| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| 8.5% | 9.4% | 2.5% |
Wedgewood Partners returned 9.4% in Q2 2026 versus 15.2% for the S&P 500, bringing YTD returns to 2.5% versus 10.2%. The fund significantly underperformed momentum-driven indices, which gained 90% over 15 months versus the fund's 25%, as high-quality stocks experienced their worst underperformance since 1999. Despite this, the manager increased positions in hyperscalers (Alphabet, Amazon, Meta, Microsoft), arguing their massive AI capex spending is rational given 30%+ returns on capital and that unrealized investment gains in SpaceX, Anthropic, and OpenAI effectively hedge against DRAM inflation. Top contributors included Taiwan Semiconductor, Alphabet, and United Rentals, driven by AI infrastructure demand. The manager warns semiconductor stocks are at cyclical peaks with potential oversupply by 2028, despite historic profit growth at companies like SK Hynix and Micron. New positions include Hermès, viewed as a rare luxury brand with genuine pricing power from nearly 200 years of artisanal craftsmanship and constrained supply. The fund continues fishing in the quality pond, recently adding Chubb and Progressive, viewing current underperformance as opportunity.
Hyperscalers are rationally deploying massive AI capex while maintaining 30%+ returns on capital, with their investments in AI companies serving as effective hedges against component inflation, making current depressed valuations attractive long-term opportunities despite near-term free cash flow concerns and negative sentiment.
The manager remains bullish on hyperscalers despite near-term headwinds, viewing their AI capex spending as rational given exceptional returns on capital and massive unrealized investment gains serving as hedges. However, the manager is explicitly cautious on semiconductor stocks, warning of classic cyclical peak dynamics and potential oversupply by 2028. The continued focus on high-quality stocks reflects conviction that current historic underperformance versus momentum strategies will eventually reverse, creating opportunities for patient capital.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Jul 14 2026 | 2026 Q2 | 000660 KS, AAPL, AMD, AMZN, CB, CDW, CPRT, GOOGL, META, MSFT, MSI, MU, NVDA, PGR, RMS.PA, TSCO, TSM, URI, V, ZTS | AI, Capex, Hyperscalers, Luxury, Memory, momentum, Quality, semiconductors | - | Wedgewood underperformed in Q2 as momentum stocks dominated, but the manager is doubling down on hyperscalers, viewing their massive AI capex as rational given 30%+ returns and investment gains hedging component inflation. Taiwan Semiconductor and Alphabet drove performance. The manager warns semiconductors are at cyclical peaks despite historic growth. New position Hermès offers rare luxury pricing power from artisanal scarcity. Quality stocks at 1999-level discounts present opportunity. |
| Apr 6 2026 | 2026 Q1 | AMZN, BKNG, CB, CDW, CPRT, GOOGL, META, MSFT, MSI, ODFL, ORLY, PGR, PYPL, TOL, TSCO, TSM, UNH, V | AI, energy, geopolitics, growth, large cap, oil, semiconductors, technology |
TSM ODFL MSI CB ORLY MSFT BKNG META GOOGL V |
Wedgewood's concentrated large-cap growth portfolio declined 6.3% in Q1 2026 as geopolitical tensions from the Iran conflict pressured markets despite strong AI-driven fundamentals at core holdings like Taiwan Semiconductor and Alphabet. The firm maintains conviction in AI infrastructure investments while navigating temporary Middle East disruptions and preparing for major tech IPOs that could provide valuation clarity. |
| Jan 14 2026 | 2025 Q4 | AAPL, AMZN, BKNG, CB, CDW, CPRT, EW, GOOGL, META, MSI, ODFL, ORLY, POOL, PYPL, SPGI, TSCO, TSM, UNH, URI, V | AI, growth, large cap, Portfolio Management, Quality, technology, valuation |
AMZN CB GOOG TSM AAPL ODFL EW META MSI URI TSCO PYPL |
Wedgewood Partners endured their worst relative performance since 1993, with quality growth stocks underperforming in a speculative AI-driven market. The manager warns of bubble-like valuations exceeding tech bubble levels but remains confident their superior portfolio fundamentals and attractive relative valuations position them well for a potential reversal in 2026 when quality may reassert itself. |
| Oct 14 2025 | 2025 Q3 | AAPL, AMD, AMZN, AVGO, BKNG, CDNS, CDW, CPRT, GOOGL, META, MSFT, NVDA, ODFL, ORCL, ORLY, PGR, PYPL, SNPS, TSM, URI | AI, Capex, Data centers, growth, large cap, semiconductors, technology |
GOOGL US PYPL US META US MSFT US |
Wedgewood delivered 5.9% in Q3, led by AI infrastructure holdings like Alphabet and TSMC. However, the manager warns that unprecedented AI spending forecasts may transform tech companies into capital-intensive businesses, creating future cyclicality as depreciation expenses weigh on earnings. Despite strong AI performance, they've been trimming positions due to sustainability concerns about trillion-dollar infrastructure spending plans. |
| Jul 14 2025 | 2025 Q2 | AAPL, BKNG, CDW, CPRT, EW, GOOGL, IDXX, META, MSFT, MSI, ORLY, TSCO, TSM, UNH, URI, V, ZTS | AI, Bull Market, growth, healthcare, large cap, tariffs, technology, Valuations | - | Wedgewood delivered 7.1% in Q2 but lagged the tech-heavy market rally. Strong AI beneficiaries like Meta and Microsoft drove performance while UnitedHealth was sold after execution issues. The manager initiated Zoetis, capitalizing on pet care trends at attractive valuations. With 76% of market sectors trading below average multiples, opportunities exist beyond the narrow, stretched technology rally. |
| Apr 14 2025 | 2025 Q1 | AAPL, CPRT, GOOGL, META, MSFT, ODFL, ORLY, POOL, PYPL, SPGI, TSCO, TSM, UNH, URI, V | China, growth, infrastructure, large cap, payments, tariffs, technology, volatility |
V ORLY URI |
Wedgewood Partners navigated tariff-driven volatility in Q1 2025, delivering -6.3% returns while adding United Rentals to capitalize on infrastructure spending tailwinds. Despite market pressure on growth stocks, core holdings like Visa demonstrated strong fundamentals. The firm maintains conviction in large-cap growth companies with secular drivers, positioning for recovery as tariff uncertainty resolves. |
| Jan 15 2025 | 2024 Q4 | AAPL, BKNG, CDW, EW, GOOGL, META, MSFT, MSI, NVDA, ODFL, ORLY, POOL, SPGI, TPG, TSCO, TSM, UNH, V | AI, growth, interest rates, large cap, semiconductors, technology, Valuations | - | Wedgewood delivered 29.1% returns in 2024 led by Taiwan Semiconductor and AI themes, but warns of stretched valuations and bubble-like sentiment heading into 2025. The firm sold Texas Pacific Land after index-driven gains and is positioned defensively, waiting for better prices while concerned about bond market risks and federal debt pressures. |
| Oct 16 2024 | 2024 Q3 | AAPL, BRK-B, CDW, CPRT, EW, GOOGL, META, MSFT, MSI, PYPL, UNH | Fed policy, growth, healthcare, large cap, technology, value |
PYPL META UNH MSI |
Wedgewood delivered 5.8% Q3 returns led by PayPal, Meta, and UnitedHealth. The fund targets high-quality businesses with competitive moats at attractive valuations, focusing on AI monetization, e-commerce expansion, and healthcare transformation. Fed rate cuts provide tailwinds while corporate profits remain at record highs. Portfolio positioning emphasizes secular growth themes with defensive characteristics. |
| Jul 15 2024 | 2024 Q2 | AAPL, BKNG, CDW, GOOGL, META, MSI, ODFL, POOL, PYPL, TSM, V | AI, Cloud, Concentration, growth, large cap, semiconductors, technology | - | Wedgewood's concentrated technology portfolio delivered strong Q2 performance led by AI beneficiaries Taiwan Semiconductor, Alphabet, and Apple. Apple Intelligence rollout should drive iPhone upgrades while TSMC benefits from AI chip manufacturing monopoly. However, manager warns of AI investment bubble with $500 billion capital hole and extreme benchmark concentration creating systemic risks. |
