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Why Wedgewood Partners sold Ross Stores (ROST) stock?

Wedgewood Partners, a St. Louis, Missouri-based investment management firm, released its Q1 2020 Investor letter – a copy of which is available for download here. Wedgewood Partners returned -16.30% for the first quarter. Meanwhile, the benchmark Russell 1000 Growth Index and the S&P 500 Index lost 14.10% and 19.60%, respectively.

In the said letter, Wedgewood Partners highlighted a few stocks and Ross Stores Inc. (NASDAQ:ROST) is one of them. Ross Stores engages in the operation of off-price retail apparel and home accessories stores. Year-to-date, ROST stock lost 18.3% and on April 29th it had a closing price of $97.05. Its market cap is of $33.8 billion. Here is what Wedgewood Partners said:

“We sold our position in Ross Stores (ROST) during the quarter, ending approximately four years of ownership. Our sale had nothing to do with our feelings about the Company, as – prior to the coronavirus pandemic, at least – conditions were quite strong, both in terms of demand and supply chain conditions, and the major off-price retailers, including Ross, TJX Companies (TJX), and Burlington Stores (BURL), remained in extremely strong competitive positions. We have been very pleased with Ross’s fundamental performance during our holding period, aside from one particular disappointment, which we probably should have anticipated: the Company’s need to make greater investments in store labor. Still, this was not a thesis-busting disappointment; it weighed somewhat on margins during the latter half of our holding period and constrained profit growth to a level modestly below our earlier expectations.

Clients will note that we have added to and trimmed our core Ross position over time as the stock’s valuation looked more or less attractive. In the end, we decided to sell our position entirely as the stock broke beyond the valuation range with which we were comfortable, hitting all-time highs earlier this year, and we eventually saw better investment opportunities elsewhere.

Since our sale, the coronavirus pandemic has created a variety of disruptions around the world, causing Ross to close all of its stores and creating severe displacements in the global apparel supply chain – between limited capacity in some places and massive order cancellations leading to oversupply in others. Obviously, with Ross’s stores closed, demand will be running at zero for the moment, but developments in the apparel supply chain should create a very favorable environment for it when business reopens and heads toward normalization. Demand disruption, excess supply, and complicated, extended supply chains all create even more opportunities than usual for the off-price retailers and its massive, nimble, fast-moving buying organizations, and all of these conditions can be expected to persist for the foreseeable future. Especially considering the collapse in the stock, we will continue to monitor Ross Stores.”

In Q4 2019, the number of bullish hedge fund positions on ROST stock increased by about 9% from the previous quarter (see the chart here).

Disclosure: None. This article is originally published at Insider Monkey.

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