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Aprll 10, 2014

I|ush|ng out Momentum

1wo Lhemes are qulckly emerglng Lhls year and boLh have been covered ln Lhese commenLarles: 1) Lhe
economy needs Lo caLch up Lo Lhe sLock markeL, and, 2) pockeLs of momenLum have become qulLe
lrraLlonal. 1here ls an underlylng Lhread LhaL unlLes Lhese Lwo Lhemes and LhaL ls Lhe poslLlve feedback
loop. 1he slmplesL posslble explanaLlon of a poslLlve feedback loop ls a deflnlLlon we wlll borrow from
Wlklpedla: A produces more of 8 whlch ln Lurn produces more of A."
SubsLlLuLe a rlslng sLock markeL" for A" and a sLrengLhenlng economy" for 8" and we have a good
shorLhand explanaLlon for Lhe relaLlonshlp beLween Lhe sLock markeL and Lhe economy. 2013 was Lhe
year of a sLrong sLock markeL and a relaLlvely Lepld economy. 1hus far ln 2014, we have seen a
sLrengLhenlng economy, helped by Lhe wealLh effecL and opLlmlsm derlved from growlng sLock markeL
valuaLlons. Meanwhlle, Lhe sLock markeL has largely sLagnaLed as evldenced by Lhe S&s 1.70 flrsL
quarLer reLurn. ln order for markeLs Lo reLurn Lo A" (a rlslng sLaLe), we need Lhe economy Lo do lLs
share and sLrengLhen, provldlng Lhe lmpeLus for conLlnued lncreases ln sLock values.
We wlll revlslL Lhls relaLlonshlp and Lhe role LhaL sLock markeL mulLlples play ln Lhls blgger game, buL for
now we would llke Lo focus our aLLenLlon once agaln on Lhese pockeLs of lrraLlonal momenLum by way
of anecdoLe. Craps ls one of Lhe mosL popular games ln a caslno. lf you hear a raucous, [oyous sound ln a
caslno, odds are Lhe craps Lable ls lLs source. Whlle Lhe caslno does offer nearly Lrue odds for a beL
behlnd Lhe pass llne, Lhe Lrue appeal of Lhe game ls how every parLlclpanL [olns forces Lo rooL ln Landem
for Lhelr unlLed cause of collecLlvely wlnnlng money. lor Lhe mosL parL, when one person wlns money aL
Lhe craps Lable, so Loo does everyone else, yeL noL everyone wlns Lhe same amounL of money ln Lhe
same way.
1he process of beLLlng on craps can easlly become lLs own feedback loop. 1hls ls someLhlng beglnners
are mosL vulnerable Lo, buL experLs are noL lmmune from Lhemselves. When a hoL roller geLs lnLo a
groove, craps players have money comlng lnLo Lhelr racks on nearly every Lhrow of Lhe dlce. Lach Llme
more money comes ln, new wagers are placed on Lhe Lable or exlsLlng wagers are pressed. 1hls effecL
lncreases Lhe scale of wlnnlngs so long as Lhe roller's momenLum ls malnLalned. 1he process of
momenLum ls a poslLlve feedback loop, whereby wlnnlngs lead Lo lncreased wagers, whlch lead Lo
lncreased wlnnlngs, and on, ln a vlrLuous cycle.
