WedgewoodPartners2ndQuarter2016ClientLetter

Brexit:TheVoteHeard‘RoundTheWorld

"Ithinkalotofthemarketreactionislessaboutthefinancialimpactandmoreaboutpopulismandwhatitmeansfortheliberaleconomicorder.TheBrexitvotereflectsadeepdistrustofthebenefitsoftheglobaleconomicsystemamongawideswathofvotersinEuropeandtheUnitedStates,andabroadlyheldviewthatgovernmentinstitutions–whetherinWashingtonorBrussels–arecalcifyinganddon'tworkwell.Bothoftheseforceshavealotofwindattheir

back."

GlennHubbard,DeanofColumbiaBusinessSchool

“Thepeoplehavespoken…thebastards!”

DickTuck,PoliticalConsultant1966ReviewandOutlookOur Composite (net-of-fees) i declined -1.82% during the second quarter of2016.Thisdecline comparesunfavorably to thegainof+.61% inourbenchmark,theRussell1000GrowthIndexandtheS&P500Index’sgainof+2.46%.TopperformancecontributorsincludedKraftHeinz,ExpressScripts,Schlumberger,and Qualcomm. Absolute performance detractors during the quarter includedApple,Perrigo,Stericycle,andCognizant.

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

2

During the quarter, we trimmed our positions in Qualcomm and Express Scripts.Wesold sharesofPerrigoand initiatednewpositions inTJXCompaniesandRossStores.Kraft Heinz Company was a top performer during the quarter. First quarteradjustedEBITDAgrew21%yearoveryearandearningspersharegrew38%yearoveryear, as theCompany’s consolidatedadjustedEBITDAmargins reached30%,upastaggering600basispointsfromtheyearagoperiod.Weestimatethatthesemarginsarebest-in-class for the large-cap foodproducts sub-industry, andnearlytwicethemedian.Inourview,thevastmajorityoflargecapitalizationfoodproductcompetitors,despitepossessinggreatbrands,areimproperlyincentivized,andarecontent to generate revenuesat theexpenseofprofits and long-termshareholderreturns.Incontrast,wecontinuetobeimpressedbyKraftHeinz’snewmanagementculture,as recentlybrought tobearby3GCapitalandBerkshireHathaway,whichaggressively alignsmanagement and employee incentiveswith shareholders. Forexample,ratherthansimplycuttingoverheadcosts,theCompanyisintentlyfocusedon eliminating financial promotions for retailers (that frequently resulted inprofitless revenues) and then reinvesting the savings into alternative productsupport, such as new products, form factors, and ad campaigns. We are seeingnascent evidence that this profit-focused strategy can be successfully executedwithout sacrificing revenue growth, as the Company posted low single-digitconstant-currencyorganicrevenuegrowth.AsKraftHeinzcontinuesitsaggressivenew approach of reinvestment, we expect organic revenue growth to accelerate,alongwithcontinuedmarginexpansion.ExpressScriptswasatopcontributorduringthequarter.Thestockrecoveredsomeof the poor performance from the first quarter after Anthemmanagement notedthat,despitefilingalawsuitoverExpressScripts’spricing,theybelievedanyrulingonthelawsuitwouldtakeseveralyearsandwerestillopentonegotiations.ExpressScriptsisthesole,independentpharmacybenefitsmanager(PBM),whichwethinkis key for maintaining their alignment with customers. We continue to expectExpress Scripts todrivemid-to-high single-digit EBITDAgrowthusing its scale tonegotiate better pricing with drug manufacturers and service providers, whileincreasingpatientadherence.Wethinkearningspersharecancontinuetogrowata double-digit rate as shares are repurchased atwhat, in our view, are attractivevaluations. That said, as shares rallied from their previous lows,we reduced thestock'sweightingtobetterreflecttherisk/rewardofExpressScripts’sgrowthandvaluation.Schlumberger contributed .42% to composite performance during the quarter.Despite the dramatic decline in exploration and production (E&P) capex budgetsduring the past 18 months, Schlumberger continues to reinforce its competitivepositioning relative to other integrated oil service companies. With one of thelargest,mosthighly-skilledupstreamworkforcesintheprivatesector,andnearly$7billionincumulativeresearchanddevelopmentspentduringthepreviousup-cycle,

