David Rolfe Takes 2 in Growing Retail Industry

Strong sector offers good investing opportunities

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Aug 18, 2016
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David Rolfe (Trades, Portfolio), chief investment officer of Wedgewood Partners Inc., increases value to his shareholders using an “index investing” approach.

Through strategic stock selection and investment in industries with potential for sustainable growth, the managers of the St. Louis-based mutual fund seek to outperform competing mutual funds and the Standard & Poor’s 500 index. During the second quarter, Rolfe invested in two retail companies: Ross Stores Inc. (ROST, Financial) and TJX Companies Inc. (TJX, Financial). With these two transactions, Wedgewood's chief investment officer increased his portfolio by 5.1% in the aggregate.

Rolfe purchased 2,487,764 shares of Ross Stores and 1,429,281 shares of TJX Companies. The two retail companies averaged $55.54 and $76.34 per share. Both companies have a five-star predictability rank, implying consistent revenue and earnings. Additionally, the two companies have a strong business outlook: Ross has a financial strength rank of 8 and a profitability rank of 9 while TJX has a financial strength rank of 7 and a profitability rank of 8.

As discussed in his client letter, Rolfe perceives high growth potential in the retail industry, especially in Ross and TJX. Ross Stores did not suffer from the Brexit vote since it has zero exposure to the United Kingdom and the European Union. Additionally, Ross offers great value for its customers through its DD’s discount stores. Rolfe expects the off-price apparel retail company to generate positive trailing 12-month revenue growth and EPS growth in the next few years.

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Rolfe stresses sustainable growth in his investment philosophy. TJX Companies, as discussed in Rolfe’s client letter, likely has sustainable growth due to its “differentiated value chain.” The fashion retailer efficiently manages its inventory: TJX buys in-season retail from its vendors and distributes the products to its stores within days. The discounted prices allow the company to reduce excess inventory and increase customer traffic in the stores. As the management of TJX efficiently operates its business, Rolfe expects the company to reach double-digit EPS growth in the short term.

With high operating margins and returns on capital, both Ross Stores and TJX Companies have strong upside potential. Ross’ operating margin currently outperforms 88% of global apparel stores while TJX’s operating margin outperforms 84%. Additionally, both companies have a return on equity in the top 5% of global apparel stores.

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Rolfe currently owns the third-highest number of shares in Ross and the fifth-highest number of shares in TJX. PRIMECAP Management (Trades, Portfolio), who currently has the largest stakes in both companies, increased its Ross Stores position by 1.73% during the second quarter.

See also

Although both companies have predictable revenue growth and earnings, Ross Stores and TJX Companies currently trade near 10-year highs. Due to high valuation ratios, neither retail companies makes the list of undervalued predictable companies or the Buffett-Munger Screener. However, two other retail companies, Hibbett Sports Inc. (HIBB, Financial) and Winmark Corp. (WINA, Financial), made these two value screeners, as mentioned in a previous article.

You can use the All-in-One Guru Screener to find good retail companies in which to invest. Rolfe targets companies that have dominant products, sustainable revenue and earnings growth, high level of profitability and a strong management team. Based on Rolfe’s investment philosophy, we can generate the following screener:

  • The company has at least a five-star predictability rank.
  • Both the one-year revenue growth rate and the five-year revenue growth rate are at least 10%.
  • The one-year EPS growth rate is at least 5%, and the five-year EPS growth rate is at least 10%.
  • The company has been profitable each year for the past 10 years.

Five U.S. retail companies, including Ross Stores and TJX Companies, made the list of Rolfe’s stock picks.

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Disclosure: The author has no position in any of the stocks mentioned in this article.

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