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

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.

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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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Wedgewood’s stake in Qualcomm Inc. (NASDAQ:QCOM) amassed 4.36% of  Wedgewood Partners’ portfolio at the end of June as the fund held 4.01 million shares valued at $215.01 million. The number of funds from database long Qualcomm declined to 48 from 59 during the second quarter. Wedgewood Partners noted Qualcomm for making progress on technology licensing front. The technology licensing business segment of Qualcomm has higher margins than its more hyped-up Chipset Franchise segment and contributes two-thirds to three-quarters of its total profitability. The company stock, with 14x Forward P/E earning is relatively undervalued as the company has $20 billion in cash on its balance sheet.  The investor considers that Qualcomm’s long-term growth will increase the value of its stock, adding that their “conviction in the stock is reinforced by the Company’s excellent financial health, which is a byproduct of their superior profitability”.

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Cognizant Technology Solutions Corp (NASDAQ:CTSH)’s stock declined 16% this year so far. Wedgewood Partners held 5.62 million shares worth $321.95 million, being one of the 40 investors in our database that held shares of Cognizant Technologies at the end of June. The fund pointed out that the company’s stock showed defensive performance as its management sounded cautious over two its core vertical verticals, Health-Maintenance Organization and Banking & Financial Services. However, despite the concerns, both verticals seem to be in a robust condition, boosting the chances of good performance by Cognizant. The company is expected to perform well in the long term, but might face some challenges in the short run.

“Despite these recent headwinds to topline growth, we think Cognizant maintains a long-term runway for generating attractive organic growth, as the company benefits from the secular shift of IT spend towards digital solutions,” Wedgewood said.

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Stericycle Inc. (NASDAQ:SRCL)’s stock has slid by 38%, year-to-date and the fund 2.7 million shares worth $281 million at the end of June. Overall, 22 funds tracked by us held shares of Stericycle at the end of the second quarter, up by four funds from the end of March. In the letter, Wedgewood said that it did not increase its stake during the third quarter as it retained cautious approach towards the stock as despite its low valuation. The fund added that the company is likely to remain under pressure on account of new developments happening in their core Regulated Medical Waste (RMW) segment.

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Disclosure: none