WedgewoodPartnersFourthQuarter2017ClientLetter

TheGreatBullMarketof2009-2018:TheGreatest

IamtheGreatestofAllTime…I’mfast…Ican’tpossiblybebeat…I’mpretty…IshookuptheWorld!

MuhammadAli

ReviewandOutlookOur Composite (net-of-fees)i gained +20.4% during 2017. The benchmark Russell 1000GrowthIndexgainedastunning+30.2%.TheS&P500Indexgained21.8%during2017.Top2017performancedetractorsincludeSchlumberger,Celgene,CoreLabs,KraftHeinzandT.J. Maxx. Top 2017 performance contributors include PayPal, Apple, Visa, BerkshireHathawayandPriceline.

2

Our Composite (net-of-fees) gained +8.5% during the fourth quarter of 2017. Thebenchmark Russell 1000 Growth Index gained +7.9%. The S&P 500 Index gained 6.6%duringthequarter.

1

1Portfoliocontributioncalculatedgrossoffees.Theholdingsidentifieddonotrepresentallofthesecuritiespurchased, sold, or recommended. Returns are presented net of fees and include the reinvestment of allincome.“Net(Actual)”returnsarecalculatedusingactualmanagementfeesandarereducedbyallfeesandtransaction costs incurred. Past performance does not guarantee future results. Additional calculationinformationisavailableuponrequest.

3

Top fourth quarter performance detractors include Celgene, Priceline, Schlumberger,Cognizant Technology and Kraft Heinz. Top fourth quarter performance contributorsincludeQualcomm,Fastenal,RossStores,TractorSupplyandPayPal.Duringthefourthquarter,weincreasedourpositionsinCelgeneandEdwardsLifesciences.WetrimmedPayPal.In an investing environmentwhere everymajor index (and asset class) is at an all-time,nearly9-yearhighs,we are still able – becauseof our focus – to construct aportfolio ofgrowthcompanieswithmuchbettergrowthandprofitabilityprofilesbutatquitefavorablevaluations. Specifically,ourportfolio’sfutureannualEPSgrowthrate(IBESconsensus)isprojectedtobeapproximately15%.(Ourinternalgrowthrateishigherstill.)Theforward12-monthP/Eis22X.Ourprospectivegrowthrateis+29%higherthanourbenchmarkand+51% higher than the S&P 500. Our forward 12-month P/E is -4% lower than ourbenchmarkandatparityversustheS&P500.

TheGreatestBack in 2016,we spent a goodly portion of our client letters putting this incredible bullmarket intohistoricalcontext.2017wasmoreofthesame,whether itwasthecontinuedlengthofthebullmarketorthenear-historicgains(settoeclipsetherecord+302%gainsofthe1990s).Inaddition,wehavechronicledhistoricallyhighvaluationsthatcontinuetogetpushedintoriskyterritory,aswellastheincrediblemoniesallocatedtopassiveinvestingfromactivemanagers,thehistoricallylowvolatility,etc.Aswenowlookbackupon2017,weadmitthatwearerunningoutofsuperlatives. Thisincrediblebullmarketisnowjusttwoshortmonthsshyofitsninthanniversary.

4

Thefourthquartercontinuedwhatbeganduringthethirdquarter,inthatmorethanafewofournon-techportfolioholdingsfinallystartedto“catchabid.”Thehitparadeduringmuchofthisbullmarkethasbeendominatedbytechnologystocks–particularlythelargestcap-weighted technology stocks. Indeed, the five largest stocks in our benchmark (Apple,Alphabet,Microsoft,AmazonandFacebook)nowmakeupanastonishing24%oftheRussell1000GrowthIndex.Further, the benchmark’s tech stockweighting (using S&P GICS,which doesnot includeAmazon)isnearly+38%andnowabovewhereitpeakedbackinthoseheadytechstockdaysinMarchof2000.Eveninourfocusedportfolio,westruggletofindthatmuchcompellingopportunitywithoutsignificantlycompromisingfuturereturns.Technology’scurrentweightingcontrastswiththefinancialandenergysectors, the lattertwoofwhichcollectivelyrepresentlessthan5%oftheentireRussell1000GrowthIndex.Ourbottom-upinvestmentprocessmakesushardlya“bull”onanyindustry,butaprospective“equal-weight” inaroughly20-stockportfolio isabout5%,soasingleholdingcaneasilyskewourindustryweightings,giventhatthefinefolksatRussellseemtobeOKwithcarryingsub-1%weightingsinverylargesectorsoftheU.S.economy.Sufficeittosaythatwefindenoughcompellinggrowthintheunderrepresentedindustriestowarrantinclusionofafewholdingsinourportfolio.Peeringacrossthestylisticgrid,itisnosecretthattheRussell1000ValueIndexmustalsobeparticularlylop-sided–indeed,witha26%weightinginfinancialsand11%weightinginenergy,itisalsonotsurprisingthatGrowthhasdramaticallyoutperformedValuein2017,nottomentionmostofthedurationofthisbullmarket(moreonthislater).