lL ls when LhaL momenLum ls noL malnLalned LhaL Lhe craps player runs lnLo Lrouble. MomenLum does
noL merely wane, raLher, lL halLs suddenly when Lhe dlce land on seven, Lhe dealer shouLs seven ouL"

and all beLs remalnlng on Lhe Lable are cleared. 1hls ls when Lhe craps player learns how much he Lruly
won on Lhe hoL roller, for far Loo many people end up wlLh a growlng arsenal of wagers on Lhe Lable LhaL
geL cleared off on Lhe reseL only Lo reallze Lhelr sLash barely grew, lf lL all, durlng Lhe course of Lhe hoL
1he secLors prone Lo momenLum ln Lhe sLock markeL funcLlon very slmllarly Lo Lhe craps Lable. 1hese
sLocks are Lhe domaln of speculaLors (ln conLrasL Lo Lhose focused on fundamenLals) ln LhaL people are
essenLlally wagerlng LhaL Lhe dlrecLlon of Lhe Lrend wlll perslsL. As Lhese sLocks rlse, Lraders lmpllclLly
have more money rldlng on each poslLlon. As Lraders make more money, Lhey become less rlsk averse
and spread Lhelr beLs Lo oLher momenLum slLuaLlons. Soon wagers of a much larger scale are on Lhe
proverblal Lable. Whlle Lhere ls no dlrecL equlvalenL Lo seven ouL" ln Lhe sLock markeL, momenLum ls
equally fleeLlng as lL ls ln craps. 1here ls no wanlng perlod, buL raLher a sharp, declslve reversal aL whlch
polnL Lhese sLocks collapse ln specLacular fashlon. Cnly afLer Lhe wlnd ls Laken ouL of momenLum's salls
does a momenLum Lrader know how much money was made durlng Lhe full cycle.
1hls sLory ls by no means a suggesLlon LhaL everyone who fllrLs wlLh momenLum loses money. 1here are
some specLacular Lraders ln Lhls arena of Lhe markeL, who conslsLenLly grow Lhelr beLLlng sLash,
however, lL ls lmposslble Lo know who really dld make money unLll Lhe Lable craps ouL. AC8 CaplLal
does ouLsLandlng research on markeL condlLlons and hlsLorlcal performance of sLraLegles. 1hey
lnLeresLlngly observed how momenLum sLraLegles Lend Lo work, however, Lhe average lnvesLor does noL
do well wlLh momenLum because Lhey buy lnLo Lhese sLraLegles far Loo laLe.
1hls ls slmllar Lo how
Lhlngs work ln craps. When a roller flrsL plcks up Lhe dlce, lL ls lmposslble Lo know wheLher Lhey are hoL
or noL. As Lhey geL rolllng and sLarL wlnnlng, only Lhen can one say a roller ls hoL," aL whlch polnL Lhe
beLLor presses hls beLs.
We Lell Lhls sLory because rlghL now momenLum ls geLLlng cllpped ln Lhe sLock markeL. lL ls happenlng
swlfLly and vlolenLly and lL ls by deslgn LhaL our allocaLlon Lo Lhese areas remalns almosL nll, for Lhese
pockeLs of momenLum are Lhe gambler's corner of Lhe sLock markeL. eople do noL own Lhese
companles for solld fundamenLal reasons, buL raLher for Lhe prospecL of fasL money". lurLher, we
operaLe on a LoLally dlfferenL wavelengLh Lhan Lhese Lypes of speculaLors. When markeLs rlse, raLher
Lhan lncrease our wagers, we Lake chlps off Lhe Lable and sLash Lhem as cash. 1hls provldes us Lhe ammo
necessarlly Lo lncrease our wagers when Lhe markeL goes down.


1hls conversaLlon we have been carrylng of laLe abouL momenLum begs anoLher quesLlon: ls Lhls a
repeaL of 1999 all over agaln? We are exLremely confldenL ln our answer LhaL lL ls noL. We have
conslsLenLly labeled Lhls problem as pockeLs of momenLum
" and pockeLs ls a very falr way Lo puL lL. As
we wenL over wlLh lmplled growLh of Lhe S&, expecLaLlons on average are noL low, buL nelLher are Lhey
hlgh. Cne mlsLake pundlLry ofLen makes ln dlscusslng markeL valuaLlons ls LhaL by naLure of Lhe game,
one musL have a poslLlon. 8y LhaL, we mean LhaL when someone appears on 1v or ln Lhe press Lalklng
abouL Lhe sLock markeL, LhaL person by naLure geLs backed lnLo a corner whereby Lhey musL label Lhe
markeL cheap" or overvalued." ln facL, lL ls Lhose who mosL vocally argue one slde or Lhe oLher LhaL
geL called upon Lo speak Lhelr oplnlons. lL ls very unsexy Lo Lhlnk of Lhe markeL as place wlLh a range of
posslble ouLcomes and no one blnary answer Lo Lhe cheap vs expenslve" quesLlon.
