Wedgewood Partners Fourth Quarter 2016 Client Letter ... · PDF fileWedgewood Partners Fourth Quarter 2016 Client Letter ... We at Wedgewood Partners ... Berkshire Hathaway continues

WedgewoodPartnersFourthQuarter2016ClientLetter

ChangingoftheGuard

Manyshallberestoredthatnowarefallen,andmanyshallfallthatnowareinhonor.

Horace,ArsPoetica

ReviewandOutlookOurComposite(net-of-fees)igained+2.30%duringthe fourthquarterof2016.Thisgaincompares favorablywith thegainof+1.01%inourbenchmark, theRussell1000GrowthIndexandunfavorablyversustheS&P500Index’sgainof+3.82%.Forcalendar2016,ourComposite(net-of-fees)gainof+4.55%laggedthegainsinbothourbenchmark(+7.07%)andtheS&P500Index(11.96%).Top fourth quarter performance contributors included Berkshire Hathaway, CognizantTechnology, Charles Schwab, Schlumberger, and Tractor Supply. Absolute performancedetractors during the quarter included TreeHouse Foods, LKQ, Visa, Mead Johnson andStericycle.Top 2016 calendar performance contributors included Berkshire Hathaway, Qualcomm,Schlumberger, Apple, and Priceline. Absolute performance detractors during 2016includedStericycle,Perrigo,ExpressScripts,M&TBankandTreeHouseFoods.During the fourth quarter, we trimmed our positions in Express Scripts and CognizantTechnology.WeaddedtoourpositionsinTreeHouseFoods,Visa,andKraftHeinz.WesoldStericycle.WealsoinitiatednewpositionsinFastenalandTractorSupplyCompany.

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Changingof theGuard. 2016willgodownasaseminalyear,whensomuchunexpectedchange took place at an unprecedented pace. Who could have predicted Brexit, Italy’sconstitutional reform, and Trump’s nomination and presidential victory? Financialmarkets, asalways,discount suchgeopoliticalnewswith ferocious speed. 2016was theyearthatinterestratesbottomedasthe10-yearU.S.Treasuryfelltojust1.36%;corporateearningsbottomedafterafive-monthrecession;andoilbottomedafterOPECreverseditstwo-yearstrategyoffloodinganalreadyoversuppliedoilmarket,breathinglifebackintoaheavilydepressednon-OPECE&PindustryandheavilydepressedOPECfiscalbudgets.

Evenhigh-yielddebtsurprised,returningapproximately17%-almosttriplethereturnofinvestment-gradedebt.Theearly“fear”ofaTrumppresidencydramaticallyturnedintoabull-runof“animalspirits”aftertheelection.

1Portfoliocontributioncalculatedgrossoffees.Theholdingsidentifieddonotrepresentallofthesecuritiespurchased,sold,orrecommended.Pastperformancedoesnotguaranteefutureresults.Additionalcalculationinformationisavailableuponrequest.

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Thebiggestwinners in thestockmarketwere thosestocks thathadbeencrushed in thepastyear(s).Ourtopfourperformersin2016wereamongourworstperformersin2015,asallfourpostednegativereturnsin2015.2016willalsogodownasoneofthetougheryearsforactiveinvestorsinrecentmemory.Itwasanenvironmentinwhichitwasdifficultto deliver benchmark outperformance, and while the five-quarter earnings recessionended, out-sized earnings growthwas difficult to deliver formost of corporateAmerica.WallStreet isalwaysademandingmistresswhoshouts,“Showmethemoney!”nomattertheeconomicenvironment.In aworld starved for growth and yield, investors over the past year also continued toshout, “Send us the money!” The C-suite placated their respective shareholders bydistributing the lion’s share of earnings in the form of dividends and outsized sharebuybacks. Wall Street applauded heartily. Indeed, those companies that chose todistributethebulk, ifnotall,oftheirrespectiveearningssince2012havebeenrewardedquitehandsomelybyMr.Market.Specifically,ascalculatedbyStrategasResearchPartners,companiesthathaveengagedinsharerepurchaseshavebeenonawinningstreakthisentirebullmarket.Dividendpayershavebeenawinningstrategysince2011.Inaddition,historicQE-monetarypolicyhasalsorenderedadebtcost-of-capitaltailwindtothosepoorlyfinancedcompaniesnotseensincethecreditbubbleyearsof2006and2007.WeatWedgewoodPartnersphilosophicallyshout,“Reinvestthemoney!” Wehavealwayspreferred to invest in higher quality, less-indebted companies that reinvest the bulk ofearnings.Webelievethatsuchcap-ex/op-existhemother’smilkoffutureearningsgrowth.Companies,wherebythereinvestmentofearningshasbeenthepriorityoverdistributions,havesufferedintheperformancerankingssince2012,notablysoin2016.Andsohavewe.Also, insuchalow-growthenvironment,acommonC-suitestrategyisto“buygrowth”intheformofmergersandacquisitions.