5

Aslong-term,multiyearinvestorsinhighlyprofitable,growing,large-capbusinesses,suchbusinesses accumulate significant amounts of retained earnings. As shareholders, theseretained earnings, that capital, is “ours.” As long-term shareholders, we typically don’tdemandthatsuchretainedcapitalbereturnedtoshareholdersintheformofstockbuybacksorviadividends(wedon’tcaretoownbondproxies).Ineffect,ourattitudeisthatwe,asshareholders (partners, really), are effectively providing capital to management to bereinvestedbackintoourcompanies.Thus,weheartilyencourageandexpectourcompaniestoreinvestlargeenoughamountsinretainedcapitaltocreateenoughvaluebygeneratingfurtherhigh returnson a growing capital base. This compounding effect is the financialmother’smilktothen,inturn,drivefuturedouble-digitearningsgrowth.Today,ourdouble-digitreturnhurdlerelativetothemarkethasrarelyseemedhigher,asweobserve marginally-profitable, large businesses able to borrow at interest rates thatarenegative.2We thinkourdemand fordouble-digit returns lookspositively quaint (punintended)inthisnarrowlight.Butifdebtandequityaresubstitutes,itbegstowonderwhataguaranteedlossofprinciplelookslikeintheequityrealm.Weimaginetheequityanaloglookssomethinglikealargecompanythatregularlylosesmoney,butregularlyissuesstock.Wehaveseenseverallargetechnologycompaniesthatissue5to10%oftheirstockeveryyear,foryearsonend.Theinfluxofcapitaltofundthosenumerous,andregularofferingshas been truly remarkable, but also completely undemanding from a profitabilityperspective.Asacompetingsourceoffinance,wethinkindexationhasrisentoprominenceon a kernel of truth, and amountain of indiscriminate return requirements, as over $10trillionincapitalhasbeeninjectedintopublicmarketsoverthepastdecade,courtesyofthethreelargestcentralbanksontheplanet.Alas,wecannearlyalwayscomplainaboutmonetarystimulus, ifonlybecause ithasruncompletely counter to our philosophy as investors. On a brighter note, we expectrecentfiscalstimulustobenefitourgreatbusinessesthatdogeneratepre-taxprofits,intheformoflowercorporatetaxrates.Afterall,fewifanygrowthcompaniescaninvest100%(ormore)oftheirexcesscapital,yearinandyearout,andgetareturnoneverysingledollar(or even a majority of those dollars) – we think even the shrewdest, most successfulbusinesses andmanagement teams are right 60-70%of the time. So,we aremore thanforgivingwhenourcompaniesgeneratecopiousamountsofpre-taxprofitability.Assuch,manyofourinternally-fundedbusinesses–particularlythosefocusedontheU.S.market–should reapawindfallof cost-less (at themargin) capital, andput themonamoreevenplayingfieldrelativetothosebusinessesthatregularlyaccessnegativecostcapital.

2https://www.veolia.com/sites/g/files/dvc181/f/assets/documents/2017/11/CP_Callisto_161117_EN.pdf

6

Howgoodisthestockmarketrightnow??Freezetime.Thisisasgoodasitgetsforthestockmarket!

• ThegainfromtheMarchlowsof2009is+310%whichequalstheincrediblebullmarketgainofthe1990’s–butsomanymorestocksandsectorshavesoaredrelativetothetech/telecom1990’sbullmarket.

• Up20outpast21quarters.

• Uppast14monthsinarow.

• 2017–the8thyear,mindyou,ofthisGreatBullMarket–wasup+20%andupEVERY

monthduringtheyear!

• Thecurrentmomentumisliterallyoffthecharts.TheDowJonesIndustrialAverage’sRelativeStrengthIndexisat90!That’sthehighestsince1959!TheS&P500Index’sRSIisalmost97!That’sthehighestsince1929!!!

This moment in time is Wayne Gretsky scoring 92 goals in a single season. This is JoeDiMaggiohittingsafelyin72outof73games;WiltChamberlainscoring100pointsinasinglegamefortheoldPhiladelphiaWarriors.ThisisTedWilliamsbatting.406.ThisisSecretariatattheBelmont.Goodgrief,thisisSpinalTapgoingto11!

7

Incredibly, theGreatBullMarketof2009-2017momentumactually increasedduring thefourthquarter.Downsidevolatilityinthestockmarketsimplyappearstobeathingofthepast(thoughwearedubious.)2017setnumerousrecordsforhistoricallylowvolatilityinboththestockandbondmarkets.Thefourthquarterrepresentedthe20thpositivequarteroverthepast21.The last negative quarter was two years agowhen the stockmarket “suffered” a -6.6%“collapse”duringthethirdquarterof2015.Infact,ifthecurrentbulladvanceswithoutatleasta-5%correctionbythethirdweekinJanuary,itwillbethelongestsuchstreaksince1928.Further,thestockmarkethasnotsufferedevena-3%drawdowninover13months,byfarthelongestinhistory.In2017alonethestockmarketwasupeverymonth(acalendaryearrecord)andhasnowbeenup14monthsinarow(arecord).95%ofthetradingdaysduring2017hadanintradayswingoflessthan1%–anotherhistoricrecord.TheDowJonesIndustrialAverageset71new highs in 2017 – themost since 1910. The secondmost new-highs figure (65)wasrecordedback in1925. The lastnotabledouble-digit “correction”wassixyearsago,waybackin2011.Thestockmarkethasrecordedpositivegains9consecutiveyearsandin14outofthepast15years.Evenvolatilityhighsduring2017werethelowestonrecord.WeneedtorepeatwhatwewroteinourlastLetter;volatilityisadearfriendoftheactive,patient,value-sensitiveinvestor.Wemissitterribly.

Ifhistoryhastaughtusanything,itisthatatmarketextremesthemostlogical(butoftenthemostdifficult)decisionistodotheexactoppositeofthemajorityofinvestors.Ourdefense-first,conservativeinvestmentstrategyisnotidealatall,giventheeuphoricenvironmentofthepast3-4years.Again,webelievethatthenextfewyearswilllikelylookverydifferent

8

thanthepastfew.Intimespast,whenextremelyhighvaluationsweremetwithextremesinlowvolatility,theensuinginvestingenvironmenttypicallyrewardeddefense-firststrategiesonceagain.

Source:EuroPacificCapital

9

Source:TheLeutholdGroup

10

Activemanagershavehadtheirhandsfullduringmostofthisbullmarket.Ourclients(aswellasallofusatWedgewood)havefeltthefullstingofunderperformanceoverthepastfew years. We have never had a calendar year ofmistake-free investing. We deploy adefense-firstphilosophytoavoidwhatwebelievetobetheultimatemistakewecouldmake,andthatisapermanentlossofcapitalonindividualportfolioholdings.

Source:GoldmanSachs

Such conservatism has served us well over full market cycles and since our strategy’sfoundingbackin1992.Sincethen,wehavecometobelievethatwehaveseen“everything”thatinvestinginthestockmarketcanthrowataninvestor–layinvestororprofessional.Well, the last few years have been certainly new territory for us. In the never-endingperformancerace,it’salwaysamarathon,butsometimesit’sasprint,andthedefinitionofa“mistake”seemedtotakeonnewmeaningoverthepastfewyears.