lf you were Lo ask us Loday where Lhe markeL sLands, we would Lell you lL ls well wlLhln average ranges
of valuaLlon. ln facL, Lhe markeL could go hlgher or lower wlLhouL changlng our answer. Were you Lo ask
us whaL we expecL Lhe markeL Lo do Lhls year, our answer would be lL lL wlll go up, lL wlll go down, and
ulLlmaLely lL wlll noL repeaL lasL year." Whlle Lhese appear as non-answers, Lhey are lmporLanL answers
noneLheless. MarkeLs spend mosL of Lhe Llme walklng wlLhln a few sLeps of falr value. lL ls Lhe excepLlon
Lo flnd a slLuaLlon en masse where prlces are exLreme ln elLher Lhe cheap or expenslve dlrecLlon.
llushlng ouL Lhese pockeLs of momenLum wlll ln[ecL some volaLlllLy lnLo markeLs, buL lL wlll noL
[eopardlze Lhe Lra[ecLory of ouLsLandlng buslnesses aL cheap Lo falr prlces, of whlch we Lhlnk we own
many. We Lhlnk Lhe key ln Lhls envlronmenL remalns focuslng lnLenLly on Lhe quallLy of Lhe companles
we own, Lhe rlsk/reward proposlLlon of ownershlp, and Lhe managemenL Leams aL Lhe helm who should
be worklng as sLewards of our caplLal, bulldlng long-Lerm value all Lhe whlle.
1o LhaL end, leL us Lurn our aLLenLlon Lo Lhls quarLer's leaders and laggards.


What do we own?
!"# %#&'#()*
I|at SpA (8I1: I) +40.6
llaL rang ln Lhe new year wlLh some exclLlng news: Lhe company agreed Lo pay vL8A $3.63 bllllon ln
LoLal conslderaLlon for Lhe ~41.3 of Chrysler lL dld noL already own.
noL only was Lhls an exLremely
aLLracLlve prlce for Chrysler, a key source of value ln our llaL Lhesls, buL lL was also pald for prlmarlly
wlLh cash on Chrysler's balance sheeL. 1hls afforded llaL conslderable flexlblllLy wlLh regard Lo boLh Lhe
quanLlLy and Llmlng of fundralslng necessary Lo execuLe lLs lnLegraLlon plan forglng Lhe new llaL-Chrysler
AuLomoblles. WlLh Lhe agreemenL compleLe, Lhe new comblned company can acceleraLe lLs focus on
sLraLeglcally uslng excess capaclLy ln Lurope Lo ramp lLs hlgher margln brands llke MaseraLl and !eep.
1hls parLlcular LransacLlon affords us Lhe opporLunlLy Lo lnLroduce an lmporLanL markeL concepL LhaL we
acLlvely seek ouL: Lhe osL Larnlngs AnnouncemenL urlfL (LAu).

ln Lhls parLlcular slLuaLlon, Lhe osL Larnlngs AnnouncemenL urlfL ls a mlsnomer, buL do noL be confused
as lL ls dlrecLly relaLed Lo whaL has happened wlLh llaL. Cn Lhe day of Lhe announcemenL, llaL's sLock
rose 13.06, a specLacular one-day reLurn. noLlce however LhaL 13 ls noL even half of Lhe LoLal move
Lhe sLock experlenced durlng Lhe quarLer. LAu ls one of Lhe markeL lnefflclencles (also called
anomalles) documenLed and agreed upon by proponenLs and opponenLs of Lhe LfflclenL MarkeL 1heory
allke. LfflclenL markeLs are supposed Lo lnsLanLly and properly lncorporaLe new lnformaLlon lnLo a
sLock's prlce, however, Lhe LAu suggesLs LhaL Lhe markeL ls very slow Lo ad[usL Lo evenLs LhaL are of Lhe
exLremely good (or bad) varleLy. 1o LhaL end, when a parLlcularly good surprlse occurs, a sLock's prlce
experlences a powerful move ln Lhe dlrecLlon of Lhe evenL, however, Lhe ensulng perlod followlng Lhe
evenL sees prlce conLlnue Lo drlfL ln Lhe dlrecLlon of sald evenL.
