Balanced Fund Report – February 2015

Caldwell North American Equity Strategy – Monthly Update February 28th, 2015

Company Updates: A Few Highlights
Cisco Systems (CSCO-us): A Cheap ‘Internet of Everything’ Play

Cisco reported a monster quarter! Revenue grew 7%, margins improved and strength was broad-based across products and geographies. This was by far Cisco’s best quarter in over a year (revenue had declined an average of 2.1% over the last 5 quarters) and signals execution of its Internet of Everything strategy, in which Cisco is central to the digital transformation of businesses, countries, cities and homes worldwide. We bought Cisco on fears that white-label providers were a major threat to the business. However, we saw Cisco responding with a sense of urgency as they aggressively moved resources from legacy to priority areas and transformed themselves into a solutions (versus strictly product) provider. Coupled with a very compelling valuation (sub 10x earnings when factoring cash on the balance sheet), we were happy to own the business through its transformation. Cisco is one of the portfolio’s best performing stocks over the last twelve months, up 32% versus 9% for the S&P 500 and 2.4% for the TSX. We continue to see attractive upside given the size of the Internet of Everything opportunity, positive margin outlook and discount valuation.

Kohl’s (KSS-us): When ‘Catalyst-Uncertainty’ Creates Opportunity

While analysts had previously acknowledged Kohl’s cheap valuation, which offered good downside protection, many felt the stock lacked catalysts to push the share price higher. We bought into this ‘catalyst uncertainty’ as it was clear that management was unsatisfied with results and was working diligently on a number of initiatives to drive traffic and sales. Investments in Beauty (a recurring purchase therefore steady traffic driver), National Brands (higher ticket prices) and the Yes2You Rewards Program (which has signed 25 million members since early October) have all started to pay off and became the catalysts needed to move the stock higher. In early February, the company pre-announced strong same store sales (sss) growth of 3.7% for Q4-2014, which was Kohl’s best result since Q4-2010 (SSS were negative in each of the prior 5 quarters). Kohl’s was the portfolio’s strongest performer in February on the back of this result, with a gain of 24% versus 5.5%% for the S&P 500 and 3.8% for the TSX. We see continued progress with these initiatives in 2015, with Beauty expanding to 900 from 500 stores, the addition of new national brands and targets to grow Yes2You by another 10 million members.

Verizon Communications (VZ-us): Best of Breed in Capital Allocation

Verizon was busy in February on their capital allocation strategy, having monetized $5 billion of tower assets, sold $10 billion of wireline assets in Florida, Texas and California, and purchased $10.4 billion of wireless spectrum. Net proceeds will be used to accelerate initiatives on the East Coast, where the company sees greater opportunity, pay down debt from last year’s purchase of Vodafone’s minority stake in Verizon Wireless, and share buybacks. Capital allocation – or how management invests and makes returns on the money entrusted to it by investors – is a key driver of value creation, and therefore a key part of our investment process. Verizon is best of breed in capital allocation with return on capital metrics well above peers over long periods of time. We believe this superior capital allocation will serve the company well as it manages through the current period of heightened competition. Management was upbeat about the business in 2015, despite investor concerns around competition, and the stock is supported by strong cash flow.

Continuing to Avoid Canada

We remain comfortable with our overweight position in the U.S., a position our investors have benefited from over the last 2.5 years. We recently highlighted our concerns about the Canadian market, where we view the fund flows out of energy and into non-energy stocks as having turned the entire market into an energy commodity play. Strong returns in most non-energy stocks seem less driven by strong operating results and more by the fact that money needs to go somewhere as it exits the energy trade. We view this as a broken market and therefore remain comfortable with our U.S. positions, where we see companies moving for their individual merit.

We appreciate your continued support. Please feel free to contact us at any time.

Best Regards,
Investment Management Team


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