David Rolfe

David Rolfe

Last Update: 08-14-2017

Number of Stocks: 37
Number of New Stocks: 1

Total Value: $3,265 Mil
Q/Q Turnover: 5%

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

David Rolfe Watch

  • David Rolfe Comments on Ross Stores

    Both TJX Companies and Ross Stores have a very deliberate brick and mortar footprint. In fact, Ross has stated on public investor calls that they have no plans to pursue an e-commerce format. Their model, which we believe to be one of their competitive advantages, is successful despite the misconception that e-commerce means the end of all brick and mortar. Ross management has explained how the transaction economics of the shopping experience Ross provides simply would not work online. 90% of their product are priced under $30, with the average unit retail closer to $10. With online retail, product return rates are substantially higher than for in-store purchases. In addition, by the time products are returned, they are potentially out of season. Add on to this the fact that these online sales are likely being offered with free shipping. The culmination of all of these factors, means that providing the value experience Ross offers would not be sustainable in an e -commerce format. To be profitable, online retail pricing is much more in line with that of department stores. This allows Ross to offer the same value proposition – delivering more for less – as usual, successfully.

    We added to our position in Ross (NASDAQ:ROST) in the quarter as the Company continues to grow same-store sales and improve margins. Further, valuation levels were very attractive as we saw the stock price trade down during the quarter with the previously mentioned general concerns in the retail space. The Company plans to open 80-90 new stores each year in new and existing markets, providing a long path for growth that offers a differentiated retail model that insulates them from the disruption we are seeing with many standard brick and mortar retailers.

    From David Rolfe (Trades, Portfolio)'s Wedgewood Partners 3rd quarter shareholder letter.   

  • David Rolfe Comments on Verisk Analytics

    Verisk Analytics (NASDAQ:VRSK) has been in portfolios since 2011, as the Company continues to serve a critical function in the property and casualty insurance value chain, providing many of the top 100 insurance customers in the US with proprietary risk data, compliance and analytical services. We estimate the Company generates over 70% of its revenues from this industry vertical, and is organically growing these revenues at a mid to high single digit, much faster than the underlying industry growth, which clocks in at a low single digit. As Verisk is able to scale its solutions across many customers, we expect margins to continue expanding and help drive a healthy double-digit earnings growth trajectory for the Company.

    While the insurance industry is far from “hyper-growth,” we think it nevertheless represents a stable base where Verisk can add significant incremental value as it aggressively reinvests in innovative ways for customers to get an edge. For example, the Company recently invested in a sophisticated data collection platform, Geomni, that includes remote sensing and machine learning technologies to gather, store, and process geographic and spatial information related to housing and commercial structures. After natural disasters, Verisk can rapidly deploy these assets to gather data and feed it into claims management tools, also maintained by Verisk. We think the value of innovative solutions like Geomni is amplified by Verisk’s suite of data and analytics services, which enable insurance customers to assess and price risk more quickly and accurately.

    Further, Verisk estimates the total cost of their services and data is just 25 basis points (0.25%) of the insurance industry’s total expense structure, which we think represents a compelling value, given the mission-critical nature of many of Verisk’s data sets. As such, over 80% of the Verisk’s revenues are subscriptions or long-term agreements. We expect Verisk to continue exhibiting attractive and expanding margins, particularly EBITDA margins, which clock in around 50% and are much higher than most subscription-based software as a service (SaaS) businesses. We think Verisk has a well-defined value proposition that makes the appropriate trade-offs between organic sales growth and maintaining superior profitability. While those tradeoffs sound like common sense, we think it has become troublingly unique, as large SaaS companies are often driven by rapid sales growth and rampant, protracted replacement of overhead expenses with highly dilutive, shareholder-funded equity issuance. Regardless, we think Verisk has struck a prudent balance between value creation and value capture, which we think should continue to drive excess returns, even against a difficult industry backdrop.


