Wedgewood Partners Q4 Letter to shareholders
Review and Outlook
Our Composite (net-of-fees) gained approximately +10.9% during the fourth quarter. This compares relatively favorably to the gains in the Standard & Poor’s 500 Index of +10.5% and +10.4% in the Russell 1000 Growth Index. For the full year we are quite pleased to report that our Composite (net) gained +30.3%. However, we are not so pleased to report that our performance for the year trailed the gains in both the stock market +32.4% (S&P 500 Index) and our benchmark +33.5% (Russell 1000 Growth Index). Through the prism of risk/reward, we are most pleased with our 2013 upside/downside capture ratio versus the S&P 500 Index. We only “captured” approximately 86% of the upside in 2013, but just 46% of the downside for a ratio of +1.84 – one of our best calendar years in our 21-year history.
The smallest gainers during the fourth quarter included EMC (-1.6%), Stericycle (+0.7%) and Verisk Analytics (+1.2%). These three stocks, plus National Oilwell Varco, were also the largest performance detractors versus the benchmark Russell 1000 Growth Index. Amongst the largest gaining and relative outperforming stocks during the quarter were Monster Beverage (+29.7%), Google (+27.9%), Perrigo (+24.5%) and Cognizant Technology Solutions (+22.9%). Apple (AAPL), given its outsized weighting – and a gain of +18% – was also tops in the relative outperformance derby during the quarter.
For the year, the largest relative performance detractors were EMC (EMC), Coach (COH) and Varian Medical Systems (VAR). Apple is once again noteworthy on this score – literally a tale of two different stocks during the year. Apple started the year at $532 and ended the year at $561 – for a piddling gain of just 5.5%. However, dear client, as most of you are well aware Apple breached $400 twice during 2013 – in mid-April and late-June. The subsequent rally to $560 has been a rip-roaring +40%. Given that we added to your Apple holdings at more propitious prices during 2013, the relative performance of Apple in your portfolio was close to par versus the market and the benchmark.
2013 also produced a few heady gains. Gilead Sciences was up +104% (adding to its gain of +79% in 2012), Priceline +87.4%, American Express +59.3% and Google +58.4%. Charles Schwab (SCHW) was our largest relative contributor to performance. The stock gained +82% in 2013 – after a gain of 30% in 2012. We trimmed the position throughout the year and fully exited the position at the end of October. Our sale rationale is quite succinct. Schwab remains a best-in-class business, but the stock, in our view, had become less than best in class (read: overvalued). Cognizant (+36.7%) and Perrigo (+47.5%) were both notable performers in absolute terms. They each were both among our best relative performers during 2013 as the market served up corrections in both whereby we added to our existing positions. Cash is a big drag on performance in ebullient markets (see 2013), but the optionality of cash in a focused portfolio can be a big arrow in our investment process quiver.
During the quarter we trimmed positions in Priceline and Gilead Sciences. We also added to existing positions in EMC and M&T Bank.
We ended the year with a higher than usual cash position, as our new-buy cupboard is quite bare. There are plenty of outstanding businesses that we would like to add to our portfolio, but such outstanding (great) companies are currently valued at outstanding (poor) valuations.