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wethinkSchlumbergerispoisedtotakeanincreasedbudgetshareofE&Pspendingas the Company’s customers outsource more services to improve returns in a“lower-for-longer” oil price environment. We expect Schlumberger’s earnings tosignificantly rebound in 2017, driven by increased market share as well as thereleaseofovertwoyearsofpent-upE&Pspending.Perrigodetracted–1.04%fromthecomposite'sabsoluteperformance.Asurprisingdecline in Perrigo’s normally staid generic prescription (Rx) business had thecompany reduce full-year guidance by almost 15% in a late April pre-earningsrelease.Inaddition,theCompanydisclosedfurtherwrite-downsandorganizationalchanges in their nascent Branded Consumer Health (BCH) segment. Last, theCompany announced the abrupt exit of long-time CEO, Joe Papa, who joinedembattled Valeant Pharmaceutical. Immediately after this slew of data points,wedecideditprudenttoliquidateourPerrigostake.Stericyclewas also a top detractor during the second quarter. Stericycle’s early-year bounce reversed itself and then some after management lowered forwardearnings expectations for the second time in three quarters. Management notedfurther weakness in their small (~3% of revenues, we estimate), industrialhazardouswastebusiness,andpushedthetimelineofabout$20millionofexpectedsynergiesfromtheirnewlyacquireddocumentdestructionbusinessintonextyear.Takenalone,wethinkthestock’s-21%reactionfollowingtheearningsreleasewasanoverreaction.WethinkStericycle’scorebusinessofregulatedwastemanagementcontinuestobeveryattractive, throwingoffstrong freecash flow,withhistoricallysteadyresults.TheCompanyhas consistently reinvested these cash flows into smaller, regulatedwastemanagementacquisitions,aswellasenteringnewverticals.Securedocumentdestruction isarelativelynewvertical fortheCompany,butwethinkthedemandcharacteristics (driven by regulatory requirements) and hub-and-spoke collectionanddisposalmodelshouldfitwelloverthelongterm.Whilemanagementnotedalonger than expected timeline for converting on-site processing into off-siteprocessing (similar to the way that medical waste is handled), we expect theCompany will be successful in this conversion. As for the Company’s industrialhazardouswastebusiness,ithasproventobehighlycyclical. However,weexpectthebenefitsoftheCompany’soverallhazardouswasteplatform(acquiredin2014)tomorethanoutweightherisks,asweestimatethatretailandmedicalhazardouswastehavegrowntoover5%ofrevenues,fromclosetozeroin2014–morethanoffsetting industrial waste declines. So while we understand investors’ concernsovertheCompany’snear-termearningsdisappointments,wecontinuetobepatientbecause we think Stericycle’s long-term opportunity for double-digit growth isintactasreturnsonreinvestmenttakehold.Apple has been a significant underperformer not only during the recent secondquarter(-11.8%),butalsofornearlyayearnow. Thestockhasfallenabout-28%onanabsolutebasis,fromitshighsetbackonJuly20,2015.Thisisthesecondtime

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thatthestockhasbeenputthroughthewringersincelate2012onfearsof“peak”iPhone growth and the concomitant lack of innovation out of the skunkworks inCupertino.GiventhesurgeofsalesoftheiPhone6in2015(pentupdemandforalarger iPhone, plus significant demand from China), we are not surprised by theweakeryear-over-yearearningscomparisons.The Apple stock advance-and-decline narrative has been pretty straightforwardover the past half-dozen years. Given the consented narrative that Apple is “TheiPhoneCompany” – andnothingbuttheiPhone–whenforwardanalystestimatesofiPhonesales increase, thestocktypicallyadvances. Whenestimatesarebeingcut,well, thestock typicallydeclines,also. Mr.Market really is thatbinaryonApple’sstockpricemovements.Wewouldargue,too,thatMr.Marketisquiteobtusewhenit comes to the totality of Apple. Everything else that a rational investor wouldconsider in accessingApple as an investment is literally put in a vacuumwhen itcomes to the stock. Valuation seems to matter not a wit. By any traditionalvaluation measure, both absolute and relative to other technology hardwarecompanies,Apple’sstock,inourview,haslongbeencheap–butitgetscheaperstillon estimate cuts. In fact,wewould argue that Apple’s stock is currently valued(6.5XFCFex-cash)2asiftoassumethattheCompany’sbusinessprospectsarelittlebetterthanacoalminein10-yearrun-offmode.

