Balanced Fund Report June 2013

Monthly Update June 2013

Portfolio Additions

Tyson Foods (TSN)

About the Company: Tyson produces, distributes and markets beef (40% of revenue), pork (15%), chicken (36%) and prepared foods (9%).

Investment Thesis: Tyson has done much to improve its operational efficiency. It moved from being one of the costliest producers to now one of the most efficient. This allows it to weather input cycles (corn) much better than it has in the past. Its businesses are also experiencing several positive trends and its focus on growing prepared foods will drive margins higher.

Valuation: Tyson is trading at 10.6x forward earnings. We see 13x as a reasonable target, implying over 20% upside on the multiple alone.

Expectations: Tyson is a much better company now than it was in the past. As the market sees the impact of improvements to their cost structure through higher margins, we believe the valuation multiple will move higher. Additionally, Smithfield Foods, one of Tyson’s competitors, announced last month that it was selling itself to a Chinese firm for $4.7 billion.

Rogers Communications (tsx:RCI.B)

About the Company: Rogers is the 2nd largest provider of wireless, cable and internet services in Canada. It also has a media group consisting of the CityTV, OMNI, Sportsnet and the Shopping Channel TV networks, 55 radio stations, 54 magazine and trade publications, and the Toronto Blue Jays and Rogers Centre event venues.

Investment Thesis: The stock has traded down on concerns that the regulator will make it more difficult for the incumbent wireless providers to maintain their current level of profitability. While we’ve seen the regulator take action to promote competition (denying Telus’ acquisition of Mobilicity), we think it will be very difficult at this point to find backers for new entrants given this last round of new entrants failed miserably. We think this provides a good opportunity to purchase shares.

Valuation: We view the telco’s as the best of the “stability bucket” stocks, which also include REITS, pipelines and utilities, given their relative valuations. At 7x ev/ebitda, Rogers trades at a discount to North American peers (7.5x) and also its historical average of 8.4x.

Expectations: We think Rogers will continue showing strong profitability and as it does, regulatory concerns will subside and the shares will trade higher.

Portfolio Deletions

BMO Equal-Weight U.S. Health Care ETF (100%) – We sold the BMO Equal-Weight U.S. Health Care ETF and locked in a solid return of +25%. Given the run, we saw better opportunities in other names.

Management Commentary

Sharp Rise in Bond Yields: Avoiding Yield Plays Pays Off

May saw a significant rise in bond yields, with the yield on the Government of Canada 10-Year rising from 1.7% to 2.07%. This is a huge move in a short amount of time which caused not only a sharp drop in bond prices but in many yield plays as well (REITS -4%, Utilities -3%, Pipelines -4% versus a gain of +1.8% for the TSX Total Return Composite). We have been avoiding much of this space for some time in anticipation of such a move and it certainly paid off.

Company Updates:

Cisco: Cisco was our best performing stock this month (+15.3%) on the back of strong quarterly results. Overall revenue grew +5.4% year over year (“y/y”), driven by 23% growth in Wireless, 77% growth in Data Center and 7% growth in their Service business. The company continues to pay back 50% of free cash flow to investors.

Canyon Services: Gains in the energy services industry were strong this month as confidence that market pricing has bottomed grows. Canyon, specifically (+11.2% in May), is well positioned to benefit from growing oil and gas drilling as it has a new and efficient equipment fleet and is located in some of best plays in Canada, particularly the Duvernay. The strength in natural gas prices is also a positive factor, given prices remain stable even as we enter the summer months.

Kohl’s: Kohl’s reported positive earnings in May. Same store sales and margins were much better than people had feared and the tone going into Q2 was positive. Kohl’s also announced additional changes to their management team, adding a new e-commerce and marketing manager, who previously worked with Starbucks. We like the progress the company is making and see additional upside as the company trades at 10.7x forward earnings. Kohl’s was also a strong performer, up 9.2% in the month.

Timken: Investors recently voted in favor of an activist shareholder proposal to spin off Timken’s steel business (57% voted in favor). Timken’s steel business produces very high quality steel with industry high margins. It should therefore command an attractive multiple. The company has created a committee to evaluate the proposed spin-out and we look forward to more news on this front.

As always, feel free to contact us at any time.