Wedgewood Partners Chief Investment Officer David Rolfe (Trades, Portfolio) disclosed his portfolio for the second quarter of 2021 last week.
The guru's St. Louis-based firm approaches potential investments with the mindset of a business owner, hoping to generate significant long-term wealth by 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.
In his shareholder letter for the three-month period ended June 30, Rolfe discussed the current state of the economy and the world, noting the “stock market climbs a wall of worry (and cascades in an avalanche of fear).” As there is no way to tell exactly when the bubble will pop or when the Federal Reserve will make a mistake with devastating consequences, the guru said worry is a given.
“Investing is a worrying thing. It must be so,” he wrote. “As fears of (you name it) recession, war, election politics, fiscal politics, monetary politics, corporate earnings, and even pandemics, recede as markets climb higher. Global stocks have enjoyed one of their best first-half calendar year gains in 100 years and the best first-half gain since 1982 – and 39 record highs already this year. And investors (speculators?) can’t seem to get enough of late either.”
Despite the multitude of concerns, Rolfe vowed “to stick to our focused investing knitting for the true long term.”
Keeping these unknowns in mind, Rolfe entered two new positions, added to two holdings and trimmed a slew of other existing investments during the quarter. He did not sell out of any stocks. The most significant trades included a new holding in Taiwan Semiconductor Manufacturing Co. Ltd. (TSM, Financial) and reductions of the Alcon Inc. (ALC, Financial), Bristol-Myers Squibb Co. (BMY, Financial), Alphabet Inc. (GOOGL, Financial) and Facebook Inc. (FB, Financial) positions.
Taiwan Semiconductor
The guru invested in an 118,209-share holding of Taiwan Semiconductor (TSM, Financial), allocating it to 2.06% of the equity portfolio. The stock traded for an average price of $117.30 per share during the quarter.
The Taiwanese company, which manufactures semiconductor chips, has a $594.57 billion market cap; its shares were trading around $114.65 on Monday with a price-earnings ratio of 28.02, a price-book ratio of 7.7 and a price-sales ratio of 10.75.
The GF Value Line shows the stock is significantly overvalued currently based on historical ratios, past performance and future earnings projections.
The valuation rank of 1 out of 10 also aligns with this assessment.
In his quarterly letter, Rolfe noted that the firm expects Taiwan Semiconductor to grow revenue, margins and returns in the coming years on the back of “leading-edge logic manufacturing.”
“Though the stock trades at a slight premium to the market, we think it is much more reasonable compared to where it traded earlier this year,” he wrote. “In fact, the stock briefly went through a bear market earlier this year – after which we began purchasing shares. As the market might periodically serve up shares due to cycle-ending fears, we will look to add to our holding as the Company should be able to sustain superior growth and returns longer than previous cycles.”
GuruFocus rated Taiwan Semiconductor’s financial strength 7 out of 10. Although the company has issued approximately 261 billion New Taiwan dollars ($9.37 billion) in new long-term debt over the past three years, it is at a manageable level due to a comfortable level of interest coverage. The robust Altman Z-Score of 11.4 indicates the company is in good standing even though assets are building up at a faster rate than revenue is growing. The return on invested capital also overshadows the weighted average cost of capital, suggesting good value creation is occurring as the company grows.
The company’s profitability scored a 9 out of 10 rating, driven by an expanding operating margin, strong return on equity, assets and capital the exceed a majority of competitors and a high Piotroski F-Score of 8 out of 9, which suggests business conditions are healthy. Taiwan Semiconductor’s consistent revenue per share growth contributed to a predictability rank of 3.5 out of five stars. According to Guru Focus, companies with this rank return an average of 9.3% annually over a 10-year period.
Of the gurus invested in Taiwan Semiconductor, Ken Fisher (Trades, Portfolio) has the largest stake with 0.5% of outstanding shares. Other top guru shareholders include Frank Sands (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), Baillie Gifford (Trades, Portfolio), Spiros Segalas (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio), Sarah Ketterer (Trades, Portfolio), Ron Baron (Trades, Portfolio) and Jim Simons (Trades, Portfolio)’ Renaissance Technologies.