U.S

. IT

Har

dwar

eMay 18, 2016

A.M. (Toni) Sacconaghi, Jr. (Senior Analyst) • sacconaghi@bernstein.com • +1-212-407-5843

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Exhibit 3IT Hardware: Secular challenges eventually take hold

Source: Gartner, IDC, Bernstein estimates and analysis. Logos from company filings

Exhibit 4IT Hardware Comparables: Valuation on P/FE

Source: Capital IQ data, Bernstein analysis

# of Vendors With Combined 70% Market Share

6

Average GM % 13%

ASP $641

Revenue, $M $185,279

Fallen Handset VendorsPCs in 1994

PCs in 2015

# of Vendors With Combined 70% Market Share

50

Average GM % 23%

ASP $1,864

Revenue, $M $88,278

Market Cap (US$B)

1 Based on latest market cap or sale price. Motorola based on sale of Motorola Mobility as of January 2016

Current/Peak Sale1

$125 $3

$79 $4

$270 $38

$37 $2

$209 $156

7.1x 7.8x 8.3x

10.3x 11.5x

14.6x

HPQ AAPL ex Cash HPE NTAP FIT EMC

�#$�&����)�!'% (��'%��#�������������&���������������������� ������#"�����'!�����

2ThomsonReuters

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Source: Standard & Poor’s

Here are a few elements of the superiority – andwewould argue, rarity – of theCompany’s business model via their platform trifecta of hardware, software andservices that should matter to investors: iPhone user base estimated at +450million.Smartphoneindustrygrossprofittakeofapproximately95%.Aninstalledecosystem base of over +1 billion sticky users. 13 million active App Storedevelopers. 130 billion downloaded Apps. Relatedly, software services grossrevenuebusinessisatanannuity-likerun-rateof$40billion–withprofitmarginsgreater than Company average. Company operatingmargins of 30%. Connectedsoftware platforms that include iOS, MacOS andWatch OS. The Company’s nearfanaticcommitmenttouserprivacy.AppleWatchunitsalesof11-13millionsincelaunch.OverthepastfourcalendaryearstheCompanyhasgeneratednearly$216billion in free cash flow, including $55 billion over the past four quarters. $250billion in balance sheet liquidity. Tens of billions of stock buybacks, in our view,belowintrinsicvalue.

7/3/16, 3:03 PMBMO calculates iPhone installed base, May 23rd, 2016. | Flickr

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It couldbeargued thatApple’sonly significant competitor is itself. Sure,AndroidvendorssuchasSamsung,Huawei,Oppo,andXiaomi,arecompetitors inthateachdoes sell high-end smartphones, particularly to first-time smartphone buyers.

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However,it'salsothecasethatonceoneexperiencesthedifferentiatednatureofatruehigh-endsmartphone,manyof thoseAndroidcustomersdo find theirway toApple forasignificantlybetteruserecosystem. Atthis juncture, theconsensusonApple is that the iPhone 7 will be a boring upgrade and thus a flop. Again, thecurrent valuation of the stock implies that Apple is once again a permanentlyimpaired growth company. Given that Apple is our second largest position, wecertainlydon’tsharesuchdireviews.

BrexitJune23rd,2016willgodownasoneonthemostpoliticallyhistoricdaysforEnglandandEuropesincetheendofWorldWarII–politically,thusfar.ThewinningBrexitvotefortheLeavecampaigntoexittheEuropeanUnionhassentshockwavesacrossglobal financial markets. The profundity and consequences of the Brexit vote –economic, financial, andpolitical – are just now in their infancy. The unintendedconsequenceswill likely be as severe in themonths and years ahead. TheBrexitvotewas – for just the first 48hours – an earthquake inmagnitudeof 8.0 on theRichterscale.Theimmediatevisibledamagewasfinancial.AttheepicenteroftheBrexitquake,theBritishpoundmadea6-monthhighandasix-monthlowoveraneight-hourtimeframe,finallycrashingto1985lows.BothU.K.andotherEuropeanbank sharesdeclined sharply – all fromnearbearmarket,multi-year lowsbeforethevote.Over$3trillioninglobalpaperwealthevaporatedinthefirsttwotradingdays.Aglobalflighttosafety,plustheimmediatefearsofaU.K.andPan-Europeanrecessionhavesentsovereignbondyieldscrashing.The10-yearU.K.Giltyieldhasfallentojust.96%.The10-yearGermanBundyieldhasgonenegativeto-.13%.(Ofnote, the30-yearGermanBundyields just .36%. Maybe“free”moneydoesexist.)The10-yearU.S.Treasuryhasfallentoarecordlow,1.37%.Inaworldstarvedforyield–andnowsafetyandcertainty–acrushofU.S.bondbuyerscouldeasilypushthe U.S. 10-year to 1.00%. The entire yield curve in Switzerland now sportsnegative interest rates. Post-Brexit, nearly $1 trillion of sovereign debt has beenadded to the roster of negative interest rates. Theword “bubble,” in our view, isthrownaroundmuchtooofteninacavaliermannerbyfinancialpundits.Thatsaid,40-year Japanese bonds (JGB) have gained +50% year-to-date (+77% in U.S.dollars).