| Apr 15 2024 | 2024 Q1 | AAPL, AMZN, BKNG, CDW, CPRT, EW, GOOGL, META, MSFT, NVDA, POOL, PYPL, SPGI, TPG, TSCO, TSLA, TSM, UNH, V | AI, growth, large cap, payments, technology, Travel, value | PYPL | Wedgewood delivered 11.5% in Q1 2024, led by AI beneficiaries Meta and Taiwan Semiconductor. The concentrated large-cap growth strategy focuses on technology leaders while adding to undervalued PayPal. Despite Fed uncertainty, the manager sees economic resilience and continued AI adoption driving secular growth across core holdings. |
| Jan 13 2024 | 2023 Q4 | AAPL, CDW, CPRT, EW, GOOGL, META, MSFT, MSI, ODFL, ORLY, PYPL, TPG, TSCO, TSM, UNH, V | AI, Cloud, Fed policy, growth, large cap, semiconductors, technology | - | Wedgewood delivered 29.2% returns in 2023, driven by AI leaders Meta Platforms, Taiwan Semiconductor, and Microsoft. The manager trimmed winners while adding to undervalued positions like PayPal and Edwards Lifesciences. With the Fed likely pivoting to cuts in 2024, the focus remains on superior businesses successfully monetizing AI technologies for sustainable competitive advantages. |
| Dec 10 2023 | 2023 Q3 | AAPL, BKNG, CDW, EW, GOOGL, META, MSI, ODFL, ORLY, PYPL, TPG, TSM | AI, Auto Aftermarket, Fed policy, growth, interest rates, large cap, technology, Travel | AVGO|BYD|CRWD|MELI|MSFT|NFLX|NVDA|NVO|ORLY|SPOT | Wedgewood delivered -2.4% in Q3, led by Alphabet's search acceleration and travel recovery at Booking Holdings. Added O'Reilly Automotive on auto aftermarket tailwinds from higher financing costs. Fed's higher-for-longer policy creates unprecedented Treasury stress with mortgage rates at 8%. Portfolio's quality focus on companies with pricing power and competitive moats provides resilience amid macro headwinds. |
| Jul 14 2023 | 2023 Q2 | AAPL, BKNG, CDW, CPRT, GOOGL, META, MSFT, PYPL, TPG, TSCO | AI, Buybacks, Cloud, Ecosystem, growth, large cap, Mobile, technology |
ADI|BDX|FI|FND|HAS|META|MSFT|MSI|ORCL|TMO AAPL GOOGL CPRT AAPL|MSFT|NFLX|NVDA|UNH PYPL TPG CDW TSCO |
Wedgewood delivered 8.1% Q2 returns led by Meta, Apple, and Alphabet, all benefiting from AI investments and ecosystem advantages. The team trimmed Meta at maximum weight and added to PayPal on valuation. They remain concentrated in high-quality large-cap technology companies with sustainable moats, though acknowledge elevated sector multiples require selectivity. |
| Apr 20 2023 | 2023 Q1 | AAPL, BKNG, FRC, GOOGL, META, PGR, POOL, SPGI, TPG, TSM, UNH | Banking, Credit Crisis, Federal Reserve, growth, large cap, technology | FRC | Wedgewood delivered 9.8% in Q1 2023, led by technology holdings while First Republic Bank collapsed due to deposit runs. The Federal Reserve's extreme rate hikes broke the banking system by creating massive unrealized losses on mortgage securities. The manager expects forced Fed easing and better investment opportunities ahead while avoiding banks until regulatory structures change. |
| Jan 19 2023 | 2022 Q4 | AAPL, CDW, EW, GOOG, META, MSI, PYPL, TPL, TSCO, V | - | - | |
| Oct 10 2022 | 2022 Q3 | AAPL, CPRT, EW, FB2A, GOOG, MSI, PYPL, TPL, TSM, V | - | - |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2026 Q2 |
AIHyperscalers (Alphabet, Amazon, Meta, Microsoft) are deploying hundreds of billions in AI capex while maintaining exceptional returns on capital (30%+). Their massive investments in AI companies (SpaceX, Anthropic, OpenAI) serve as effective hedges against DRAM inflation. The manager views AI infrastructure spending as rational given the high returns being generated, despite market concerns about free cash flow compression. |
Cloud Data Centers Semiconductors Capex |
Semiconductor CycleMemory semiconductors are experiencing historic growth with companies like SK Hynix and Micron posting revenue and profit surges of 198% and 398% respectively. However, the manager warns this is a classic cyclical peak, noting that semiconductor stocks are notoriously momentum-driven and that supply shortages won't last forever, with potential oversupply as early as 2028. |
Memory Cyclical Momentum Valuation | |
QualityHigh-quality stocks with strong balance sheets are experiencing their worst underperformance since 1999, being pummeled by momentum-driven rallies in lower-quality names. The manager continues to fish in the high-quality pond, recently adding positions like Chubb, Progressive, and Hermès, viewing this as an opportunity despite stark underperformance. |
Value Underperformance Opportunity | |
MomentumMomentum strategies have dominated, with the Invesco S&P 500 Momentum ETF up 90% versus the fund's 25% over 15 months. The portfolio is 50% technology stocks, mostly semiconductors and AI-related names. The manager acknowledges significant underperformance when momentum strategies are ascendant, as has been true over the past 15 months. |
Technology Semiconductors Underperformance | |
LuxuryHermès represents a nearly 200-year brand built on skilled artisans producing highest-quality products from premium materials, generating 41.8% EBIT margins and 11.8% revenue CAGR over 20 years. Supply of skilled artisans is genuinely constrained, with industry and government investments in training. The iconic Birkin bag maintains extraordinary pricing power and brand equity, with secondary market prices at double retail. |
Apparel Brand Pricing Power | |
Data CentersData center and power project construction is driving strong demand for equipment rental companies like United Rentals, which posted 9% sales growth acceleration and 10% EPS growth. Megaprojects and nonresidential construction tied to AI infrastructure are key growth drivers. |
Infrastructure Spending Construction Equipment | |
| 2026 Q1 |
AIAI infrastructure spending continues driving growth at Microsoft, Meta, and Alphabet despite market concerns about elevated capex. Companies are demonstrating strong productivity gains and margin expansion from AI investments. The market is discounting AI-enabled companies ahead of major IPOs from OpenAI, Anthropic, and other AI firms expected in 2026. |
Infrastructure Capex Productivity Cloud Software |
SemiconductorsTaiwan Semiconductor Manufacturing delivered strong performance with 25% revenue growth and guidance for 30% growth in 2026. Demand for AI compute accelerators continues ramping unabated. The company increasingly works directly with cloud service providers on custom silicon development. |
AI Compute Custom Silicon Cloud Foundries | |
OilThe Strait of Hormuz conflict has driven oil prices from $67 to $100 per barrel. Iran's blockade strategy is proving economically powerful as the IRGC demands sovereignty and tolling rights. The war represents a significant geopolitical risk with potential for prolonged supply disruptions. |
Geopolitics Supply Iran Shipping Energy | |
| 2025 Q4 |
ConcentrationU.S. equity market concentration has reached extreme levels with the ten largest S&P 500 constituents accounting for over 40% of index weight. This concentration creates challenges for risk management and alpha generation in actively managed portfolios. The concentration is driven by both expanding valuations and growing earnings share of mega-cap technology companies. |
Market Structure Index Weight Risk Management Alpha Generation Mega Cap |
