle (SRCL) alone operates globally and generates close to $2 billion in annual revenues. Despite Stericycle's strong business performance during the recently reported quarter, the stock detracted from performance, partially driven by headlines of rumored regulatory action related to one of the Company's incinerators. We believe the issue is not meaningful to results and we would be willing to add to shares on pullbacks related to this. Stericycle's stock trades in the mid to high-­‐teens EBITDA range, but the company routinely purchases smaller competitors for just 3X-­‐6X EBITDA. This accretion is a byproduct of Stericycle's competitive positioning and we believe it paves a multi-­‐year runway for double-­‐digit growth.

    From David Rolfe (Trades, Portfolio)'s Wedgewood Partners first quarter 2014 commentary.  

  • David Rolfe Comments on Varian Medical Systems

    Varian Medical Systems (VAR) has been a staple in our portfolio since the fall of 2005. The stock has rebounded smartly, up +31% from its April 2013 lows through the first quarter. Varian continues to be the global market share and technological leader in the radiation oncology business. Unfortunately, the incidence of cancer continues its deadly growth. In the U.S. alone, the American Cancer Society projects that some 1.7 million people will be diagnosed with cancer. Expectations of new cancer cases around the world are approaching 25 million over the next three decades. Of these new cases, approximately two-­‐thirds will be treated with some sort of radiation therapy. Varian has been at the forefront of linear particle accelerator since the late 1940's. Today the Company's installed base numbers over 7,300 LINACS across the globe – a 60% market share. As impressive as that may sound, the availability of state-­‐of-­‐the-­‐art radiation therapy (radiosurgery and proton therapy) outside of the U.S. is woefully low. The developed world has access to 35 to 110 LINACS per million people over the age of 65. In the U.S., it's 110 LINACS per million. Western Europe and Japan is 35 to 65 per million. In India, Africa, Eastern Europe and Southeast Asia there are between 1 and 20 machines per million. In China there is less than 10 machines per million. Complementing the Company's long-­‐term growth opportunity in radiation therapy is the secular trend in the "digitization of radiology," which is a key driver of their lucrative software and flat-­‐panel services business, plus their X-­‐ray tube replacement business that sells into the installed base of competing LINACS. The Company's initiatives to drive greater productivity continue to bear fruit. In 2013 sales per employee increased 14% and operating income per employee increased 20% over 2012 levels. Such productivity has helped the Company offset the continuing losses as they rollout their proton therapy machines. Cutting edge technologies such as proton therapy are one of the many reasons why cancer survivorship rates are up to nearly 70% from 50% from just the 1970's. You will be hearing much more about the marvels of proton therapy in the years to come. The key benefit of proton therapy over the latest x-­‐ray technology is that proton beams, due to proton's relatively larger sub-­‐atomic mass, can be controlled and stopped at the tumor. Conventional X-­‐rays particles cannot be 3 stopped and risk damaging surrounding healthy cells. Due to the exceptional accuracy of a proton beam, the oncologist can more safely deliver much higher doses of radiation (hypofraction), which kills cancer faster with fewer treatments. Furthermore, tumors that are close to vital organs are ideal for proton therapy. These include head and neck, breast, lung, gastrointestinal, prostate and spine. Proton therapy is also ideal for children to avoid longer-­‐term side effects of traditional radiation therapy. The advantages of this therapy have been known since the 1940's, but the cost of commercialization has been a nearly insurmountable hurdle. The Varian proton therapy equipped facility at the Scripps Proton Therapy center in San Diego just went online in January. This $220 million, 102,000 square-­‐foot, facility is only the 15th proton therapy facility in the U.S. At its core sits a 95-­‐ton superconducting cyclotron where the proton beam is generated using oxygen and hydrogen to create a plasma stream. Protons are then extracted and accelerated to roughly 100,000 miles per second. Such miracles of science and technology (Cincinnati Children's Hospital just recently placed a proton order) come at considerable costs. The Company needs to get the costs of such systems below $25 million in order to drive any meaningful growth and profitability from proton therapy. Given Varian's long and exceptional history of innovation with LINACS, combined with proton therapy's high barriers to entry, we believe the Company is well-­‐positioned to eventually reap a substantial proportion of any potential financial rewards generated by this ground-­‐breaking technology. Stericycle continued its steady streak of growth. Last quarter earnings per share were up 12%, driven by a 13% increase in revenues, compared to the December 2012 calendar quarter. Stericycle is able to methodically deliver such growth through a unique combination of organic and inorganic means. For instance, during the quarter they closed eight acquisitions that will generate roughly $34 million in incremental annual revenues. As for the Company's competitive positioning, the regulated medical waste industry market opportunity is roughly $10.5 billion spread across a highly fragmented competitive field, consisting of regional or local players, with none generating revenues above $100 million.

