Balanced Fund Report – October 2014

Caldwell Balanced Fund—Monthly Update October 31st, 2014

Portfolio Additions

Whirlpool (WHR-us)

About the Company: Whirlpool is a leading maker of consumer appliances operating under the Whirlpool, Maytag, KitchenAid and other brands. While over 50% of revenue currently comes from North America, the company recently closed joint ventures (JVs) that will significantly increase their scale in Europe and China.

Investment Thesis: The closing of JVs in Europe and China will significantly increase scale in both markets. This has the effect of creating tremendous operating leverage given the fixed cost nature of operations. Whirlpool’s purchase of Maytag in 2006 is a great example – overall company revenue has not grown at all since that time and yet earnings are roughly 90% higher today. The company has said that both deals are significant value drivers, even if there is no improvement in demand. The ability to unlock value without requiring growth is appealing, especially in the current market. The company has further growth potential from an improving U.S. economy through new housing builds and a replacement cycle.

Valuation: At 10.8x TEV/EBIT, we believe Whirlpool shares are trading at a reasonable value without factoring in the JV related growth prospects. This means that future growth is largely un-reflected in the share price, which creates the opportunity to unlock substantial upside potential.

Portfolio Deletion

Rogers Communication (RCI.B-t)

Reason we sold the stock: Rogers reported results that missed expectations and provided underwhelming guidance. While some trends showed progress, results remain weak as the company works through its restructuring plan. We believe the new CEO’s focus on service and costs are on the right track, however, it will take time to reflect in results. Pricing is increasingly competitive and Rogers is struggling to grow the top line. We prefer to hold cash and redeploy into other opportunities as they arise.

Home Capital Group (HCG-t)

Reason we sold the stock: We sold HCG based on the combination of the stock nearing our valuation target and our view that potential business challenges may be emerging. While Home Capital’s business has been performing very well, we have seen a number of large U.S. companies indicate weaker results from Canada over the last few quarters. Combined with lower oil prices, we anticipate that the Canadian economy could become more challenged. Competition also seems to be heating up given competitors’ plans to grow markets that have not historically been core to their businesses – it seems that a lot of capital is beginning to chase fewer opportunities. While we may be early in our call to sell given strong results and management’s positive outlook, our preference is to take money off the table and focus on capital protection over growth when we see risks building.

Company Updates: A Few Highlights

CanElson Drilling (CDI-t)

This has been the portfolio’s most challenged position given the sharp decline in oil prices over the last few months. However, we see tremendous value in the shares. The company recently announced long term contracts on 5 new drilling rigs which will increase their drilling fleet by 10%. Four of the five rigs are to be deployed in the Permian basin in Texas which continues to see very strong drilling activity. On its last earnings call, the oil giant Chevron pointed to the Permian as a very strong play that can withstand much lower oil prices. There is much credibility behind comments from Chevron given their long term track record of making profitable investments (high teen return on capital). CanElson continues to exhibit industry leading utilization levels given their focus on efficient drilling, which becomes increasingly important in a lower commodity price environment. A strong balance sheet gives them flexibility to execute in this challenging environment.

Best Regards,
Investment Management Team