RiskConcentrated markets create uneven beta distributions and increased correlation among smaller stocks, making portfolios more sensitive to estimation error during market stress. The ten largest companies now contribute more than 50% of S&P 500 volatility and have aggregate volatility 1.5 times that of the overall index. |
Beta Distribution Volatility Correlation Market Stress Risk Models | |
AIBreakthroughs in artificial intelligence have helped drive strong performance in mega-cap stocks, contributing to increased market concentration. AI is identified as one of the key technological drivers behind the outperformance of the largest companies in recent years. |
Technology Performance Mega Cap Innovation | |
| 2025 Q3 |
AIAI infrastructure spending is reaching unprecedented levels with forecasts of trillions in necessary investment. The manager expresses concern about the sustainability of current AI spending plans and the transformation of capex-light tech companies into capital-intensive businesses. They worry about the cyclical nature this will create as depreciation expenses weigh on future earnings. |
Data Centers Cloud Semiconductors Infrastructure Capex |
Data CentersMassive data center buildouts are straining power grids and requiring enormous capital investments. Companies like Meta are building 70 football-field sized facilities consuming as much power as major cities. The manager highlights power as the key bottleneck for future AI growth. |
Power Infrastructure Grid Energy Capacity | |
SemiconductorsThe semiconductor supply chain is described as a modern miracle with critical dependencies on single sources globally. Taiwan Semiconductor Manufacturing produces over 90% of advanced chips, creating significant concentration risk. The manager discusses the fragility of this interconnected system. |
Taiwan Manufacturing Supply Chain Technology Foundries | |
| 2025 Q2 |
AIMeta Platforms has been a consistent beneficiary of artificial intelligence over the past several years, investing aggressively in deep learning recommendation systems that help power its products. Meta's AI investments, combined with its massive scale, allow the Company to quickly spin up new products across its digital advertising real estate to reinforce its competitive positioning. Microsoft showed key acceleration in its Azure cloud infrastructure business, driven by demand for AI-compute capacity. |
Deep Learning Recommendation Systems Azure AI Compute Digital Advertising |
Pet CareZoetis is the global leader in animal healthcare, with business skewing heavily toward pets in the U.S. The pet industry continues to be driven by increasing pet ownership, changing attitudes toward quality of care, and personification of pets as family members. Pet ownership trends accelerated during COVID-19, with 7% more households owning dogs and 15% more owning cats over four years. |
Animal Healthcare Pet Ownership Veterinary Pet Personification COVID Impact | |
SemiconductorsTaiwan Semiconductor Manufacturing was a top performance contributor for the quarter and the best portfolio performer since September 2022 panic-selling lows. The company benefits from strong demand for semiconductor manufacturing capacity, particularly related to AI and technology infrastructure needs. |
Foundries Manufacturing Technology Infrastructure AI Demand | |
TravelBooking Holdings contributed to performance as travel spending across the Company's core ex-U.S. markets, particularly Europe, remained healthy. The Company continues to take share in alternative accommodations and is on track to expand margins after years of reinvestment. |
Alternative Accommodations Europe Market Share Margin Expansion | |
| 2025 Q1 |
Trade PolicyThe Trump administration's tariff policy has created significant market volatility, with reciprocal tariff rates initially announced at 10% across-the-board and 145% on Chinese exports. The administration issued a 90-day pause to negotiate lower rates, with critical technology exclusions for computers, smartphones and chip-making equipment representing nearly 25% of Chinese imports. |
Tariffs China Reciprocal Technology Inflation |
Infrastructure SpendingUnited Rentals benefits from secular demand for heavy industrial equipment driven by America's aging infrastructure needs. Massive federal funding is already in place to support more than GDP-plus growth for the industrial rental equipment industry, with demand measured in decades rather than quarters. |
Construction Equipment Federal Secular Rental | |
PaymentsVisa continues to demonstrate strong growth with +10% revenue and +14% adjusted earnings per share growth, handling $13.4 trillion in volume on 240 billion transactions. Large untapped addressable markets persist, particularly in cash and checks totaling $11 trillion, with expanding opportunities in peer-to-peer and business payments. |
Digital Volume Cross-border Network Addressable | |
| 2024 Q4 |
AIWedgewood views AI as evolutionary rather than revolutionary, noting that companies like Alphabet and Meta have been using machine learning for over a decade. They emphasize that AI has been hiding in plain sight, with their portfolio companies already generating substantial returns from AI-related investments in R&D and capex. |
Machine Learning TensorFlow GPUs Cloud Computing Data Analytics |
SemiconductorsTaiwan Semiconductor Manufacturing was a top contributor, benefiting from dramatically accelerated earnings growth as wafer fabrication volumes soared in 2024. The company maintains a near-monopoly in fabricating AI accelerators and continues investing tens of billions in future capacity for hyperscale demand. |
Foundries AI Accelerators Wafer Fabrication Hyperscale Capacity Expansion | |
Capital MarketsS&P Global is positioned to benefit from declining interest rates and increased capital formation activity. The company's ratings business generates roughly half of profits and benefits from corporate debt refinancing cycles, with a wall of debt refinancings expected in coming years. |
Credit Ratings Bond Issuance Refinancing Interest Rates Debt Markets | |
| 2024 Q3 |
AIMeta has been a consistent beneficiary of artificial intelligence over the past several years, investing aggressively behind deep learning recommendation systems. Meta's AI investments, combined with its massive scale, allow the Company to quickly spin up new products across its digital advertising real estate. Apple is well situated to develop a suite of compelling, consumer-friendly AI services given its proprietary semiconductor development and the compute-intensive nature of AI applications. |
Deep Learning Recommendation Systems Generative AI AI Hardware |
E-commercePayPal continues to trade at levels considered quite cheap given their strong positioning in the long-term secular expansion of global e-commerce. The Company serves over 35 million online merchants and has a large, online merchant acceptance base that is a rare and crucial component to profitably monetizing payment volumes. |
Digital Payments Online Merchants Payment Volumes Merchant Acceptance | |
Managed CareUnitedHealth has been able to adjust pricing in its Healthcare segment to keep up with medical cost inflation while working with its Optum units to deliver more value-based care. Value-based care is a sensible, long-term growth opportunity that differentiates them from the vast majority of healthcare providers, particularly as it relates to Medicare patients. |
Value-Based Care Medical Cost Inflation Medicare Healthcare Pricing | |
| 2024 Q2 |
AIApple unveiled Apple Intelligence at WWDC, rebranding AI as Apple Intelligence. The company has been developing AI capabilities for years through custom silicon and neural processing units. Apple's vertically integrated approach positions it well for AI applications, though the rollout will be modest initially. |