    From David Rolfe (Trades, Portfolio)'s Wedgewood Partners first quarter 2014 commentary.  

  • David Rolfe Comments on Schlumberger

    Schlumberger (SLB) was a top performer during the quarter, continuing its strong performance since the summer of 2012. Since late June 2012 (6/22) through mid-­‐ April 2014, the stock (a holding since late September 2011) is up approximately 60% -­‐ nearly double the S&P 500 Index's gain of 36%. Schlumberger continues to do what it does best – dominate their respective industry and generate industry-­‐ leading growth and cash flow generation. The Company is a leading global provider of oil services. At the risk of repeating an oil service industry cliché, "the easy oil has been found." The technological development being brought to bear to the extremes and complexities in the exploration and development of hydrocarbon energy is relentless. The Company's depth and breadth of their integrated products and services has been at the forefront of the unceasing progress of energy services for decades. Indeed, according to the Company, over the past decade, total E&P capital expenditures have increased by 400%, yet global oil production is up only a scant 15%. Furthermore, in just the last three years, the upstream E&P industry has spent on average $600 billion per year yielding only a net increase in global oil production coming from the shale deposits in North American. Due to the significant advancements in horizontal drilling and multistage fracking natural gas prices are generally one-­‐third of what they are in Europe or Asia. This differential has had 2 profound implications, for instance in the U.S. chemical industry. Chevron Phillips just this month broke ground on a $6 billion ethane cracker plant in Texas – the first petrochemical refinery built in the U.S. in twenty-­‐five years. Circa-­‐2014 finds the Company at the cutting edge in the continued search for unconventional oil and gas, plus in the environmentally challenging area in offshore and deepwater. The Company continues to enhance their capabilities, scale and integration with strategic acquisitions – including of late, Rock Deformation Research (geological software), Saxon (international land drilling), Gushor (petroleum geochemistry and fluid analysis) and GeoKnowledge (exploration risk and resource software). In an inherently cyclical industry, Schlumberger is a beacon of consistent profitability – posting net margins regularly between 12½% and 14½%. Free cash flow over the past twelve months ($5.8 billion) is 90% higher than the last cyclical peak in calendar 2007. Schlumberger is the only peer-­‐related company that has increased margins and generated double-­‐digit growth in operating earnings and earnings per share over the past two years.

    From David Rolfe (Trades, Portfolio)'s Wedgewood Partners first quarter 2014 commentary.  

  • David Rolfe's Wedgewood Partners Q1 2014 Investor Letter

    Review and Outlook

    Our Composite (net-­‐of-­‐fees) gained approximately +1.9% during the first quarter of 2014. This gain is inline with the gain in the Standard & Poor's 500 Index of +1.8% and middling to the gain of +1.1% in the Russell 1000 Growth Index.


  • Wedgewood's David Rolfe Wagers in Favor of Berkshire in High-Stakes Bet

    It takes a lot chutzpah to bet against Warren Buffett (Trades, Portfolio) — arguably the greatest investor in history. Yet much to my own surprise, that’s exactly the position I've unexpectedly found myself in.

    Here’s how it all happened:  

  • Coach: A Champion Among Luxury Retailers

    As a luxury brand retailer, Coach Inc. (COH) enjoys strong pricing power, sourcing and distribution advantages, as well as capital efficiency, making it one of the top companies in the industry with a narrow economic moat. Its high quality handbags and accessories, sold at a more attractive price than its competitors, have garnered a large customer base with strong brand loyalty, resulting in a business with excess economic profits. Therefore, it should come as no surprise that investment gurus like John Griffin (Trades, Portfolio) and David Rolfe (Trades, Portfolio) recently acquired over 1 million shares in this company, hoping to gain long term rewards.

