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uly 14, 2014

What ou See Is Not Necessar||y What ou Get
As we hlL Lhe halfway mark on Lhe calendar year, lL's worLh reflecLlng on Lhe expecLaLlons we ouLllned
ln our 2014 prevlew. lf you recall, we emphaslzed LhaL lL ls qulLe posslble, almosL probable LhaL 2014
wlll be a beLLer year for Lhe economy Lhan lL wlll be for Lhe sLock markeL"
. Were we wrong? So far Lhls
year, reallLy seems llke a mlrror reflecLlon of our expecLaLlon, for Lhe sLock markeL (as represenLed by
Lhe S&) ls up 6.93, whlle Lhe economy (as measured by Lhe Cross uomesLlc roducL (Cu) ln Lhe flrsL
quarLer) appears frlghLenlngly weak
. noLlce however LhaL we used Lhe phrase seems llke" raLher Lhan
ls" a mlrror reflecLlon of Lhls expecLaLlon. CfLen Llmes whaL you see ls noL necessarlly whaL you geL.
lL ls an exerclse ln fuLlllLy Lrylng Lo esLlmaLe sLock markeL performance based on Cu. More broadly, Lhe
flrsL half Lhls year ls one of Lhe clearesL slgnals LhaL markeL parLlclpanLs who spend Lhelr Llme Lrylng Lo
guess whlch dlrecLlon Lhe broader economy wlll go, Loo ofLen mlsLake Lhe foresL for Lhe Lrees. Whlle
Cu ls obvlously a good proxy for Lhe dlrecLlon of corporaLe earnlngs, lL ls far from perfecL. Moreover,
Cu does noL Lell us anyLhlng abouL how companles are valued, and where Lhose correspondlng values
wlll go over Llme. 1here are Lwo lmpllclL polnLs here ln our knock on Cu as a Lool for sLock markeL
Llmlng: 1) lL ls an exLremely challenglng Lask Lo predlcL whaL Lhe raLe of change ln Cu wlll be one
quarLer ouL, leL alone one year ouL, and, 2) even were one Lo know ln advance whaL Cu would do Lhe
nexL quarLer, lL does noL follow LhaL one would Lhen be able Lo use LhaL lnformaLlon proflLably ln Lhe
sLock markeL.
1hls ls buL one parL of why we are sLrong bellevers ln learnlng our companles Lhrough-and-Lhrough,
famlllarlzlng ourselves wlLh Lhe secLors wlLhln whlch Lhey do buslness, and undersLandlng Lhe general
conLexL of Lhe economy around Lhem, wlLhouL shlfLlng our Lhesls on ouLsLandlng buslnesses based solely
on Lhe ebbs and flows of Lhe macroeconomy.
So where does LhaL leave us wlLh regard Lo our seemlngly very wrong assessmenL of Lhe general
landscape for 2014? Well, glven recenL sLock markeL performance, we clearly aren'L Loo dlsappolnLed ln
belng wrong. Powever, we do Lhlnk LhaL we are sLlll far more rlghL Lhan lL may appear. Whlle Lhe S& ls
off Lo a greaL sLarL ln 2014, Lhe 8ussell 2000 ls up half as much as Lhe S&, or 3.26. 1hls ls evldence


LhaL a few large cap mulLlnaLlonals have been pulllng up Lhe vasL ma[orlLy of sLocks, whlle Lhe average
sLock has been, qulLe average," for lack of a beLLer word.
Meanwhlle Lhe exLremely negaLlve C1'14 Cu number ls far less negaLlve Lhan lL appears. noLe LhaL
Cu numbers go Lhrough many revlslons before Lhey are flnallzed. lmporLanLly, Lhls parLlcular C1'14
Cu number was drasLlcally lmpacLed by Lhe lnclemenL weaLher affecLlng much of Lhe counLry.