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Source:J.P.Morgan

TheU.S.stockmarketofcoursedidnotgounscathed.Theimmediatereactioninthefirst two trading days post-Brexit was to sell those companies with significantbusiness line exposure to the U.K. and Europe, notably exposure to older, moreWestern E.U. countries – including those companies whose repatriated earningswere unduly exposed to a renewed increase in the U.S. dollar. “Sell now; askquestionslater”seemedtobetheoperativestrategy. Duringthosefirsttwoknee-jerktradingdays,afewofourportfolioholdingsweretorchedinthesellingdeluge.Withinourportfolioof19stocks,onlythreeofourholdingshavezeroexposuretothe U.K. or E.U. – Charles Schwab, Express Scripts and Ross Stores. Our singularholdingwithsignificantexposuretotheU.K.isLKQ.OtherholdingswithmeaningfulexposuretotheU.K. includeVeriskAnalytics,PayPal,StericycleandSchlumberger.Thoseholdingswithmeaningful exposure to theE.U. includeThePricelineGroup,Core Labs, LKQ, PayPal, Qualcomm, Stericycle and Schlumberger. If the first twotrading days were panic induced, the trading since has been nothing short of

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euphoric. Stock and bond prices have ripped to the upside. All it took was thepromiseofmore“helicoptermoney”fromtheEuropeanCentralBank.

Source:WSJ

Investors have been contemplating the impact and import of the world’s centralbank Quantitative Easing monetary policies over the past few years. The linkbetweentheastonishingballooningoftheFederal’sReserve’sbalancesheetandtheGreatBullMarketof2009-2016hasbeenas tightasever. Recall that inour firstquarter2015ClientLetterwerecognized the trulyhistoricgainsof theGreatBullMarketas it celebrated its6thanniversary. Specifically, theGreatBullMarkethadtripledinjustsixshortyears–gainsrivaledonlybythegreatbullmarketsendingin1929and2000.Ifinvestorsarewonderingwhythestockmarkethasnotmadeanymeaningful advances (ormeaningful corrections) since early 2015, oneneedonlyrefer to thegraphicbelow. Toparaphrase the famousKeynesianquotebyMiltonFriedman(alsoattributedtoRichardNixon),“Weareallcentralbankersnow.”

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Andifweallareindeedcentralbankersnow,perhapsweneedlooknofurtherforfuture guidance than from our own Wizard of Banking Oz, Chair of the FederalReserve Janet Yellen. We offer caution on this score, so be careful before pullingback theOz curtain. According toDavidRosenberg fromGluskinSheff, FedChairYellenhasusedtheword“uncertainty”39timesinherlastfourpublicforums.Investorshavenowenteredthe“unthinkable”withBrexit. Whathas the financialworldwroughtwith40%of theworld’s sovereigndebt at negative interest rates,plus$10 trillionon thebalance sheetsof centralbankers? Consider that aminusfractionalrateisthefunctionalequivalentofastoragefeeforalargehoardofcash.

Source:BreakingBad,AMC

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Thechaseforyieldhasbeenarewardingstrategyoverthepast fewyears. Utilitystocksandhigher-yieldingconsumerstaplesstockshavebeenreferredto,rightfullyso, as bond proxies. However, given the ardent chase for yield, such stocks nowsportvaluationsnormallyunheardofonforward2017estimates–andeven2018estimates.Furthermore,thesestocksarenowtradinglockstepasiftheywerelongduration fixed income securities. Indeed, these stocks have largely led theperformancederbyoverthepastfewyears.Considerthatutilitystockshavegainedasmuchas+30%overthepast12monthsalone;inotherwords,thesestockshavegained5-6years’worthofannualdividendpaymentsinjust12shortmonths.Forthoseofuswhobelievethatvaluationmatters,wehavebeendulyhumbledbytheoutperformance of dividend-based strategies and other “low-volatility” strategiesoverthepastfewyears.