11

Heretofore,“mistakes”attheindividualstocklevelwerethoseofpermanentlossofcapital.Giventhenonstopadvancementofthestockmarketsincetheendof2012(up20quartersofthepast21),“mistakes”arenowdefinedasdegreesofhowmuchastocklagsitsrespectivestylebenchmark.Even“winners”havebeenredefinedasmistakes.Forexample,considerthe5-yeargaininCognizantTechnology–aseeminglyterrificgainof+14.1%.However,comparedtothestaggering5-yearannualgaininthebenchmark(Russell1000GrowthIndex)of+17.1%,ourinvestmentinCognizantis,well,amistake.Again,intermsof“degreesofmistakes,”the5-yearannualgaininBerkshireHathaway–withthesame+17.1%as the benchmark – has been, to a degree, a mistake too, since the stock has notoutperformed. The performance derby has been a demandingmistress over the recentcycle.Butaswithallcycles,thepastisnotprologue.Vanguardauthoredaninterestingstudyin2015ofmutual fundsthatoutperformedtheirrespectivebenchmarksovera15-yearperiod.Theydeemedsuchfunds“successful”intheirstudy.Theupshotoftheirstudyisthatthevastmajorityoftheverybestactiveinvestmentmanagerssufferthroughmeaningfulperiods,evenconsecutiveyears,ofunderperformance.Theperformancederbycanbeutterlyhumbling.Wecontinuetolearnfromourmistakes–andoursuccesses.Ourlearningprocessmustnotstop.WeatWedgewoodremainsteadfastinadheringtoourtime-testedinvestmentphilosophyandinvestmentstrategy.

12

Anaside:OurCompositeperformance(net)forthe15-yearperiodendingDecember31,2014,wasagainof+6.37%perannum(gross:+7.26%),versusthebenchmarkperannumgainof2.21%.The15-yearperiodfromtheendof1999throughtheendof2014isaratherinteresting,ifnotinstructive,periodinwhichtoanalyzetheperformanceofactivemanagers,asittakesintoaccounttwooftheworstbearmarketsinstockmarkethistory.

13

CompanyCommentariesApple“YouhavetogobacktoRockefellerandStandardOiltofindacompanysodominantinabusinesssolarge,”saysDavidRolfe,chiefinvestmentofficeratWedgewoodPartners,whichmanages$5billion.“Othercompaniessettle

forunitsalesorrevenues,butinmanyquarters,Applecollectsmorethan80%ofgrossprofitacrossthesmartphoneindustry.”

Barron’s

December23,2017

Appleenjoyedastellar2017onboththeproductfrontandonthefinancialfront.Revenuegrowthacceleratedallfourquartersin2017.TheCompany’sfiscalyear-end(September)endedonahighnoteofrecordrevenueacrossallproductcategories,plusnotableproductmomentumandmarketsharegainsinmostproductsandinmostgeographiesaroundtheglobe.Chinawasnotable,withmarketsharegainsforiPhone,iPadandtheMac.Specifically,ApplepostedrecordrevenueinChinaforitsservicesbusinessandtheMac.TheCompany’sfiscal fourth quarter posted record year-over-year September revenue of $52.6 billion(+12%)andrecordearningspershareof$2.07(+24%).GiventhesizeoftheCompany’siPhonefranchise,theresultsinanygivenquarterorcalendaryeararedominatedbythefortunes(orlackthereof)oftheiPhone.TheiPhonereallyisthestraw that stirs theAppledrink. The iPhonecelebrated its10-yearanniversary in2017.SincethelaunchofthefirstiPhone,Applehassold1,250,432,000iPhones.Thesesaleshavegeneratednearly$800billion.Itisestimatedthat800millionoftheseiPhonesremainactive.Overthepast10years,theaveragesellingpriceoftheiPhonehas,tothesurpriseofmany,beenremarkablysteadyforatechnologyhardwareproduct.Overtheyears,thesellingpricehasaveragedabout$638.Nodoubtcarrier-subsidizedcostovermanyofthepast10yearshasbeenpartandparcelofASPstability. Inrecentyears, theacceptanceofsmartphoneusersthattheirverypersonalizedphoneshavebecomeindispensableintheirdailylivessomuchsothatmillionsofusersnowallocateasmuchmonthlybudgetfortheirsmartphonesastheydoforhousing/rental,transportation,cableandelectricbills.Dareweincludefoodtoo?Remarkably,theutilityandfunctionalityofmodernsmartphones,withtheirmyriadofApps and capabilities (communication, social networking, entertainment, financialmanagement,shopping,healthtracking)arenothingshortofdailyhumansubsistence.

14

ThesurpriseoverthenextcoupleofyearsmightbeaspikeiniPhoneASPs.Applecouldwellsell250millioniPhoneseachyearoverthenextthreeyears. Astheuserbase(plusnewusers)upgradestotheiPhone8andtheiPhoneX,ASPscouldeasilyexceed$700–andevenapproach$750.TheCompanynowofferssixiPhoneconfigurationsbetween$650and$850–iPhone7and8.TheiPhoneX(currently$1,000to$1,150)reallygetsintoASPsnextyear.Infiscal2017theCompanysoldnearly217millioniPhones,againofjust+2%over2016–andlessthanthe231millioniPhonessoldin2015.Asseenbelow,theapexofiPhonesaleswasrecordedbackinlate2015duringtheincrediblesuccessofthenew,largeriPhone6era.Pent-updemandforthelargeriPhone6(particularlyinChina)droveiPhoneunitgrowthof+22%andrevenuegrowthof+36%infiscal2015.Sincethetoughcomparisonfrom2015,plustherealitiesofreplacementdemandfornewiPhonesdrivingunitsales,withnewiPhoneusergrowthlosingitsformingtailwind,unitgrowthwaswelcomedbackin2017.ChinawaskeytotherenewalofconsistentiPhonegrowthduring2017.KantarreportsthatiPhonemarket share fell from25.3% inNovemberof2015 to19.9%. ByMarchof2017iPhonemarketshare inChinahad tumbled to just12.4%. Thatwouldmark thenadirofiPhonemarketshare.Fastforwardtotoday,andiPhonemarketsharehassteadilyimprovedbacktoapproximately20%.