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Lookingaheadto2017andbeyond,wemaybeatachangingoftheguardmomentintermsofMr. Market’s enthusiasm for the recently favored C-suite capital allocation strategies.According toLeuthold&Co., for the first timeever, corporateAmerica returnedover$1trillion dollars to shareholders (over a trailing 12-month period) in January 2016 in theformofdividendpayoutsandoutstandingsharerepurchases,exceedingthepriorcyclicalpeaksetin2008.Cashreturnedasapercentageofsalesbyindustrysectortellsasimilartale.Mostsectorsareclosinginonrespective2008peaks.

Lastly, and most disconcerting, is corporate America’s collective debt load, (again,accordingtoLeuthold&Co.)whichhasskyrocketedandisapproaching25-yearhighssetback in late 2007. Aggregate long-term debt has once again reached $6 trillion thissummer. Furthermore, long-termdebt issued by S&P 500 companies has increased by a

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none-too-small75%. Thedebtfordividend/buybackspigotcouldshutoffrapidlyevenifinterestratesdofallbacktosummer2016lows.(Theoffset,asitwere,isthatgenerationallowinterestrateshaveloweredtheburdentoservicemoredebt.)Combining the aforementioneduse of cash flowwith copious amounts of debt, themostcommonC-suitestrategytoexpendthiscapitalhasbeenforsharebuybacksanddividendpayments. Success in growing sales and incomehas been foundbybuying “growth” viamergersandaquisitions.Relatedly,rareisthecompanythathassuccessfullygrownsalesorincomeorganicallywhileissuingdebt.

Source:TheLeutholdGroup

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Evenaquickperusalofthetablebelowwillsurprisemostwiththeastonishingincreaseindebt in almost everymajor industry sector. A few noteworthy comments: The energysector’s ratioshavebeen inflatedby thedepressedstateof salesafter themostdire,24-monthindustrycorrectionindecades,andutilitycompanieshaveembarkedonlargerate-basedplantexpansioninrecentyears.Thenatureofinformationtechnologyhaschangeddramaticallyoverthepastdozenyears.Large, well-entrenched industry leaders may not have much growth inherent in theirbusinesses these days, but they generate cash at historically high levels. Debt fundeddividend payments and large-scale share buybacks have become the norm during thischeap-debterainIT.Health care, consumer staples, andevenconsumerdiscretionary companieshavebrokenthemoldintheircollectiveembraceofleveraginguptheirrespectivebalancesheetswithlong-termdebt. Theuseof thisdebt is to “buygrowth”viaM&A, andof course, to fundcapitalreturnstoshareholders.

Source:TheLeutholdGroup

We should note successful examples of the use of outsized debt by our own investedcompanies. ConsiderApple. Applegeneratesenoughcash($65billion inoperatingcashTTM) that even after spending $10billion inR&D in fiscal 2016, theCompany’s balancesheetliquiditygrewalmost$10billion,toover$250billion.Thistroveistrappedoverseasawaiting a change in U.S. repatriation laws - a potentially significant bullish event forshareholders. In the meantime, in order to return this cash back to shareholders, theCompanyhasissuedover$75billionindebt.Further, and often left unremarked byWall Street’s finest, is the rapid, and acceleratinggrowth inApple’sR&Dspendingover thepast fewyears. Clearly theCompanydoesnotneedtospend$10-$15billionperyeartosustaintheevolutionaryupgradestotheiPhone,iPad, Apple Watch and/or new video streaming services. Apple’s nascent automotiveprogramProjectTitanmaynotbeatallaboutcreatingacompleteautonomousdrivingcar(AppleCar),butratherthecreationofsoftwarethatmakesexistingcarssmarter–orevenautonomous.Nowthatisahuge,creativelydisruptiveopportunity.

