Caldwell North American Equity Strategy – Monthly Update April 2014

Portfolio Additions

We did not have any new additions to the portfolio in March.

Portfolio Deletions

Trilogy Energy (TET-T)

Reason we sold the stock: Our investment process has us look to protect our investor’s capital before we look to grow it. This makes us cautious of investments where positive future events are already reflected in today’s share price as the risk of capital loss is heightened given the future does not always come out as expected. While Trilogy has one of the best growth profiles of Canadian energy names and owns attractive land positions in the Duvernay (Alberta), we sold the stock because its valuation already reflects high expectations for growth going forward. While it may turn out that they hype is real and Trilogy’s share price only reflects a portion of good things to come, we prefer to invest in companies where the expected outlook is overly cautious, as these stocks trade at much more depressed levels and offer more compelling risk/reward, in our view.

Company Updates: A Few Highlights

Ann Inc. (Ann-US)

Ann was the portfolio’s strongest performer last month, up 16% on news that a private equity firm has taken a 9% ownership stake in the company. Our interest in owning ANN was for the company’s strong cash flow profile, which often attracts interests from activist investors.

Citigroup (C-US)

The U.S Federal Reserve this month conducted stress tests on key financial institutions to assess their ability to stay in business under extremely adverse economic conditions. While Citigroup was among the banks that passed the rigorous test, the Federal Reserve, to the surprise of Citigroup’s management and investors, denied the company’s proposal to return excess capital to shareholders. This caused some investors to sell the stock because excess cash on the balance sheet makes it tough for the company to meet profitability (ROE) targets. We view it more simplistically—extra cash on the balance sheet is not a bad thing—and see the decision as only a delay to the eventual return of capital to shareholders, which should act as a positive catalyst for the share price moving higher. We continue to own the shares as we see a very attractive valuation with Citigroup trading at a 15% discount to its tangible book value, a significant discount to its peers.

Parkland Fuel (PKI-T)

Parkland reported strong earnings results and was another strong performer for the portfolio, up 8% this month (versus the Canadian market up 1.2% and the U.S. market in C$ up 0.6%). Parkland is the largest independent fuel distributor in Canada, delivering fuel through commercial, retail and wholesale distribution channels. This is the largest quarter Parkland reported results that included participation in wholesale pricing through a contract with Suncor. Earnings going forward will be less volatile, which will likely lead to a higher share price because investors prefer and pay more for stable earnings streams. Parkland is also busy consolidating distribution assets and notes that the acquisition pipeline remains robust. This is positive and should drive earnings higher as fuel distribution is a scale business; the more volume the company does, the higher their cost advantages over competitors become.

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