1yplcally, Cu moves alongslde ersonal ConsumpLlon LxpendlLures (CL), whlch measures Lhe amounL
of money LhaL households spend, and whlle Cu was negaLlve, CL remalned poslLlve All ln all, we also
sLlll do noL know Lhe C2'14 Cu, and Lhus cannoL speak Lo Lhe flrsL half ln lLs enLlreLy, however, lL's falrly
clear from Lhe conLexL of an amalgamaLlon of leadlng lndlcaLors such as hours worked, durable goods
orders, and Lhe urchaslng ManufacLurers lndex (among oLher reference polnLs) LhaL Lhe economy
has/ls acceleraLlng raLher Lhan slumplng.
1aken as a whole, we Lhlnk our expecLaLlon LhaL 2014 wlll be a beLLer year for Lhe economy Lhan Lhe
sLock markeL remalns Lhe correcL overall framework when consLrucLlng porLfollos. As we dlscussed over
recenL quarLers, we conLlnue Lo carry a healLhy cash balance, we have llLLle Lo no exposure Lo Lhe
momenLum segmenLs of Lhe markeL, and we have bullL a subsLanLlal allocaLlon Lo global equlLy markeLs.
WlLh LhaL belng sald, leL's revlew our leaders and laggards over Lhls pasL quarLer.
What do we own?
!"# %#&'#()*
|atform Spec|a|ty roducts (NSL: An) +47.14
1hls ls laLform's second consecuLlve appearance on Lhe leaderboard. When we covered laLform lasL
quarLer, we spenL mosL of our dlalogue dlscusslng lLs CLC, MarLln lranklln's hlsLory and background as
well as explalnlng Lhe company's emphasls on asseL-llghL, hlgh-Louch nlche producLs." 1hls alone made
Lhe lnvesLmenL worLhwhlle from our perspecLlve. now we Lhlnk lL's worLh explalnlng why Lhls
lnvesLmenL remalns one Lo hold, raLher Lhan sell afLer such sLellar performance. We have ofLen spoken
abouL feedback loops, and Lhe role poslLlve feedback loops ln parLlcular play ln economles and markeLs
(we spenL exLra Llme on Lhls ln our March CommenLary).

ln essence, Lhe laLform buslness ls an efforL Lo creaLe [usL such a poslLlve feedback loop. As a roll-up,
laLform's sLraLegy lnvolves purchaslng hlgh quallLy buslnesses for falr-Lo-cheap prlces. lnlLlally,


laLform was flnanced wlLh caplLal from lLs founders and early lnvesLors Lo make Lhese purchases. As
Llme progresses, Lhese purchases wlll be flnanced wlLh a comblnaLlon of Lhe cash flows from companles
lL owns, and elLher debL or equlLy, whlchever ls cheaper. As Lhe sLock moves hlgher, equlLy lLself
becomes cheaper. Moreover, as Lhe sLock moves hlgher, Lhere ls a larger equlLy caplLallzaLlon Lo work
wlLh, and use as currency for fuLure acqulslLlons.
1he poslLlve feedback loop works as follows: laLform makes an acqulslLlon LhaL makes lLs sLock more
aLLracLlve. lLs sLock Lhen moves up ln prlce reflecLlng Lhe added value of Lhls acqulslLlon. 1he hlgher
sLock provldes more currency wlLh whlch laLform can make anoLher acqulslLlon. laLform makes
anoLher acqulslLlon wlLh lLs now hlgher sLock, whlch Lhe markeL Lhen greeLs favorably, Lhus leadlng Lo
furLher prlce lncreases. 8lnse, wash, repeaL. now obvlously Lhls Lype of feedback loop cannoL work ln
perpeLulLy, however, ln cerLaln lndusLrles (here we're Lalklng abouL speclalLy chemlcals), and sLarLlng
from a small markeL cap, Lhere ls a long runway wlLhln whlch Lo operaLe ln such a way. Mr. lranklln's
Lrack-record suggesLs he ls qulLe good aL Lhls, and we are more Lhan happy Lo rlde hls coaLLalls as Lhe
sLock marches on.