15

ThatfirstiPhonewastrulyrevolutionary.HereiswhatwewroteontheiPhonelaunchbackinAprilof2007:

ThehypeandhyperboleovertheiPhonehasbeensuchthataskepticmightsuspectthatexpectationsaresohighonthisso-called“revolutionary”devicethatitisdoomedtodisappointallbutthemostdie-hardApplefans.Perhaps.Butwedon’tthinkso.Infact,despitetheearlyglowingreviewsthusfar,andthegee-whizads(seeforyourself:

http://www.apple.com/iphone/usingiphone/guidedtour.htmlandherehttp://www.apple.com/iphone/ads/ad1/),webelievetheiPhonewillbeinfactaquantum

leapintheever-evolvingdescriptionandmaturationofthe“smartphone”market.

TheiPhoneraisesthebaracrossallapplications.Ittrulyisarevolutionarycellphone;Apple’sbestiPodto-dateandthefirsttrulyusefulwebbrowserdevice.Howdidthey

accomplishsomuchinasingledevice?Simpleanswer;buthardforcompetitorstocopy:cutting-edgesoftware,deliveredonverypowerfulhardware(threemicroprocessors

withintheiPhone).AttheiPhones’corerunsafullversionofMacOS–withfirst-in-classintegrationofiPodsoftwareandSafari(webbrowser)software.Elementsofthe

operatingsoftwareintheBlackBerryPearl,LGPrada,MotorolaQ9,NokiaN95,SonyEricssonW810iandTreo750arecertainlyrobust,butthemeanstobothnext-generationapplicationintegrationanduser-experiencesuperiorityresidesinbest-in-classoperatingsystemswhichistheMacOS.WewouldnotdiscountwhatJobssaid,theiPhonecould

wellbeyearsaheadofitsrespectivecompetitors.

Tomarkthe10-yearanniversary,Applepulledoutalltheskunk-worksstopsindesigningthe iPhone X. Heretofore, every new iteration of the iPhonewas certainly evolutionary,ratherthanrevolutionary.EverynewgenerationoftheiPhoneboastedthelatestcutting-edgehardwareandsoftwaremarquefeaturesfromApple.“S”generationiPhoneshaven’tgarneredtheenthusiasmfromtheuserbase,newcustomersorthepresstoo,buttheynodoubtpushedenoughelementsoftheCompany’stechnologicalprowess.NewgenerationsofiPhonesthatpromisednewdesignaestheticsandnewformsizeshavebeenseminalnewproductannouncements.Theall-glassiPhone4andthelargeriPhone6cometomindonthisscore.TheintroductionoftheAppStoreinthesummerof2008withaninitial500AppsfundamentallyturnedtheiPhoneintowhatwouldbecomeauniquelypersonalcomputingdevice.TheAppStoreofferingscontinuetofundamentallychangethewaywecommunicateviasocialmedia,changeourshoppinghabits,howwebank–andmuchmore.

16

TheiPhoneXisnot,inourview,atrulyrevolutionaryproductinthesamesenseasthefirstiPhone,butwedothinkofitasmuchmorethananevolutionaryimprovement.ComparetheiPhone 8 to the iPhone 7 and the evolutionary cadence is clear. The iPhone X is a newdirection,aninflectionpoint,asitwere,towardadifferentiPhonefuture.ThetwodesignchangesoftheiPhoneXthatstandoutversustheiPhone8areFaceIDandtheeliminationofthefront-facinghomebutton.Removalofthehomebuttonnotonlyfreesupmorespace,butisanew,moreintuitivegatewayintotheiPhone’ssoftwareviaaswipe.FaceIDisApple’sentryintobiometricauthentication.FromourexperienceusingFaceID,wehappilyreportthatitworkswell–andit’sveryfast.ApplereportsthatthetypicaliPhoneisunlocked80timesperday.JustintermsofunlockinganiPhone,comparedtotheearlyyearsof4and6–digit PIN numbers, to Touch ID and now to Face ID, the daily time savings is apparentimmediatelytonewiPhoneXusers.Again, the iPhone Xmay not be revolutionary, but it does represent a paradigm shift insoftware interaction and presents the pathway for the development by both Apple andoutsidedevelopersinthenew,newworldofaugmentedreality.Relatedly,lastSeptemberAppleannouncedtheirlatestprocessor,theneuralengineA11Bionicchip.This4.3billiontransistor, 6-core chip is notablenot only for its power (exceeding thepowerof currentlaptopPCs),butalsotheinclusionoftheCompany’sfirst-designedGPUsolution.Followingthisprocessorroadmap,2018couldbringtheannouncementofasystemonachip(SOC)thatoffershardwareaccelerationforartificialintelligence(AI)processing.Rounding out the other products and services thatmakeup theCompany’s best-in-classecosystem,wefindmoregoodnewstoreport.TheiPadwasawakenedfromitsmultiyearslumberin2017.Amixofthelarger,10.5-inchiPadPro,plusmoreattractivepricepointsforthe9.7-inchiPadreignitedgrowth.Inall,iPadsaleswereup+15%infiscal2017andtheiPadglobalmarketsharereboundedto4-yearhighs.NPDreportsthatiPadmarketshareinthe U.S. jumped to 54% from 47% over fiscal 2017. Revenues in the all-important U.S.educationmarketgained+32%duringthefourthquarter.Unitsaleswereup+25%inChinaand+39%inIndia.

