David Rolfe (Trades, Portfolio), the chief investment officer of Wedgewood Partners, disclosed his portfolio for the final quarter of 2021 earlier this 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 Dec. 31, Rolfe discussed inflation and the Federal Reserve’s monetary policy, looking back to August of 2010 when then-Chair Ben Bernanke “unleashed what has become a staple of monetary policy over the past decade, permanent ‘quantitative easing.’”
Under the leadership of current Chair Jerome Powell, the U.S. central bank is set to start quantitative tightening later this year.
He continued:
“At Wedgewood we expect a very volatile 2022, particularly on the downside – QT will see to that. QE has been the oxygen for financial markets for so long that we suspect that far too many market participants can’t remember a time without such market steroids. The graphic below reminds us that when speculation reigns, markets can go far higher than what seems sober. Relatedly, when speculators lose their collective psychology to speculator, then markets will repeat their long history of falling faster and further than what seems sober.”
As a result of these developments, Rolfe added that the firm’s “pencils are sharpened for opportunities as Mr. Market serves them up.”
Keeping these considerations in mind, Rolfe entered two new positions, sold out of three stocks and added to or trimmed a slew of other existing investments during the quarter. The most significant trades included a new holding in Texas Pacific Land Corp. (TPL, Financial), a boost to the Visa Inc. (V, Financial) position, reductions in Edwards Lifesciences Corp. (EW, Financial) and Motorola Solutions Inc. (MSI, Financial) and the divestment of Electronic Arts Inc. (EA, Financial).
Texas Pacific Land
The guru invested in a 9,831-share holding of Texas Pacific Land (TPL, Financial), allocating it to 1.63% of the equity portfolio. The stock traded for an average price of $1,257 per share during the quarter.
The Dallas-based company, which manages and leases land and collects oil and gas royalties, has a $7.8 billion market cap; its shares were trading around $1,018 on Thursday with a price-earnings ratio of 33.13, a price-book ratio of 12.97 and a price-sales ratio of 20.65.
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 called the company, which operates in the Permian Basin of West Texas, “the best business most investors have never heard of.”
GuruFocus rated Texas Pacific Land’s financial strength 7 out of 10, driven by a comfortable level of interest coverage and a robust Altman Z-Score of 54.21 that indicates it is in good standing. Assets are building up at a faster rate than revenue is growing, indicating it may be becoming less efficient. The return on invested capital, however, overshadows the weighted average cost of capital, meaning value is being created as the company grows.
The company’s profitability scored a 10 out of 10 rating. Although margins are in decline, Texas Pacific Land is supported by returns on equity, assets and capital that top a majority of competitors. It also has a moderate Piotroski F-Score of 6 out of 9, indicating operations are typical for a stable company, and a predictability rank of 4.5 out of five stars. According to GuruFocus, companies with this rank return an average of 10.6% annually over a 10-year period.
Of the gurus invested in Texas Pacific Land, Murray Stahl (Trades, Portfolio) has the largest stake with 19.55% of its outstanding shares. Tom Gayner (Trades, Portfolio), Keeley-Teton Advisors, LLC (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Caxton Associates (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) also have positions in the stock.
Visa
With an impact of 1.97% on the equity portfolio, Rolfe increased his holding of Visa (V, Financial) by 49.09%, picking up 68,315 shares. During the quarter, shares traded for an average price of $214.28 each.
The guru now holds 207,467 shares, which represent 5.97% of the equity portfolio and is his sixth-largest position. GuruFocus estimates he has gained 117.68% on the investment so far.
Headquartered in San Francisco, the company, which facilitates electronic payments and provides credit card services, has a market cap of $489.93 billion; its shares were trading around $225.90 on Thursday with a price-earnings ratio of 37.45, a price-book ratio of 14.76 and a price-sales ratio of 19.8.
According to the GF Value Line, the stock is fairly valued currently.
In his letter, Rolfe noted credit card payment volumes have continued to recover from the effects of the Covid-19 pandemic and the company “maintains a dominant franchise that is providing the network- or ‘rails’ – that have led to a boom in fintech payment volumes.”
Visa’s financial strength was rated 6 out of 10 by GuruFocus on the back of adequate interest coverage. In addition, the high Altman Z-Score of 7.88 indicates it is in good standing. The ROIC also eclipses the WACC, indicating value is being created.
The company’s profitability fared better, scoring a 9 out of 10 rating as a result of strong margins and returns that outperform a majority of industry peers. It also has a high Piotroski F-Score of 7, meaning operations are healthy. Visa has recorded consistent earnings and revenue growth, contributing to a five-star predictability rank. GuruFocus says companies with this rank return an average of 12.1% annually.
With a 0.74% stake, Fisher is Visa’s largest guru shareholder. Other top guru investors include Frank Sands (Trades, Portfolio), Warren Buffett (Trades, Portfolio), Chuck Akre (Trades, Portfolio), Steve Mandel (Trades, Portfolio), Spiros Segalas (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Al Gore (Trades, Portfolio), Philippe Laffont (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Lee Ainslie (Trades, Portfolio) and Mairs and Power (Trades, Portfolio).
Edwards Lifesciences
The investor curbed the Edwards Lifesciences (EW, Financial) position by 25.28%, selling 119,478 shares. The trade had an impact of -1.91% on the equity portfolio. During the quarter, the stock traded for an average per-share price of $116.86.
