Ruane, Cunniff & Goldfarb was founded in 1969 by William J. Ruane, Richard T. Cunniff and Robert Goldfarb. This is one of the most storied value firms on Wall Street.
The firm, and its flagship Sequoia Fund, can trace its roots back to Bill Ruane's lifelong friendship with Warren Buffett (Trades, Portfolio). These two investors met in 1950, and Ruane went on to set up his own investment partnership, following a similar path to Buffett.
Ruane's partnership was so successful that when Buffett decided he would exit the asset management business in the late 1960s, Ruane's partnership was the only investment vehicle he recommended to his former partners. To take on the new investors, the Sequoia Fund was formed.
Today, Sequoia is a multi-billion dollar asset manager. It has transitioned through several market cycles over the past few decades, giving it a track record of almost legendary proportions. While its founders may have moved on, the company still follows the investment principles they developed over decades.
Sequoia holdings
According to its most recent 13F filing, which detailed U.S. equity holdings at the end of the fourth quarter of 2020, the most significant position in Sequoia's portfolio was Taiwan Semiconductor S.A. (TSM, Financial). The asset manager owned just under 2.5 million shares in this business at the end of the year, giving it a 6.3% portfolio weight.
According to its year-end letter to investors, the fund likes this company because it dominates leading edge chip production. Revenues increased 31% in 2020, outpacing the rest of the foundry industry by five times.
Its letter noted that as the process for producing semiconductors has grown more complex and expensive, "technology companies have increasingly outsourced production." Taiwan Semiconductor has been a significant beneficiary of this trend, emerging as the dominant survivor in the foundry industry with most competitors "having given up on producing at the leading edge."
Based on this competitive advantage, analysts at Sequoia believe the company remains significantly undervalued compared to its long-term potential.
The second-largest holding in the portfolio at the end of 2020 was United Health Group (UNH, Financial), with a 5.4% portfolio weight. Commenting on this position in the firm's year and letter to investors, Sequoia noted:
"United Health entered the year at a relatively small weight in Sequoia's portfolio. A dip in late January provided an initial opportunity to add to our investment below $290 per share, and the dramatic decline in mid-March provided another opportunity below $240 per share. Today, United Health trades at a below-market multiple of our 2021 earnings estimate, which we believe represents good value given our expectation for double-digit earnings growth in the years ahead."
The third-largest holding with a 5.3% portfolio weight at the end of 2020 was CarMax (KMX, Financial). In its year-end letter, the fund stated that it liked this holding because it believes its transition towards an "omnichannel" offering will allow it to "thrive in the coming years." Once again, the firm topped up its position in the stock during the March sell-off last year.
Common traits
All of these portfolio holdings have a couple of things in common. For a start, they are all industry leaders with substantial competitive advantages. According to the firm's own literature, they were also all trading at a relatively cheap valuation based on Sequoia's growth projections.
When Ruane started Sequoia, Buffett was impressed by his ability to find deep-value net net stocks. His firm left that approach behind years ago. Today it's looking for high-quality, wide moat businesses that appear cheap compared to their growth potential.
This ability to change with the times is one reason why Sequoia has been so successful over the years.
Disclosure: The author owns no share mentioned.
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