Whlle llaL's poslLlve evenL was noL earnlngs" ln Lhe llLeral sense, lL was an exLremely poslLlve evenL
whlch we felL Lhe markeL clearly undervalued on Lhe flrsL day followlng Lhe news. 1o LhaL end, we used
Lhe caLalysL as a reason Lo lncrease our exlsLlng poslLlon ln Lhe sLock. lurLher, we would call Lhe
agreemenL wlLh vL8A an lmporLanL de-rlsklng evenL." When we look aL any poLenLlal company Lo own,
we Lhlnk abouL Lhe rlsk relaLlve Lo Lhe reward. ln a de-rlsklng evenL, Lhe reward slde of Lhe equaLlon


does noL change, buL Lhe rlsk slde decreases. 1hlnk abouL lL maLhemaLlcally. LeL's say you look for
lnvesLmenLs wlLh Lhree unlLs of reward per unlL of rlsk. 1hen, leL's say Lhe rlsk ln Lhe slLuaLlon ls cuL ln
half due Lo some caLalyLlc evenL. When LhaL happens, whaL formerly was 3:1 reward: rlsk now becomes
All Lhls ls a roundabouL way of saylng our lnvesLmenL ln llaL remalns one of our mosL aLLracLlve
opporLunlLles ln Loday's markeL desplLe Lhe already solld unreallzed caplLal galns we have earned.
|atform Spec|a|ty roducts (NSL: An) +34.74
laLform SpeclalLy ls a unlque slLuaLlon. 1he company came publlc on Lhe new ?ork SLock Lxchange
Lhrough a reverse merger." 8everse mergers are Lyplcally looked aL wlLh scorn ln Lhe lnvesLmenL
communlLy and mosL of Lhe Llme LhaL ls Lhe correcL way Lo Lhlnk abouL such slLuaLlons, however, noL all
of Lhe Llme. 1hls parLlcular reverse merger was sponsored and largely owned by some parLles who have
excepLlonal records of value creaLlon and ouLperformance. llrsL and foremosL, laLform SpeclalLy ls an
lnlLlaLlve underLaken by MarLln lranklln, formerly an acLlvlsL lnvesLor who Look over, renamed and
compleLely revamped whaL ls now known as !arden Corp. We are sure you all have encounLered !arden
producLs ln your day-Lo-day llves. !arden producLs range from mason [ars, Lo k2 skls, Lo Coleman
ouLdoor gear, Mr. Coffee makers and beyond.
Slnce Mr. lranklln [olned !arden ln 2001, Lhelr sLock has appreclaLed by 2,898.3 compared Lo 33.42
for Lhe S&. 1hese are specLacular numbers and are reflecLlve of Mr. lranklln's sLraLegy whlch calls for
acqulrlng hlgh margln, markeL-leadlng nlche producLs wlLh mlnlmal caplLal needs. !arden focused
prlmarlly on household and consumer producLs, buL Mr. lranklln Loday clalms LhaL a very slmllar seL of
condlLlons exlsLs ln Lhe speclalLy chemlcals secLor for Lhe deploymenL of such an acqulslLlon sLraLegy.
8ased on whaL we have learned abouL Lhe secLor, we compleLely agree, Lhough we would be wllllng Lo
seLLle for a reLurn less Lhan LhaL of !arden's (whlch ls anoLher way Lo say LhaL whlle we llke Lhe poLenLlal
here, lL would be unreasonable Lo expecL a reLurn as specLacular as LhaL of !arden's). lmporLanLly, we
dld noL buy laLform as a shell, for laLform's lnlLlal offerlng on Lhe n?SL came alongslde Lhe compleLlon
of lLs acqulslLlon of Macuermld, a speclalLy chemlcals company wlLh a greaL Lrack-record of lLs own and
a managemenL Leam LhaL expllclLly subscrlbes Lo Warren 8uffeLL's phllosophy of ownershlp and
operaLlon. 1o LhaL end, Lhe Macuermld managemenL Leam Look a decenL-slzed sLake of lLs own ln
laLform ln Lhe acqulslLlon.