  • David Rolfe Comments on TreeHouse

    After a relatively short holding period of just 12 months, we sold our TreeHouse (NYSE:THS) position. After the acquisition of the Private Brands business from ConAgra in November of 2015, the Company became by far the largest manufacturer and distributor of private label grocery products in the U.S. With notable size and scale through unmatched scale in both manufacturing and distribution, we believed TreeHouse would significantly benefit from the secular shift toward private label, particularly in higher margin natural and organic segments, while driving out costs in lower growth segments. Specifically, the shift toward private label brands was one of the rare growth opportunities in the increasingly cut-throat battles in nearly every aisle of the grocery store business. We see private brands all around us in our local family-owned grocery stores and in the big national chain stores, as well as food retailers that are uniquely private label – Whole Foods, Trader Joe’s, Aldi, and Costco.

    Our investment thesis began to be challenged earlier in the year, as forecasted synergies from the Private Brands acquisition were slow to emerge. In addition, the cadence and frequency of privately-owned businesses pricing bids began to shorten from the industry standard 12-month pricing, rendering significant volatility to financial results – particularly at the earnings line. The Company’s response – like most of the industry’s – has been to protect revenues by reducing prices. By this point our original thesis was compromised enough that we sold our position to redeploy capital back into more promising portfolio positions.


  • David Rolfe Comments on Tractor Supply

    We have continued to add to our position in Tractor Supply (NASDAQ:TSCO), which was one of our top contributors in the third quarter. Over time, we have noticed that whenever we see unseasonable weather cause weakness in retail, the cries of “Amazon, Amazon, Amazon!” get louder for a period of time. As we have stated before, Amazon’s retail business has been wildly successful in building revenues (if not profits or returns on capital) over the past 20 years, and this has led them to a low-single-digit share of U.S. retail. However, the U.S. retail market is a monstrous, and growing, multi-trillion-dollar opportunity, which leaves trillions of dollars (and growing) of addressable market for everyone who is not Amazon.

    As this relates to Tractor Supply, specifically, we believe that the Company has spent most of its history differentiating itself from imposing competition. Their strategy to remain relevant to their customers in the face of Amazon is a natural evolution for a company that established its value proposition around the sides of Home Depot, Lowe’s, and Wal-Mart – which, incidentally, has roughly 5-6X the domestic sales of Amazon, and which is a far more relevant competitive threat due to its size and physical proximity to Tractor. Reiterating our prior stance, we believe Tractor Supply brings stores, service, and on-the-ground inventory to an underserved, rural customer base. Weather will impact quarterly results, as it always has, and we are willing to accept these short-term disruptions. Finally, we have argued repeatedly that the stock was selling at or near recessionary valuations, and we would note that the stock bounced off of our estimate of its trough valuation on its most recent quarterly results, despite a reduction to full-year earnings guidance.

    After unhelpful weather had hindered Q1, we saw a nice rebound in Q2 results, which coincided with a return to normal weather across most of the country. Revenues came in ahead of expectations, as did gross margins – in fact, gross margins turned in their best performance in six quarters – so we fail to see any sign that Amazon is encroaching on their business in terms of crippling sales or pricing pressure. Furthermore, just as we see every quarter, the Company’s “CUE” (consumable, usable, edible) category – which should be the area most susceptible to online incursion – once again turned in the Company’s strongest performance. Management did lower full-year guidance by 7% to account for the Q1 weakness, and, we believe, to build some cushion into second half expectations. We were expecting a modest guidance cut, ourselves, although we were a little disappointed with the magnitude of the cut; however, the market clearly was expecting much worse, with the stock having corrected -35% at that point from its highs in anticipation of what ended up being a 7% reduction to guidance. We believe the significant bounce in the stock since the Q2 report validates our belief that the market has been overly negative on financial expectations and valuation. We still believe that Tractor Supply can continue to grow its store base over time while generating healthy, flat to improving returns, leading to mid-to-high-single-digit revenue growth and double-digit EPS growth.


  • David Rolfe Comments on PayPal Holdings

    PayPal Holdings (NASDAQ:PYPL) was a top contributor to relative performance during the third quarter. The Company’s constant currency revenue growth, operating earnings and earnings per share continue to grow at high-teens rates as their core payment services gain relevance with a growing base of more than 15 million merchants and over 200 million users. We think PayPal’s large-scale, two-sided platform is a unique value proposition to the payments industry where competitors typically focus on either merchants or customers, but rarely integrate both at scale. PayPal’s traction with users and merchants proliferated during its decade-and-a-half tenure under the eBay umbrella, concomitant to the rise of the e-commerce sales channel. The core value proposition of PayPal – then and now – is its ability to offer a turn-key payments platform that includes payment acceptance, processing, fraud detection, and an increasing array of financial services traditionally offered by banks, to merchants of any size, particularly small and mid-sized merchants.