He now holds 353,149 shares total, which make up 6.07% of the equity portfolio and is his fifth-largest holding. GuruFocus says Rolfe has gained an estimated 211.49% on the investment, which was established in the first quarter of 2017.
The Irvine, California-based medical devices manufacturer, which specializes in artificial heart valves and hemodynamic monitoring, has a $67.42 billion market cap; its shares were trading around $108.18 on Thursday with a price-earnings ratio of 45.27, a price-book ratio of 11.57 and a price-sales ratio of 13.05.
Based on the GF Value Line, the stock appears to be fairly valued currently.
GuruFocus rated Edwards Lifesciences’ financial strength 8 out of 10 due to a comfortable level of interest coverage and a robust Altman Z-Score of 18.1. Although assets are building up at a faster rate than revenue is growing, value creation is occurring since the ROIC exceeds the WACC.
The company’s profitability scored a 9 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a majority of competitors and a high Piotroski F-Score of 8. Boosted by steady earnings and revenue growth, Edwards Lifesciences also has a 4.5-star predictability rank.
Sands is Edwards Lifesciences’ largest guru shareholder with a 2.04% stake. The Vanguard Health Care Fund (Trades, Portfolio), Fisher and PRIMECAP also have significant positions in the stock.
Motorola Solutions
Impacting the equity portfolio by -1.20%, Rolfe trimmed his Motorola Solutions (MSI, Financial) holding by 19.05%, selling 36,697 shares. The stock traded for an average price of $252.37 per share during the quarter.
The guru now holds 155,982 shares total, accounting for 5.63% of the equity portfolio. As Rolfe’s eighth-largest holding, GuruFocus data estimates he has gained 37.84% on the investment since establishing it in the second quarter of 2019.
The data communication and telecom equipment company, which is headquartered in Chicago, has a market cap of $36.68 billion; its shares were trading around $217.39 on Thursday with a price-earnings ratio of 30.31 and a price-sales ratio of 4.61.
The GF Value Line suggests the stock is modestly overvalued currently.
Rolfe noted in his quarterly letter that Motorola has benefited from its partnerships with public safety customers who rely on software updates and constant cybersecurity support. As such, he expects the company’s “core public safety market to continue adopting these software and service solutions that drive higher productivity in the face of chronic labor shortages.”
Motorola’s financial strength was rated 4 out of 10 by GuruFocus. Although assets are building up at a faster rate than revenue is growing, the Altman Z-Score of 3.12 indicates the company is in good standing. It also has adequate interest coverage. Value is being created since the ROIC surpasses the WACC.
The company’s profitability fared even better with a 7 out of 10 rating, driven by operating margin expansion, strong returns that top a majority of industry peers and a high Piotroski F-Score of 7. Motorola also has a one-star predictability rank. GuruFocus data shows companies with this rank return, on average, 1.1% annually.
Of the gurus invested in Motorola Solutions, Mairs and Power (Trades, Portfolio) has the largest holding with 0.46% of its outstanding shares. Steven Cohen (Trades, Portfolio), Leon Cooperman (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Joel Greenblatt (Trades, Portfolio), Dodge & Cox and Fisher also own the stock.
Electronic Arts
The guru exited the Electronic Arts (EA, Financial) investment, selling 196,446 shares. The transaction had an impact of -3.94% on the equity portfolio. During the quarter, shares traded for an average price of $134.21 each.
GuruFocus data indicates he gained an estimated 29.3% on the investment, which was established in the second quarter of 2019.
The Redwood City, California-based video game publisher has a $36.86 billion market cap; its shares were trading around $130.85 on Thursday with a price-earnings ratio of 59.05, a price-book ratio of 4.84 and a price-sales ratio of 5.78.
According to the GF Value Line, the stock is modestly undervalued currently.
In his letter, Rolfe said the stock detracted from portfolio performance, so the firm sold out of the position to use the proceeds “to add to existing holdings that are better positioned competitively.”
GuruFocus rated Electronic Arts’ financial strength 6 out of 10 on the back of sufficient interest coverage and a high Altman Z-Score of 5.08. While the ROIC topping 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 even though the operating margin is in decline. Electronic Arts is supported by returns that top over half of its competitors and a moderate Piotroski F-Score of 5, but the one-star predictability rank is on watch.
With 0.30% of outstanding shares, PRIMECAP Management (Trades, Portfolio) is Electronic Arts’ largest guru shareholder. Other top guru investors include Cohen, Ron Baron (Trades, Portfolio), Simons’ firm, Grantham and Greenblatt.
Additional trades and portfolio performance
During the quarter, Rolfe also added to his holdings of Meta Platforms Inc. (FB, Financial), Booking Holdings Inc. (BKNG, Financial) and Taiwan Semiconductor Manufacturing Co. Ltd. (TSM, Financial) as well as whittled down the Old Dominion Freight Line Inc. (ODFL, Financial) and Keysight Technologies Inc. (KEYS, Financial) positions.
Wedgewood's $753 million equity portfolio, which is composed of 39 stocks, is most heavily invested in the technology, communication services and financial services sectors.
The firm posted a return of 32.1% for 2021, outperforming the S&P 500 Index's 28.7% return.
