Balanced Fund Report February 2014

Caldwell North American Equity Strategy ‐ Monthly Update February, 2014

Portfolio Additions

Varian Medical (VAR‐US)

About the Company: Varian is a leading provider of radiation therapy equipment used for cancer treatment. We see Varian as an attractive growth/stability stock as the company maintained revenue and earnings growth throughout the recession, has a balance sheet with a net cash position (meaning the company has more cash than debt), and generates strong cash flow.

Investment Thesis: Revenue growth in the US has been tepid stemming from uncertainty in reimbursement rates and Obamacare, which has put investment spending by hospitals on hold. We believe this is a temporary issue and creates a good buying opportunity as 1) global cancer rates continue to climb; 2) demand is strong outside of developed markets, as radiation equipment per 1000 persons in emerging markets is well below U.S. levels; 3) the U.S. market is entering a product upgrade cycle.

Valuation: We’re able to buy this company at an attractive valuation, with 20% upside to historic valuations. On an absolute level, the stock is in the top 30% least expensive stocks in our investment universe.

Expectations: We expect U.S. orders to pick up, which will act as a positive catalyst for the stock. Our thesis has already started to play out as the company recently announced strong order bookings in the U.S., up 13% this last quarter. Varian was the 2nd strongest performer in our portfolio in January on the back of this strong earnings announcement. The stock was up 4.7% versus a U.S. market that was down 3.6%. We continue to expect strong growth out of the U.S., which should continue to drive shares higher.

ShawCor (SCL‐T)

About the Company: ShawCor is a global leader in pipeline coating and benefits from the development of new oil and gas fields. It is one of the few companies that can execute on projects that are becoming increasingly technical and complex, especially in the growing deep-water market.

Investment Thesis: 2013 will be a peak earnings year for ShawCor as two big projects in Asia come to an end. While analysts like the company’s prospects beyond the short term, they are reluctant to put a “Buy Rating” on the stock given a declining order backlog (due to the roll-off of these big projects). We believe this is creating a good buying opportunity as bidding activity on new projects is currently very strong, which creates potential for the company to again reach the record 2013 earnings in 2015. In addition to ShawCor benefiting from new oil and gas fields, the existing global pipeline infrastructure is old and will need to be replaced, which will drive demand for ShawCor’s products.

Valuation: Our cycle analysis suggests capital is protected using conservative earnings assumptions for 2014, and shows compelling upside to the stock price should results come in stronger than our conservative assumptions.

Expectations: We expect current bidding activity to translate into new order wins, which will push the backlog higher. This is a key catalyst for the shares moving higher.

Portfolio Deletions
General Motors (GM‐US)

Reason we Sold the Stock: There is a lot of good stuff happening at GM – they just won the Detroit Auto Show’s car and truck of the year awards, and they recently announced a dividend that would yield 3%. We sold half the position early in the month on this strength, as analyst estimates at the time projected a 35% rise in EPS in 2014, which we thought was quite strong and meant that a lot of the good news was already being reflected in the stock price. We were quick to sell the remaining stake in GM a week later when the company issued an outlook for 2014 that profits would rise only slightly. Had we still held GM in the portfolio, the stock would have been our worst performer in January. The sale is a great example of how our valuation targets allow us to get out of a position when too much optimism becomes built into the share price.

Company Updates: A Few Highlights
Tyson Foods (TSN‐US)

Tyson was the portfolio’s strongest performer in January, up 11.8% on the back of a strong earnings report. The outlook remains positive for Tyson, which is a producer of chicken, beef, pork and prepared foods. We are starting to see the benefit of a new management team, which is focused on stabilizing margins through the earnings cycle and improving their return on capital. The company still trades at a considerable discount to its historic average and to current peer valuations. As the company continues to demonstrate its ability to execute, we believe the discount on valuation starts to close, driving shares higher.

Cold Weather Impacts Retail (ANN‐US & KSS‐US)

The very cold winter has created low expectations for retail earnings this quarter, driving down the share prices of the entire retail sector, including our holdings in Ann Taylor and Kohl’s. One of the conditions we look for when investing in a company is low valuations caused by temporary headaches. We think weather related-headaches fit the “temporary” description quite well. While the volatility in these stocks may continue, valuations remain compelling and are supported by strong balance sheets and cash flow generation. Operational initiatives have the potential to drive positive earnings surprises in both companies.

Market Commentary
Taking Advantage of the Market’s Sell‐of

The U.S. market sold off in January after very strong performance in 2013 while the Canadian market gained ground on the back of strong performance in gold stocks. Valuations, or the prices we have to pay for companies, are the primary drivers of our investment decisions. The sell off in the U.S. market, which has been more pronounced in some stocks versus others, has brought valuations in many companies down to attractive levels, and we have been buying stocks and adding to positions on the dip.


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