17

2017was a significant year for AppleWatch. The AppleWatchwas first introduced inSeptemberof2014andbecameavailableforsaleinAprilof2015.Today,andinveryshortorder, Apple can boast that they have become the world’s largest watchmaker. Rolex,foundedafewyearsagoin1905,cededits#1rankingtoApplelastquarter.ApplereportsthattheirWearables(Watch,AirPodsandBeatsheadphones)businessinunitswasup+75%year-over-yearinthefourthquarteroffiscal2017–andwasnowthesizeofaFortune400business. AppleWatchendedthefiscalyearhavinggrownat+50%forthreeconsecutivequarters. As2018rolls in,AppleWatch’srevenuerun-rate looks tobeapproaching$5.5billion – driven by the launch of the LTE cellular-enabled Series 3 Watch, as well asrepositioningtheWatchasabest-in-classcardiovascularwearable.Alltold,theCompanysold18millionwatchesin2017–andhassold33millionsinceitsinitiallaunch.TheWatchstorycouldwellbeintheveryearlyinningsofgrowth,astheadoptionoftheWatchwithintheiPhoneuserbaseisjust5%.Even theMachad itsbest-ever revenueyear in2017, reaching$25.8billion. During theSeptemberquarter,Macrevenuesgrew+25%,andgrew+10%forfiscal2017.TheseresultssparkleevenmoreagainstthebackdropofapunkindustryenvironmentthatIDCreportsshrankby -1%onaglobalbasis. Apple’s long-heldposition in thepremiumPCsegmentcontinuestoservethemwell.NotethestabilityandtheASPofMacsinthefirstgraphic.TherecentlyintroducediMacProisawonderofdesktophorsepower–awellreceivedadditiontotheMaclineupafterthelacklusterlaunchofthelatestMacBookProinlate2016.Apple’sServicesbusinessmayhavebeenthebrightspotduring2017.Longinthemaking,ServicesistheglueofApple’sincredibleecosystem.KeyelementsoftheServicesbusiness–AppStore,iCloud,AppleCare,ApplePay,AppleMusic,plusaddinAppleMapsandSiri–aretheconnectivetissuebetweentheCompany’sconnectedhardwaretoenhancethecustomerexperience.Today,Apple’secosystemhasgrowntoover900millioncustomersandover800millionactivedevicesandover300milliondevicessoldperyear.Thisecosystemisnodoubtgiant,aswellasglobalinsize,scale,andscope.WhileAppleoutsourcesthemanufacturingofitshardwareproducts,theCompanyhaslongownedastaggeringamountofequipmentlocatedintheirmanufacturingpartners’plants-$54billionofmachinery,equipmentandinternal-usesoftwareonApple’sbalancesheetcertainlyatteststotheenormityofthescaleandfinancialresourcesittakestomanufactureandsell+300milliongadgetsperyear.Onthisscore,Appleisunmatched.

18

Forexample,Appleisthebest-sellingwesternbrandinChina.GreaterChina(including mainland China, Hong Kong, and Taiwan) revenueseclipsed$10billionin2011andsoaredto$59billionin2015.Aftertwoyearsofdecline,theCompany’srecentGreaterChinarevenueaccelerationmaychallengethe2015high-watermarkin2018. TheCompany’snonstopeffortstoimprovetheirecosystemdelivers,prospectively,stickiercustomers, halo effects, and annuity-like revenues. Like most technology companyecosystemefforts (thinkSoftwareasaServiceand thesort), theCompany’sServices isabastionofstellarrevenuegrowth,butunlikemost,aprofitmachine.

19

Servicesrevenuereachedanall-timequarterlyrecordof$8.5billionlastquarter(+34%)–reaching a $30 billion annual run-rate. The business is now the size of a Fortune 100business.AcrossalloftheCompany’sServicesofferings,thenumberofpaidsubscriptionshasreached210million.PaidsubscriptionsforAppleMusichavereached30millioninjust27months–ittookSpotify74monthstoreachthatmark.Overthecourseof2017,ApplePayusershavedoubledandannualtransactionswentup+330%.TheAppStoresetanewrecord in 2017 and enters 2018 as the Company’s fastest-growing and highest-marginbusiness.TheCompany’sAppStoregrossmarginisashighas90%onNetAppspurchases.

20

In fact,asof thiswriting, theCompany just reported that theAppStore’sNewYear’sDaypurchases of $300 million set a new record. In addition, during the week starting onChristmasEve,arecordnumberofcustomersbothpurchasedanddownloadedappsfromtheAppStore,tothetuneof$890millionduringthosesevendays.Lastly,onapppurchasesduring2017, theCompany reports that theypaidout$26.5billion to iOSdevelopers– a+30%increase.

Latein2017broughtthesignificantnewsthatthecashproblemofthe1stNationalBankofCupertinowasfixedwhenPresidentTrumpsignedthe"TaxCutsandJobsAct"intolawonDecember 22. Under the current U.S. tax system, Apple owes 35% tax to the federalgovernment on all revenue earned - both in theU.S. and abroad. The new law enacts adeemedrepatriationofoverseasprofitsatarateofjust15.5%forcashandequivalentsand8%forreinvestedearnings.GoldmanSachsestimatesthatU.S.companieshold$3.1trillionofoverseasprofits.AsofSeptember30,Applealoneholds$252billionintax-deferredforeignearnings,94%ofits total cash and marketable securities. This is most welcome news for shareholders.Heretofore, Apple has needed to borrow heavily to fund capex, buy back stock and paydividends.TheirU.S.-onlyoperatingcashgenerationwasn’tfootingthebill.

21

Now, before you think Apple wants for cash, a little perspective is in order. We havechronicledApple’sprodigiouscashgenerationforoveradecadenow,solet’sgetcaughtup:Overthepasttenyears,Applehasgenerated$450billioninoperatingcashflowand$373billion infreecashflow. Overjustthepastfiveyears,theyhavegenerated$324billion inoperatingcashflowand$267billioninfreecashflow.Infiscal2017alone,Applegeneratednearly$64billionofoperatingcashflow,aboutasmuchasthatofAlphabet,AmazonandFacebookcombined.Onafreecashflowbasis,whichisameasure of howmuch cash is generated after taking into account such items as capitalexpendituresandotherexpensesassociatedwithrunningtheCompany,Apple's$51billionoffreecashflowwas$2billiongreaterthanfreecashproducedbyAlphabet,AmazonandFacebookcombined.In2013and2014,Applebegantakingonbothlong-termandshort-termdebttooffsettheirinternationalearnings.TodaytheCompanyhas$113billionindebt,nettingouttheircashandliquiditytoapproximately$150billion.Afterrepatriation,Applewillbesittingonacool+$213billioninU.S.cash.Netofdebt,theCompanywillhaveabout$100billion.

