Wedgewood Partners: Apple Stock Suffering From “Hit-Driven” Fears; QUALCOMM Balance Sheet “Fortress-Like”

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Wedgewood Partners is a prominent large-cap equity asset management company, which follows a growth-oriented investment philosophy. It was founded in 1988 and currently has  $6.3 billion worth of assets under management. Its holdings are mainly concentrated in Information Technology and Industrial sectors. According to its third-quarter letter to investors, Wedgewood’s Composite returned 3.07% during the quarter, which is lower than its benchmark, the Russell 1000 Growth Index and the S&P 500, which advanced by 4.58% and 3.85% respectively.

The fund added that among its top performers were Apple Inc. (NASDAQ:AAPL), Priceline Group Inc. (NASDAQ:PCLN), Qualcomm Inc. (NASDAQ:QCOM), while detractors included Stericycle Inc. (NASDAQ:SRCL) and Cognizant Technology Solutions Corp (NASDAQ:CTSH). In this article, we are going to take a closer look at Wedgewood’s comments about these stocks.

The smart money sentiment is an important metric that can be used to assess the long-term profitability of a stock. While there are thousands of stocks trading daily on the market, taking a look at what hedge funds think about certain companies can narrow down the search significantly. At Insider Monkey, we track more than 740 hedge funds, whose 13F filings we analyze as part of our small-cap strategy. Our research has shown that imitating a portfolio that includes the 15 most popular small-cap stocks among hedge funds can outperform the market by as much as 95 basis points per month on average (see more details).

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Apple Inc. (NASDAQ:AAPL)’s stock has gained around 8% so far this year and represented 9.56% of Wedgewood Partners’s equity portfolio at the end of June as the fund held 4.93 million shares worth $471.59 million. Among the funds in our database, 116 funds amassed around $10.67 billion worth of Apple shares at the end of the second quarter. According to Wedgewood Partners, Apple has seen its forward P/E ratio declining on account of mis-perception regarding its customer relationships. Its ratio is nearly 12.7x, down from 38x ratio it used to command in 2007. The stock is likely to see upside in the coming times as commanded by Apple’s hold over its loyal repeat customers.

“[…] we believe that Apple’s iOS franchise and “annuity-like” ecosystem has demonstrated an exceptional ability to retain and obtain repeat customers, while commanding over 90% of the profitability generated by smartphone manufacturers—qualities we think should help the stock generate extremely attractive returns at the current multiple,” the fund said.

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In Priceline Group Inc. (NASDAQ:PCLN), Wedgewood Partners trimmed its holding by 9% to 253,186 shares worth $316.08 million during the second quarter. Meanwhile, 85 funds from our database held shares of Priceline Group worth $7.24 billion in aggregate at the end of June. Wedgewood Partners believes that Priceline Group is set to perform well as it possesses scale on the both the ends of the hospitality industry. The company generates more than 90% of its profit from non-US markets, which are characterized by their high margin potential vis-à-vis the US markets. Priceline Group stock has seen its P/E ratio shrink by 15% over the past three years, despite posting nearly 60% cumulative increase in its earnings during the same time period.

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