David Rolfe (Trades, Portfolio), the chief investment officer of Wedgewood Partners, disclosed his portfolio for the third quarter of 2021 last week.
The guru's St. Louis-based firm approaches potential investments with the mindset of a business owner, striving 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 Sept. 30, Rolfe discussed supply chain disruptions that are causing shortages around the world using the popular “I, Pencil” soliloquy that touts free market economies.
He continued:
“We offer it in our Letter as not only a compelling treatise on the mind-numbing complexities of making, well, a simple pencil but also a juxtaposition against the truly unfathomable complexities of our modern day, just-in-time global supply system. We hope by comparison we can convey our worries that Corporate America and Jane and Joe Consumer will continue to face uncharted waters of a mismatch between soaring consumptive demand and near-structural matériel and finished-goods shortages in everything! The manifest combination of COVID-related global shutdowns and the spun-offsymptoms of labor shortages, raw material shortages, intermediate and finished goods shortages, double and triple ordering masking true demands, chain-reaction transportation gridlock, innumerable commodity, manufacturing, and labor inflation spikes has, as our greatest fear, both structural supply shortages and systemic (not transitory) inflation, that grinds well into 2023.”
As a result of these uncertainties, Rolfe added that the firm is "preparing ourselves for enormous pressure on corporate revenues, profits and, ultimately, earnings estimates.”
Keeping these considerations in mind, Rolfe entered one new position, sold out of one stock, added to three holdings and trimmed a slew of other existing investments during the quarter. The most significant trades included a new holding in UnitedHealth Group Inc. (UNH, Financial), a boost to the Taiwan Semiconductor Manufacturing Co. Ltd. (TSM, Financial) position and reductions in Alphabet Inc. (GOOGL, Financial), Starbucks Corp. (SBUX, Financial) and Keysight Technologies Inc. (KEYS, Financial).
UnitedHealth Group
The guru invested in a 51,972-share holding of UnitedHealth Group (UNH, Financial), allocating it to 2.86% of the equity portfolio. The stock traded for an average price of $414.25 per share during the quarter.
The Minnetonka, Minnesota-based company, which provides health care plans and services, has a $431.07 billion market cap; its shares were trading around $457.38 on Monday with a price-earnings ratio of 28.38, a price-book ratio of 6.13 and a price-sales ratio of 1.57.
The GF Value Line shows the stock is modestly overvalued currently based on historical ratios, past performance and future earnings projections.
In his quarterly letter, Rolfe noted that even though the company detracted from performance, he expects UnitedHealth to grow revenue in the coming years on the back of an expanding addressable market that coincides with “the aging of the general U.S. population.”
GuruFocus rated UnitedHealth’s financial strength 6 out of 10. Despite issuing approximately $13.2 billion in new long-term debt over the past three years, it is at a manageable level due to adequate interest coverage. The Altman Z-Score of 3.89 also indicates it is in good standing even though assets are building up at a faster rate than revenue is growing. Additionally, the return on invested capital overshadows the weighted average cost of capital, meaning value is being created as the company grows.
The company’s profitability scored an 8 out of 10 rating on the back of an expanding operating margin, strong returns on equity, assets and capitl that outperform a majority of competitors and a moderate Piotroski F-Score of 6 out of 9, indicating business conditions are typical for a stable company. Despite recording consistent earnings and revenue growth, UnitedHealth’s perfect five-star predictability rank is on watch. According to GuruFocus, companies with this rank return an average of 12.1% annually over a 10-year period.
Of the gurus invested in UnitedHealth, the Vanguard Health Care Fund (Trades, Portfolio) has the largest stake with 0.76% of its outstanding shares. Dodge & Cox, Steve Mandel (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio), Pioneer Investments, Jeremy Grantham (Trades, Portfolio) and Barrow, Hanley, Mewhinney & Strauss also have significant positions in the stock.
Taiwan Semiconductor Manufacturing
With an impact of 1.45% on the equity portfolio, Rolfe increased his holding of Taiwan Semiconductor Manufacturing (TSM, Financial) by 77.74%, picking up 91,898 shares. During the quarter, shares traded for an average price of $117.53 each.
