David Rolfe

David Rolfe

Last Update: 02-14-2017

Number of Stocks: 36
Number of New Stocks: 2

Total Value: $4,096 Mil
Q/Q Turnover: 6%

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

David Rolfe Watch

  • David Rolfe Invests in Tractor Supply, Fastenal

    Wedgewood Partners’ David Rolfe (Trades, Portfolio) gained two new holdings and divested another in the final quarter of 2016. He established positions in Tractor Supply Co. (NASDAQ:TSCO) and Fastenal Co. (NASDAQ:FAST). He sold out of Stericycle Inc. (NASDAQ:SRCL).


    With over 29 years of portfolio management experience, Rolfe serves as the chief investment officer at Wedgewood. The firm believes significant long-term wealth is created by investing as “owners” in a company. Wedgewood seeks highly profitable companies that offer a dominant product or service, consistently grow earnings, revenues and dividends and have strong management teams that prioritize shareholders. The current portfolio is composed of 36 stocks and is valued at around $4.1 million.

      


  • If Only Ross' Shares Were as Discounted as Its Merchandise

    Ross Stores Inc. (NASDAQ:ROST) is a growth story in retail despite no online presence. The company uses buying and merchandising expertise to sell name-brand and designer goods for up to 70% less than conventional retailers.


    It has more than 1,500 stores selling personal and home fashion through Ross Dress for Less and dd’s Discount. In coming years, it expects to grow the chains to at least 2,500 stores.

      


  • David Rolfe Comments on Visa

    Visa (NYSE:V)'s valuation came under pressure following the election early November as the market saw a rotation out of higher-multiple tech and financial securities and into more cyclical names. We used this opportunity to increase weightings across accounts as valuation levels became more attractive.


    Visa has consistently grown its revenue, EBITDA, and earnings double digits as it has played a key role in facilitating commerce’s multi-decade move away from paper-based transactions. The Company effectively represents the collective economic bargaining power of many of the United States’ and, more recently Europe’s, credit and debit card issuers – particularly banks. Visa has tremendous scale in card transaction processing, as they facilitated over $5.7 trillion in credit and debit volume across more than 120 billion transactions, during their fiscal 2016 - well above 2015 levels. Going forward, we fully expect to see this growth trajectory continue, with added help from the integration of Visa Europe which, as we've discussed previously, should help drive double digit accretion.

      


  • David Rolfe Comments on Tractor Supply Company

    Like Fastenal, Tractor Supply Company (NASDAQ:TSCO) is a company we have long admired. Management has executed a disciplined retailing strategy where they have carved out a niche, serving rural land owners with higher than average incomes. The Company has very deliberately positioned itself to be distinct from its competitors, namely Home Depot, Lowe’s, and, to a lesser extent, Wal-Mart, primarily by locating itself in more rural locations and focusing on merchandise that caters to the maintenance needs of a rural lifestyle, in a one-stop shop format (i.e. all-terrain vehicle replacement parts and feed for livestock as pets).


    We think the Company's profitability and value proposition will be insulated over time as they have made key tradeoffs to avoid competing with big box retailers, without necessarily impairing returns. As an example, we found evidence that the company’s real estate strategy, on average, has been to simultaneously locate Tractor Supply Company stores further from “big box” competitors, while getting into more densely populated markets. Meanwhile, the Company has managed to lower the build-out and rental costs of their new stores as they have continued to expand the store base aggressively, leading to improved returns - something that is particularly difficult in the brick-and-mortar retail world, where typically new store openings generate a lower level of sales and profitability than mature stores (naturally pressuring return on investment as the company grows). We assume the Company’s continuing store base expansion, as well as a conservative assumption on same store sales, should enable the Company to grow revenues in the mid-to-high single digits over the next several years, with earnings per share growth in the double digits, driven by a combination of flat to modest margin expansion as well as stock buybacks.

      


  • David Rolfe Comments on TreeHouse Foods

    TreeHouse Foods (NYSE:THS) was a relative detractor from performance during the quarter after a confluence of a few unfortunate, though we think transient, events. The Company unexpectedly missed its quarterly earnings estimates and reduced 2016 guidance, despite having had a few wins earlier in the year not long after closing the Private Brands acquisition in January. The Company reiterated, however, its long-term accretion guidance for Private Brands. From the time the merger was announced (late 2015), we had seen multiple areas where we think this longer-term guidance is still understated. Because of our belief in this cushion management built into their original guidance, we remain comfortable that they will be able to hit their long-term growth expectations, despite these shorter-term issues.