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Speakingof“low-volatility”investmentstrategies,theflatteningoftheFed’sbalancesheet,inadditiontothelikelihoodoflittlesubstantialchangeintheFed’smonetarypolicyhasbeenlikeanepiduraltoreduceanysustainedoutbreakofinvestorpain.Indeed, the lastquarter inwhich theS&P500 Indexdeclinedmore the -10%wasalmostfiveyearsagoduringthethirdquarterof2011whentheS&P500Indexfell-14%. TheFed’spalliativemonetarypolicyhasbeen so effectiveover thepast4+yearsthattheworstquarterlydeclinesince2011wasameager-6.4%registeredinthethirdquarterlastyear.

Alas,onWallStreet,nothingsucceeds likerecentsuccess. Someskepticsmaycallthisbyanothername–performancechasing.Bethatasitmay,moneyisflockingtolow-volatilitystrategiesindroves,valuationsbedamned.

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Source: Ritholtz Wealth

So, what does the future hold, post-Brexit? Our Letters are not the venue forpersonalpolitics.Werightfullyconfessthatwehavenosingularorcollectiveedgewhen it comes to including political forecasts into our investment process. Thatsaid,we have no excuse for not beingminimally observant of any future politicalmachinations if such politics render an observant risk to any of our portfolioholdings.Gametheorists,marketandpoliticalpontificators(mostlyoftheMonday-

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morning quarterbacking ilk – and, of course, the plethora of central bank self-anointedmandarinswhoareasmediaravenousasaKardashian)arehavingafieldday so far with endless prognostications enveloped by Catch-22s, PrisonerDilemmasandHobsonChoices.Political,economic,andmarketscenariosabound.BritainhasbeenareluctantparticipantandfriendofBrusselssincethe1951Treatyof Paris. Britain finally entered the European community in 1973. The 1992MaastrichtTreatytowidentheE.U.tosharesocial,foreignandjusticepoliciestorethe Tory Party apart. David Cameron’s campaign promise in 2013 to hold areferendum vote set the stage and opened a Pandora’s box for the unexpectedoutcome of Brexit. The Leavemovementwas strongest in England. The RemaincampinScotlandandNorthernIrelandwasn’tstrongenough.Brexit isanon-bindingreferendum,butasfarastheE.U.ParliamentinBrusselsisconcerned,Britainhasflownthecoop.Andspeakingofcoopsandcoups,recallthecoup-like treatment of Greece when they turned over de facto control of theireconomic policy to Brussels in the summer of 2015 for a 50 billion Euro bailout.PrimeMinister Cameron had until Christmas to activate Article 50 of the LisbonTreaty to start the two-year clock of exit negotiations with Brussels, but hisimmediateresignationwill leavethatdecisiontohissuccessor. (OfcriticalnoteinArticle50: 27E.U. countriesvoteon theU.K.’sdeparture. Britaindoesnotvote.)Willthecurrencymarketstoleratewaitingsixmonths?OnceArticle50isactivated,eventsmaymoveshockinglyfast.Inaddition,willBrusselsmakeanotherexampleoutoftheU.K.tostaveoffmoreE.Udefections?Brusselsisthe1927Yankees.Theirlineup of lawyers has had 70 years of batting practice inwriting treaties, signingtradenegotiations,fixingbailoutsandaccessions,and,well–makingandbreakingnations.TheU.K.maynothaveenoughtradenegotiatorstofilladugout.Brexitcouldwellbea leading indicator. Exitreferendumsarebeingdemanded inFrance by Marine Le Pen, by the Dutch Party for Freedom in the Netherlands(Nexit),by theFiveStarMovement in Italyand inDenmark,Slovakia,AustriaandHungary. SinnFeinhas called fora referendumonunitingNorthern Irelandwiththerestof Ireland. DoesLondonwanttobe independent? DoesScotlandwanttosecedefromtheU.K.,withdemandsfortheirowncurrencytoo? Perhapsthebestindicator for thosewhobelieve thatBrexit ismore than justpolitical andmaybeEurope’s“Lehmanmoment”needonlywatchtheactionsofDeutscheBank.(WatchboththecrippledpairoftheRoyalBankofScotlandandItaly'sMontePaschi,too.)DeutscheBankisthelargestbankinGermany,withmorethan100,000employeesand $1.8 trillion of assets and $64 trillion book of derivatives – but a marketcapitalization of just $20 billion. Note, Germany’s GDP is $3.9 trillion, and theEurozone’sGDPis$13.2trillion.