Apple Intelligence Neural Processing Custom Silicon Machine Learning Generative AI |
SemiconductorsTaiwan Semiconductor Manufacturing benefited from strong demand for AI chips and rollout of leading-edge N3 manufacturing node. The company has monopoly market share for manufacturing AI chips like GPUs and aggressive capital investment in equipment provides competitive advantage. |
AI Chips Manufacturing Foundries Capital Equipment N3 Node | |
CloudAlphabet's cloud infrastructure business grew 28% and is at nearly $40 billion revenue run-rate. The company has differentiated AI service offerings and has priced services competitively to take share from AWS and Azure. |
Infrastructure Revenue Growth Market Share Competitive Pricing AI Services | |
| 2024 Q1 |
AIArtificial intelligence continues to drive significant performance with portfolio holdings including Alphabet, Apple, Meta Platforms, Microsoft and Taiwan Semiconductor Manufacturing benefiting from the secular AI tailwind. Meta Platforms and Taiwan Semiconductor were 2024 performance leaders on this front. |
Artificial Intelligence Technology Semiconductors Software Innovation |
PaymentsPayPal represents a significant opportunity as the company navigates post-COVID normalization while maintaining strong fundamentals with 23% earnings per share growth and 13% total payment volume growth in 2023. The digital payments market continues growing with room for multiple players to succeed. |
Digital Payments FinTech E-commerce Financial Services Transaction Processing | |
TravelBooking Holdings shows healthy end markets with 16% bookings growth and 22% adjusted operating income growth, though facing tough comparisons. Consumers maintain significant wallet share for travel compared to pre-COVID levels, supporting continued growth in the travel ecosystem. |
Online Travel Hospitality Consumer Spending Leisure Recovery | |
| 2023 Q4 |
AIAI has been a multi-year phenomenon driving growth and profitability across portfolio companies. Meta Platforms has built one of the world's fastest supercomputers and uses AI for advertising optimization and content curation. Alphabet has spent $150 billion on R&D over five years, with 80% of advertising customers using AI-enabled tools. Apple has developed custom neural processing units enabling FaceID and other AI features across 200+ million devices annually. |
Machine Learning Neural Networks Recommendation Systems Supercomputing Custom Silicon |
SemiconductorsTaiwan Semiconductor Manufacturing has dominant market share in leading-edge semiconductor fabrication capacity key to manufacturing AI accelerators. The company began shipping chips using its industry-leading N3 node, with capacity filled by Apple, NVIDIA and Intel. As high-performance computing builds momentum, TSMC will be a key supplier for many years to come. |
Foundries Leading Edge AI Accelerators EUV Manufacturing Custom Silicon | |
CloudMicrosoft reported 28% growth in Azure and other cloud services, leading to 25% growth in operating income. The company has a commanding hold on productivity software with almost 50% operating margins, and AI features could help solidify that lead. Cloud-scale service providers are driving the majority of recent GPU spending for generative AI applications. |
Azure Productivity Software Cloud Services Operating Leverage AI Infrastructure | |
| 2023 Q3 |
Auto AftermarketO'Reilly Automotive represents the aftermarket auto parts industry which benefits from higher car financing costs forcing owners to keep cars longer, increasing maintenance needs. The industry remains fragmented with growth opportunities, particularly in the do-it-for-me segment where O'Reilly excels through its distribution network. |
Auto Parts Distribution DIFM Market Share Maintenance |
AIAlphabet has been at the vanguard of artificial intelligence for over a decade, spending $150 billion on R&D over five years. Over 80% of advertising customers use AI-enabled tools for Google Search and YouTube campaigns, positioning the company well despite fears of AI disruption to search. |
Search Advertising R&D Tools Revenue | |
TravelBooking Holdings reported continued healthy travel demand with accelerating trends into July. The alt-accommodations segment grew 11% in room nights, approaching parity with Airbnb while maintaining superior operating margins. Consumer travel budgets remain pent-up from the pandemic, particularly outside the US. |
Demand Alt-accommodations Margins Recovery International | |
RatesThe Fed's pivot to higher rates for longer has created unprecedented Treasury yield surges, with the 10-year set for a third consecutive year of negative returns. Mortgage rates have cracked 8%, the highest in 23 years, while bonds are experiencing a historic bear market with a 38-month drawdown. |
Fed Treasury Mortgage Bear Market Yields | |
| 2023 Q2 |
AIMeta has been at the forefront of investing in valuable artificial intelligence IP, particularly with ranking and recommendation systems across its products. Despite the recent Gen-AI frenzy, Meta has been researching generative-AI tools for years. Alphabet and Google have been pioneers in AI development, creating important software and hardware specifications that developers rely on today. |
Artificial Intelligence Machine Learning Generative AI Recommendation Systems AI Infrastructure |
CloudMicrosoft's Azure and other cloud services grew 31% during the quarter, while Alphabet's Cloud division turned a small profit on roughly $30 billion revenue run-rate. The Company's internal engineering prowess should continue to drive longer hardware useful life and better profitability for this unit over time. |
Cloud Computing Azure Google Cloud Cloud Infrastructure SaaS | |
BuybacksApple has returned a staggering $763.5 billion in capital to shareholders, largely through share buybacks. Since initiating buybacks in 2012, the share count has reduced from over 26 billion shares to just under 16 billion shares. This sizable reduction has been material in the accretion in earnings per share over the past ten years. |
Share Repurchases Capital Return Share Count Reduction EPS Accretion Shareholder Returns | |
E-commerceApple's App Store ecosystem facilitated $1.1 trillion in billings and sales worldwide in 2022, with over 90% originating from transactions outside the App Store. The ecosystem includes mobile commerce through apps on iPhone and iPad, representing a groundbreaking shift in how business is conducted digitally. |
Mobile Commerce App Store Digital Transactions M-commerce Digital Ecosystem | |
| 2023 Q1 |
Credit StressThe banking crisis that began with Silicon Valley Bank and Signature Bank failures created a deposit run on First Republic Bank, despite its strong lending track record. The crisis highlighted the vulnerability of banks with high uninsured deposit ratios and the systemic risks in the banking sector. |
Banking Deposits Credit Systemic Risk Liquidity |
RatesThe Federal Reserve's rapid rate increases from near zero to 4.83% in twelve months created massive unrealized losses on mortgage-backed securities and destabilized bank funding. The extreme tightening broke the MBS market and forced banks into a liquidity crisis. |
Federal Reserve Interest Rates Monetary Policy MBS Duration | |
AIMicrosoft's AI investments created investor concerns about potential competition to Alphabet's search business. However, Alphabet has been investing in AI hardware and software for over a decade, and the manager views AI competition concerns as overblown. |
