David Rolfe's Top 5 2nd-Quarter Trades

Guru adds to Edwards Lifesciences, trims Nvidia and Apple

Aug 18, 2020

David Rolfe (Trades, Portfolio), chief investment officer of Wedgewood Partners, disclosed his portfolio for the second quarter of 2020 last week.

The guru's St. Louis-based firm approaches potential investments with the mindset of a business owner, analyzing a handful of undervalued companies that have a dominant product or service, consistent earnings, revenue and dividend growth, are highly profitable and have strong management teams.

Taking these criteria into consideration, Rolfe established a small new position in Boeing Co. (BA, Financial), sold out of four stocks and trimmed or added to a number of other holdings during the quarter. The most significant trade was a 181.85% increase in the Edwards Lifesciences Corp. (EW, Financial) position. Other major transactions included the sale of Booking Holdings Inc. (BKNG, Financial) and FleetCor Technologies Inc. (FLT, Financial), as well as reducing the holdings of Nvidia Corp. (NVDA, Financial) and Apple Inc. (AAPL, Financial).

Edwards Lifesciences

Impacting the equity portfolio by 5.05%, Rolfe expanded the Edwards Lifesciences position by 431,342 shares. The stock traded for an average price of $70.98 per share during the quarter.

He now holds 668,452 shares total, which represent 7.83% of the equity portfolio. GuruFocus estimates Rolfe's firm has gained 199.43% on the investment since the first quarter of 2017.

The Irvine, California-based medical devices manufacturer, which specializes in artificial heart valves and hemodynamic monitoring, has a $48.94 billion market cap; its shares were trading around $78.72 on Tuesday with a price-earnings ratio of 67.45, a price-book ratio of 12.7 and a price-sales ratio of 11.49.

The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 1 out of 10 also supports this assessment since the share price and price ratios are near 10-year highs.

GuruFocus rated Edwards Lifesciences' financial strength 8 out of 10, driven by a comfortable level of interest coverage and a robust Altman Z-Score of 13.62. The return on invested capital is also over four times larger than the weighted average cost of capital, indicating it has good profitability potential even though assets are building up faster than revenue is growing.

The company's profitability scored a 9 out of 10 rating on the back of an expanding operating margin, strong returns that outperform a majority of competitors and a high Piotroski F-Score of 8, which indicates business conditions are healthy. Boosted by consistent earnings and revenue growth, Edwards Lifesciences also has a predictability rank of three out of five stars. According to GuruFocus, companies with this rank have returned an average of 8.2% annually over a 10-year period.

Of the gurus invested in Edwards Lifesciences, Frank Sands (Trades, Portfolio) has the largest stake with 2% of outstanding shares. Other top guru shareholders include the Vanguard Health Care Fund (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Ken Fisher (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies, Steven Cohen (Trades, Portfolio) and Ron Baron (Trades, Portfolio).

Booking Holdings

The guru divested of his 13,547 remaining shares of Booking Holdings, impacting the equity portfolio by -3.46%. Shares traded for an average price of $1,519.55 each during the quarter.

GuruFocus data shows Rolfe gained 66.37% on the investment.

The online travel agency, which is headquartered in Norwalk, Connecticut, has a market cap of $71.94 billion; its shares were trading around $1,758.22 on Tuesday with a price-earnings ratio of 29.66, a price-book ratio of 18.01 and a price-sales ratio of 6.56.

According to the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 3 out of 10 supports this analysis as the price-book and price-sales ratios are near multiyear highs.

Due to the headwinds facing the travel industry in the wake of the Covid-19 pandemic, Rolfe wrote in his second-quarter letter that the firm decided to sell its position. While he said there has been "no fundamental change" to their opinion of Booking's business or management, the "outlook for industry fundamentals quickly became much worse than we had previously anticipated."

Booking's financial strength was rated 5 out of 10 by GuruFocus. Although the company has issued approximately $2.2 billion in new long-term debt over the past three years, it is still at a manageable level due to adequate interest coverage. The Altman Z-Score of 5.6 also indicates it is in good standing even though the Sloan ratio suggests the company has poor earnings quality. The ROIC also significantly outperforms the WACC, indicating there is high profitability.

The company's profitability fared much better, scoring a 9 out of 10 rating. It is also supported by margins and returns that outperform a majority of industry peers and a moderate Piotroski F-Score of 5, which implies operations are stable. Due to recording an operating income loss and declining revenue per share, Booking's 3.5-star predictability rank is on watch. GuruFocus says companies with this rating typically return an average of 9.3% per year.

With a 3.6% stake, Dodge & Cox is the company's largest guru shareholder. Steve Mandel (Trades, Portfolio), Pioneer, First Eagle Investment (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), Yacktman Asset Management (Trades, Portfolio), First Pacific Advisors (Trades, Portfolio), Hotchkis & Wiley, Steven Romick (Trades, Portfolio) and several other gurus also own the stock.

FleetCor Technologies

With an impact of -1.41% on the equity portfolio, the investor sold his 39,966 remaining shares of FleetCor Technologies. The stock traded for an average per-share price of $236.36 during the quarter.

According to GuruFocus, Rolfe lost an estimated 15.07% on the investment.

The Atlanta-based company, which provides business payment solutions globally, has a $20.26 billion market cap; its shares were trading around $240.16 on Tuesday with a price-earnings ratio of 28.57, a price-book ratio of 7.16 and a price-sales ratio of 8.52.