Cne of Lhe facLs we llke mosL abouL laLform's early rlse ls how lL provldes Mr. lranklln and hls Leam an
lncreaslng amounL of currency wlLh whlch Lo underLake Lhelr sLaLed acqulslLlon sLraLegy. Whlle Lhe sLock

ls noL cheap per se, one of Lhe greaL ways for a falrly valued sLock Lo become cheap ls vla Lhe acqulslLlon
of companles and pleces LhaL are ln facL cheap. 8eLween Lhe ample cash flow LhaL Macuermld Lhrows
off, Lhe recenLly obLalned warranL proceeds, and a rlslng sLock, laLform has plenLy of dry powder for
acqulslLlons. ln Loday's envlronmenL, speclalLy chemlcal companles around Lhe world are splnnlng off
non-core" buslnesses, many of whlch flL laLform's crlLerla of hlgh margln, hlgh-Louch nlche producLs.
1he comblnaLlon of ample ammunlLlon and plenLlful LargeLs play rlghL lnLo Mr. lranklln's hands and we
are exclLed Lo waLch Lhls sLraLegy play ouL over Llme.
1eva harmaceut|ca| Industr|es Ltd (NASDA: 1LVA) +32.83
1eva was Lhe second worsL performer ln our porLfollo lasL year, and appeared ln Lhe laggards secLlon of
our quarLerly commenLary Lwlce. Whlle Lhe sLock dld en[oy a poslLlve reLurn on an absoluLe basls ln
2013, lLs reLurn relaLlve Lo Lhe S& was qulLe poor. All LhaL changed ln a flash when Lhe calendar Lurned
Lo 2014. We have spoken aL lengLh abouL 1eva ln Lhe pasL, Lhough flnd lL worLh emphaslzlng a key polnL:
1eva ls a LexLbook example of a slLuaLlon where all Lhe negaLlves are known, obvlous and heavlly
dlscounLed ln Lhe sLock's prlce, buL where Lhe markeL refuses Lo look pasL Lhem. Peadllnes end up on
Lop of a sLory for a reason-Lhey are deslgned Lo draw aLLenLlon. lew people could look beyond Lhe
headllnes aL 1eva for Lhey aLLracLed all Lhe wrong klnds of lnLeresL.
Someone who followed Lhe newsflow ln 1eva lasL year sees a company whose lead producL (Copaxone)
ls loslng paLenL proLecLlon and a managemenL Leam ln dlsarray. 1hose who dug deeper would see LhaL
1eva had an opporLunlLy Lo proLecL some of lLs poLenLlal revenue hlL from Copaxone and LhaL even lf
Lhey were noL able Lo do so, Lhe prlce of Lhe sLock reflecLed lLs enLlre loss anyway. Pere ls where Lhe
relaLlonshlp beLween prlce and value ls so lmporLanL. 8ad news ls lnherenLly lmplled ln Lhe prlce of a
cheap sLock. ulgglng even deeper, one could Lhen reallze how slgnlflcanL a company llke 1eva ls ln
Loday's pharmaceuLlcal landscape. Cenerlcs are becomlng lncreaslngly lmporLanL globally and are one of
Lhe key sources of prlce pressure amldsL rapldly escalaLlng healLh care cosLs.
lurLher, as Lhe largesL generlc drug company ln Lhe world, 1eva noL only ls perfecLly poslLloned Lo help
drlve down cosLs ln Lhe healLh care sysLem, buL Lhey also have Lhe capaclLy Lo sell aL scale ln a Llme
when dlsLrlbuLlon and reLall are consolldaLlng ln a push for more scale. WlLness Lhe
Walgreen's/Alllance-8ooLs deal wlLh Amerlsource8ergen and Lhe Mckesson merger wlLh Celeslo. Whlle
Lhese mergers puL downward pressure on prlclng aL generlc companles ln Lhe shorL-run, Lhey creaLe a
proflL opporLunlLy for Lhose who can Lrade some margln for a loL of scale on a global level. 1hereln lles a
longer-Lerm opporLunlLy for 1eva Lo conLlnue lLs domlnance ln generlc prescrlpLlons worldwlde.