    Although we consider PayPal to be in competition with traditional banks, the nature of their competition is a rare partnership, where both create value beyond what either could achieve by themselves. Of course, if they both fail to create value, then their competitive dynamic will turn into winner-take-all, but we think PayPal is in the very early stages of adding substantial value to banks, via their recently signed partnership agreements with Visa and MasterCard. For years, traditional banks have been trying in vain to construct widely accepted mobile payment platforms, beyond what Visa and MasterCard offer, while PayPal has succeeded through its one-click checkout on mobile, Braintree mobile payment solutions, and more recently Venmo P2P money transfer application (among others). In exchange for capturing some of the economics from this mobile volume, banks have become a new source of distribution for PayPal, both on the user and merchant end.

    In addition, PayPal has a disciplined value chain that is focused on procuring the natural operating leverage inherent to payments and prudently reinvesting it into large and growing addressable markets. We think PayPal is capable of further leveraging its fixed cost base as the aforementioned partnerships will reduce customer acquisition and support costs.

    Over the next few years, we expect PayPal to monetize their credit receivables portfolio, which should free up a substantial amount of capital for reinvestment. Also, we think the Company will begin to specify their strategy around their exclusivity agreement with eBay, which expires in a few years. We believe a substantial portion PayPal’s small and mid-sized merchants will continue to do business via the eBay marketplace. Considering that PayPal’s most valuable offerings are to its small and mid-sized customers; we would expect the Company to take the appropriate measures to maintain these lucrative relationships.

    While PayPal sports one of the richest earnings multiples in the portfolio, we think the Company has a multi-year potential for double-digit revenue and profit growth, which is rare for a business of PayPal’s size. If they continue to execute on this growth strategy, leveraging their unique, dual -sided platform in addition to optimizing their capital structure and maintaining their relationship with small and mid-sized merchants, we think the Company will continue to be a core holding for many years.


  • David Rolfe Comments on Qualcomm

    Qualcomm (NASDAQ:QCOM)’s stock continues to be stuck in lawsuit purgatory. Ironies abound. A judge says Apple doesn’t have to pay Qualcomm, even though Apple admits they owe Qualcomm at least $4 per phone. The FTC says Qualcomm is violating antitrust, even though the head of the FTC admits Qualcomm isn’t violating anti-trust. Both Companies have been quite public in their respective legal positions. Apple is adamant about letting a judge decide on a fair price (or royalty rate) from them to pay for Qualcomm’s technology. Qualcomm is just as adamant that they will once again go to great lengths to defend what they believe is a fair market price for their technology. The public posturing from Apple’s CEO Cook seems to imply that Apple is in no hurry to reach an out-of-court settlement. Qualcomm’s CEO Mollenkopf continues to expect an out -of-court settlement.

    Our main position in holding the stock throughout this turmoil is that we cannot conceive that a U.S. court (judge) would rule that a U.S. company’s patent estate can be rendered virtually worthless. In addition, at the stock’s current valuation, the market, in our view, has priced in either an onerous settlement with Apple or an onerous settlement that for all practical purposes emasculates Qualcomm’s cash-cow royalty business. We believe either extreme is unlikely. Furthermore, the risk/reward for Qualcomm’s stock (currently in the low $50’s), again in our view, is significantly asymmetric to the upside, particularly in a world were other notable semiconductor companies such as NVidia and Broadcom sport market caps of over $110 billion and over $105 billion, respectively – and both on lower revenues and profits than Qualcomm.

    Last, we believe that the market is giving little benefit for the earnings accretion of the Company’s planned year-end closing of their +$47 billion acquisition of NXP Semiconductor. The Company has obtained regulatory clearance in four jurisdictions, including the U.S. and Taiwan, and is still working on clearances from five other regions consisting of the EU, China, Japan, South Korea, and the Philippines. Just recently the Company has offered NXP-owned patent concessions to win regulatory approval in the EU.