    On the same day the Company announced its disappointing Q3, the company also announced that their COO, Chris Sliva, was leaving the company. He turned up as the new CEO of a small food company a few days later. Fortunately - the only bit of good news on the day - Dennis Riordan, the retiring CFO, reversed his retirement on this news, announcing that he would stay on as President/COO for as long as he was needed.

      


  • David Rolfe Comments on Stericycle

    We liquidated Stericycle (NASDAQ:SRCL) from portfolios after we determined that the Company's competitive advantage in its core regulated medical waste (RMW) business was not as robust as we had seen during the past five years of our holding period. Prior to the erosion in the economics of their core RMW business, we remained optimistic about Stericycle’s business. Despite recent stumbles in their non-core hazardous waste business and slower than expected integration of newly acquired Shred-it, the RMW business continued to serve as the engine to double-digit growth in free cash flow. We previously believed that Stericycle's unrivaled scale had served to insulate its RMW profitability from competitive pressures, including customer push-back associated with consolidating end-markets, as many of Stericycle’s most profitable customers - particularly individual physician practices


    • have been consolidated by managed care organizations over the past several years. However, over the past few quarters, management began disclosing that the long-term contracts associated with these newly consolidated customers were coming up for renewal at significantly lower prices. It is not clear to us why the Company gave up this pricing, given that the market has few large-scale alternatives to Stericycle. Suffice it to say, these contracts are in place for several years (sometimes five years or more), and while the Company can spend this time recovering economics through more cross selling, this strategy is unproven and potentially dilutive. As such we lost conviction in Stericycle’s ability to defend its excess profitability in RMW, and subsequently liquidated our positions.
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  • David Rolfe Comments on Charles Schwab

    Charles Schwab (NYSE:SCHW) was a top performer in the quarter as the company stands to benefit from the continued normalization of U.S. monetary policy. Despite a single federal funds rate hike during calendar year 2016, market expectations for further rate hikes have dramatically risen in the face of potential fiscal stimulus and higher inflation expectations.


    While we understand the market’s desire to discount the near-term “embedded option” of money market fee waiver relief at Schwab, we continue to invest in the Company for its industry-leading pretax profit margins and asset gathering capabilities, which we think are a byproduct of their consistent productivity investments made over the past few decades. We think this positions Schwab well in the increasingly commodified financial services industry, as the Company’s low-cost model and scale allows them to pass savings on to advisors and clients in the form of competitively lower fees, in exchange for mid-single digit platform asset growth. Combined with modest rate relief and continued productivity gains, we expect Schwab to continue posting earnings per share growth in the mid-teens.

      


  • David Rolfe Comments on Fastenal

    Fastenal (NASDAQ:FAST) is a company we have followed and admired for many years. The Company is a distributor of manufacturing and construction supplies - generally consumable parts and products such as fasteners (i.e., screws, nuts/bolts) and various items used in the maintenance, repair, and operations (MRO) of customers’ plants. The company has established a differentiated position in its industry by investing heavily to get itself as close as possible to a generally smaller, less urban customer base than its competitors. This is most evident in its extensive network of more than 2,500 branch locations, which the company effectively uses as selling and distribution outposts to serve its customer base. We contrast this with Fastenal’s largest competitor, Grainger, for example, which has only 300-odd branch locations (and shrinking) despite having twice the revenues as Fastenal. We believe this has led to a fairly healthy segmentation between the Company and its competitors: Fastenal has specialized in smaller, geographically dispersed clients who are more heavily reliant on the Company’s local distribution capabilities, sales expertise, and somewhat more specialized, locally tailored product lines; Grainger and other competitors specialize in larger, more urban clients who have more distribution and service requirements, so these distributors generally focus on more standardized products, in large quantities at the lowest cost. When we observe the healthy, and remarkably steady, returns on investment across the major competitors in the space, we view this as confirmation that the major players, for the most part, have managed to carve out profitable segments of an attractive industry without tripping over each other.


    Fastenal has extended its differentiation in recent years through three other initiatives designed to get closer to its customers. First, the Company has installed over 60,000 vending machines in customers’ plants, in which they constantly replenish products customers use regularly in their manufacturing processes. Second, the Company has accelerated the expansion of its Onsite program, in which it basically opens a small Fastenal store within a larger customer’s plant. Fastenal staffs and stocks this mini-location, effectively taking control of a portion of the customer’s supply chain. It is important to note that both the Vending and (especially) Onsite initiatives further integrate the Company into a customer’s operations, helping to make these customers stickier. Third, Fastenal has invested in additional inventories over the past several quarters, while also shifting a higher percentage of its inventory from its distribution centers into its branch locations. This once again is designed to get Fastenal as close to its customers as possible - if the Company has the products its customers need, already waiting in their market, available for same-day delivery, at an attractive price, there is no need for those customers to take their business elsewhere, whether that be to a larger, out-of-market competitor such as Grainger or to an online competitor such as Amazon.

