David Rolfe (Trades, Portfolio), known for his business acumen and eye for quality stocks, disclosed this week a series of trades he executed in the first quarter.
Rolfe was among a handful of gurus who seized on the attractive valuation of social media giant Facebook (FB, Financial). In an April commentary, Rolfe acknowledged the stock had experienced a pullback as a result of “short-term headline risk.”
At the same time, the guru expressed confidence the stock had plenty of room to grow in the years ahead, thanks to its strong advertising demand.
Facebook and competitor Alphabet Inc. (GOOGL, Financial) combined account for more than 60% of the digital advertising market in the U.S.
“To put the two companies’ dominance in perspective, no other competitor even cracks 5% of the U.S. digital ad market share,” Rolfe wrote.
Rolfe’s firm, Wedgewood Partners, lists 34 positions in its portfolio, which is valued at more than $2.1 billion. The portfolio reported a quarter-over-quarter turnover of 7%.
A total of 28% of the portfolio is invested in technology stocks. About 24% is made up of stocks in the financial services industry and about 17% is represented by consumer cyclical stocks.
Rolfe has managed Wedgewood for 18 years. He operates on the belief success can be achieved when investors see themselves as business owners.
He chooses stocks in companies that provide a dominant product that is practically irreplaceable. He also searches for high-quality companies that provide consistent growth, revenue and earnings. He tries to avoid companies with excessive debt.
In 2017, Wedgewood Partners reported a rate of return of 20.42% compared to the S&P 500’s 21.71%.
In the prior year, it returned 4.54% compared to the S&P 500’s 11.99%.
Facebook position
Shares of the California-based company sit in about 6.14% of the portfolio. He purchased 836,000 shares for an average price of $179.55 a share.
Facebook was trading at under $183 a share on Friday afternoon. The stock was down slightly 0.39%. It has risen 27% over the last 12 months. Its 52-week range is $144.42 to $195.32 a share.
Facebook trades at more than 30 times its earnings. Its price-book ratio is 6.91 times and its price-sales ratio is 12.21 times.
The stock trades at 24.15 times its forward earnings multiple. Its return on equity is 25.36%, while its return on assets is 22.6%. Over the last five years, its average annualized earnings grew at a rate of 63.50%.
It reported an operating margin of 49.7% in December 2017. The margin has teetered between 35% and 50% over the last six years.
In the final months of the year, revenue stood at $40.6 billion, up from $27.6 billion the prior year and $18 billion the year before that.
Net income in December 2017 was $16 billion, compared to $10 billion in December 2016.
Its market cap has jumped to $540 billion from $63 billion in December 2012.
Analysts are projecting earnings of $10.87 per share on revenues of more than $85 billion in 2020. The three- to five-year growth rate estimate on earnings per share is 19.92%.
Facebook is ranked with a financial strength of 9 out of 10 and a profitability and growth ranking of 9 of 10, according to GuruFocus.
Expansions to portfolio
The guru expanded some of his major stakes in the first quarter.
He expanded a position in PayPal Holdings (PYPL, Financial) by 11%. A total of about 1.1 million shares of PayPal now sit in a portfolio space of 0.41%. His average price paid for PayPal was $79.23 a share. GuruFocus reports he has collected an estimated gain of 56% since he began buying shares in the third quarter of 2015. The estimate is based on quarterly returns. PayPal has seen steady revenue and income increases over the years.
Rolfe purchased additional shares of Ross Stores Inc. (ROST, Financial). A total of 1.56 million shares sit in a portfolio space of 0.18%. He expanded his position by 3.25% and purchased shares at an average price of $79.36 a share. Estimates show he has gained 33% since he began buying in the second quarter of 2016.
The guru expanded his stake in Apple (AAPL, Financial) by 0.07% for a total of 1.1 million shares. His average purchase price was $172.19 a share. The shares sit in 0.01% of the portfolio. So far, he has made an estimated 67% gain on the investment since he has held shares of the company over a number of years.
Reduced positions
The guru reduced positions in three companies.
He made a major reduction in Verisk Analytics (VRSK, Financial), downsizing his position by 99%. He now owns a total of 4,800 shares.
He reduced his position in Google by 27%. He holds a total of 107,000 shares. He also trimmed Berkshire Hathway Inc. (BRK.B, Financial) by 11.93% for a total of 1 million shares.
Exited positions
Rolfe closed a position in off-price apparel and home fashions retailer TJX Companies Inc. (TJX, Financial) for an estimated return of 0%. The guru has been reducing his stake in the stock since he purchased 1.4 million shares almost two years ago. Quarterly estimates of holdings show a 0% return on the position.
Rolfe also exited his position in Express Scripts Holding Co. (ESRX, Financial) for an estimated gain of 17%. The guru has been a longtime investor of the company, buying as many as 6 million shares over several years. He began reducing the holding in the second quarter of 2015.
He sold out of PepsiCo Inc. (PEP, Financial). It produced an estimated 15% return for the investor since he began buying shares. He first purchased 3,300 shares two years ago.
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