Wedgewood Partners Second Quarter 2013 Client Letter

Wedgewood Partners Review and Outlook

Our Composite (net of fees) gained approximately 2.00% during the second quarter of 2013. This compares with the gain in the Standard & Poor’s 500 Index of 2.91% and 2.06% in the Russell 1000 Growth Index. For the first half of 2013 our performance lagged behind the stock market and our benchmark by considerable margins: 7.95% (WWP) vs. 13.82% (S&P 500 Index) and 11.80% (Russell 1000 Growth Index).

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Our largest performance detractors for the quarter were Cognizant (-­?18.2%), Apple (-­?10.4%) and Qualcomm (-­?8.7%). Our biggest winners were Monster Beverage (+27.4%), Priceline (+20.1%) and Charles Schwab (+20.0%).

Our portfolio activity during the quarter continues to be more sloth like than usual for– our last new stock purchases were last year in October (Priceline and Monster Beverage). During the quarter we trimmed back positions in American Express, Google and Monster Beverage. We sold Expeditor’s International. We added to existing positions in Cognizant and EMC.

In our last Client Letter we discussed our observations and opinions on both the Federal Reserve’s “QEternity” monetary policy, as well as the current (and future) state of both corporate profit margins and earnings. We would like to continue our discussion on both these topical matters.

In our view, the Federal Reserve’s large hand in driving the “chase for yield” may have begun a marked change in May when the 10 year Treasury note fell to a minuscule yield of just 1.60%.

Heretofore, the mantra of the Fed driven markets in both the bond market and stock market has been “bad” news is “good” and “good” news is “bad.” Said another way, “bad” economic news will force the Fed to replenish the current $3.5 trillion monetary punch bowl. However, the bond market seems to be sniffing out a different economic reality than Bernanke & Co. The quick ramp of the 10 year yield to 2.70% may also signal a change in investor/speculator attitude and behavior. In our view, the insatiable chase for dividend yield over the past twelve months or so was ultimately unsustainable. Multi-decade valuation highs in “defensive” yield bearing stocks will likely see to that. In addition, according to Bloomberg, the most indebted U.S. companies have gained (+25%), the most in nearly four years compared with the rest of the stock market almost double the gains for businesses with cash rich balance sheets and the least need to borrow.

Wedgewood Partners Second Quarter 2013 Client Letter