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KraftHeinz is a rareexampleof a company thathas issued sizabledebtwith thegoalofincreasingsalesandearnings-particularlyearnings,inthecaseofKraftHeinz.Theunique,hard-to-copymanagementstyleof3G(entrepreneurial,zero-basebudgeting),coupledwithlow-cost debt, has proven to be quite a powerful combination for driving higherprofitabilitywellbeyondindustrypeers.

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TheGreatBullMarketof2009-2016Changingoftheguard?TheGreatBullMarketwilllikelycelebrateits8-yearbirthdaycomeMarch. Notonly is thisbullmarketoneof thegreatest in termsofcumulativegains,butalso in the remarkable consistency of its positive calendar year gains during its +7-yearduration.

Mr.Market’scollectiveexuberanceovertheprospectofaTrumpadministrationhasonceagain pushed valuations to historical extremes. By almost every relevant measure, the

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stockmarkethaspricedingoodtidings–perhapstoogood. P/E,EV/EBITDA,andglobalP/Emultiplesareatnose-bleedlevels.

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SinceTrump’selectionasthe45thpresident,theDowJonesIndustrialAverage(asofthiswriting) has posted 18 record-high closings, trumping (bad pun) even Ronald Reagan’selection honeymoon in 1980. In addition to Trump’s surprising victory, we argue thatequallyasimportantwastheGOP’scontinuedcontrolofCongress.Wearetypicallyfansoflegislative gridlock,which allows for amorepredictable backdrop againstwhichwe canexecuteourbottom-upprocess;however,theGOP’svariouspledgesforfiscalstimulushavehelpedrekindlecyclicalanimalspirits,withinvestorshopingitmightigniteuponanearlyadecades’ worth of unprecedented monetary stimulus. That said, in mid-December, theEuropean Central Bank extended its pledge to continue vacuuming up risk-free assets,expandingtheprogramtoastaggering$2.4trillion,whichwethinkcouldputalidondebt-issuedcostofcapital,atleastuntilweseemoreconcretetermsforU.S.fiscalstimulus.As for the stock market in 2017, Trump enters office with the headwinds of theaforementionedhistoricallystretchedstockmarketvaluations,aneconomicexpansionthatbeganlongagoinJuneof2009,andaFederalReservethathasbeguntighteningmonetarypolicy. Indeed,tothosewhosubscribetotheAtlantaFed’stheoryof“shadowtightening”viathesizeoftheFed’sbalancesheet,theFedactuallybegantighteningbackin2014.To-date,theycalculatethe“ShadowFedFundsRate”hasdefactotightenedbyasmuchas325basispoints. TheFederalReserve,morethanTrump’sfiscalorregulatoryinitiatives,andmoretoothantheprospectofasharprevivalofcorporateearningsgrowthwillmostlikelydrive the direction of the stockmarket in 2017. In our view, the unknown key for theeconomy, the valuation of stocks, plus the continued appetite for debt-based capitalallocationintheC-suite,is:atwhatleveldoestheriseininterestratesbitehardenough?ThepeakbiteintheFederalFundsRatein2000was6.5%.Thepeakbitein2007was5.25%.In today’s debt-ridden economy (government, corporate, and individual), will 2.50%,3.00%,or3.50%bethebitethatushersinachangingoftheguardinassetreturns?