TheCompanybeganreturningcapitaltoshareholdersbackin2012,firstasadividend.Sharebuybacksstartedin2013.Todate,theCompanyhasreturned$234billionoftheircurrent$300billioncapitalreturnprogram.WhilethesharesarestillreasonablyvaluedwewouldprefertheCompanytocontinuetobuybackstock.TheCompanyhasbeenbuyingbackstockto the tuneof$6billion to$10billionperquarter (dividendsarealmost$3.5billionperquarter).Perhapsa$50billionto$75billionDutchAuctionstockbuybackisinorder.Insum,wehopetoconveythattheStateofAppleisquitehealthy–andgrowing.RecallthattheCompany’srecent financialpeakwas fiscal2015whentheCompanygenerated$81.3

22

billioninoperatingcashflow.Weexpectthatleveltobebreachedinthenextcoupleofyears.Capital spending has clocked in around $13 billion over the past few years. Even if theCompanyspends$45billionincapexoverthenextthreeyears,theCompanywillgeneratemanybillionsmorethantheyneedtokeepthelightson.iCashindeed!CelgeneCelgenewasatopdetractortoperformanceduetoacouplenegativenewseventsreleasedduringthequarter. ThecompanyannouncedtheywoulddiscontinueaphaseIII trial fortheir drug GED-0301 in Crohn's disease (CD) and an extension trial, following arecommendationoftheDataMonitoringCommittee.TheyalsodecidedthatanotherphaseIIItrialforCrohn'sdiseasewouldnotbeinitiated.WhileaphaseIItrialwithGED-0301inulcerative colitis is still ongoing, the Company is currently awaiting review of data todeterminetheirnextstepsforthisindication.IntheabsenceofanyinformationonwhetherthetrialfailurewasduetosomethingspecifictoCDorthedrugitself,itiscurrentlyassumedto be a high-risk program for that indication. This studywas deemed a high risk/low-probabilitystudy,especiallywhencomparedtootherIBDdrugs.However,itssuccesscouldhavebeenablockbusterInflammation&Immunology(I&I)assetforthecompany,makingitsfailureadisappointingloss.Inaddition to these trial failures,during the thirdquarterearnings release,managementbroughtdown2020guidance,partiallyduetothediscontinuationofGED-0301programinCD.Whilesaleswereonlymodestintheir2020model,managementdidforecastmultibilliondollarpeaksalespotentialforthedrug.Thelargestimpactto2020guidance,however,wasweak performance of their existing drug Otezla, which experienced headwinds due toslowinggrowthandincreasedcompetitioninthepsoriaticarthritisandpsoriasismarkets.TheupdatedguidancetakesintoaccountGED-0301,themarketdynamicsimpactingOtezla,aswellas reassesses theopportunitiesandrisksassociatedwith theremainingphase IIIstudiesexpectedtoreadoutbytheendof2018.Webelievemanagementtookaconservativestancewith theirupdateandyet theresultingguidemaintainsmore than+14%revenuegrowthandnearly+20%earningsgrowthonacompoundedannualbasisthrough2020.WerealizetherewillbephaseIIIfailures;andwitheachfailurecomesthepotentialformoreriskandlessgrowth.WereiteratethattheCompanyhasaverybroadpipeline,with12phaseIIIstudiessettoreadoutbetweennowandtheendofthisyear,makingsetbackslikethesemoremanageableinthelongerterm.CelgenehassubstantiallymorephaseIIIassetsthananyotherbiotech company. Several of thesepipeline assets arenot incorporated in thecurrent2020guidance,astheyreadoutatadatewhenanysalespotentialwillcontributeatfuturedates.Withnearly+20%compoundedannualearningsgrowththrough2020andfreecash flowgenerationof$100billionover thenext tenyears,Celgenecontinuestoofferacompellinggrowthopportunity.

23

KraftHeinzKraft Heinz underperformed during the past quarter and throughout the year as toughconditionsinthetraditionalbrandedfoodindustry–primarilynegativevolumegrowth,aswellaspricingpressurefromretailcustomersintentongivingawaytheirprofitstochasemarketshare–weighedonthecompany’sresults.Furthermore,investorshavebeenitchingfortheCompanytoexecuteanothermajoracquisition,andthisfailedtomaterializein2017,althoughtheCompanydidmakeanultimatelyabandonedapproachforUnileverearlyintheyear. Wehavebeenimpressed,duringourownershipofKraftHeinz,withmanagement’sabilitytocutcostsandtoimprovemarginsatthebusinessesithasintegrated,but,withover$1.5billionofcostsavingsalreadybehindus,andwithvolumegrowthnowheretobeseen,webelieveweneedtoseeamajoracquisitiontodrivethestockmeaningfullyhigher.Webelievethecompanyremainsactiveinitspursuitofacquisitions,andthiswouldseemtobe an ideal environment for buying, between still-low interest rates, relatively lowervaluations across the Consumer Staples sector, and nearly limitless available liquiditybetween Kraft Heinz and its co-sponsors, 3G and Berkshire Hathaway. We believeacquisitionintegrationandoperationalandfinancialimprovementarecorestrengthsoftheorganization,andwewouldbepositivelybiasedtowardanyacquisition.Withallofthisinmind,wedidtrimourpositioninthestockthroughouttheyear,particularlyaswesawthestockbouncingoffofall-timehighswhilethefundamentalperformanceofthecompany,intermsof volume/revenue/profit growth,was struggling. In themost recent quarter,wewererelievedtoseeunderlyingorganicperformanceimprovesomewhat,butwecontinuetobelievethegrowthwerequirewillonlycomefromacontinuingacquisitionstrategy,andwearemonitoringthissituationclosely.PricelinePriceline’s sharesunderperformed thebenchmarkafter reporting+18%growth in travelbookings,+19%roomnightgrowthand+18%growthinadjustedEBITDA.Despitethosestrongresults,wethinkmostoftheweaknessisattributedtotheCompany’sguidanceofahigh-single-digitgrowthrateinbookings.Further,growthamongPriceline’slargestpeersintheonlinetravelagencyindustryhasslowedoverthepastfewquarters,leadingmanytothink the industry is slowing. Thoughwe trimmed our position earlier in the year, wecontinue to think the OTA industry remains underpenetrated, particularly internationalmarkets,wherelodgingsupplyismorefragmented.WealsothinksomeoftheCompany’speers,particularlyin“meta-search,”havefailedtoinnovateandhaveresortedtocompetingdirectlywiththeirOTAcustomers-includingPriceline’sproperties–anditrepresentsanunsustainablestrategy.Assuch,Pricelineisintheprocessofshiftingadvertisingspend–acriticalcomponentofdemandgeneration–awayfrommetasearchprovidersandtowardsalternativemarketingchannels,inordertodrivebetterprofitabilityfrombookingsgrowth.Whilethismightbehavinganear-termeffectonPriceline’sbookinggrowth,wealsothinktheCompany’syear-agocomparableofover+30%representsatemporary“optical”hurdle.However,wecontinuetoseePricelineascapableofreacceleratingtoadouble-digitgrowthrateinanindustrythat,overall,istakingshareoftravelspending.

