12:19 T =Wedgewood Partners' Investment Chief Likes Info-Tech Cos
ST. LOUIS (Dow Jones)--As David Rolfe, chief investment officer of Wedgewood
Partners, searches the stock market for companies that meet his criteria, he's
finding much of what he wants in the information technology, financial
services, health-care and recreational sectors.
Using the firm's bottom-up approach, which emphasizes company performance
over economic trends, Rolfe told Dow Jones that he looks for several
characteristics in his stock selections. Those include annual earnings growth
in excess of 15%, annual return on equity of 25% to 30%, and solid long-term
outlooks.
Wedgewood Partners is a small money-management firm in suburban St. Louis
that manages $110 million, primarily for wealthy individuals. The firm's
clients have concentrated portfolios, with most having about 20 companies in
them. Wedgewood's turnover rate averages 25% a year.
Intel Corp. (INTC), which is growing at about 20% a year, is one of the
information-technology companies that Rolfe likes. He said that the Santa
Clara, Calif., chip maker had record microprocessor shipments and revenue in
1998, and this year's new products look promising. Those products include the
low-end Celeron chip, the mid-range Pentium III chip, and the high-end Xeon
chip.
Rolfe said Intel has very good manufacturing efficiencies, which helped
increase its gross margins.
"It's had its bumps along the way, but we stuck with it because Intel
dominates its market," he said. "Even in a bear market, it still would have
been a good performer."
Rolfe said that MCI WorldCom Inc. (WCOM), one of the largest
telecommunications companies in the U.S., has a collection of
telecommunications assets that is "second to none." Those assets have come from
a long-list of acquisitions.
He said the Jackson, Miss., company is pumping capital into the
fastest-growing areas of telecommunications, including its Internet, data, and
international assets. Rolfe said that this trio will account for more than 75%
of MCI WorldCom's growth during the next three to five years.
Chief Investment Officer Rolfe also likes Linear Technology Corp. (LLTC), a
Milpitas, Calif., company that makes linear integrated circuits that transform
analog signals into a form that can be used in electronic devices.
Linear Technology sells more than 5,200 proprietary products to more than
13,000 original-equipment manufacturers. It has had more than 45 consecutive
quarters of pretax profits exceeding 20% of sales, and a similar number of
quarters of positive cash flow.
"It's one of the best diversified technology companies that has growth
opportunities in every major development in information technology," Rolfe
said.
One of the financial services stocks that Rolfe is bullish on is Charles
Schwab & Co. (SCH), the discount brokerage firm in San Francisco.
Rolfe said that Schwab is rapidly expanding its on-line trading capabilities.
He said it has the capacity to handle 45,000 simultaneous Internet
transactions, compared with the 4,500 it can handle over the telephone.
He noted that Merrill Lynch & Co. (MER) or Salomon Smith Barney would have to
triple their broker staffs to match Schwab's Internet capacity.
In the health-care sector, Rolfe likes Merck & Co. Inc. (MRK). The
pharmaceutical company has introduced 14 new products since 1995 and has a
number of products under development.
One of the company's most promising drugs in Vioxx, a Cox-2 inhibitor for
treatment of osteoarthritis and pain. Earlier this month, the Food and Drug
Administration gave the drug a six-month priority review.
Merck, of Whitehouse Station, N.J., is expected to spend $2 billion on
research this year.
With baby boomers getting to the age where they have more discretionary
income, a recreational company that Rolfe thinks has a solid future is
motorcycle manufacturer Harley-Davidson Inc. (HDI) in Milwaukee.
Rolfe said he estimates that Harley will make 165,000 motorcycles this year,
up more than 11% from last year. He expects the company to have $200 million in
cash flow this year, double its 1998 amount.
"They have a simple business plan, and they execute it very well," he said.
One of Rolfe's favorite names is home-improvement retailer Home Depot Inc.
(HD). Rolfe said the company, based in Atlanta, has been able to exploit the
growth in the do-it-yourself home repair market with a combination of low
prices and wide selection. He said the company is looking to grow its square
footage between 20% and 22% annually.
(MORE) DOW JONES NEWS 01-20-99
12:19 PM
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