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CompanyCommentariesBerkshireHathawayBerkshireHathaway continues to carry an outsizedweighting in portfolios – in fact, thestock continues to be one of our largest holdings.We believe the Companymaintains along-term competitive advantage, evidenced in its below-average cost of capital, whichshould become more valuable in an environment of both heightened equity marketvolatilityand/orhighercostofborrowing. 2016operatingresultswerequiteimpressivegiventheheadwindsinthebullmarket-laden,overcrowdedreinsurancebusiness,plusthestagnantgrowthatBurlingtonNorthern.Thestockdidenjoyapost-Trumpelectionpopofnearly15%.Mr.Market'searlyenthusiasmforTrump'sfiscalproposalsoflowercorporatetaxrates,ifenacted,wouldcertainlybenefitBerkshire'sbottomline. TheCompanycouldpotentially be a huge beneficiary ofmeaningfully lower corporate tax rates. If enacted,lowercorporatetaxrateswouldhaveanout-sizedimpactbyreducingBerkshire’sdeferredtaxliabilitybyboostingtheCompany’sbookvalue.TheCompanycurrentlyhasamassedamassive$65billiondeferredtaxliabilitythatBuffetthimselfhasequatedtoaninterest-freeloan from the U.S. government. If Trump, and the Republican controlled Congress aresuccessfulinloweringcorporatetaxratesto15%fromthecurrentstatutoryrateof35%,theCompany’sbookvaluecouldrisedoubledigits.Inaddition,giventheterrificyear-endrally in bank and financial stocks, the nice pop in the Company's multibillion-dollarholdings, including American Express, Bank of America, Goldman Sachs,M&T Bank, U.S.Bank,andWellsFargo.BankofAmericaandWellsFargoenjoyedoutsizedgainsduringthequarterof42%and25%,respectively.Berkshire'sbankandfinancialstockholdingshavenowreachedacumulativemarketvalueofover$57billion.

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FastenalFastenalisacompanywehavefollowedandadmiredformanyyears. TheCompanyisadistributorofmanufacturingandconstructionsupplies -generally consumablepartsandproducts such as fasteners (i.e., screws, nuts/bolts) and various items used in themaintenance, repair, and operations (MRO) of customers’ plants. The company hasestablishedadifferentiatedpositioninitsindustrybyinvestingheavilytogetitselfascloseaspossibletoagenerallysmaller, lessurbancustomerbasethanitscompetitors. This ismost evident in its extensive network of more than 2,500 branch locations, which thecompany effectively uses as selling anddistribution outposts to serve its customerbase.WecontrastthiswithFastenal’slargestcompetitor,Grainger,forexample,whichhasonly300-oddbranch locations (andshrinking)despitehaving twice the revenuesasFastenal.We believe this has led to a fairly healthy segmentation between the Company and itscompetitors:Fastenalhasspecializedinsmaller,geographicallydispersedclientswhoaremoreheavilyrelianton theCompany’s localdistributioncapabilities, salesexpertise,andsomewhatmorespecialized,locallytailoredproductlines;Graingerandothercompetitorsspecialize in larger, more urban clients who have more distribution and servicerequirements, so these distributors generally focus on more standardized products, inlargequantitiesatthelowestcost.Whenweobservethehealthy,andremarkablysteady,returns on investment across the major competitors in the space, we view this asconfirmation that the major players, for the most part, have managed to carve outprofitablesegmentsofanattractiveindustrywithouttrippingovereachother.Fastenal has extended its differentiation in recent years through three other initiativesdesigned to get closer to its customers. First, the Company has installed over 60,000vending machines in customers’ plants, in which they constantly replenish productscustomers use regularly in their manufacturing processes. Second, the Company hasacceleratedtheexpansionofitsOnsiteprogram,inwhichitbasicallyopensasmallFastenalstore within a larger customer’s plant. Fastenal staffs and stocks this mini-location,effectivelytakingcontrolofaportionofthecustomer’ssupplychain.ItisimportanttonotethatboththeVendingand(especially)OnsiteinitiativesfurtherintegratetheCompanyintoa customer’s operations, helping tomake these customers stickier. Third, Fastenal hasinvested in additional inventories over the past several quarters, while also shifting ahigherpercentageof its inventory from its distribution centers into its branch locations.This once again is designed to get Fastenal as close to its customers as possible - if theCompanyhas theproducts its customersneed, alreadywaiting in theirmarket, availableforsame-daydelivery,atanattractiveprice,thereisnoneedforthosecustomerstotaketheir business elsewhere,whether that be to a larger, out-of-market competitor such asGraingerortoanonlinecompetitorsuchasAmazon.Webecameincreasinglyinterestedinthestockaroundthemiddleoftheyear,aswesawFastenal’svaluationbeginto implyanaccelerateddecline in itsendmarkets,particularlyenergy and manufacturing. However, our research from our energy holdings helpedinform us on this score, as we see North American energy production approaching aninflection,whichshouldhelpreinvigoratemanufacturing-heavyenergyserviceandsupportindustries. We also noted that both presidential candidates were pitching large