  • David Rolfe Comments on Fastenal

    Since we first bought Fastenal (NASDAQ:FAST) at the end of October last year, the U.S. manufacturing and energy industries have transitioned from approximately two years of recessionary conditions to a healthy recovery, driven in large part by a rebound in U.S. energy production. In fact, we note that the Institute for Supply Management’s Purchasing Managers Index – a widely-used gauge of manufacturing activity – just hit a 6-year high in September, with the component of the index representing actual production hitting its highest level in 13 years. Fastenal’s own results have moved from declining revenues and operating margins to double-digit percentage revenue growth and improving operating margins.

    Aside from an aggressive run in the stock for a brief period after the U.S. presidential election, Fastenal’s stock has barely noticed the significant recovery in both the end markets and the Company’s results, leaving valuations still near 2009’s recessionary lows. Persistent noise about potential disruption to the industry from Amazon has weighed on the stock to some degree; we note that Amazon is actually Fastenal’s largest vending customer, meaning that Fastenal clearly can offer value that Amazon is not able to provide itself. This highlights, again, that the strategies used by the Company for decades to differentiate its business model versus traditional competitors are the same strategies that differentiate its business versus online competition: specifically, Fastenal has people, products, branches, and a local delivery fleet on the ground as close to the customer as possible – in fact, in many cases, Fastenal is managing a customer’s inventory right on the customer’s factory floor. We continue to view Fastenal as a high-quality growth business, benefitting from the continuing long-term renaissance in U.S. manufacturing and energy production, while gaining share in this highly fragmented industry from a variety of competitors who are unable to offer the services Fastenal provides. We believe this is a great example of the sort of investment opportunity that occasionally will be tossed up by an exceptionally narrow market. In Fastenal, we have a company and its end markets involved in the creation of real products, real profits, and real cash flows, which create real economic value for stakeholders and for the economy as a whole.


  • David Rolfe Comments on Cognizant

    Cognizant (NASDAQ:CTSH) has been a strong performer throughout the year. In 2016 it proved to be a bit sluggish, particularly when the strong and steady revenue growth typically reported by the Company experienced headwinds in multiple business segments. In their Financial Services segment, 2016 was marked by large money center bank customers spending more cautiously due to the low interest rate environment. Political uncertainty in the U.S. during the election year also impacted spending by their customers. While these large banks continue to take a conservative approach to spending, management has noted some stability in the banking sector relative to last year.

    Recall that when we last wrote on Cognizant's performance (about a year ago) we mentioned four Cognizant clients in the HMO industry were all attempting to merge with or acquire each other. This M&A activity caused these clients to pause their project spending until the mergers were either finalized or abandoned. It did not help that these large industry M&A transactions were slowed by regulatory hurdles. Both transactions were ultimately blocked by the Department of Justice and, as we predicted a year ago, spending has since bounced back as these clients are now looking to invest.

    Perhaps the largest contributor to Cognizant's performance has been the announcement and implementation of their Strategic Plan earlier this year. The plan focusses mainly on accelerating the Company's shift to Digital Services (from a majority IT Services today) through both organic investments and acquisitions. Digital Services make up approximately 26% of total Company revenue (this is up from 23% of total revenue when the plan was first announced). However, these revenues are growing well above the Company average. While the digital market is not without competition, we certainly believe there is enough addressable market for Cognizant to take a reasonable share.

    Additional initiatives of the Strategic Plan include improving margins and enhancing capital deployment. Historically, management has targeted a fairly steady operating margin level of 19-20%. As part of this plan, Cognizant is targeting 22% operating margins by 2019, a fairly substantial expansion but one we believe is achievable as the Company optimizes its cost structure. The shift to digital also helps in this area as these revenues generate higher margins in addition to growing faster than the Company average. Capital deployment plans include increased capital returns which include both share buybacks and dividends (the Company had not paid a dividend prior to the announcement of this plan), with a plan in place to return 75% of U.S.-generated free cash flow from 2019 onward.