!"# %&++&(')*
Amer|ca Mov|| SA8 de CV (NSL: AMk) -14.93
1hls ls Amerlca Movll's second consecuLlve appearance ln Lhe laggards, Lhough Lhe sLock remalns largely
range-bound. ln Lhe pasL, we have emphaslzed our bellef LhaL Lhe company has been under pressure
generally speaklng from weakness ln emerglng markeLs, and speclflcally from a regulaLory overhaul ln
Mexlco's Lelecom secLor. We malnLaln LhaL Lhese problems are fully prlced ln, and aL Loday's value,
Amerlca Movll ls a greaL sLock Lo own. Carlos Sllm ls a proven operaLor who ls backlng hls bellefs wlLh
money from Lwo angles: Sllm conLlnues Lo buy more shares ln hls personal capaclLy, and Lhe company
conLlnues Lo cannlballze" lLs own shares wlLh large repurchases.
Clven many of Lhese polnLs are redundanL, we wanL Lo hlghllghL an lnvesLmenL concepL LhaL aLLracLs us
Lo Amerlca Movll. 1hlnk of Lhe sLock markeL has havlng Lwo klnds of waves: long waves and shorL waves.
Long waves are Lhe Lrends LhaL Lake place over years Lo decades, whlle shorL waves are Lhe Lrends LhaL
Lake weeks or monLhs Lo play ouL. 1owards Lhe end of a long-wave ln Lhe upward dlrecLlon, a sLock
becomes preLLy expenslve as lnvesLors assume Lhe pasL Lrend wlll conLlnue ln perpeLulLy (whlch never
happens ln reallLy). When Lhe Lrend lnevlLably breaks, Lhe sLock geLs re-prlced downward and Lhen
proceeds sldeways for a long Llme. lor us Lo be lnLeresLed ln Lhe sLock, one of Lhe mosL lmporLanL
facLors ls LhaL durlng Lhe sldeways acLlon, Lhe lnLrlnslc value of Lhe company conLlnues Lo lncrease whlle
Lhe sLock sLagnaLes. 1hls ln Lurn leads Lo valuaLlon compresslon.
valuaLlon compresslon ls LhaL slLuaLlon where slmply by movlng sldeways, Lhe sLock becomes cheaper"
from an owner's perspecLlve. SLaLed anoLher way, you can buy conslderably more wlLh Lhe same
amounL of money. Amerlca Movll's long-wave came Lo a concluslon ln early 2008. lrom Lhen on, Lhe
company's lnLrlnslc value has conLlnued Lo lncrease, Lhough Lhe sLock largely has moved sldeways.
1oday's ~$20 Amerlca Movll earns over double Lhe revenues and over 30 more ln operaLlng lncome
Lhan 2007's $20 Amerlca Movll. Clearly proflL marglns have noL been as robusL as ln Lhe pasL, buL Lhe
facL remalns LhaL Amerlca Movll ls a conslderably more aLLracLlve bargaln Loday Lhan lL was seven years
ago aL Lhe same prlce. 8ack Lhen Lhe sLock was prlced for growLh, whlle Loday lL ls prlced for conLracLlon.
ln reallLy, Lhe company LhroughouL Lhls Llme perlod has dellvered modesL, buL sLeady growLh and we
expecL LhaL Lo conLlnue lnLo Lhe fuLure, Lhough we belleve we are ln poslLlon for a favorable lnvesLmenL
ouLcome even lf growLh comes Lo an end.