Alcon
With an impact of -2.35% on the equity portfolio, Rolfe slashed his holding of Alcon (ALC, Financial) by 79.84%, selling 217,262 shares. During the quarter, shares traded for an average price of $71.19 each.
The guru now holds 54,875 shares, which represent 0.56% of the equity portfolio. GuruFocus estimates he has gained 7.61% on the investment since establishing it in the second quarter of 2019.
The medical company headquartered in Geneva, Switzerland, which specializes in eye care products, has a market cap of $34.59 billion; its shares were trading around $70.49 on Monday with a price-book ratio of 1.82 and a price-sales ratio of 5.03.
According to the price chart, the stock is overvalued since it is trading above both its median price-book ratio and median price-sales value.
Alcon’s financial strength was rated 5 out of 10 by GuruFocus. In addition to debt ratios that underperform compared to other players in its industry, the Altman Z-Score of 2.76 indicates the company is under some pressure since revenue per share has been declining over the past three years.
The company’s profitability fared even worse, scoring a 2 out of 10 rating on the back of negative margins and returns that underperform over half of its industry peers.
With a 0.49% stake, the Vanguard Health Care Fund (Trades, Portfolio) is Alcon’s largest guru shareholder. Pioneer Investments (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Fisher, Simons’ firm, George Soros (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) also own the stock.
Bristol-Myers Squibb
Impacting the equity portfolio by -0.69%, the investor curbed his Bristol-Myers Squibb (BMY, Financial) position by 92.58%, selling 70,210 shares. The stock traded for an average per-share price of $65.15 during the quarter.
Rolfe now holds 5,625 shares total, accounting for 0.05% of the equity portfolio. GuruFocus data estimates he has gained 7.10% on the investment since establishing it in the fourth quarter of 2019.
The New York-based pharmaceutical giant has a $152.07 billion market cap; its shares were trading around $68.44 on Monday with a price-book ratio of 4.14 and a price-sales ratio of 3.49.
Based on the GF Value Line, the stock appears to be fairly valued currently.
The valuation rank of 8 out of 10, however, leans more toward undervaluation even though the share price is close to a five-year high.
Bristol-Myers Squibb’s financial strength was rated 4 out of 10 by GuruFocus. As a result of issuing approximately $15.9 billion in new long-term debt over the past three years, the company has weak interest coverage. In addition, the Altman Z-Score of 1.93 indicates it is under some pressure since assets are building up at a faster rate than revenue is growing.
The company’s profitability scored a 7 out of 10 rating despite having a declining operating margin. Bristol-Myers Squibb also has negative returns that underperform a majority of competitors and a moderate Piotroski F-Score of 6, indicating business conditions are stable. The one-star predictability rank is on watch as a result of recording losses in operating income over the past three years. GuruFocus says companies with this rank return an average of 1.1% annually.
Warren Buffett (Trades, Portfolio) has the largest stake in Bristol-Myers with around 1.39% of its outstanding shares. Other top guru shareholders are Dodge & Cox, Vanguard, PRIMECAP, Simons’ firm, Pioneer, Andreas Halvorsen (Trades, Portfolio), Hotchkis & Wiley, Catherine Wood (Trades, Portfolio) and Richard Pzena (Trades, Portfolio).
Alphabet
Rolfe trimmed the Alphabet (GOOGL, Financial) position by 6.11%, selling 1,453 Class A shares. The trade had an impact of -0.46% on the equity portfolio. During the quarter, the stock traded for an average price of $2,328.99 per share.
The investor now holds 22,316 shares total, which make up 7.9% of the equity portfolio and is his largest position. GuruFocus says he has gained an estimated 86.09% on the long-held investment.
The tech conglomerate headquartered in Mountain View, California, which is the parent company of Google and YouTube, has a market cap of $1.82 trillion; its Class C shares were trading around $2,722.36 on Monday with a price-earnings ratio of 29.47, a price-book ratio of 7.62 and a price-sales ratio of 9.02.
The GF Value Line suggests the stock is significantly overvalued currently.
The valuation rank of 3 out of 10 supports this assessment since the share price and price ratios are all closing in on 10-year highs.