  • David Rolfe Comments on Alphabet

    Alphabet (NASDAQ:GOOGL) has been in portfolios continuously since 2007, as the Company has invested in and developed more than a half-dozen digital content platforms, each with over 1 billion monthly users, to form the backbone of what is now the largest advertising franchise in the world. The Company continues to extend its lead, evidenced in its over 20% constant currency revenue growth for the June quarter, while generating 15% adjusted operating income growth. While traffic acquisition costs (TAC) to Google properties rose during the past few quarters, historically the Company has not managed margin trends as closely as they have revenue growth, and we would expect TAC growth to moderate over the next several quarters.

    Alphabet continues to carry one of the strongest balance sheets in Corporate America, with nearly $100 billion in net cash and investments, a byproduct of the Company’s attractive profitability profile, which is on pace to generate $25 billion per year in free cash flow, along with a de minimis payout ratio. We do not think Alphabet needs this level of cash on its balance sheet to sustain its growth or value proposition, and we would expect the Company to eventually begin returning it to shareholders. We think this should benefit existing shareholders, as a new class of income-oriented investors is brought into the ownership fold.

    We continue to hold Alphabet at a roughly weighted 6% in portfolios, roughly in-line with where it’s been for the past several years though, admittedly, below the 7% to 8% weightings of 2012, which saw the stock trade close to just 10X forward earnings on business model fears. Though Alphabet’s multiple has expanded quite a bit since those fearful days, it still remains attractive, particularly given its financial strength and continued high-teens revenue and profitability growth.


  • David Rolfe's 3rd Quarter 2017 Shareholder Commentary

    Review and Outlook


  • Cheap Stocks That Pay High Dividend Yields

    According to GuruFocus' All-In-One Screener, the following stocks have high dividend yields but performed poorly over the past 12 months.

    Mannatech Inc.’s (MTEX) dividend yield is 3.48% with a payout ratio of 2.08%. Over the past 52 weeks, the price has declined by 11.7%. The stock is trading with a price-earnings (P/E) ratio of 62.5 and a price-sales (P/S) of 0.2.


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    The following companies have grown their book values per share (BV/S) over the last 10 years.

    BV/S is calculated as total equity minus preferred stock, divided by shares outstanding (EOP). Theoretically, it is what shareholders will receive if the company is liquidated. Total equity is a balance sheet item and equal to total assets minus total liabilities. Because the BV/S may not reflect the company’s true value, some investors check the tangible book value to confirm their investment ideas.


  • David Rolfe Comments on Celgene Corp

    Wedgewood has not owned a biotech stock since we sold out of Gilead Sciences in the spring of 2014. Over the following three years we saw the biotech space go through quite a cycle. From 2014 through mid-2015, we witnessed essentially the entire biotech space move up in frenzied unison, causing a strong relative performance headwind for us in the process. The biotech space then sold off sharply as political rhetoric began to focus on taking action to reduce prescription drug pricing. Indeed, our cautious stance on the group was validated when biotech stocks (IBB) literally crashed (–40%) from July 2015 in just six short months. It should come as no surprise that this broad sell off raised our interest in the space, and we began buying shares of Celgene Corporation (NASDAQ:CELGZ).

    Celgene is a global biopharmaceutical company engaged primarily in the development of therapies for the treatment of cancer and immune-inflammatory diseases. Celgene's current blockbuster drug is Revlimid, an indication for the treatment of patients with multiple myeloma, a cancer that forms in plasma cells. While Multiple Meyloma is considered a relatively uncommon cancer, it is the second most common blood cancer in the world with approximately 114,000 new cases diagnosed each year.5 Revlimid is considered a leading therapy for Multiple Meyloma and as a result of its success, accounted for more than 60% of Celgene's 2016 revenues.

    Such strong sales in a single drug has resulted in the stock trading at a lower valuation than its biotech peers as investors are concerned about whether Celgene will be able to replace its revenue stream once Revlimid goes off patent in 2027 and generics enter the market (which will begin gradually as early as 2022). Management is not concerned; rather, their focus remains on business development to grow beyond the loss of exclusivity, particularly in Revlimid, with a pipeline and R&D model that they believe will create significant growth potential through 2030.