24

Schlumberger/CoreLabsOurtwooilservicestocksdetractedfromperformancefortheyearandweremixedduringthemostrecentquarter–arguablyourbiggestsurpriseanddisappointmentintheportfoliolastyear.WhenwelastwroteonourenergynamesinthesecondquarterLetter,wenotedthe low correlations between our energy service names and the underlying commodityperformance.Asareminder,wefoundthatlessthanathirdofSchlumberger’slonger-termstockperformance variation canbe explainedby theperformance of oil. These findingsplayedoutfurtherduringtheremainderoftheyear,unfortunatelynotinourfavor–intheextreme.WesawoilpricesreboundinthesecondhalfoftheyearasbothBrentCrudeandWTIpricesreturned+30%,whileourenergynamesreturneddismallow-to-mid-single-digitreturnrates.Fortheyearwesawthisperformancedivergenceevenmoreexaggerated,asoilfinishedtheyearinthegreen,withWTIreturningapproximately+12%whileSchlumbergerwasdownnearly-20%andCoreLabs-9%.Ascanbeseeninthegraphicbelow,divergenceswerequiteextremesincetheFallof2016.

Whilewegoto lengthstoexplainthatbothSchlumbergerandCoreLabscreatevalue farbeyond that of owning the underlying commodity,we alsomust askwhy they have notbenefitedfromtheapparentreboundoftheenergymarketfollowingoneoftheworstoilmarket crashes in recent history. The answer likely lies in the uncertainty around theproductionestimatesforunconventionalshalenumbers.

25

Take,forexample,thedifferenceinconventionalversusunconventionaloilproduction.Aconventionaloilwelltypicallyoperatesonextremelylongcycles.Theamountofcrudeoilproducedusuallydeclines just2-5%peryear,andawellcankeeppumpingfor20years,withsomewellspumpingfarbeyondthat. So, theinvestmentofbillionsofdollars intoaconventional oil field to produce for several years, if not several decades, canwithstandvolatileoilpricesaslongasthepriceofoilexceedsthevariablecosttoextracttheoilyearafteryear.Ittypicallydoesnotpaytostopproductionofaconventionaloilfield.Unlikeconventionalprojects,unconventionalshalewellshavearathershortlife,andmostofashalewell’sproductioncomesduringitsfirstyearaftercompletion.TaketheBakkenfieldsforexample.AwellintheBakkenwillexperienceaproductiondeclineof-72%afterthefirstyear.Morethanhalfofthereservesofthatwellwillbedepletedbythebeginningofyearthreeandannualproductionwillfalldramatically.Togenerateconstantorincreasingrevenue,producersneedtoconstantlydrillnewwells.Inaddition,workonanewshalewellcanbepostponedafterthedrillingphase,andbeforethefracturingoftheshalestructure,soproductioncanbetakenonandoffratherquicklyinresponsetopriceswingsinoil.As oil prices rose into the $100 range following the Great Recession, discovery anddevelopmentofshalefieldsandproductionratesgrewrapidly.Uponthesubsequentcrashinoilprices,shaleproductionnearlystalledwhenpricesfelltothelow$30s(andforashortperiod,below).Asoilpriceshaveonceagainbeguntorisetoward$60perbarrel,we’veseencapital spending rebound sharply in North American production. And yet international(unconventional) capital spending commitments remain hesitant, with some estimatesindicatingonlymodestgrowthfortheyearahead,althoughthiswouldbethefirstyear-over-yearincreaseincapexspendinginfouryears.ItisthislimitedinvestmentininternationalE&Pspendingthathaslikelycontributedtothesluggishturnaroundofouroilservicecompaniesrelativetothecommodity.International,conventionalfieldproductionhousesthehigher-margin,biggerpay-offprojects.Anystallincommittingcapitaltothisgroupwillflowthroughtothecompaniesthatservicethatwork.Schlumbergergenerateslessthanonequarterofthecompany’stotalrevenuefromtheNorthAmericanregion.Themajorityofrevenueisgeneratedinservicingtheinternationalplays.So, what gives us confidence that capital commitment toward international fields willincreasebeyondthemodestratesprojectedfor2018?Itisthebroadbeliefthat2018asawholeshouldoperateasacloselybalancedmarketandthatsupplyanddemandwillcomeintobalanceatsomepointintheyear–thisisasaresultofOPECandnon-OPECmembers’continuedcompliancewithanagreementreachedoverayearago,whichtookmorethan1millionbarrelsperday(bpd)outofproduction.Inaddition,globaldemandgrowthremainsabove1millionbpd.Thisisoffset,however,bytheU.S.oilproductionincreaseof800,000bpdprojected for20183. AndwhileNAMproductiongrowth isrobust, theEIAcurrentlyforecastsamoderationofU.S.productiongrowthtoamorereasonable200,000bpdbytheendofthedecade.43https://www.eia.gov/outlooks/steo/report/us_oil.php4Schlumbergermanagementpresentation,Cowen&Company12/4/2017