Artificial Intelligence Search Competition Technology | |
TravelBooking Holdings reported accelerating travel trends with room night bookings up over 25% compared to 2019. Multiple years of pent-up travel demand as pandemic restrictions ease, with populations returning to spending on travel well beyond pre-Covid levels. |
Tourism Recovery Pent-up Demand Hospitality | |
SemiconductorsTaiwan Semiconductor Manufacturing grew revenues 27% despite near-term customer weakness. The company is well-positioned for long-term growth as leading-edge capacity is absorbed by high-performance computing applications from companies like Apple, Alphabet, and Amazon. |
Foundries High Performance Computing Leading Edge Capacity |
| Date | Pitch Type | Author | Ticker | Company | Industry | Sub Industry | Bull / Bear | Exchange | Keywords | Action |
|---|---|---|---|---|---|---|---|---|---|---|
| Jul 1, 2023 | Fund Letters | Wedgewood Partners | ADI|BDX|FI|FND|HAS|META|MSFT|MSI|ORCL|TMO | Meta Platforms | Communication Services | Interactive Media & Services | Bull | NASDAQ | AI infrastructure, Artificial Intelligence, digital advertising, growth, revenue acceleration, social media, technology, user engagement | Login |
| Jul 1, 2023 | Fund Letters | Wedgewood Partners | AAPL | Apple | Information Technology | Technology Hardware, Storage & Peripherals | Bull | NASDAQ | App Store, asset-light, Ecosystem, high-margin, Mobile Economy, Returns on Capital, services, Smartphones | Login |
| Jul 1, 2023 | Fund Letters | Wedgewood Partners | GOOGL | Alphabet | Communication Services | Interactive Media & Services | Bull | NASDAQ | Artificial Intelligence, Automation, Cloud computing, digital advertising, engineering, profitability, Revenue Growth, search engine | Login |
| Jul 1, 2023 | Fund Letters | Wedgewood Partners | CPRT | Copart | Industrials | Commercial Services & Supplies | Bull | NASDAQ | Auto auctions, Automotive Complexity, competitive moat, Insurance, market share, Returns on Capital, Total Loss, Vehicle Salvage | Login |
| Jul 1, 2023 | Fund Letters | Wedgewood Partners | AAPL|MSFT|NFLX|NVDA|UNH | Microsoft | Information Technology | Software | Bull | NASDAQ | Azure, Cloud computing, Digital transformation, double-digit growth, Enterprise software, Office365, productivity software, SaaS | Login |
| Jul 1, 2023 | Fund Letters | Wedgewood Partners | PYPL | PayPal | Information Technology | IT Services | Bull | NASDAQ | Branded Payments, digital payments, double-digit growth, e-commerce, financial technology, Payment Volume, Scalable Business, valuation multiple | Login |
| Jul 1, 2023 | Fund Letters | Wedgewood Partners | TPG | Texas Pacific Land Corp | Energy | Oil, Gas & Consumable Fuels | Bull | NYSE | capital expenditures, Delaware Basin, energy infrastructure, land holdings, Oil and Gas Royalties, Permian Basin, Resource Scarcity, Water Rights | Login |
| Jul 1, 2023 | Fund Letters | Wedgewood Partners | CDW | CDW Corporation | Information Technology | Electronic Equipment, Instruments & Components | Bull | NASDAQ | Cheap Multiple, Digital transformation, IT Complexity, IT services, Omni-office, Returns on Capital, technology distribution, Work From Home | Login |
| Jul 1, 2023 | Fund Letters | Wedgewood Partners | TSCO | Tractor Supply Company | Consumer Discretionary | Specialty Retail | Bull | NASDAQ | Core Position, Execution, Inflation Moderation, margin expansion, Relative value, Rural Lifestyle, Specialty retail, store remodeling | Login |
| Apr 6, 2026 | Fund Letters | Wedgewood Partners | TSM | Taiwan Semiconductor Manufacturing Company | Semiconductors | Semiconductors & Semiconductor Equipment | Bull | New York Stock Exchange | AI, Cloud Service Providers, custom silicon, Foundry, growth, Leading-Edge Nodes, semiconductors, Taiwan | Login |
| Apr 6, 2026 | Fund Letters | Wedgewood Partners | ODFL | Old Dominion Freight Line | Trucking | Trucking | Bull | NASDAQ | Capacity Management, Cyclical, Freight, Industrial Recovery, Ltl, manufacturing, Transportation, Trucking | Login |
| Apr 6, 2026 | Fund Letters | Wedgewood Partners | MSI | Motorola Solutions | Communication Equipment | Communications Equipment | Bull | New York Stock Exchange | Command Center Software, Communications Equipment, Government, Land Mobile Radio, LMR, Mission-Critical, Public safety, Unmanned Aerial | Login |
| Apr 6, 2026 | Fund Letters | Wedgewood Partners | CB | Chubb | Insurance - Property & Casualty | Property & Casualty Insurance | Bull | New York Stock Exchange | combined ratio, Digital, International, productivity, Property & Casualty Insurance, Small and Middle-Market, underwriting | Login |
| Apr 6, 2026 | Fund Letters | Wedgewood Partners | ORLY | O'Reilly Automotive | Auto Parts | Specialty Retail | Bull | NASDAQ | Automotive Aftermarket, comparable sales, defensive, Non-Discretionary, Pricing power, Professional Business, Specialty retail | Login |
| Apr 6, 2026 | Fund Letters | Wedgewood Partners | MSFT | Microsoft | Software - Infrastructure | Systems Software | Bull | NASDAQ | AI, backlog, capital allocation, Cloud computing, commercial bookings, OpenAI, Productivity Suite, Systems Software | Login |
| Apr 6, 2026 | Fund Letters | Wedgewood Partners | BKNG | Booking Holdings | Travel Services | Hotels, Restaurants & Leisure | Bull | NASDAQ | air travel, Consumer AI, Middle East, Online Travel, Revenue Growth, Travel Booking, travel demand | Login |
| Apr 6, 2026 | Fund Letters | Wedgewood Partners | META | Meta Platforms | Internet Content & Information | Interactive Media & Services | Bull | NASDAQ | advertising, AI infrastructure, Interactive Media, Productivity Gains, Revenue Growth, social media, valuation discount | Login |
| Apr 6, 2026 | Fund Letters | Wedgewood Partners | GOOGL | Alphabet | Internet Content & Information | Interactive Media & Services | Bull | NASDAQ | advertising, AI, capital allocation, Google Cloud, Interactive Media, margin expansion, operating leverage, Search | Login |
| Apr 6, 2026 | Fund Letters | Wedgewood Partners | V | Visa | Credit Services | Data Processing & Outsourced Services | Bull | New York Stock Exchange | consumer spending, Data Processing, duopoly, Payment Networks, Payments, Regulatory risk, value-added services | Login |
| Jan 14, 2026 | Fund Letters | David A. Rolfe | AMZN | Amazon.com, Inc. | Consumer Discretionary | Broadline Retail | Bull | NASDAQ | advertising, cloud, ecommerce, Margins, valuation | Login |
| Jan 14, 2026 | Fund Letters | David A. Rolfe | CB | Chubb Limited | Financials | Property & Casualty Insurance | Bull | New York Stock Exchange | compounding, Insurance, premiums, profitability, underwriting | Login |
| Jan 14, 2026 | Fund Letters | David A. Rolfe | GOOG | Alphabet Inc. | Communication Services | Interactive Media & Services | Bull | NASDAQ | advertising, AI, cloud, scale, Search | Login |
| Jan 14, 2026 | Fund Letters | David A. Rolfe | TSM | Taiwan Semiconductor Manufacturing Company Ltd. | Information Technology | Semiconductors | Bull | New York Stock Exchange | AI, Foundry, HPC, Pricing, semiconductors | Login |
| Jan 14, 2026 | Fund Letters | David A. Rolfe | AAPL | Apple Inc. | Information Technology | Technology Hardware, Storage & Peripherals | Bull | NASDAQ | Ecosystem, Hardware, Margins, services, Upgrades | Login |
| Jan 14, 2026 | Fund Letters | David A. Rolfe | ODFL | Old Dominion Freight Line, Inc. | Industrials | Cargo Ground Transportation | Bull | NASDAQ | Cyclicality, efficiency, Freight, Logistics, Pricing | Login |