    Management has regularly provided long-term goals with current 2020 targets for revenue to grow +17% on a compounded basis and earnings growth of more than +20% on a compounded annual basis. Their confidence, as well as ours, in this long-term guidance is backed by a plethora of pending data that could result in potential value-creating events as data readouts are expected from 17 Phase 3 trials over the next 18 months. In addition to these late stage results, the company has 30 unique molecules in development with 50 programs supporting those molecules. Management is confident that several of these have blockbuster potential and that a few even have peak potential in the multi-billion dollar range. We believe it would be difficult to find another biotech name with a pipeline as deep as Celgene's.

    One of Celgene's drugs that investors are awaiting with much anticipation is Ozanimod, which Celgene added to its line-up via its acquisition of Receptos in June 2015. Ozanimod is expected to enter the market next year but has already been noted as having the potential to be a best-in-class oral agent in Phase 3 trials for Inflammatory Bowel Disease (IBD) and Relapsing Multiple Sclerosis (RMS). While deemed expensive at $7.2 billion, this acquisition significantly enhances Celgene's Immune-Inflammatory (I&I) portfolio and further diversifies the company's revenue stream beginning in 2019 with projected revenue generation in the billions of dollars in the IBD space alone.

    By fiscal year-end 2017, Celgene is expected to have four drugs with sales exceeding $1 billion dollars each – Revlimid, Abraxane (treatment of solid tumors), Pomalyst (another myeloma drug), and Otezla (an oral alternative for advanced psoriasis and psoriatic arthritis) – and well on their way to diversifying their revenue stream. Management continues to reiterate confidence in meeting or beating their current long-term expectations. We take comfort too in the fact that Celgene is attributing a significant portion of their growth to volume growth versus price increases in their drugs. From a cash flow standpoint, Celgene generates billions of dollars in free cash flow each year that the company can spend on drug development as well as share buybacks and additional acquisitions. With the stock trading at attractive valuations relative to the peer group, in our view, the addition of Celgene to the portfolio is a great opportunity to re-enter the biotech space and to benefit from the growth opportunities in Celgene's existing pipeline and R&D efforts.


  • David Rolfe Comments on Core Labs

    Despite oil’s bear market performance, year to date, oil development activity in North America has exhibited a “V”-shaped recovery, with the U.S. oil rig count more than doubling over last year’s depressed levels. We think Core Labs’ (NYSE:CLB) Production Enhancement (PE) unit is most levered to North American development budgets, as they provide niche completion products and services, especially when the one-size-fits-all completion systems of competitors run into the limits of applicability. During the quarter, Core Labs’ PE unit reported 15% year-on-year revenue growth, and 19% sequential revenue growth, along with healthy margin expansion. While Core Labs’ other business unit, Reservoir Description (RD), reported less impressive growth – flat sequentially, and down slightly over last year – RD is much less cyclical than the PE unit and we think will likely return to more robust growth as international production budgets inevitably inflect higher, after an unprecedented 3-year decline.

    We think the market largely has ignored the fact that OPEC and its partners have been behaving remarkably rationally over the last several quarters—a marked departure from what we had seen for the prior two years. In fact, compliance with the production cuts agreed upon late last year has been historically high. We believe that most of the governments involved, many of which are quasi-authoritarian, are uneasily watching the events unfolding in member states, where the unwinding of governmental ability to placate populations with the proceeds of high oil prices is causing massive unrest (e.g., Venezuela). We believe it remains in OPEC’s long-term interest to do everything it can to support oil prices.

    Despite the headlines crowing about tight U.S. oil output, we think there is less than meets the eye. According to EIA, data through April 2017, U.S. onshore production has risen just 350,000 barrels per day (bbl/d) above its September 2016 trough, which should be more than offset by global demand growth of over 1 million bbl/d, in addition to the over 1 million bbl/d in OPEC production cuts. In addition, oil rig counts in some of the U.S.’s most prolific shale basins have started plateauing as early as April (Eagle Ford), as the full-cycle economics of $40-$50 oil is challenging to even the best operators. Furthermore, setting aside debates about the short-term price of oil, we note that we are now in the middle of a third year of constrained investment in the development of large-scale fields, and we continue to believe that this will lead to a longer-term supply-demand imbalance. We believe much of this imbalance will have to be cured through catch-up investments, particularly in international markets, which should benefit Schlumberger both from a demand and pricing standpoint. We believe Core Labs is more focused on maintaining pricing throughout the cycle, and we think that they will drive growth by doing more work in more basins, globally.