Based on the Peter Lynch chart, the stock appears to be overvalued. The GuruFocus valuation rank of 5 out of 10, however, leans more toward it being fairly valued.

In his letter to investors, Rolfe wrote that FleetCor "has a few attractive assets in the electronic payments space," but feels that they will become pressured in the "new macro-environment."

GuruFocus rated FleetCor's financial strength 4 out of 10. Despite the company issuing approximately $635.44 million in new long-term debt over the past three years, it is at a manageable level as a result of sufficient interest coverage. The Altman Z-Score of 2.85, however, indicates the company is under some pressure.

The company's profitability fared much better with a 9 out of 10 rating. In addition to an expanding operating margin, FleetCor is being supported by returns that outperform a majority of competitors and a moderate Piotroski F-Score of 5. The 4.5-star predictability rank is on watch, however, as a result of a slowdown in revenue per share growth over the past 12 months. GuruFocus data shows companies with this rank return, on average, 10.6% annually.

Chase Coleman (Trades, Portfolio) is FleetCor's largest guru shareholder with a 1.54% stake. Other gurus with positions in the stock include Spiros Segalas (Trades, Portfolio), Baron, Lee Ainslie (Trades, Portfolio), Cohen, Pioneer, Stanley Druckenmiller (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Mairs and Power (Trades, Portfolio).

Nvidia

Impacting the equity portfolio by -2.12%, Rolfe curbed the Nvidia holding by 50.97%, or 42,436 shares. During the quarter, the stock traded for an average price of $322.32 per share.

GuruFocus says the guru has gained an estimated 83.36% on the investment since establishing it in the third quarter of 2019.

Headquartered in Santa Clara, California, the company, which manufactures graphics processing units for the gaming, mobile and auto markets, has a market cap of $302.14 billion; its shares were trading around $491.14 on Tuesday with a price-earnings ratio of 92.86, a price-book ratio of 23.32 and a price-sales ratio of 26.12.

The Peter Lynch chart and GuruFocus valuation rank of 1 out of 10 both suggest the stock is overvalued as its share price and price ratios are approaching 10-year highs.

Nvidia's financial strength was rated 7 out of 10 by GuruFocus, driven by a comfortable level of interest coverage and a robust Altman Z-Score of 20.82. It also has good profitability since the ROIC signigicntly surpasses the WACC. Two negatives, however, include assets building up at a faster rate than revenue is growing and a Sloan ration that is indicative of poor earnings quality.

Boosted by an expanding operating margin, the company's profitability scored a 9 out of 10 rating. Nvidia also has strong margins that outperform a majority of industry peers and a moderate Piotroski F-Score of 5. Despite having predictable earnings and revenue growth, though, the 3.5-star predictability rank is on watch.

Of the guru investors, Segalas has the largest stake in Nvidia. Other top shareholders include PRIMECAP, Pioneer, Fisher, Simons' firm, Philippe Laffont (Trades, Portfolio), Mairs and Power (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Caxton Associates (Trades, Portfolio), Baron and Greenblatt.

Apple

Reducing the holding by 12.19% and the equity portfolio by 1.23%, the guru sold 25,527 shares of Apple. During the quarter, shares traded for an average price of $308.62 each.

GuruFocus estimates Rolfe has gained 80.2% on the investment.

The Cupertino, California-based tech giant, which manufactures iPhones and Mac computers, has a $1.97 trillion market cap; its shares were trading around $461.11 on Tuesday with a price-earnings ratio of 34.78, a price-book ratio of 27.11 and a price-sales ratio of 7.41.

According to the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 1 out of 10 also aligns with this analysis since the share price and price ratios are close to 10-year highs.

In his quarterly letter, Rolfe said "the state of Apple remains quite robust" due to its vast portfolio of successful products and, as a result, is weathering the pandemic "exceptionally well."

GuruFocus rated Apple's financial strength 6 out of 10. While the company has issued $2.7 billion in new long-term debt over the past three years, it is at a manageable level as a result of adequate interest coverage. The Altman Z-Score of 6.68 also indicates it is in good standing.

The company's profitability scored a perfect 10 out of 10 rating even though its operating margin is in decline. Apple is supported by strong returns that outperform a majority of competitors, as well as a high Piotroski F-Score of 7 and steady earnings and revenue growth. It also has a 4.5-star predictability rank.

With a 5.73% stake, Warren Buffett (Trades, Portfolio) is by far Apple's largest guru shareholder. Fisher, Pioneer, Segalas and Jeremy Grantham (Trades, Portfolio) also have significant positions in the stock.

Additional trades and portfolio performance

Other major transactions Rolfe made during the quarter included a 44.22% boost to the Bristol-Myers Squibb Co. (BMY, Financial) holding and a 14.82% reduction of the Facebook Inc. (FB, Financial) position. The two other stocks he completely sold out during the three months ended June 30 were Fastenal Co. (FAST, Financial) and Ross Stores Inc. (ROST, Financial).

Wedgewood's $590 million equity portfolio, which is composed of 38 stocks, is most heavily invested in the technology and communication services sectors.

The firm posted a return of 31.96% for 2019, slightly outperforming the S&P 500 Index's 31.49% return.

Disclosure: No positions.