8anco Santander 8ras|| (NSL: 8S8k) +24.24
We spenL some Llme earller Lhls year parslng Lhrough opporLunlLles ln emerglng markeLs. We were
parLlcularly aLLracLed Lo 8anco SanLander 8rasll for lLs lncredlbly hlgh quallLy balance sheeL, sLrong Lrack-
record and sharp managemenL Leam. We also felL 8razll had parLlcularly favorable valuaLlons relaLlve Lo
lLs peers, and for Lhe mosL parL, lLs rule of law was less rlsky Lhan some oLher emerglng markeLs, llke
8ussla or Chlna. LasLly, we llked LhaL 8anco SanLander 8rasll was a largely owned subsldlary (formerly
wholly owned subsldlary) of SanLander (n?SL: SAn), a generally well-run Spanlsh bank.
Whlle we are pleased wlLh 8anco SanLader 8rasll's performance ln our flrsL quarLer of ownershlp, we
wlll chalk up Lhe emergence of a recenL caLalysL Lo luck. SanLander, Lhe Spanlsh bank offered Lo buy ouL
all oLher shareholders ln Lhe 8razlllan subsldlary for a greaLer Lhan 30 premlum ln Lhe form of a sLock
for sLock deal. Whlle Lhe premlum sounds qulLe nlce, we Lhlnk Lhls prlce ls aL a subsLanLlal dlscounL Lo
where Lhe 8razlllan bank could have Lraded Lwo or Lhree years down Lhe llne glven a normallzaLlon ln
Lhe buslness cycle ln 8razll, a reorganlzaLlon of Lhe company's balance sheeL Lo sLreamllne lLs caplLal
raLlos, and Lhe prlvaLe secLor Laklng an lncreaslngly large sllce of Lhe lendlng markeL ln 8razll as Lhe
governmenL pulls back some.
We remaln undeclded on wheLher we wlll own SanLander, Lhe parenL company ln perpeLulLy, however,
we do expecL Lo hold our shares unLll Lhls poslLlon can move Lo long-Lerm caplLal galn sLaLus. We wlll do

so because a) we are qulLe comforLable wlLh SanLander lLself for now, and b) we Lhlnk Lhe Luropean
envlronmenL rlghL now ls parLlcularly favorable for lLs banks. Were Lhese Lwo condlLlons noL presenL,
we would slmply sell 8anco SanLander 8rasll and move on, however, we would llke Lo proLecL as much
of our galn as posslble from shorL-Lerm Lax consequences whlle malnLalnlng some poLenLlally nlce
Devon Lnergy (NSL: DVN) 18.63
We have owned uevon for some Llme now and lL has made more Lhan one appearance ln Lhe laggards
secLlon. ConsequenLly, we are qulLe pleased Lo see uevon ln Lhe leaderboard and comforLably above
our purchase prlce. uevon ls an exLremely well-run oll and gas exploraLlon company, whlch has been ln
Lhe mldsL of an overhaul whereby Lhe company has been selllng off ouLslde of u.S. asseLs and uslng Lhe
proceeds Lo purchase hlgher quallLy domesLlc energy sources.
uevon remalns well-exposed Lo naLural gas, and has an lncreaslng amounL of shale oll exposure. 1he
prlclng envlronmenL ln lLs core operaLlons conLlnues Lo lmprove, all Lhe whlle managemenL conLlnues Lo
Lake smarL sLeps ln order Lo mlLlgaLe Lhe Lax consequences of lLs LransformaLlon and maxlmlzlng Lhe
reallzable value on Lhe dlsposlLlon slde.
uevon was cheap because of lLs ongolng LransformaLlon, buL also because of Lhe dlsLressed
envlronmenL LhaL emerged ln naLural gas lnLenslve companles followlng Lhe collapse ln prlces of naLural
gas. Companles were pumplng ouL supply and selllng aL prlces below break-even, acLlng ln uneconomlc,
lrraLlonal ways. We llked uevon's capaclLy Lo boLh weaLher Lhe sLorm and emerge as an opporLunlsLlc
purchaser of hlgher quallLy asseLs. So far Lhe company has been dellverlng on our expecLaLlons, Lhough
up unLll Lhls quarLer Lhe markeL had been LreaLlng Lhe company as gullLy unLll proven lnnocenL.