  • David Rolfe Comments on Amazon

    We certainly follow Amazon (NASDAQ:AMZN) with great interest, and have owned shares in the past, however we struggle to understand how its $470 billion enterprise value can be justified by future profitability – let alone current profits, at just $2.6 billion trailing 12-month net income. Looking at comparably sized businesses, for example, Apple, first eclipsed $470 billion enterprise value in the midst of generating $40 billion in GAAP net income over a 12-month period (fiscal 2012) and went on to post another $220 billion in cumulative GAAP net income, since. Alphabet, also a portfolio holding, only recently eclipsed $470 billion EV in 2015, in the middle of $16 billion in bottom-line value creation, and then posted another nearly $20 billion in GAAP income, a year later. Clearly, Apple and Alphabet are both growing businesses that have substantial, and consistent profit generating value propositions.3 In addition, and more importantly, the reinvestment requirements to maintain those profits appear to be substantially lower than what Amazon apparently requires. According to Jeff Bezos, Amazon CEO:

    “We get to monetize in a very unusual way. When [Amazon] wins a Golden Globe, it helps us sell more shoes.”

    This sounds not far from the strategy brands have been executing for decades in endorsing celebrities and athletes (i.e., content) to sell more products. What is unusual, relative to brands, is that Amazon doesn’t appear to have the high levels of merchandise margins available to produce television content that wins Golden Globes. So, maintaining a high-cost fly-wheel that monetizes by selling commodity products (Amazon Prime) – or makes a market for others to sell commodity products (Amazon Fulfillment) – makes us very skeptical that Amazon’s retail unit can generate the magnitude of long- term profits we think are necessary to justify today’s enterprise value. Using our best estimates, we believe Amazon currently holds less than 2% market share of U.S. retail sales, using the U.S. Department of Commerce’s definition of retail sales, excluding cars and fuel. The exact share and/or exact definition of the size of the market is not particularly important; the relevant point, to us, is that the absolute share is not significant. Even if we assume, for example, that Amazon quintuples its U.S. market share, that would leave 90% of the U.S. retail market up for grabs. We think that investors and retailers alike obviously must be aware of Amazon – now, and for the last 10-15 years, for that matter – but both also should be aware of the size of the opportunity to be found in the substantial portions of the market where Amazon is not. As we consider our own retail exposure, we take the same approach: we have not invested in traditional retailers in suburban malls pursuing business-as-usual strategies; rather, our holdings have differentiated models based upon non-traditional buying strategies (T.J. Maxx, Ross Stores) or upon targeting underserved rural populations with merchandise assortments that are often difficult for, or unattractive to, competitors (Tractor Supply Company). These companies have taken a thoughtful approach to their operations and to their competitive position in relation to online retail, and they have found ways to remain relevant. Finally, we would point out that Amazon just wrote a $14 billion check to Whole Foods to admit, very publicly and very clearly, that online retail is not as suitable in some categories as it is in others, and this was after they tried to do it their own way for ten years.


  • David Rolfe Comments on Tractor Supply Company

    Tractor Supply Company (NASDAQ:TSCO) is another North American retail holding that we believe will continue to profitably differentiate itself over the next several years by focusing on serving a select demographic, specifically rural land owners who earn higher than average incomes. We think this customer base is underserved due to its fragmented nature and exhibits merchandise needs that are not standard enough, so competitors find it hard to justify the real estate investment in low population density areas, or want to risk working capital investments in slow-turning inventory. In our view, a key element of Tractor’s approach is a mundane but disciplined real estate and merchandising strategy that attempts to bring stores and inventory to this naturally underserved customer base. We also would highlight that the Company has a long history of developing a merchandise assortment deliberately differentiated from large competitors—initially, they built the business around the sides of big-box behemoths such as Home Depot, Lowe’s, and Wal-Mart—and we believe that the same deliberate approach to e-commerce competition comes naturally to them.