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Intermsofthereal(orperceived)risksinourinvestedcompanieswithexposuretotheU.K.andtheE.U.,thebiggestriskspost-Brexitarebotheconomicrecessionandlocal currencyvolatility. Recession risk seemshigher in theU.K. than throughoutthevariousE.U.countrymembers. ConsiderLKQandPriceline. LKQ isalmostallaftermarket automotive parts in the U.K. and E.U., which is a fairly defensiveindustry. Thetravel industrymayexhibitmoredefensivequalities,as travel isakey cultural attribute across the populace of theU.K. andE.U. If, post-Brexit, thefriction between hotel and resort vacation owners and vacationers increases,Priceline, in our view, possesses a unique value proposition to both parties bylowering such potential friction. Consider too the potential offset of the falling(crashing?)U.K.andE.U.currencieswhichhavemadetravelrarelycheapertosuchdestinations.Asalways,cashisalwaysashock-absorberonanabsolutebasiswhenvaluationsskyrocketinthecurrentQE-negativedebt-investingenvironment.WearepoisedtoquicklyputittoworkaswedidlastAugustandthisFebruarywhen(notif)downsidevolatilityrearsitsopportunistichead.Asweenterthelonghotdaysofsummer,weremainmindfulthatmarketvaluationsremain historically stretched. Even in the current challenging investingenvironment we continue to execute our strategy of investing in competitivelyadvantaged growth companies at attractive valuations. We estimate that theforward earnings growth rate of our portfolio of companies is 13.7%, valued at atwelvemonth forwardP/Eof19X3. ThebenchmarkRussell1000GrowthIndex'srelatedmetricsare10.2%and24X4,respectively.

3 Thomson Reuters 4 FTSE Russell

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Company CommentariesTJX Companies

During the quarter, we purchased shares of TJX Companies (TJX). As anexceptionally profitable “off-price” retailer, we think TJX has a substantiallydifferentanddurablevaluepropositioncomparedtotraditionalretailers. While itmight soundobvious,webelieve that it is less than fullyunderstood that thevastmajority of TJX’s highly discounted inventory can be found at many othermainstreamretail locations, albeit at full price. We think it isTJX’sdifferentiatedvaluechainthatallowsthemtonegotiatehighlyfavorableeconomicswithbrandedretail vendors,with those savings passed on to TJX customers. For instance, TJXbuys thevastmajorityof its inventory fromretail vendorswhile in season ratherthan months or quarters in advance. TJX stores and distribution are set up toquickly get this inventory in front of consumers - within weeks or even days ofpurchase-byhavingveryflexiblein-storecapabilities(i.e.fourwallswithnofixeddisplays and many movable racks), as well as having a rigorous and disciplineddiscounting regimen to keep inventory moving. While we do not think vendorsparticularly enjoy the concept of their products selling at steep discounts, theyneverthelessvalueworkingwithTJX,astheCompanyrepresentsawaytomonetizechronic, excess inventory. Further, we have found that TJX typically purchasesmuchshallowerlevelsofinventorycomparedtoatypicalretailer,sothereislimitedquantity of any single stock keeping unit (SKU) at each of the Company’s 3,600stores.In our opinion, the considerable value proposition that results fromTJX’s vendorand distribution investments is a difficult-to-replicate, differentiated shoppingexperience. First, we find that TJX’s SKU “sprawl,” when combined with highinventory turnover and largediscounts, compels shoppers to return frequently tokeeptrackofthequicklychanginginventory–boostingtraffic–whileverylimitedavailability of any single item drives a “fear of missing out” and/or a scarcity