      


  • David Rolfe Comments on Berkshire Hathaway

    Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) continues to carry an outsized weighting in portfolios – in fact, the stock continues to be one of our largest holdings. We believe the Company maintains a long-term competitive advantage, evidenced in its below-average cost of capital, which should become more valuable in an environment of both heightened equity market volatility and/or higher cost of borrowing. 2016 operating results were quite impressive given the headwinds in the bull market-laden, over crowded reinsurance business, plus the stagnant growth at Burlington Northern. The stock did enjoy a post -Trump election pop of nearly 15%. Mr. Market's early enthusiasm for Trump's fiscal proposals of lower corporate tax rates, if enacted, would certainly benefit Berkshire's bottom line. The Company could potentially be a huge beneficiary of meaningfully lower corporate tax rates. If enacted, lower corporate tax rates would have an out-sized impact by reducing Berkshire’s deferred tax liability by boosting the Company’s book value. The Company currently has amassed a massive $65 billion deferred tax liability that Buffett himself has equated to an interest-free loan from the U.S. government. If Trump, and the Republican controlled Congress are successful in lowering corporate tax rates to 15% from the current statutory rate of 35%, the Company’s book value could rise double digits. In addition, given the terrific year-end rally in bank and financial stocks, the nice pop in the Company's multibillion-dollar holdings, including American Express, Bank of America, Goldman Sachs, M&T Bank, U.S. Bank, and Wells Fargo. Bank of America and Wells Fargo enjoyed outsized gains during the quarter of 42% and 25%, respectively. Berkshire's bank and financial stock holdings have now reached a cumulative market value of over $57 billion.

    From David Rolfe (Trades, Portfolio)'s fourth quarter 2016 Wedgewood Partners investor letter.   


  • David Rolfe Comments on Kraft Heinz

    Kraft Heinz (NASDAQ:KHC) is a rare example of a company that has issued sizable debt with the goal of increasing sales and earnings - particularly earnings, in the case of Kraft Heinz. The unique, hard-to-copy management style of 3G (entrepreneurial, zero-base budgeting), coupled with low-cost debt, has proven to be quite a powerful combination for driving higher profitability well beyond industry peers.

    From David Rolfe (Trades, Portfolio)'s fourth quarter 2016 Wedgewood Partners investor letter.   


  • David Rolfe Comments on Apple Inc.

    We should note successful examples of the use of outsized debt by our own invested companies. Consider Apple. Apple (NASDAQ:AAPL) generates enough cash ($65 billion in operating cash TTM) that even after spending $10 billion in R&D in fiscal 2016, the Company’s balance sheet liquidity grew almost $10 billion, to over $250 billion. This trove is trapped overseas awaiting a change in U.S. repatriation laws - a potentially significant bullish event for shareholders. In the meantime, in order to return this cash back to shareholders, the Company has issued over $75 billion in debt.


    Further, and often left unremarked by Wall Street’s finest, is the rapid, and accelerating growth in Apple’s R&D spending over the past few years. Clearly the Company does not need to spend $10-$15 billion per year to sustain the evolutionary upgrades to the iPhone, iPad, Apple Watch and/or new video streaming services. Apple’s nascent automotive program Project Titan may not be at all about creating a complete autonomous driving car (Apple Car), but rather the creation of software that makes existing cars smarter – or even autonomous. Now that is a huge, creatively disruptive opportunity.

      


  • David Rolfe's Wedgewood Partners 4th Quarter Letter: Changing of the Guard

    Review and Outlook

      


  • David Rolfe Buys 1, Sells 1 in 3rd Quarter

    Wedgewood Partners’ David Rolfe (Trades, Portfolio) acquired one new holding and sold another in the third quarter.


    Rolfe is the chief investment officer at Wedgewood. The firm’s investment philosophy is established on the belief that significant long-term wealth can be created through investing as an “owner” in a company. It looks for a dominant product or service that is hard to compete with, has sustainable and consistent growth of revenue, earnings and dividends, is highly profitable and has a strong, shareholder-oriented management team.