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infrastructurespendingprojectswhichwouldbesupplementedbya federalhighwaybillpassedin2015-thefirstlong-termbillinovertenyearsafteraseriesofshort-termstop-gaps thatdidnotallowstates toplanany largeor long-termconstructionprojects–andcould begin to generate some demand in the near future as states begin to implementspendingplans. Thatsaid,withthestocktradingatornearpost-recession lowsonmostvaluationmetrics,wedidnotbelieveweneededanyofthesepotentialcatalyststoemergeinthenearfuture,butwewerehappytohavethepossibilitiesinfrontofus.Overall,overamultiyeartimeframe,webelieveFastenalshouldbeabletocontinuetogrowat an attractive pace for several years, particularly due to the Company’s continuousreinvestment and explicit focus on profitability. With the stock trading at valuationmultiples similar to the last recession, andwithkeyendmarkets alreadyhavingbeen inrecession for two years with signs of potential recovery emerging, we think Fastenalrepresentsanexcellentlong-terminvestmentopportunityforportfolios.CharlesSchwabCharlesSchwabwasatopperformerinthequarterasthecompanystandstobenefitfromthe continuednormalization ofU.S.monetarypolicy. Despite a single federal funds ratehike during calendar year 2016, market expectations for further rate hikes havedramaticallyriseninthefaceofpotentialfiscalstimulusandhigherinflationexpectations.Whileweunderstandthemarket’sdesiretodiscountthenear-term“embeddedoption”ofmoneymarket feewaiver relief at Schwab,we continue to invest in theCompany for itsindustry-leadingpretaxprofitmarginsandassetgatheringcapabilities,whichwethinkareabyproductoftheirconsistentproductivityinvestmentsmadeoverthepastfewdecades.We think this positions Schwab well in the increasingly commodified financial servicesindustry, as the Company’s low-costmodel and scale allows them to pass savings on toadvisors and clients in the form of competitively lower fees, in exchange formid-singledigitplatformassetgrowth.Combinedwithmodestratereliefandcontinuedproductivitygains,weexpectSchwabtocontinuepostingearningspersharegrowthinthemid-teens.StericycleWe liquidated Stericycle from portfolios after we determined that the Company'scompetitive advantage in its core regulated medical waste (RMW) business was not asrobustaswehadseenduringthepastfiveyearsofourholdingperiod.Priortotheerosionin the economics of their coreRMWbusiness,we remained optimistic about Stericycle’sbusiness.Despiterecentstumblesintheirnon-corehazardouswastebusinessandslowerthanexpectedintegrationofnewlyacquiredShred-it,theRMWbusinesscontinuedtoserveas the engine to double-digit growth in free cash flow. We previously believed thatStericycle'sunrivaledscalehadservedto insulate itsRMWprofitability fromcompetitivepressures, including customer push-back associated with consolidating end-markets, asmanyofStericycle’smostprofitablecustomers-particularlyindividualphysicianpractices