    We are comfortable with the volatility of Tractor’s results, which can be choppy due to weather, as a substantial portion of their sales is dedicated to outdoor projects and activities, consistent with the requirements of the upkeep of large tracts of land. For example, after posting a solid +2.6% growth in comparable stores sales for the first quarter 2016 (adjusted for Easter holiday timing), the Company reported first quarter 2017 comparable store sales that declined -2.2%. While the stock gave up over 20% of its value during the past three months – we think this has been a significant overreaction. Many market participants assume the Company’s weak first quarter comp represents evidence that e-commerce has compromised the long-term potential of Tractor. However, e-commerce is not a new phenomenon. Instead, January and February combined were unseasonably warm in many of the Company’s markets, so Tractor’s seasonal inventory – typically used to help customers combat winter weather – was marked-down and monetized to make room for spring inventory. We note that the Company’s western geographic markets, which were virtually unaffected by weather, posted mid-single digit growth in comparable sales – very healthy levels, and also evidence that weather, rather than e-commerce, likely hurt the balance of Tractor’s sales base.

    Furthermore, if Amazon were making inroads into TSCO’s business, we would expect to see signs of this incursion in Tractor’s “CUE” (consumable, usable, edible) categories, which generally are among their faster-turning, often-replenished products that would seem most susceptible to the e- commerce model. However, even in a rough quarter, CUE remained the company’s strongest portion of the business.

    Over a multi-year timeframe, we continue to think Tractor has ample opportunity to expand its store footprint, while driving traffic growth at existing stores through both customer engagement and merchandising investments. The stock currently discounts earnings that are substantially lower than what we believe the Company can earn on these growth investments over the next several years, likely on unfounded fears regarding e-commerce.


  • High-Yield Stocks at Cheap Prices

    According to GuruFocus' All-In-One Screener, the following stocks have high dividend yields but performed poorly over the past 12 months.

    Manning & Napier Inc.’s (MN) dividend yield is 12.58% with a payout ratio of 108%. Over the past 52 weeks, the price has dropped by 44.3%. The stock is trading with a price-earnings (P/E) ratio of 7.5 and a price-sales (P/S) ratio of 0.2.


  • Wedgewood Partners - Humility and Rationality in Practice

    One of my favorite gurus is Dave Rolfe, who built Wedgewood Partners from a small shop to a multi-billion-dollar reputable fund. I think Wedgewood is unique in many ways such as being a truly focused high-quality money manager and being impressively adaptive with the investment in technology companies such as Alphabet (NASDAQ:GOOG) and Priceline (NASDAQ:PCLN) way ahead of other value investors. But the thing that I admire most about Dave is his humility and rationality.

    All of us are subject to the commitment and consistency bias. This bias is especially strong if we shout it out in public. In the investment business, the commitment and consistency bias is exacerbated because of the quarterly or annually letters to investors that every investment manager has to write. Most investment managers would trumpet the winners and blame external factors for losers, which is understandable. Most investment managers would also stick with the losers when disconfirming evidence presents itself. Very few can act in a humble and rational way. After all, changing your mind after you have shouted it out publicly can be construed as being inconsistent by investors. That’s one of the reasons Mohnish Pabrai (Trades, Portfolio) and Guy Spier don’t talk about their current holdings.


  • David Rolfe's Quest for 'Huge Winners'

    David Rolfe (Trades, Portfolio) of Wedgewood Partners Inc. is one of the GuruFocus gurus who’s beaten the Standard & Poor's 500 on most cumulative returns over the past two decades.

    Rolfe is a value investor, looking for large-cap growth stocks with excellent potential and at least temporarily underpriced. He uses Porter’s Five Forces of Competitive Advantage to identify companies with sustainable moats.


  • David Rolfe Gains 3 Holdings, Sells 2 Others in 1st Quarter

    Wedgewood Partners’ David Rolfe (Trades, Portfolio) gained three new holdings during the first quarter and sold two others. His new positions are Edwards Lifesciences Corp. (NYSE:EW), Celgene Corp. (NASDAQ:CELG) and Boeing Co. (NYSE:BA).

    As Wedgewood’s chief investment officer, Rolfe believes long-term wealth is created by investing as owners of a company. The firm seeks profitable companies with a dominant product or service that grows its earnings, revenues and dividends consistently. Shareholder-friendly management is another quality the investment team values. Rolfe’s current portfolio is composed of 37 stocks, which is valued at $3.8 billion.


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