      


  • Robert Olstein Invests in Waste Management, Outdoor Sports, Lab Products

    Olstein Capital Management’s Robert Olstein (Trades, Portfolio) bought eight new holdings in the third quarter. His top three new holdings are Stericycle Inc. (NASDAQ:SRCL), Vista Outdoor Inc. (NYSE:VSTO) and VWR Corp. (NASDAQ:VWR).


    Olstein founded his firm in 1995. It follows an accounting-driven, value-oriented philosophy that is based on the premise that the price of a common stock may not reflect the company’s true value. The investment team employs analytical and valuation methods to determine the quality of a company. It looks behind the numbers to assess the company’s financial strength and downside risk.

      


  • Apple Reports Strong Fiscal 4th Quarter Earnings

    During the fiscal quarter ended Sept. 25, Apple Inc. (NASDAQ:AAPL) reported $46.9 billion in net income and diluted earnings per share of $1.67. The company’s gross margin slightly declined compared to the corresponding quarter last year.


    While these values were slightly lower compared to the fiscal fourth quarter of 2015, Apple’s service revenue reached an all-quarter high of $6.3 billion in the most recent quarter, likely due to increased iPhone 7 sales and Samsung Electronics Co. Ltd. (XKRX:005930) (XKRX:005935) terminating its Note 7.

      


  • David Rolfe Comments on TreeHouse Foods Inc.

    We initiated positions in TreeHouse Foods, Inc. (NYSE:THS) during the third quarter. TreeHouse is the largest private label food manufacturer and distributor in North America. An aphorism in the private label industry is that “a grocer is only as good as their private label.” As such, private label food has been growing its share of the North American food industry over the past several years, as consumers have sought value in comparison with branded food, and as grocery retailers and other food vendors have pursued the greater profitability to themselves of private label products. This trend primarily began in national-brand equivalents, in which TreeHouse and other private label manufacturers offer products of comparable quality to brand names but at better prices. However, much of TreeHouse’s growth in recent years has come from premium products, which often might be natural/organic/healthy choices and possibly of even greater quality or featuring greater innovation (flavors/recipes) than competing branded products. Having evolved from simply offering retail customers a "good/better/best" option of national brand equivalents, the Company has begun to offer deeper category segmentation and insights, while developing and manufacturing multi-tiered pricing assortments, so their retail customers can better compete under the pricing umbrella typically created by higher priced national brands. Many of TreeHouse’s best customers, including large, growing retailers such as Trader Joe’s, Aldi’s, Amazon, and Kroger, have embraced this more complete portfolio strategy of private label products, which offers the retailers not only improved profitability but also better sales opportunities, as well. In addition, TreeHouse’s scale and presence in over 20 food categories, enhances its value proposition, which is to help grocery customers hone in on this secular trend towards customized store brands.


    The Company has been growing successfully through acquisition since its formation in 2005. TreeHouse has driven value in its acquired businesses by bringing to bear greater operational capabilities and expertise, greater resources behind innovation and customer research, much greater scale and buying power, and an extensive existing customer list into which the acquired businesses could sell. In early 2016, TreeHouse completed the transformational acquisition of the Private Brands business of ConAgra Foods, effectively doubling TreeHouse’s revenue base and operating footprint while removing its only private label competitor of any meaningful size, all at what we view as an attractive purchase price. The acquired business had struggled under the ownership of ConAgra, which historically had been a branded player and which had not understood the different skill set required to operate a private label business. We believe that TreeHouse comprehensively understands these operational issues and already has begun to remedy them. Better execution at the acquired business, which will drive improving revenue growth and margins, combined with significant cost savings opportunities as a result of the combined companies’ greatly enhanced scale, will allow TreeHouse to deliver roughly 70% earnings growth from the time of the acquisition to the completion of its integration in 2018. During this integration, we likely will see smaller tuck-in acquisitions, as the company’s capital structure still allows it to be active in consolidating the industry. We estimate that the company has less than 10% market share in North America, with plenty of room to expand organically and through acquisition, both within its current 20+ product categories and in adjacent and new categories.