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- have been consolidated by managed care organizations over the past several years.However, over the past few quarters, management began disclosing that the long-termcontractsassociatedwiththesenewlyconsolidatedcustomerswerecomingupforrenewalat significantly lowerprices. It isnot clear touswhy theCompanygaveup thispricing,giventhatthemarkethasfewlarge-scalealternativestoStericycle.Sufficeittosay,thesecontracts are in place for several years (sometimes five years or more), and while theCompany can spend this time recovering economics through more cross selling, thisstrategy is unproven and potentially dilutive. As suchwe lost conviction in Stericycle’sabilitytodefenditsexcessprofitabilityinRMW,andsubsequentlyliquidatedourpositions.TreeHouseFoodsTreeHouse Foods was a relative detractor from performance during the quarter after aconfluence of a few unfortunate, though we think transient, events. The Companyunexpectedlymisseditsquarterlyearningsestimatesandreduced2016guidance,despitehaving had a few wins earlier in the year not long after closing the Private BrandsacquisitioninJanuary.TheCompanyreiterated,however,itslong-termaccretionguidanceforPrivateBrands. From the time themergerwas announced (late2015),wehad seenmultipleareaswherewethink this longer-termguidance isstillunderstated. Becauseofour belief in this cushion management built into their original guidance, we remaincomfortablethattheywillbeabletohittheirlong-termgrowthexpectations,despitetheseshorter-termissues.On the same day the Company announced its disappointing Q3, the company alsoannouncedthattheirCOO,ChrisSliva,wasleavingthecompany.HeturnedupasthenewCEOofasmallfoodcompanyafewdayslater.Fortunately-theonlybitofgoodnewsonthe day - Dennis Riordan, the retiring CFO, reversed his retirement on this news,announcingthathewouldstayonasPresident/COOforaslongashewasneeded.Themarkettookallofthisnewsbadly,combiningthepoorlytimedmanagementchangeswithwhatweviewasunrelatedshort-term issues inPrivateBrands, andconcluded thatthere were serious institutional issues with the company. We think we just had aconfluence of unfortunate events. After speaking with management, we remaincomfortablewith thedepthandbreadthof theCompany’sexecutive leadership,which isheavilysupplementedbytheengagementoftheirboardofdirectors.Wealsocontinuetobe quite optimistic about the long-term potential of the combined Private Brands andlegacyTreeHousebusinesses.Asthelargestmanufactureranddistributorofprivatelabelgroceryproducts in theU.S.,webelieveTreeHouse shouldbenefit from the secular shifttoward private label, particularly in highermargin natural and organic segments, whiledriving out costs in lower growth segments, through unmatched scale in bothmanufacturinganddistribution.Weremainoptimisticaboutthesignificantupsiderewardat TreeHouse, relative to diminished downside risks, and added to our positions onweaknessduringthequarter.

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TractorSupplyCompanyLikeFastenal,TractorSupplyCompanyisacompanywehavelongadmired.Managementhasexecutedadisciplinedretailingstrategywhere theyhavecarvedoutaniche, servingrurallandownerswithhigherthanaverageincomes.TheCompanyhasverydeliberatelypositioneditselftobedistinctfromitscompetitors,namelyHomeDepot,Lowe’s,and,toalesserextent,Wal-Mart,primarilybylocatingitselfinmorerurallocationsandfocusingonmerchandise that caters to themaintenanceneedsofa rural lifestyle, inaone-stopshopformat(i.e.all-terrainvehiclereplacementpartsandfeedforlivestockaspets).WethinktheCompany'sprofitabilityandvaluepropositionwillbeinsulatedovertimeasthey have made key tradeoffs to avoid competing with big box retailers, withoutnecessarilyimpairingreturns. Asanexample,wefoundevidencethatthecompany’srealestate strategy, on average, has been to simultaneously locate Tractor Supply Companystores further from “big box” competitors, while getting into more densely populatedmarkets.Meanwhile,theCompanyhasmanagedtolowerthebuild-outandrentalcostsoftheirnewstoresastheyhavecontinuedtoexpandthestorebaseaggressively, leadingtoimproved returns - something that is particularly difficult in the brick-and-mortar retailworld,wheretypicallynewstoreopeningsgeneratealowerlevelofsalesandprofitabilitythanmaturestores(naturallypressuringreturnoninvestmentasthecompanygrows).Weassume the Company’s continuing store base expansion, as well as a conservativeassumptiononsamestoresales,shouldenabletheCompanytogrowrevenuesinthemid-to-high single digits over the next several years, with earnings per share growth in thedoubledigits,drivenbyacombinationofflattomodestmarginexpansionaswellasstockbuybacks.Whenwepurchasedthestock,itwastradingatabout18XNTMearnings,nearafive-yearlow (and well below the nearly 30X seen a few years ago), a rarity in a market wherevaluations have been extended. The stock had been hit by a few issues in 2016. First,unseasonablewinterweathercausedashort-termblipinresultsearlyintheyear;weather,unfortunately, isarecurringrisk for thisandmostotherretailbusinesses,butwedonotviewoddweatherasalong-term,relativeissue.Laterintheyear,theCompanywashitbysalesweaknessintheirenergy-andagricultural-locatedgeographicmarkets.However,wethinkweareclosertotheendofamulti-yeardownturninthesemarkets,oratleastnearaninflectionpoint,butrecessionaryexpectationsfortheCompany’send-marketscontinueto be built into the stock. So with little risk from further adverse macroeconomicdevelopments,wewerepleasedthatwewerepresentedwithanopportunitytoestablishaposition in what we view to be a very high-quality company, generating excellent andstable or improving returns over time, with an above-market growth rate, all at ahistoricallycheapmultiple.VisaVisa'svaluationcameunderpressurefollowingtheelectionearlyNovemberasthemarketsawa rotationoutofhigher-multiple techand financial securities and intomore cyclical