| Jan 14, 2026 | Fund Letters | David A. Rolfe | EW | Edwards Lifesciences Corp. | Health Care | Health Care Equipment | Bull | New York Stock Exchange | Cardiology, growth, innovation, Margins, Medical devices | Login |
| Jan 14, 2026 | Fund Letters | David A. Rolfe | META | Meta Platforms Inc. | Communication Services | Interactive Media & Services | Bull | NASDAQ | advertising, AI, Data, Engagement, social media | Login |
| Jan 14, 2026 | Fund Letters | David A. Rolfe | MSI | Motorola Solutions Inc. | Information Technology | Communications Equipment | Bull | New York Stock Exchange | Communications, growth, Public safety, Software, valuation | Login |
| Jan 14, 2026 | Fund Letters | David A. Rolfe | URI | United Rentals Inc. | Industrials | Trading Companies & Distributors | Bull | New York Stock Exchange | construction, Cyclicality, infrastructure, Rentals, scale | Login |
| Jan 14, 2026 | Fund Letters | David A. Rolfe | TSCO | Tractor Supply Company | Consumer Discretionary | Specialty Retail | Bull | NASDAQ | Loyalty, Margins, recovery, retail, Rural | Login |
| Jan 14, 2026 | Fund Letters | David A. Rolfe | PYPL | PayPal Holdings Inc. | Financials | Transaction & Payment Processing Services | Bear | NASDAQ | Competition, Execution, Margins, Payments, Volumes | Login |
| Oct 14, 2025 | Fund Letters | David A. Rolfe | GOOGL US | Alphabet Inc | Communication Services | Interactive Media & Services | Bull | NASDAQ | advertising, AI, cashflow, cloud, growth, infrastructure, Search, technology | Login |
| Oct 14, 2025 | Fund Letters | David A. Rolfe | PYPL US | PayPal Holdings Inc | Financials | Financial Technology | Bull | NASDAQ | ecommerce, Fintech, growth, Payments, stablecoin, valuation, Venmo | Login |
| Oct 14, 2025 | Fund Letters | David A. Rolfe | META US | Meta Platforms Inc | Communication Services | Social Media & Networking | Bull | NASDAQ | AI, cashflow, datacenter, infrastructure, innovation, social media, Software | Login |
| Oct 14, 2025 | Fund Letters | David A. Rolfe | MSFT US | Microsoft Corp | Information Technology | Systems Software | Bull | NASDAQ | AI, CapEx, cashflow, cloud, data centers, growth, Software | Login |
| Oct 1, 2024 | Fund Letters | Wedgewood Partners | PYPL | PayPal Holdings | Information Technology | Data Processing & Outsourced Services | Bull | NASDAQ | digital payments, e-commerce, Fintech, Merchant Services, Payment Platform, Transaction Processing, Venmo | Login |
| Oct 1, 2024 | Fund Letters | Wedgewood Partners | META | Meta Platforms | Communication Services | Interactive Media & Services | Bull | NASDAQ | Artificial Intelligence, digital advertising, Family of Apps, machine learning, Recommendation Systems, social media, technology platform | Login |
| Oct 1, 2024 | Fund Letters | Wedgewood Partners | UNH | UnitedHealth Group | Health Care | Managed Health Care | Bull | NYSE | health insurance, healthcare, managed care, Medicare, Optum, Preventative Care, value-based care | Login |
| Oct 1, 2024 | Fund Letters | Wedgewood Partners | MSI | Motorola Solutions | Information Technology | Communications Equipment | Bull | NYSE | Communications Equipment, Emergency Communications, Government, infrastructure, Land Mobile Radio, Mission-Critical, Public safety | Login |
| Apr 1, 2024 | Fund Letters | Wedgewood Partners | PYPL | PayPal Holdings Inc | Information Technology | Data Processing & Outsourced Services | Bull | NASDAQ | Braintree, cost-cutting, digital payments, e-commerce, Fintech, Margin recovery, market share, payment processing, Post-COVID Normalization, SaaS, Share Buybacks, turnaround, Value, Venmo | Login |
| Apr 1, 2023 | Fund Letters | Wedgewood Partners | FRC | First Republic Bank | Financials | Regional Banks | Bear | NYSE | Banking Crisis, Bear, conservative lending, Deposit Run, regional banks, wealth management | Login |
| Oct 1, 2023 | Fund Letters | Wedgewood Partners | AVGO|BYD|CRWD|MELI|MSFT|NFLX|NVDA|NVO|ORLY|SPOT | O'Reilly Automotive | Consumer Discretionary | Automotive Retail | Bull | NASDAQ | Automotive Aftermarket, DIFM, distribution network, DIY, market share, retailer, ROIC, Share Buybacks | Login |
| - | Fund Letters | Wedgewood Partners | V | Visa Inc. | Information Technology | Data Processing & Outsourced Services | Bull | NYSE | Cross-Border, digital payments, Fintech, growth, network effects, Payments, Transaction Processing | Login |
| - | Fund Letters | Wedgewood Partners | ORLY | O'Reilly Automotive Inc. | Consumer Discretionary | Automotive Retail | Bull | NASDAQ | Automotive Aftermarket, market share, Professional Customers, retail, Returns on Capital, Value, West Coast | Login |
| - | Fund Letters | Wedgewood Partners | URI | United Rentals Inc. | Industrials | Trading Companies & Distributors | Bull | NYSE | consolidation, construction, Equipment Rental, Industrial, infrastructure, market share, network effects, secular growth | Login |
| TICKER | COMMENTARY |
|---|---|
| GOOGL | Alphabet was a top contributor to performance during the quarter. Google Search and Cloud continue to accelerate, with Search posting 19% revenue growth and Cloud posting 63% revenue growth, helping drive 30% growth in operating income. That torrid growth in operating income compares to, we estimate, more than 40% growth in Alphabet's total gross assets. While that means returns on capital were slightly diluted, they remain above 30%. We think Alphabet is an exceedingly rare, if not entirely unique, business, growing a nearly $450 billion gross asset base by 40% while maintaining a 30% return on that massive asset base. These are astonishing compounding figures. Further, we have excluded from operating income large, unrealized gains from the Company's investment portfolio, which totaled more than $35 billion in the most recent quarter (mostly due to SpaceX) and nearly $50 billion over the past six quarters. The Company also has a 14% stake in the private company Anthropic. That stake could be worth more than $100 billion based on valuations reported from recent capital raises. We highlight these investments because these investees are drivers of recent inflation in component costs, especially DRAM memory. Although the market typically ignores the 'one-time' investment gains that Alphabet has made, we think these extremely large gains have served as a de facto hedge for the rapid, incremental capex spending requirements. In other words, we estimate the $150 billion in investment gains on SpaceX and Anthropic (if realized) could effectively cover incremental DRAM-related capex costs for several years. These one-time gains are not included in our core calculations for returns - but suffice it to say, Alphabet has plenty of excess profitability to continue investing both responsibly and aggressively. In addition, Alphabet announced it would begin delivering its proprietary Tensor Processing Units (TPU) to external customer data centers, representing a very sizable new addressable market. Alphabet has spent more than a decade developing and iterating on TPU systems for internal workloads, claiming to reduce the cost of serving its AI model (Gemini) by almost 80%. We expect Alphabet to continue delivering excellent returns as it helps proliferate AI use cases for businesses, consumers, and data centers. Despite outperformance during the quarter, we continue to manage portfolio concentration risk by limiting individual position sizes to 10%. |