The guru now holds 210,107 shares, which represent 3.31% of the equity portfolio. GuruFocus estimates he has gained 0.77% on the investment since establishing it in the second quarter.
The Taiwanese company, which manufactures semiconductor chips, has a market cap of $614.44 billion; its shares were trading around $118.06 on Monday with a price-earnings ratio of 27.63, a price-book ratio of 7.52 and a price-sales ratio of 10.35.
According to the GF Value Line, the stock is modestly overvalued currently.
In his letter, Rolfe noted the stock detracted from performance as “the market attempted to price in a downturn.”
“Although there are some signs that memory markets might be somewhat oversupplied, we have yet to see any tangible signs that logic semiconductors – particularly at the leading-nodes where the Company dominates– are in anything but short supply,” he wrote. “In addition, and as a result of this strong demand, the company should be able to pass through price increases to help fund very attractive returns on the rare leading-edge capacity that serves this demand.”
Taiwan Semiconductor’s financial strength was rated 6 out of 10 by GuruFocus. Although the company has issued approximately 393.2 billion New Taiwan dollars ($14.15 billion) in new long-term debt over the past three years, it is manageable due to a comfortable level of interest coverage. The robust Altman Z-Score of 8.58 indicates the company is in good standing even though assets are building up at a faster rate than revenue is growing. The ROIC also eclipses the WACC, suggesting good value creation is occurring.
The company’s profitability scored a 9 out of 10 rating, driven by an expanding operating margin, strong returns that exceed a majority of industry peers and a moderate Piotroski F-Score of 5. Taiwan Semiconductor’s consistent revenue per share growth contributed to a predictability rank of 3.5 out of five stars. GuruFocus says companies with this rank return an average of 9.3% annually.
With a 0.49% stake, Fisher is the company’s largest guru shareholder. Other top guru investors include Frank Sands (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), Baillie Gifford (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio), Spiros Segalas (Trades, Portfolio), Sarah Ketterer (Trades, Portfolio), Ron Baron (Trades, Portfolio) and Jim Simons (Trades, Portfolio)’ Renaissance Technologies.
Alphabet
The investor trimmed the Alphabet (GOOGL, Financial) position by 11.23%, selling 2,505 Class A shares. The trade had an impact of -0.89% on the equity portfolio. During the quarter, the stock traded for an average per-share price of $2,720.51.
He now holds 19,811 shares total, which make up 7.47% of the equity portfolio and is his third-largest holding. GuruFocus says Rolfe has gained an estimated 87.44% on the long-held investment.
The tech conglomerate headquartered in Mountain View, California, which is the parent company of Google and YouTube, has a $1.97 trillion market cap; its Class C shares were trading around $2,966.49 on Monday with a price-earnings ratio of 28.55, a price-book ratio of 8.06 and a price-sales ratio of 8.43.
Based on the GF Value Line, the stock appears to be significantly overvalued currently.
Rolfe said in his quarterly letter that the company’s Google search business “accelerated to multiyear highs” as advertisers rushed to its Android platform.
“Recent policy changes to Apple’s iOS operating system have made it more difficult for advertisers to get a return on its ad spend across the Apple ecosystem,” he wrote. “These changes should help close the gap between Android and iOS advertising share and sustain Alphabet’s torrid growth.”
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 14.21. The ROIC also exceeds the WACC, indicating good value creation is occurring.
The company’s profitability also fared well with 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 competitors as well as a high Piotroski F-Score of 8, indicating business conditions are healthy. Boosted by steady earnings and revenue growth, the company also has a five-star predictability rank.
Fisher has the largest stake in Alphabet with 0.28% of outstanding shares. PRIMECAP Management (Trades, Portfolio), Pioneer Investments, Segalas, Sands, Bill Nygren (Trades, Portfolio) and Chris Davis (Trades, Portfolio) also have notable positions in the stock.
