Wedgewood Partners, a St. Louis, Missouri-based investment firm, has released its 2019 Q3 investor letter – you can download a copy here.
The investment firm reported mixed results for the quarter, with composite returns largely flat at 0.39% for the quarter. Meanwhile, the benchmark Russell 1000 Growth Index and the S&P 500 Index gained 1.49% and 1.87%, respectively.
Wedgewood Partners wrote extensively on the stock that lost value for the firm in the quarter – Ulta Beauty (NASDAQ: ULTA) is one such stock. Ulta Beauty Inc., previously known as Ulta Salon, Cosmetics & Fragrance Inc., is an American chain of beauty stores in the United States, headquartered in Bolingbrook, Illinois.
The firm had the following to say on the stock:
"Ulta Beauty was our top detractor during the quarter, following bleak commentary during the Company's latest earnings call and management’s subsequent reduced annual guidance for top and bottom-line performance, noting a slowing U.S. makeup category. Based on what management is seeing in their own stores as well as information from market research firms, growth in both mass cosmetics and the higher-priced prestige cosmetics has steadily declined over the last couple of years. The broad category, not specific to Ulta stores, put up strong growth figures in 2016 and into 2017. Those growth figures have hence slowed nearly continuously to the point where the Company is seeing figures (as of their earnings report in late August) indicating that the U.S. cosmetics category had turned negative, pointing to a volatile and sudden change. This seemed to take everyone by surprise, Wedgewood included, as no other peer had indicated a market slowdown to this extent in reports provided only a month prior.
Ulta has a diverse offering of non-makeup categories in skin care, hair care, fragrance, and bath, which are all producing strong, healthy gains. However, cosmetics accounts for approximately 50% of Ulta’s business and is one of the highest-margin categories, especially the prestige category, which has experienced a stronger slow-down than mass over the past couple of years. Ulta has a slightly stronger weighting to prestige in their offering. For many years there was an influx of innovations around multiple makeup behaviors, application techniques, and formulas. More recently, these innovations have slowed, and while they are still very important to the overall category, they are no longer driving the incremental growth of which Ulta was once the beneficiary, and unfortunately, new entrants have not yet replicated that excitement and growth.
Despite the slowing category growth and recent volatility which saw a swing to negative, Ulta has continued to gain share in this very fragmented industry. At their Investor Day last year, management noted that Ulta holds an approximate 7% market share of the vast $87 billion U.S. beauty products market and specifically, an approximate 20% share in cosmetics. They attribute their ability to continue taking share not only to their diverse offerings across price points but also to their strong loyalty program, which is now 33 million members who represent a vast majority of annual revenue. However, we cannot ignore the slowing sales growth in both the industry and Ulta Beauty and the resulting near-term volatility in revenue. At the same time, we are cognizant the Company will continue with planned investment initiatives to position themselves for future growth, which will likely weigh on operating earnings for a period of time. Therefore, we trimmed our holding to a minimum weighting during the quarter. Management – and Wedgewood – remain confident in the long-term outlook of the business. As we neared the end of the quarter and shortly after the close, we saw reports of substantial insider buying in Company stock, a typically strong positive indicator. While the years of mid-teens same store sales growth are likely behind them, Ulta continues to report industry-leading comp sales growth as well as growing their new store footprint at a mid-single-digit growth rate."
[caption id="attachment_515846" align="aligncenter" width="750"] Copyright: bbtreesubmission / 123RF Stock Photo[/caption]
Our calculations also showed that ULTA isn’t among the 30 most popular stocks among hedge funds. ULTA was in 44 hedge funds’ portfolios at the end of June. There were 43 hedge funds in our database with ULTA positions at the end of the previous quarter.
"Edwards Lifesciences reported a strong acceleration in transcatheter aortic valve replacement (TAVR) sales, up 18% over last year, and helped drive the stock’s performance during the quarter. As we mentioned last quarter, Edwards reported positive clinical results for the “low-risk” population of TAVR patients, which we expect to generate more awareness about minimally invasive procedures, now indicated for nearly all populations that suffer from severe aortic stenosis. We believe Edwards’ addressable market has expanded significantly by about 50% due to this new data and augurs well for the next several quarters."
In addition, the investment management firm closed out its position in a number of firms, including Berkshire Hathaway Inc. Class A (NYSE: BRK.A). Commenting on the matter, the investor had the following to say to on the stock in its letter to investors:
"We sold our multi decade-long position during the third quarter after first trimming the position during the second quarter this year. We went into some detail in our change of thesis on Berkshire in our last Client Letter. In short, Berkshire’s industrially/economically sensitive businesses have slowed considerably over the course of 2019. Their utilities business (Berkshire Energy) needs continued acquisitions to restart utility growth. In addition, Warren Buffett’s cash hoard of +$125 billion continues to be a considerable impediment of growth, rather than our previous hard expectation of a valuable call option on opportunity in the hands of one of the most elite capital allocators extant. Further, the efficacy of putting this cash pile to work (plus +$25 billion in annual operating cash flows in Omaha) will be paramount if Berkshire Hathaway is to once again regain their former status as a meaningful grower over just baseline U.S. GDP growth. Thumb-sucking has not cut the Heinz mustard during the Great Bull Market of 2009 – 2019. The Great Bull could have been one helluva of an astounding career denouement for Messrs. Buffett and Munger.
In terms of errors of omission by Buffett & Co. over the past ten years, a few stocks stand out to us as considerable head scratcher errors that should have been in Buffett’s wheelhouse, and should have been huge winners for Berkshire shareholders. The first stocks are Mastercard and Visa. Buffett is incredibly well-versed in the payments processing industry given his half-century knowledge in longtime holding American Express. These two stocks should have been layups for Buffett. Mastercard and Visa have been massive wealth creators during the Great Bull Market.
Indeed, since the Great Bull started back on March 9, 2009, Berkshire Hathaway B stock is up a notable +269% through the recent ending 3rd quarter. Over the same time period, the S&P 500 Index is up +370%. Mastercard is up a stunning +1,521%. Visa is up a near-stunning +1,137%. Not all is lost, though. Buffett’s two CIO lieutenants currently own both stocks at a combined weight of just a thumb-sucking 1.50% of Berkshire’s current equity portfolio. The current combined weighting should be 15.00%!."
Disclosure: None. This article is originally published at Insider Monkey.