| MSFT | Microsoft ended the most recent quarter with average gross assets of more than $585 billion (trailing two years), up 22%, yet generated $170 billion in gross cash flow over the prior four quarters, up 27% from a year ago. Again, these are astonishing figures: Microsoft added an average of $100 billion in assets and $27 billion in incremental cash flows. The Company is achieving nearly 30% returns while compounding the assets that generate those returns at more than 20% - extraordinary! On top of that, Microsoft reportedly has an investment in OpenAI worth over $100 billion, so we think these huge investment gains, if realized, also effectively serve as a hedge against commodity inflation, particularly incremental DRAM-related capex over the coming years. |
| AMZN | As we have noted before, Amazon is another member of this elite group generating high returns, and we think it is being quite rational by rapidly compounding its asset base at these returns. During the quarter, Amazon grew revenue by 17% and operating income by 30%. While the bears continue to complain about Amazon's $200 billion in capex growth and dwindling free cash flow, we estimate this incremental capex will increase the 2025 total asset base by around 28%. With 30% cash flow growth on what we assume is at least 28% asset growth, we conclude Amazon is achieving at least as good, if not better, returns on capital than it has previously - yet the stock is trading near historically depressed multiples. This is another telltale sign to us that the Company's aggressive free cash flow reinvestment is very rational and that the depressed valuation presents an excellent long-term investment opportunity for us. Moreover, we estimate the Company's investment in Anthropic is worth at least $100 billion and, if realized, will serve as another effective hedge against commodity memory price inflation, especially in DRAM, over the next few years. That should be long enough to offset inflation until more DRAM capacity comes online to moderate prices. |
| META | Last but not least in the capex spending bonanza is Meta Platforms. While they have certainly received its share of criticism for recently increasing its 2026 capex plans by around $10 billion, citing DRAM inflation, we'd like to point out that the warrants Meta holds on Advanced Micro Devices (AMD), related to a strategic sourcing arrangement with AMD struck in late February (~5 months ago), are now worth close to $90 billion, by our estimate (a swift nine times more than the incremental DRAM inflation for 2026). Meta's sourcing advantage from its massive scale gives it the bargaining power to keep commodity cost inflation in check, which investors are so worried about. Although this investment in AMD does not technically qualify as a GAAP-based accounting hedge, it is certainly an economic hedge that we believe investors have completely overlooked, even though it should serve to blunt the effects of DRAM inflation and bolster returns for years to come. |
| TSM | Another beneficiary of the AI spending boom has been Taiwan Semiconductor Manufacturing. Revenues grew by more than 40% (in USD), on top of 40% growth last year. Its leading-edge fabs and packaging capacity are fully booked, driving margins to all-time highs. Much of this capacity was put in place a few years ago, before generative AI was a household and business-wide term. More recent demand signals from customers - including Nvidia, Broadcom, and even Micron - indicate AI-related growth of over 50% per annum through 2029. Whereas the Company used to have demand visibility only a few quarters out, it now has visibility a few years out. As with long-held portfolio risk mitigation, we limit all positions to 10% weightings. We believe it is prudent to maintain this risk-management limit on the stock, especially given the massive investor inflows into semiconductor-levered stocks and the large speculative ecosystem (e.g., 2x- and 3x-leveraged single-stock ETFs) that has recently sprung up around them. |
| URI | United Rentals was a top performer across portfolios. Equipment rental sales growth accelerated to 9%, while adjusted margins stabilized, driving 10% growth in earnings per share. This acceleration was driven by strong nonresidential construction end markets, particularly data centers and power projects, and by continued growth in megaprojects. |
| AAPL | Apple was also a top contributor to performance during the quarter. Revenues grew 17%, driven by 22% growth in iPhone and 16% growth in services. The iPhone 17 family has catalyzed a solid upgrade cycle ahead of what we expect to be another strong launch later this year, featuring a new foldable form factor. Because input prices for DRAM have risen at a parabolic rate, the Company recently raised prices on some of its devices to pass these costs through. As one of the largest single purchasers of DRAM, the Company has strong negotiating leverage, but it can also implement hardware and software innovations to reduce its dependence on memory. |
| V | Visa contributed to quarterly performance, reporting accelerating revenue growth of 17%, driven by 11% growth in payment volumes and 21% growth in cross-border volume. Value-added services also grew 25% and now represent almost one-third of the Company's total revenue. Agentic commerce remains nascent but could represent a new addressable market for Visa as the Company tracks and helps autonomous AI agents perform microtransactions. This contrasts with just a few quarters ago, when the market was fretting about the risks agentic commerce could pose. We think Visa's global scale, including acceptance at over 130 million merchants, and deep integration with almost 15,000 financial institutions make it a valuable partner for agentic commerce startups. |
| RMS.PA | We recently initiated positions in Hermès International, one of the world's leading designers, manufacturers, and retailers of ultra-luxury leather goods, apparel, and accessories. Hermès began in 1837 as a harness and saddle maker in a Paris shop, after its founder, Thierry Hermès, trained for eight years as a master craftsman. From the beginning, the company focused on artisanal skill, high-quality materials, and exceptional craftsmanship, earning awards and serving a prestigious upper-class clientele in and beyond Paris, including world leaders and royalty. Over time, the Company expanded into adjacent equestrian-related product categories, including bags, leather gloves, and scarves, intended for riders. In the 20th century, with the advent of the automobile and the fading importance of horses, the Company applied its leather goods expertise to areas such as luggage, leather jackets, and handbags. Today, the Company still produces equestrian equipment as part of its leather goods segment, which remains its largest at 44% of revenues. The Company has also built important businesses over time in apparel and accessories (28% of revenues), a highly recognizable and unique business in silk scarves and other fabrics (9% of revenues), and businesses in watches, beauty, perfume, and other areas. The Company has likewise expanded from its single store on Rue Honore in Paris—which still exists—to nearly 300 stores globally. Top geographic markets now are Asia (over 50% of revenues), Europe (roughly 25%), and the Americas (roughly 20%), with sales in the Middle East relatively insignificant. However, Middle Eastern customers make sizable contributions to sales in other markets as tourists. Over time, Hermès has continued to focus on the factors that led to its success nearly 200 years ago: using highly skilled artisans to hand-produce its products from the highest-quality materials. This has given the Company a lasting brand heritage that has driven demand, commanded deservedly high prices, delivered high, consistent profitability, and insulated the Company to a large degree from competition. Hermès has repeatedly