Starbucks
Impacting the equity portfolio by -0.82%, Rolfe curbed his Starbucks holding by 20.02%, selling 50,904 shares. The stock traded for an average price of $117.05 per share during the quarter.
The guru now holds 203,420 shares total, accounting for 3.16% of the equity portfolio. GuruFocus data estimates he has gained37.90% on the investment since establishing it in the first quarter of 2019.
The Seattle-based coffee chain has a market cap of $132.61 billion; its shares were trading around $112.47 on Monday with a price-earnings ratio of 31.69 and a price-sales ratio of 4.58.
The GF Value Line suggests the stock is fairly valued currently.
Starbucks’ financial strength was rated 4 out of 10 by GuruFocus. Although the company has been issuing new long-term debt in recent years, it is at a manageable level as a result of sufficient interest coverage. The Altman Z-Score of 3.47 also indicates the company is in good standing even though assets are building up at a faster rate than revenue is growing. The ROIC surpasses the WACC, so value is being created.
The company’s profitability fared better, scoring an 8 out of 10 rating even though the operating margin is in decline. Starbucks is supported by strong returns that top a majority of industry peers as well as a Piotroski F-Score of 7. Even though the company has recorded losses in operating income, consistent revenue growth has contributed to a 2.5-star predictability rank. GuruFocus data shows companies with this rank return an average of 7.3% annually.
Of the gurus invested in Starbucks, Fisher has the largest stake with 0.71% of its outstanding shares. Pioneer Investments, Stanley Druckenmiller (Trades, Portfolio) and Ray Dalio (Trades, Portfolio) also have large holdings.
Keysight Technologies
The guru whittled down the Keysight Technologies (KEYS, Financial) investment by 16.81%, selling 35,989 shares. The transaction had an impact of -0.81% on the equity portfolio. During the quarter, shares traded for an average price of $167.84 each.
Rolfe now holds 178,081 shares total, giving it 4.13% space in the equity portfolio. GuruFocus data indicates he has gained an estimated 78.73% on the investment since the first quarter of 2020.
The company headquartered in Santa Rosa, California, which manufactures test and measurement equipment and software for electronics, has a $34.63 billion market cap; its shares were trading around $188.01 on Monday with a price-earnings ratio of 42.52, a price-book ratio of 9.21 and a price-sales ratio of 7.21.
According to the GF Value Line, the stock appears to be significantly overvalued currently.
In his letter for the quarter, Rolfe said he expects the company to generate attractive growth over the next several years as its customers’ research and development budgets increase.
“Many of the technologies that Keysight helps enable will not come to market for several years, so Keysight must develop many of its own custom parts, especially microprocessors,” he wrote. “The company's captive fabrication plant has helped it avoid many of the shortfalls seen at companies that rely on more off-the-shelf silicon.”
GuruFocus rated Keysight’s financial strength 6 out of 10, driven by sufficient interest coverage and a high Altman Z-Score of 7.11. While the ROIC exceeding the WACC indicates value creation, the company may be becoming less efficient since assets are building up at a faster rate than revenue is growing.
The company’s profitability scored an 8 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.
PRIMECAP Management (Trades, Portfolio) is Keysight’s largest guru shareholder with a 0.81% stake. John Rogers (Trades, Portfolio), Pioneer Investments, Robert Olstein (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Lee Ainslie (Trades, Portfolio) and Baillie Gifford (Trades, Portfolio) also own the stock.
Additional trades and portfolio performance
During the quarter, Rolfe also added to the Booking Holdings Inc. (BKNG, Financial) and Progressive Corp. (PGR, Financial) positions, sold out of Alcon Inc. (ALC, Financial) and reduced a number of other investments, including Edwards Lifesciences Corp. (EW, Financial) and Meta Platforms Inc. (FB, Financial).
Wedgewood's $709 million equity portfolio, which is composed of 40 stocks, is most heavily invested in the technology, communication services and financial services sectors.
The firm posted a return of 32.1% for 2020, outperforming the S&P 500 Index's 18.4% return.