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premium – boosting conversion rates. We also note TJX’s demographic tends toskew frommiddle income to high income, which we think is a byproduct of theCompany’s more fashion-oriented product sourcing from well-known affordableluxury,andsometimesluxurybrands.Over the past roughly 40 years, TJX has replicated its fashion forward, off-priceretail model across a few different concepts and cultural borders. We think theCompany’s rigorous, long-term, cross-training of its “buyers” – employees whomaintainandfacilitatevendorrelationshipsandpurchasing–aswellastheirintra-companyknowledgesharing,areparamountto futuresuccessastheyexpandintonewmarkets.Currentgrowthinitiativesincludegrowingtheexistingstorebaseby50%, in addition to expanding into new markets and geographies. We thinkmanagement'splan togrowrevenues30%, in addition toexpandingmerchandisemargins,whilerepurchasingsharesatattractiveabsolutevaluationsshouldleadtodouble-digitEPSgrowthoverthenextseveralyears. RossStoresWe also purchased shares of Ross Stores during the quarter. Ross is the otheruniquely profitable off-price retailer, with nearly 1500 locations in 34 US states.LikeTJX,we thinkRoss’svalue chain is tailored todelivera “more for less”valueproposition for its customers. However, unlike TJX, Ross skews to amuchmoremoderateincomebuyerwhoislookingtofind“value”morethanfashion. Wefindevidence that Ross’s catering to this demographic requires substantially differentinvestmentandoperationalactivities.Forinstance,nearlyhalfofRoss’sinventoryis“packaway” inventory, which is typicallymore fashion-orientedmerchandise thatwaspurchasedfromvendorsandkeptinstorage,tobedeployedtostorefloorsatalater date (sometimes the following season, but rarelymore than a year). In themeantime, the “flow” thatmakesupmostofRoss’s turnover consistsof lesswell-knownfashionbrandsbutatpricepointsthatstillrepresentgreatvaluerelativetofull-price retailers. In contrast, we do not think TJX has a meaningful packawaystrategy,insteadtailoringtheirmerchandiseflowtobefashion-orientedmost,ifnotall, of the time. Further, Ross operates a very moderate priced concept, DD’sDiscount,with average unit retail (i.e., the price of an item at checkout) closer todollar stores,which is about half the price of our estimate for TJX’s average unitretail.WeexpectRosstocontinueinvestingandexpandingitscoreRossStoresconceptsand DD’s Discount stores across the U.S., as well as eventually enter intointernationalmarkets,with room to double their existing footprint. Alongwith amulti-decade history of routinely positive comparable store sales, we expect thatRoss’s growing footprint should lead to healthy high-single-digit revenue growth,whilemarginexpansionandbuybackshelpdrivemid-teenEPSgrowth.

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PerrigoDuring the quarter, a surprising decline in Perrigo’s normally staid genericprescription (Rx) business had the Company reduce full-year guidance by almost15%inalate-Aprilpre-earningsrelease.Inaddition,theCompanydisclosedfurtherwrite-downsandorganizationalchangesintheirnascentBrandedConsumerHealth(BCH)segment.Last,theCompanyannouncedtheabruptexitoflong-timeCEO,JoePapa,whojoinedembattledValeantPharmaceutical.Immediatelyafterthisslewofdisconcertingdatapoints,wedecideditprudenttoliquidateourPerrigostake.We think that, at its core, Perrigo’s U.S. private label over-the-counter (OTC)business is intrinsically attractive, with nearly 70%market share and long-tailedrevenuestreamssimilartothatofaconsumerstaple.Private-labelOTCwasabout50% of the Company’s calendar 2015 revenue, and nearly 40% of consolidatedoperatingprofitability.AnotherthirdofPerrigo’sprofitswasderivedfromtheirgenericRxbusinesswhichwe believed, until recently,was relatively defensible. We had seen that Perrigo’sstrategyingenericRxwastotargetdrugsthathadsmalladdressablemarkets(oftenlessthan$50millionperyearsales),butagoodprobabilityofeventuallybecomingapprovedforOTC.WehypothesizedthatPerrigo’srivalswereslowtocopyPerrigogeneric drugs either because the addressablemarketwas not big enough, and/orbecausemarginsonOTCaredramatically lowerthanRx,particularlyforsub-scaleOTCmanufacturers.(Private-labelOTCmanufacturing,marketing,anddistributionsupportcapabilitiesaresubstantiallydifferentfromprescription). Inotherwords,wesawPerrigo’ssubstantialscaleinprivate-labelOTCasenablingtheCompanytorealize unique economics in other parts of their business, namely generic Rx.Therefore,itwassurprisingtouswhentheCompanycutitsownguidanceforthisunitbydouble-digitsandthenofferedlittleinthewayofanoutlook,despitehavingprovidedasteadyoutlookjustafewmonthsago.Further, Perrigo’s relatively new BCH platform continued to underperform. Thecompanyexpendedalmost$4.5billioninshareholdercapitaltoacquireBCH’scoreasset, Omega Pharmaceutical, in early 2015. We think this business will beineffective as a growth platform, despite management’s previous optimism. TheCompany has commented that the highly entrepreneurial culture of Omega hasmade it difficult to scale this business through further bolt-on acquisitions. Thescaling of acquisitions has been a key component of Perrigo’s long-term growthstrategy, sowewould not be surprised if there aremore examples of unrealizedvalue-destructionembeddedintheOmegaacquisition.Finally,Mr. JoePapa,now formerCEOofPerrigo, abruptlyexited theCompany inlateApril.Mr.Papa’sexitcameafterhavingspentcountlesshoursandmoney,withtheBoardofDirectors’encouragementandunanimousapproval,fendingoffMylan’shostilebidonthebasisofthefollowing:Perrigo’sstockbeingundervalued,Mylan’s