Cree Inc. (NASDA: CkLL) -9.S3
Cree ls anoLher repeaL offender on Lhe laggards llsL, Lhough lL also flnlshed our 2013 Leaderboard ln
second place. 1he blggesL problem faclng Lhe sLock ls LhaL early lasL year's prlce appreclaLlon wenL much
farLher Lhan lLs fundamenLals. now Lhe fundamenLals need Lo spend some Llme caLchlng back up wlLh
Lhe sLock prlce. ln essence, Cree ls llke Amerlca Movll clrca 2008, Lhough wlLh a much qulcker cycle LhaL
should noL see valuaLlon compresslon lasL nearly as long. As we have polnLed ouL ln Lhe pasL, we already
reallzed conslderable galns on Cree, Lhough we have malnLalned an average allocaLlon Lo Lhe sLock wlLh
Lhe resldual of our sales. We do Lhls for several reasons: 1) belng as large a galn as Cree has, our
unreallzed galns are effecLlvely a deferred Lax loan LhaL leverages Lhe upslde of our holdlng, and, 2) we
conLlnue Lo belleve LhaL Lhe long-Lerm ouLlook holds Lhe poLenLlal for even beLLer performance.
ln our 2013 revlew we sald LhaL Cree has a modesLly expenslve valuaLlon" and Lhls facL remalns Lrue
Loday, Lhough Lo a sllghLly lesser exLenL. We conLlnue Lo llke Lhe ouLlook for 2014 and beyond now LhaL
Lhe lncandescenL bulb ban ls fully ln effecL. lmporLanLly, Cree's llghL bulbs have esLabllshed Lhemselves
as Lhe cleanesL and puresL new" form of llghL. LlghL bulbs are ofLen dlscussed as a LexLbook example of
an lnnovaLlve producL Lurned lnLo a commodlLy good, and cerLalnly down Lhe llne LLus wlll follow LhaL
same rouLe. Powever, ln Lhe near-Lerm, we Lhlnk Lhere ls conslderable opporLunlLy Lo beneflL from
ramped uLlllzaLlon, whlch wlll more Lhan offseL prlce decllnes, and, longer-Lerm we see upslde from Lhe
company's leadlng presence ln LLu flxLures, and a plpellne of opporLunlLles Lo use llghLlng ln new ways.
Iohnson Cutdoors (NASDA: ICU1) -7.10
We boughL !ohnson CuLdoors and almosL lnsLanLly Lhe prlce dropped sharply. 1he caLalysL was Lhe
company's fourLh quarLer earnlngs, Lhough we would be hard pressed Lo say Lhese earnlngs fell shorL of
expecLaLlons. lor one, Lhe fourLh quarLer ls always a slow one for !ohnson conslderlng Lhe company
speclallzes ln warm weaLher ouLdoor goods, and second, few analysLs follow Lhe sLock, renderlng
expecLaLlons largely a mooL polnL. uesplLe Lhe decllne, we are exclLed Lo have found Lhls sLock and Lhlnk
Lhe Llmlng ls largely rlghL.
!ohnson ls an owner-operaLor, of Lhe same famlly LhaL ls behlnd SC !ohnson & Co. !ohnson has several
llnes of buslness: Marlne LlecLronlcs, CuLdoor LqulpmenL, WaLercrafL and ulvlng. ln recenL years, Lhe
vasL ma[orlLy of lncome has been earned ln Lhe Marlne LlecLronlcs segmenL, whlch makes Lhe
Pummlngblrd llne of flsh/depLh-flnders. Cver Llme, dlvlng has been proflLable, Lhough lL has sLruggled
laLely slnce much of lLs buslness has been earned from LourlsLs ln and from Lhe mosL Lroubled Luropean
economles. 1he waLercrafL buslness ls !ohnson's oldesL and mosL Lroubled. As of Loday, Lhere ls Lalk of

posslbly selllng LhaL buslness Lo a purchaser and reallocaLlng LhaL caplLal. 1he CuLdoor LqulpmenL llne ls
one area where Lhe company recenLly made a sLraLeglc acqulslLlon wlLh vasL poLenLlal: !eLboll. !eLboll
makes a new llne of camplng sLoves LhaL ls slmpler Lo use Lhan any predecessor and already ls a Lop
seller aL many ouLdoor ouLleLs.
