David Rolfe (Trades, Portfolio), the chief investment officer of St. Louis-based Wedgewood Partners, disclosed one new holding in his first-quarter portfolio last week.
The guru’s firm approaches a potential investment with the mindset of a business owner, evaluating 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.
Based on these criteria, the guru established a position in Starbucks Corp. (SBUX, Financial) during the quarter. In his first-quarter letter to clients, Rolfe noted he sees “a variety of avenues for sales and earnings growth” for the company over the next several years as it focuses on expansion in the U.S. and China.
While the U.S. is Starbucks’ largest and most mature market in terms of coffee consumption and competition, Rolfe believes expansion in the Chinese market is promising.
“China potentially is a much larger market that is early in its development, and the market penetration for both Starbucks and competitors is extremely low,” he wrote. “We see new stores in China as a high-return use of capital, as we expect margins and lease costs to be better than the corporate average.”
Starbucks
Rolfe invested in 711,660 shares of Starbucks, dedicating 3.86% of the equity portfolio to the holding. The stock traded for an average price of $68.63 per share during the quarter.
The Seattle-based coffee chain has a $92.22 billion market cap; its shares were trading around $76.25 on Friday with a price-earnings ratio of 32.98 and a price-sales ratio of 3.89.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced.
On April 25, the popular coffee and tea brewer reported second-quarter 2019 earnings. Adjusted earnings of 60 cents per share topped estimates of 56 cents. Revenue grew 5% from the prior-year quarter to $6.31 billion, but fell short of expectations of $6.32 billion. Same-store sales gained 3%, beating the anticipated increase of 2.9%.
GuruFocus rated Starbucks’ financial strength 5 out of 10. Although the company has issued approximately $6.3 billion in new long-term debt over the last three years, it is at a manageable level as a result of adequate interest coverage. The Altman Z-Score of 4.27 also indicates it is in good fiscal standing.
The company’s profitability and growth scored a 7 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 4, which suggests business conditions are stable. Starbucks also has a business predictability rank of one out of five stars, which is on watch. According to GuruFocus, companies with this rank typically see their stocks gain an average of 1.1% per year.
Of the gurus invested in Starbucks, Jim Simons (Trades, Portfolio)’ Renaissance Technologies has the largest stake with 0.89% of outstanding shares. Caxton Associates (Trades, Portfolio) also established a position during the quarter, while Pioneer Investments (Trades, Portfolio), Tom Gayner (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) added to their holdings.
Additional trades and portfolio composition
During the quarter, Rolfe also added to his holding of C.H. Robinson Worldwide Inc. (CHRW, Financial) and trimmed a number of positions, including Qualcomm Inc. (QCOM, Financial), Charles Schwab Corp. (SCHW, Financial), Berkshire Hathaway Inc. (BRK.B, Financial), Ross Stores Inc. (ROST, Financial), Visa Inc. (V, Financial), Edwards Lifesciences Corp. (EW, Financial), Apple Inc. (AAPL, Financial) and Old Dominion Freight Lines Inc. (ODFL, Financial).
The guru’s $1.37 billion equity portfolio, which is composed of 36 stocks, is heavily invested in the technology, financial services and consumer cyclical sectors. According to GuruFocus, Wedgwood posted a return of -4.01% in 2018, slightly outperforming the S&P 500’s -4.38% return.
Disclosure: No positions.
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