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names. We used this opportunity to increase weightings across accounts as valuationlevelsbecamemoreattractive.Visa has consistently grown its revenue, EBITDA, and earnings double digits as it hasplayed a key role in facilitating commerce’smulti-decademove away from paper-basedtransactions. The Company effectively represents the collective economic bargainingpower ofmany of the United States’ and,more recently Europe’s, credit and debit cardissuers–particularlybanks.Visahastremendousscale incardtransactionprocessing,asthey facilitatedover$5.7 trillion increditanddebitvolumeacrossmorethan120billiontransactions, during their fiscal 2016 - well above 2015 levels. Going forward, we fullyexpecttoseethisgrowthtrajectorycontinue,withaddedhelpfromtheintegrationofVisaEuropewhich,aswe'vediscussedpreviously,shouldhelpdrivedoubledigitaccretion.ConclusionWedgewood is pleased to announce the promotion of Sheila Kilper to Chief ComplianceOfficer,succeedingBillThomas,who is focusedonhisroleasPresident. SheilahasbeenemployedwithWedgewoodsince1992andhasbeenacomplianceofficerat the firmforthe last 15 years, where she has been key in creating and implementingWedgewood’scompliance policies and procedures. Her previous role at the firm was as a registeredrepresentative. Sheila earnedanaccountingdegree fromWebsterUniversity inSt. Louis.Prior to her time atWedgewood, sheworked atMark Twain Bank. Sheila has been anincredibleresourceforthefirmoverthelast25yearsandweareexcitedtohaveheratthehelmoftheComplianceDepartment.WehopetheseLettersgiveyousomeaddedinsightintoourportfoliostrategyandprocess.On behalf of Wedgewood Partners, we thank you for your confidence and continuedinterest. As always, please do not hesitate to contact us if you have any questions orcommentsaboutanythingwehavewritteninourLetters.

January,2017DavidA.Rolfe,CFAMichaelX.Quigley,CFAChiefInvestmentOfficerSeniorPortfolioManagerMorganL.Koenig,CFAChristopherT.Jersan,CFA PortfolioManagerResearchAnalyst

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The information and statistical data contained herein have been obtained fromsources, which we believe to be reliable, but in no way are warranted by us toaccuracyorcompleteness. Wedonotundertake toadviseyouas toanychange infiguresorourviews.This isnota solicitationofanyorder tobuyor sell. We,ouraffiliates and any officer, director or stockholder or anymember of their families,mayhaveapositioninandmayfromtimetotimepurchaseorsellanyoftheabovementionedorrelatedsecurities.Pastresultsarenoguaranteeoffutureresults.This report includes candid statements and observations regarding investmentstrategies, individual securities, and economic and market conditions; however,there isnoguarantee that these statements,opinionsor forecastswillprove tobecorrect. These comments may also include the expression of opinions that arespeculativeinnatureandshouldnotbereliedonasstatementsoffact.WedgewoodPartnersiscommittedtocommunicatingwithourinvestmentpartnersascandidlyaspossiblebecausewebelieveourinvestorsbenefitfromunderstandingour investment philosophy, investment process, stock selection methodology andinvestor temperament. Our views and opinions include “forward-lookingstatements”whichmayormaynotbeaccurateoverthelongterm.Forward-lookingstatementscanbe identifiedbywords like “believe,” “think,” “expect,” “anticipate,”or similar expressions. You should not place undue reliance on forward-lookingstatements, which are current as of the date of this report. We disclaim anyobligationtoupdateoralteranyforward-lookingstatements,whetherasaresultofnewinformation,futureeventsorotherwise.Whilewebelievewehaveareasonablebasisforourappraisalsandwehaveconfidenceinouropinions,actualresultsmaydiffermateriallyfromthoseweanticipate.The information provided in this material should not be considered arecommendationtobuy,sellorholdanyparticularsecurityReturnsarepresentednetoffeesandincludethereinvestmentofallincome.“Net(Actual)”returnsarecalculatedusingactualmanagementfeesandarereducedbyallfeesandtransactioncostsincurred.