    Of Capital Efficiency and International Expansion


  • Wedgewood Partners' Views on 2014

    While our primary task is to be “bottom-­up” owners of terrific businesses, rather than the less predictable, less profitable and certainly less satisfying task of economic or stock market forecasting, we would like to offer our views on the current investing environment. In short, we expect much of 2014 to be the opposite of 2013. Further, we expect Main Street to outperform Wall Street. We expect better than expected economic growth, better employment - and correspondingly higher than expected inflation and interest rates. Even a cursory dive into the latest employment figures shows that the college-plus segment is near full employment. Leading economic indicators have currently crept back up to 3-­year highs. Relatedly, what may be better for the economy, may very well likely challenge current exuberant financial markets - particularly the stock market. Higher interest rates and higher inflation could cause a deflation-­obsessed Fed to "taper" much sooner than their official policy statements.

    As such, any surprises in interest rates and inflation could well be to the upside and prove to be, in our opinion, a considerable headwind for the stock market. 2013 was a year of P/E multiple expansion. 2014 may well be the opposite. We also expect more volatility (read: downside) throughout 2014. Our more specific evolving views on the broad stock market echo our thoughts from our last couple of Client Letters. As much as pessimism and fear ruled the day back in late 2008 and early 2009, we are of the current view that we are in the midst of a bull market in optimism. In short, we expect evolving Risk-avoidance to trump Reward-chasing in 2014.


  • David Rolfe on Charles Schwab Corp.

    Charles Schwab was our largest relative contributor to performance. The stock gained +82% in 2013 – after a gain of 30% in 2012. We trimmed the position throughout the year and fully exited the position at the end of October. Our sale rationale is quite succinct. Schwab remains a best-in-class business, but the stock, in our view, had become less than best in class (read: overvalued)....

    For instance, we liquidated our stakes in Charles Schwab during the fourth quarter, as we believe several years of Schwab’s future earnings power were sufficiently recognized by Mr. Market in current prices. While the Company has continued to grow and take profitability share via its superb low-cost, internet-based platform, our analysis of the stock’s valuation suggests that the implied earnings power of the business is not only taking current business momentum into account, but also giving shareholders ample credit for higher short-­term interest rates, even though short-­term rates are currently anchored near zero. Admittedly, valuation is somewhat of a blunt tool, given the wide array of future assumptions, however, we believe that valuation becomes clarified and much sharper too as time passes.


  • Worldly Wisdom and Advice, from David Rolfe of Wedgewood Partners

  • David Rolfe Comments on Perrigo

    During the quarter, Perrigo (PRGO) announced strong September quarter adjusted earnings growth of 20%.  We say “adjusted” because the Company incurred what we believe are non-recurring charges related to the recent purchase of Elan Corporation, which is a branded-drug company domiciled in Ireland.  Upon the closing of this purchase, Perrigo has “re-domiciled” itself in Ireland, with an effective tax rate meaningfully below what they were subjected to in the U.S.  Given that the Company actively pursues a strategy of inorganic growth as much as it pursues organic growth - having acquired six new businesses over the past 18 months (including Elan) - we expect that this new tax structure should make future acquisitions, particularly those U.S. based businesses, much more attractive.  Further, Perrigo’s core business, which includes private-label over-the-counter (OTC) pharmaceuticals and infant formula, drove much of the year-over-year growth.  The Company’s unrivaled scale in manufacturing and marketing of store-branded offerings continues to enable retailers to mimic the value proposition of OTC pharmaceuticals and infant formula.  This “store-brand conversion” is a multi-year trend that we expect will continue for the foreseeable future as consumers continue to become more value-conscious, yet more comfortable with store-brand quality that Perrigo helps engineer. 



  • David Rolfe Comments on Cognizant

    Cognizant (CTSH) continued to execute well on its value proposition of providing deep domain expertise for outsourced enterprise IT.  As IT has rapidly evolved in the face of a “devolving” macroeconomic backdrop, outsourcing customers are demanding more value-added services to not only convert fixed IT costs into variable costs, but to improve business agility and drive revenues. Cognizant has aggressively reinvested to meet and exceed these demands, cultivating a relationship-based approach that relies on a much larger on-site presence compared to transactionally-based peers.  In turn, customers have given Cognizant more “wallet share,” to the point where revenues have routinely grown at a 20% clip.  We expect emerging trends, such as the proliferation of mobile IT as well as the perpetual trend of IT infrastructure transformation to drive double-digit growth well into the future.



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