      


  • David Rolfe Comments on Cognizant

    Cognizant (NASDAQ:CTSH) also detracted from overall performance during the quarter, due to management’s cautious commentary related to the demand environment in two of their core customer verticals. Management’s caution about IT spend in Cognizant’s BFS (Banking and Financial Services) segment trace back to the prolonged low interest rate environment along with increased uncertainty in the macro environment—particularly attributed to the “Brexit” vote, which was relatively fresh news at the time of management’s comments. We do not think this weakness has materialized in the near-term, at least to the extent that management was implying. In addition, but not necessarily new, Cognizant has four clients in the HMO (health-maintenance organization) industry, all attempting to merge with or acquire the other. Though the extended timeline of these M&A deals likely pushes out the timing of expected work for Cognizant at each of these four clients, we think Cognizant’s longer-term positioning as a key partner at all four HMOs will continue to allow them to capture wallet share, regardless of M&A outcomes. Near-term, we expect investors to remain skittish around the shares, if only because the investor base has been skittish for years, with the NTM P/E multiple of Cognizant typically vacillating 20%-30% per year. Despite these recent headwinds to topline growth, we think Cognizant maintains a long- term runway for generating attractive organic growth, as the company benefits from the secular shift of IT spend towards digital solutions. The Company maintains excellent financial strength, with nearly $8 billion in borrowing capacity before reaching the average net debt to operating income leverage of the S&P 500—close to 25% of the current market cap.

    From David Rolfe (Trades, Portfolio)'s Wedgewood Partners third-quarter 2016 shareholder letter.   


  • David Rolfe Comments on Core Labs

    Core Labs (NYSE:CLB) was the third largest detractor from our relative performance during the third quarter. While “energy” continues to be a four-letter word at this point in the cycle of U.S. growth investing,5 we continue to think that Core Labs’ value proposition is worthy of multi-cycle consideration. We estimate that roughly 85% of the Company’s revenues are generated by providing equipment and services for the upkeep of their customers’ existing carbon producing fields. As such, the majority of the value that Core Labs provides its customers is not directly predicated on the activity of drillings rigs, or even on the short-term price of oil. For instance, the Company’s Reservoir Description business generated over 60% of consolidated revenues during the trailing 12 months. Reservoir Description revenues have declined just -16% from their trailing 12-month peak (set during late 2013 through mid 2014 – when oil traded at twice today’s levels). A significant portion of Core Labs’ revenues are generated outside the United States, so we estimate revenues in Reservoir Description have probably fallen by a high single digit percent, constant currency – despite the E&P industry (Core Labs’ customers) drastically cutting budgets by between - 30% and -75% during that timeframe. Thus, a significant portion of Core Labs’ business is very well insulated from the vagaries of short-term oil price fluctuations. Although the margins of this segment have suffered more than revenues, we expect that margins have bottomed and should rapidly rebound with E&P spending budgets, as Core Labs’ management has prudently balanced costs without sacrificing personnel capacity.

    From David Rolfe (Trades, Portfolio)'s Wedgewood Partners third-quarter 2016 shareholder letter.   


  • David Rolfe Comments on Stericycle

    Stericycle (NASDAQ:SRCL) underperformed during the quarter as headwinds related to their core, regulated medical waste (RMW) segment began to emerge. Prior headwinds to the Company were limited to non-core businesses or are short-term issues that should be remedied over the next few quarters. While the stock has become cheap, historically and relatively, we did not add to positions during the quarter, as we continue to evaluate the extent of the pressure the Company is seeing in its RMW business.

    From David Rolfe (Trades, Portfolio)'s Wedgewood Partners third-quarter 2016 shareholder letter.   


  • David Rolfe Comments on Qualcomm

    Qualcomm (NASDAQ:QCOM) was also a top contributor to performance over the past three months. We saw Qualcomm make meaningful progress on its technology licensing (QTL) front after several quarters of patiently waiting for the Company to capture unpaid royalties in China. Although Qualcomm’s chipset franchise (QCT) usually garners most of the attention for the Company, its high-margin QTL segment actually generates two-thirds to three-quarters of consolidated profitability. So while revenues at Qualcomm grew 4%, operating income grew almost 30%, year-over-year. Although it has taken several quarters to eventually materialize, we think that the “lumpy” nature of QTL revenues does not make Qualcomm’s long-term prospects for monetizing its prolific research and development spend (cumulative $16 billion over the past three years), any less attractive. In our opinion, Qualcomm shares remain underappreciated by the market, trading at just 14X next 12 month earnings. In addition, the Company maintains a fortress-like balance sheet with about $20 billion in net cash. As a valuation thought-experiment, if Qualcomm levered its balance sheet to be at parity with the average S&P 500 company's (excluding financials) net debt-to-operating earnings ratio4, the Company would have close to 35% of its market cap available for redeployment. We continue to expect that the long-term growth of the business will drive the stock higher and help close that gap, but our conviction in the stock is reinforced by the Company’s excellent financial health, which is a byproduct of their superior profitability.

    From David Rolfe (Trades, Portfolio)'s Wedgewood Partners third-quarter 2016 shareholder letter.   


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