1aken LogeLher, !ohnson ls an lnLeresLlng collecLlon of nlche producLs, wlLh Lhe company's llnes elLher
Lhe number one or Lwo besL sellers, where brand recognlLlon ls lmporLanL and long-Lerm proflL marglns
are aLLracLlve. !ohnson ls rellanL on lelsure spendlng and durlng Lhe crlsls households cuL back
slgnlflcanLly on Lhese purchases. Cn Lhe plus slde, !ohnson's core earnlngs were largely unscaLhed (Lhey
dld Lake slgnlflcanL goodwlll wrlLe-downs, buL Lhese were non-cash expenses). Cn Lhe mlnus slde, Lhe
company experlenced a llquldlLy crunch durlng Lhe crlsls, and as a resulL, has malnLalned excess
caplLallzaLlon ever slnce. 1haL mlnus has slnce Lurned lnLo an opporLunlLy for Lhe company, as now LhaL
economlc normallzaLlon ls furLher along, Lhere ls conslderable room for balance sheeL opLlmlzaLlon Lo
drlve beLLer reLurns on equlLy. 1he company's relnsLaLemenL of a dlvldend Lowards Lhe end of 2013 was
a key sLep ln Lhls dlrecLlon.
1he ouLlook for lelsure spendlng looks lncreaslngly good as Lhe unemploymenL slLuaLlon naLlonally
conLlnues Lo lmprove. WlLh !ohnson now Lradlng aL some of Lhe lowesL mulLlple valuaLlons we see ln Lhe
small cap space, Lhls ls a very aLLracLlve lnvesLmenL opporLunlLy.
1hank you for your LrusL and confldence, and for selecLlng us Lo be your advlsor of cholce. lease call us
dlrecLly Lo dlscuss Lhls commenLary ln more deLall - we are always happy Lo address any speclflc
quesLlons you may have. ?ou can reach !ason or LllloL dlrecLly aL 316-663-7800. AlLernaLlvely, we've
lncluded our dlrecL dlal numbers wlLh our names, below.
Warm personal regards,

!ason CllberL, CA/lS, Cll
Managlng ulrecLor
C: (316) 663-7800
u: (316) 663-1940
M: (917) 336-3066
LllloL 1urner, Lsq.
Managlng ulrecLor
C: (316) 663-7800
u: (316) 663-1942
M: (316) 729-3174

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ast performance |s not necessar||y |nd|cat|ve of future resu|ts. 1he vlews expressed above are Lhose of 8CA lnvesLmenL Advlsors LLC (8CA).
1hese vlews are sub[ecL Lo change aL any Llme based on markeL and oLher condlLlons, and 8CA dlsclalms any responslblllLy Lo updaLe such
vlews. asL performance ls no guaranLee of fuLure resulLs. no forecasLs can be guaranLeed. 1hese vlews may noL be relled upon as lnvesLmenL
advlce. 1he lnvesLmenL process may change over Llme. 1he characLerlsLlcs seL forLh above are lnLended as a general lllusLraLlon of some of Lhe
crlLerla Lhe Leam conslders ln selecLlng securlLles for Lhe porLfollo. noL all lnvesLmenLs meeL such crlLerla. ln Lhe evenL LhaL a recommendaLlon
for Lhe purchase or sale of any securlLy ls presenLed hereln, 8CA shall furnlsh Lo any person upon requesL a Labular presenLaLlon of: (l) 1he LoLal
number of shares or oLher unlLs of Lhe securlLy held by 8CA or lLs lnvesLmenL advlser represenLaLlves for lLs own accounL or for Lhe accounL of
offlcers, dlrecLors, LrusLees, parLners or afflllaLes of 8CA or for dlscreLlonary accounLs of 8CA or lLs lnvesLmenL advlser represenLaLlves, as
malnLalned for cllenLs. (ll) 1he prlce or prlce range aL whlch Lhe securlLles llsLed ln lLem (l) were purchased. (lll) 1he daLe or range of daLes
durlng whlch Lhe securlLles llsLed ln response Lo lLem (l) were purchased.

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