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poor corporate governance record, and the risk of dis-synergies. We now findshares trading at about half the supposedly undervalued bid price; Mr. Papa’sdeparture to run a company with one of the worst corporate governance trackrecords around, dis-synergies from the Omega acquisition; and a materiallyweakenedgenericRxfranchise. Importantly,wethinkthatexecutionmisstepsareexpected over the long term and therefore manageable (if only because we canhandicap those hiccups by building in a valuation cushion). However,we do notinvestinCompaniesthatarenotforthcomingwiththeirinvestorbase.Wequestionthe credibility of Perrigo’s remaining management team, as well as the Board ofDirectors.Inourexperience,fortunately,thishasbeenthankfullyrare.ConclusionLast, but not least, Wedgewood is pleased to announce a new analyst hire,ChristopherJersan,CFA.Chrishasover18yearsofexperienceasananalystandhisdepthofexperienceandknowledgewillbeagreatbenefittotheinvestmentteam.Chris joins us from Kennedy Capital Management, where he had been an equityanalyst since 2006. Prior to his tenure at Kennedy Capital, he was a portfoliomanagerandanalystatCommerceTrustfor8years.ChrisreceivedhisBSinfinancefromSaintLouisUniversity.Wearethrilledtohavehimjoinus.WehopetheseLettersgiveyousomeaddedinsightintoourportfoliostrategyandprocess.OnbehalfofWedgewoodPartners,wethankyouforyourconfidenceandcontinuedinterest. Asalways,pleasedonothesitatetocontactusifyouhaveanyquestionsorcommentsaboutanythingwehavewritteninourLetters.

July,2016 DavidA.Rolfe,CFAMichaelX.Quigley,CFAMorganL.Koenig,CFAChiefInvestmentOfficerSeniorPortfolioManagerPortfolioManager

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The information and statistical data contained herein have been obtainedfromsources,whichwebelievetobereliable,butinnowayarewarrantedbyustoaccuracyorcompleteness.Wedonotundertaketoadviseyouastoanychangeinfiguresorourviews.Thisisnotasolicitationofanyordertobuyorsell.We,ouraffiliatesandanyofficer,directororstockholderoranymemberoftheirfamilies,mayhaveapositioninandmayfromtimetotimepurchaseorsellanyof theabovementionedorrelatedsecurities. Pastresultsarenoguaranteeoffutureresults.This report includes candid statements and observations regardinginvestment strategies, individual securities, and economic and marketconditions;however,thereisnoguaranteethatthesestatements,opinionsorforecasts will prove to be correct. These comments may also include theexpressionofopinionsthatarespeculativeinnatureandshouldnotbereliedonasstatementsoffact.Wedgewood Partners is committed to communicating with our investmentpartners as candidly as possible because we believe our investors benefitfrom understanding our investment philosophy, investment process, stockselectionmethodology and investor temperament. Our views and opinionsinclude“forward-lookingstatements”whichmayormaynotbeaccurateoverthe long term. Forward-looking statements can be identified bywords like“believe,” “think,” “expect,” “anticipate,” or similar expressions. You shouldnotplaceunduerelianceonforward-lookingstatements,whicharecurrentasof thedateof thisreport. Wedisclaimanyobligationtoupdateoralteranyforward-looking statements, whether as a result of new information, futureevents or otherwise. While we believe we have a reasonable basis for ourappraisalsandwehaveconfidence inouropinions,actualresultsmaydiffermateriallyfromthoseweanticipate.The information provided in this material should not be considered arecommendationtobuy,sellorholdanyparticularsecurity. iReturnsarepresentednetoffeesandincludethereinvestmentofallincome.“Net(Actual)”returnsarecalculatedusingactualmanagementfeesandarereducedbyallfeesandtransactioncostsincurred.