Rolfe noted in his quarterly letter that the company’s Google Search and YouTube businesses generated nearly $38 billion in revenue combined.
“The Google business segment also generated robust margin expansion on moderated expense growth, partially due to pandemic-induced spending curbs,” he wrote. “The Company has several, long-term revenue and profitability drivers, in addition to the ability to enhance returns by returning net cash to shareholders.”
GuruFocus rated Alphabet’s financial strength 8 out of 10. In addition to comfortable interest coverage, the company is supported by a robust Altman Z-score of 13.86. The company may be becoming less efficient, however, since assets are building up at a faster rate than revenue is growing. The ROIC also eclipses the WACC, indicating good value creation is occurring.
The company’s profitability scored a 9 out of 10 rating. Even though the operating margin is in decline, Alphabet is supported by strong returns that outperform a majority of industry peers as well as a moderate Piotroski F-Score of 6. Boosted by consistent earnings and revenue growth, the company also has a five-star predictability rank. GuruFocus data shows companies with this rank return, on average, 12.1% annually.
Of the many gurus invested in Alphabet, Fisher has the largest stake with 0.27% of outstanding shares. PRIMECAP, Pioneer, Segalas, Halvorsen, Sands, Bill Nygren (Trades, Portfolio) and Chris Davis (Trades, Portfolio) also have notable positions in the stock.
With an impact of -0.43% on the equity portfolio, the guru reduced the Facebook (FB, Financial) holding by 5.94%, selling 9,403 shares. During the quarter, shares traded for an average price of $320.19 each.
He now holds 148,764 shares total, giving it 7.5% space in the equity portfolio. It is also his third-largest holding. GuruFocus estimates Rolfe has gained 24.57% on the investment so far.
The Menlo Park, California-based social media company, which owns Facebook, Instagram, Whatsapp and several other popular platforms, has a $1.02 trillion market cap; its shares were trading around $361.30 on Monday with a price-earnings ratio of 26.7, a price-book ratio of 7.39 and a price-sales ratio of 9.94.
According to the GF Value Line, the stock is fairly valued currently.
In his quarterly commentary, Rolfe highlighted that Facebook is growing revenue at an “astonishing” rate, but “continues to trade at a meaningful discount compared to other companies that are growing revenues this quickly.”
“Facebook has pulled forward several years of investment during the past few years and has had a particular focus on content curation capabilities with the goal of making its platforms safer and more accessible for brands and users,” he wrote. “The Company should be able to increasingly automate these functions as its heavy investments in artificial intelligence, especially machine learning, yield productivity benefits.”
Facebook’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 21.62. The company’s ROIC also surpasses its WACC, suggesting it is creating value as it grows.
The company’s profitability fared even better with a perfect 10 out of 10 rating. Despite recording a decline in its operating margin, Facebook is supported by strong returns that top a majority of competitors, a high Piotroski F-Score of 7 and steady earnings and revenue growth. It also has a five-star predictability rank.
Baillie Gifford (Trades, Portfolio), with a 0.28% stake, is the company’s largest guru shareholder. Steve Mandel (Trades, Portfolio), Sands, Chase Coleman (Trades, Portfolio), Segalas, Pioneer, Fisher, Dodge & Cox, First Eagle Investment (Trades, Portfolio), Davis, Philippe Laffont (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio), Halvorsen, David Tepper (Trades, Portfolio) and several other gurus have significant positions in Facebook.
Additional trades and portfolio performance
During the quarter, Rolfe also established a position in Paychex Inc. (PAYX, Financial), added to his Booking Holdings Inc. (BKNG, Financial) investment and curbed his exposure to Edwards Lifesciences Corp. (EW, Financial), Motorola Solutions Inc. (MSI, Financial), Tractor Supply Co. (TSCO, Financial) and Apple Inc. (AAPL, Financial), along with several other top holdings.
Wedgewood's $690 million equity portfolio, which is composed of 40 stocks, is most heavily invested in the technology, financial services and communication services sectors.
The firm posted a return of 32.1% for 2020, outperforming the S&P 500 Index's 18.4% return.