26

Of importantnote is the fact thatU.S. oil production contributes a small fractionof totalworldwideproduction.Globalexplorationexpenditureshavedecreasedyear-over-yearforthreeconsecutiveyears,fallingbyover-60%from2014-2017,withonlymodestincreasesestimatedfor2018.Ifthingsstayatstatusquo–whereglobaldemandgrowthcontinuesatitssteadypace,theOPECproduction-cutagreementremainsinplace,andinvestmentlevelsintheproductionbaseoutsideNAMlandremainatlowlevels–wecouldseeamedium-termglobal supply challenge. We believe the need for higher investment in internationalproductionisimminent.CharlesSchwabCharlesSchwabcontinuestoexecuteontheirdifferentiatedstrategyofprovidinglow-costfinancial services to mass affluent customers and advisors in the U.S. The Companycontinuedtogenerateexcellentandexpandingpre-taxprofitmargins,relativetoitslargecaptiveand independentcompetitors,despiteaggressively lowering tradingcommissionsearlierintheyear,andlaunchinglow-costindexmutualfundsinthemostrecentquarter.AsSchwab attracts more assets to its banking and brokerage platforms, the Company’soverhead expense as a percentage of platform assets continues declining to what wecalculatetoberoughly15basispointsperdollarofassets(trailingfourquartersthroughtheendofSeptember).Thisoverheadexpensecomparestothenearly150basispointsofnetinterestmarginavailabletotheCompanyonalmost$70billionofclientassetsthattheyplanontransferringfrommoneymarketstothebankingsubsidiaryoverthenextthreeyears.Combinedwithadramaticallylowertaxratefortheforeseeablefuture,wethinkSchwabhasauniqueopportunitytosubstantiallygrowitsearningsbaseoverthenextseveralyears.Visa

Visaisamarvel–anincrediblecash-generatingmachine.Visawasoneofourtopperformersinthefourthquarterandforthefullyear. Themultiyeartailwindoftheglobaltransitionaway from cash transactions continues unabated, driving solid double-digit growth inpaymentvolumes,transactions,revenuesandearningsthroughouttheyear.AsoftheendoftheSeptemberquarter,Visaestimatesthatafteralloftheseyearsonlyroughly10%ofglobalpaymentvolumesarepaidby card;with cash, check, andACHstillmakingup theoverwhelmingmajorityoftransactions.WecontinuetoexpectVisatobenefitaselectronicpayments takeshare throughout theworldand increase theirpenetration inall formsoftransactions, fromPersonal Consumption (where cards have a relatively higher, but stillsmall,sharethaninotherformsofpayment)tothesignificantlyunderpenetratedareasofBusiness-to-Business,Person-to-Person,andBusiness-to-Consumer.

TheCompanyisnotrestingonitslaurelswiththeirsuccessintheU.S.BackinJune2016,Visa purchased Visa Europe for awhopping $23 billion – adding over $15 billion on itsbalancesheettofinancethedeal.TheacquisitionwillrecombinetheglobalVisabrandaftereightyearsasseparateentities.

27

TheCompanyhaslargeambitionsoutsideofEurope,too.TheU.S.paymentprocessorshavetheircollectiveeyesonthegiantChinesemarket.The$8trillionyuanbankcardnetworkiscurrently dominated by state-backed China UnionPay. We expect the Company (if theyhaven’talready)tobeginpreparingtorequestlicensestooperateinChina.

Aswithmuchofourportfolio,particularlyinourtech-relatedholdings,wearenotconcernedabout the company’s growth prospects or long-term competitive position, but we arekeepinganeyeonvaluation.Visa’scompetitivepositionandcompetitiveadvantageisnearlyunmatched.TheCompanygeneratesbucketsoffreecashflow(FCF)tomatchitscompetitiveposition.Visa’s5-yearaverageFCFperrevenuesisanamazing40%.But,likemostofthemarket,Visaistradingatahealthyvaluationonanabsoluteandrelativehistoricalbasis,butwefeelthatthecompany’ssteadyandhighlyvisiblelonger-termgrowthpotentialinvolume,revenue,earnings,andcashflowsestablishesVisaasanattractivevalueinrelationtoourinvestmentuniverse.

January2018DavidA.Rolfe,CFAMichaelX.Quigley,CFAChiefInvestmentOfficerSeniorPortfolioManagerMorganL.Koenig,CFAChristopherT.Jersan,CFAPortfolioManagerResearchAnalyst

28

The information and statistical data contained herein have been obtained fromsources,whichwebelievetobereliable,butinnowayarewarrantedbyustoaccuracyorcompleteness.Wedonotundertaketoadviseyouastoanychangeinfiguresorourviews.Thisisnotasolicitationofanyordertobuyorsell.We,ouraffiliatesandanyofficer,directororstockholderoranymemberoftheirfamilies,mayhaveapositioninandmayfromtimetotimepurchaseorsellanyoftheabovementionedorrelatedsecurities.Pastresultsarenoguaranteeoffutureresults.This report includes candid statements and observations regarding investmentstrategies,individualsecurities,andeconomicandmarketconditions;however,thereisnoguaranteethatthesestatements,opinionsorforecastswillprovetobecorrect.Thesecommentsmayalsoincludetheexpressionofopinionsthatarespeculativeinnatureandshouldnotbereliedonasstatementsoffact.WedgewoodPartnersiscommittedtocommunicatingwithourinvestmentpartnersascandidlyaspossiblebecausewebelieveourinvestorsbenefitfromunderstandingour investment philosophy, investment process, stock selection methodology andinvestortemperament.Ourviewsandopinionsinclude“forward-lookingstatements”whichmayormaynotbeaccurateoverthelongterm.Forward-lookingstatementscan be identified bywords like “believe,” “think,” “expect,” “anticipate,” or similarexpressions. You shouldnot placeundue reliance on forward-looking statements,whicharecurrentasofthedateofthisreport.Wedisclaimanyobligationtoupdateor alter any forward-looking statements, whether as a result of new information,future events or otherwise. Whilewe believewe have a reasonable basis for ourappraisals and we have confidence in our opinions, actual results may differmateriallyfromthoseweanticipate. The information provided in this material should not be considered arecommendationtobuy,sellorholdanyparticularsecurity.

iReturnsarepresentednetoffeesandincludethereinvestmentofallincome.“Net(Actual)”returnsarecalculatedusingactualmanagementfeesandarereducedbyallfeesandtransactioncostsincurred.