produced iconic products with decades of staying power, indicating that the brand's success is not built on the caprices of fashion whims or fads but on its heritage and quality. The Company's long-term focus on the highest quality has led to sustainably strong demand and exceptional profitability. According to the U.S. Bureau of Economic Analysis, U.S. personal consumption expenditures on clothing, footwear, and related services have grown at a compound annual growth rate of about 2.8% over the past 20 years. Over the same period, Hermès has seen its revenue growth compound at 11.8%. Given the varying definitions of the global luxury goods market and the lack of particularly good data available to us, our best approximation is that the luxury market itself has roughly tripled over this time, for a CAGR of roughly 5.5%. Although the luxury apparel-footwear-accessories market has outgrown the standard market for those categories, the Company has capitalized on its strategy and heritage to deliver outsized growth relative to its industry. We would note that this period included two of the most traumatic economic periods in recent history: the 2007-2009 global financial crisis and the 2020 pandemic. Another interesting component of the Hermès story, and of the ultra-luxury world in general, is the supply side of the equation. One could reasonably point out that a business strategy to limit supply is a sound approach in an industry seeking to cultivate an air of exclusivity and sustain high prices. An important point in the luxury goods industry is that supply appears constrained, whether or not that is a company's strategy. Again, although solid industry data are hard to come by, our readers could search 'luxury goods artisans' shortage' and find more than 10 years of articles lamenting the shortage of skilled artisans in the industry. The aging of the workforce, as older artisans retire and are not replaced, and the younger generation's aversion to manual work. We understand that a skeptical person might not take some industry pronouncements at face value, and that a fear of supply shortages may drive both pricing and demand—we have found projections saying the industry is 20,000 artisans short. We have found others saying the industry is 90,000 people short, and there may be some leeway in those numbers. However, we would point out that luxury companies across the industry, as well as the governments of France and Italy in particular, have been investing in training and schools to encourage more people to enter these positions. Hermès itself has opened 24 workshops in its leather goods division, with four more scheduled to open over the next four years. Industry peers LVMH and Bottega Veneta likewise have invested heavily in training and education, and some Italian luxury houses are even making agricultural investments to support Italian silk and wool production. So, we would say that Hermès and the rest of the industry may have planned for some supply scarcity over time as an effective strategy. Still, there seems to be a genuine scarcity of skilled artisans, with fairly compelling evidence that companies and governments are investing to prevent the supply situation from worsening. Again, we will point out that when you combine strong, consistent demand with limited and arguably declining supply, you get the pricing power and high profitability that we see with Hermès. Turning to a real-life example, let's refer back to the iconic Birkin bag. Perhaps you know someone who would like to get their hands on a new one? Here's how. First of all, walking into a Hermès store isn't going to do it. The bags are made in very limited quantities, so there will not be any in stock, and the few that trickle into stores are immediately sold by allocation to the store's most important customers. How do you become one of the most important customers? You develop a long personal relationship with one of the sales associates. The key to this relationship is consistently spending a lot of money on other Hermès products. Sifting through various blogs, it seems you might be expected to spend at least one to two times the price of the Birkin bag before you even have a chance, at which point you might be offered one in a period somewhere between six months and three years later. If you are so lucky, retail prices start around $15,000 for smaller bags made from the company's 'base leather,' and you can spend multiple times that amount on other designs. If you aren't able to get an allocation directly from the store, though, don't worry - you can buy the same bag from someone selling it on the secondary market for roughly double that price. This is very powerful brand equity for a bag introduced 42 years ago. This brand is not a fad. We also highly suspect that this brand equity would no longer exist if Hermès had chosen at some point to skimp on artistry or materials. On the valuation front, the stock is rarely what many people—especially those outside the U.S. large-cap growth arena—would call 'cheap.' Still, we note that significant insider ownership (the family owns 66.7% of the shares) serves as a valuation floor, and a business model of this quality warrants a premium valuation. The stock recently retreated to a more reasonable level after the company's most recent results showed a modest negative impact from the outbreak of war in the Middle East. This disrupted some travel and particularly weighed on the business of Middle Eastern customers in tourism markets worldwide; we view this impact as temporary. In summary, we believe Hermès is a true example of a company with significant brand equity, earned through an established, nearly 200-year history of doing things that are not easily replicated: having skilled artisans produce the highest-quality products from the highest-quality materials. The process and the brand work together to create both significant demand for the company's products and significant profitability, and we expect the company to continue this trajectory of growth and profitability. |
| CB | In recent months, we've added Chubb, Toll Brothers, United Rentals, Progressive, and, most recently, Hermès. Good fishing. |
| PGR | In recent months, we've added Chubb, Toll Brothers, United Rentals, Progressive, and, most recently, Hermès. Good fishing. |
| 000660.KS | Consider SK Hynix's recent results. The South Korean company holds a majority share of high-bandwidth memory, which is essential for the current generation of GPUs. Revenue of $35.5 billion was up 198% year over year, crushing consensus estimates, and the company's net income surged 398%. Not to be outdone, Micron Technology's profit surge is one for capitalism's history books. |
| MU | Not to be outdone, Micron Technology's profit surge is one for capitalism's history books. Memory company earnings will surely grow over the next few years, at least until demand cools and/or supply shortages wane. However, and this is key, it only takes a modest cooling in current red-hot demand or a modest easing of the significant supply shortage for these stocks to drop as suddenly as they have risen because expectations reverse; earnings expectations will always be too high once growth-rate deceleration kicks in. It is the second derivative change in the rate of growth that matters. This is how cyclical top traps are set. The market always sniffs out a peak in earnings growth acceleration well before the cycle turns. Again, it matters little if earnings continue to grow; the stocks lead fundamental results, often by years. |
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