!"# %&++&(')*
I|at SpA (8I1: I) -1S.2S
llaL, a frequenL leader ln our prevlous commenLarles ls a laggard for Lhe flrsL Llme, Lhus hammerlng
home Lhe lesson LhaL noLhlng goes up ln a sLralghL llne. 1here ls llLLle Lo add Lo llaL above and beyond
whaL we have prevlously dlscussed, however, lL's worLh noLlng LhaL llaL, Lhls quarLer, dellvered a qulLe
amblLlous 3 year plan. 1he markeL has LreaLed Lhe company's amblLlon as rlsk, as has been Lhe case
from Lhe beglnnlng wlLh lLs approach Lowards Serglo Marchlonne, Lhough we Lhlnk Lhls ls mlsgulded.
AmblLlon and rlsk are noL even Lwo sldes of Lhe same coln. As ouLllned, llaL wlll be lnvesLlng
conslderably ln expandlng some of lLs premlum brands, and ln dolng so, wlll requlre some klnd of

fundralslng and/or lncreaslng leverage. ln Lhls global envlronmenL where caplLal lnvesLmenL has been
frusLraLlngly anemlc, Lhose companles who do [usL LhaL can bulld a susLalnable leg up for Lhemselves
agalnsL compeLlLors lnLo Lhe fuLure wlLh smarL lnvesLmenL (key word here belng smarL"). llaL's
leadershlp has proven adepL Lhrough a varleLy of challenges, and we Lhlnk Lhe quallLy of managemenL
wlll once agaln shlne Lhrough as opporLunlLy ls pursued.
Whlle Lhe markeL dlsagrees aL Lhe momenL, lnvesLmenL ls noL on lLs face a bad Lhlng so long as cerLaln
ob[ecLlves are conLlnulng apace, and sure enough, durlng Lhls pasL quarLer we goL conLlnued evldence
LhaL Lhe plvoL Lo luxury brand growLh ls acceleraLlng. lor Lhree quarLers runnlng, !eep has posLed lLs
besL ever monLhly car sales numbers, golng back well before Lhe flnanclal crlsls, whlle MaseraLl Lhls May
sold flve Llmes as many cars as lL dld ln May of Lhe prlor year.
AdmlLLedly, MaseraLl ls growlng from a
small base, however lLs marglns are beLLer Lhan Lhose of hlgher volume llaL brands and lLs runway for
growLh ls qulLe large.
1he New ork 1|mes Company (NSL: N1) -11.16
Pere's anoLher leader Lurned laggard. We Lhlnk Lhls move ls largely [usL a llLLle reflex as Lo how large Lhe
galns have been over Lhe pasL year. noLhlng fundamenLally drove Lhls move lower, Lhough recenLly n?1
has been caughL ln Lhe upward drlfL of momenLum and Lhus was punlshed when momenLum unwound.
As wlLh llaL, Lhere ls llLLle new lefL Lo be sald abouL 1he new ?ork 1lmes. 1he company's LranslLlon Lo a
more dlglLally domlclled revenue sLraLegy conLlnues apace, and Lhere are slgns LhaL Lhe decllne ln ad
raLes wlll reverse.
uurlng Lhe quarLer, Lhe company flred lLs LdlLor ln Chlef, !lll Abramson, and replaced her wlLh uean
8aqueL. Whlle Lhere had been rumors of Abramson's poLenLlal deparLure for some Llme, Lhe markeL
vlewed Lhls as an opporLune Lo sell off and conslder Lhe consequences. SeparaLely, Lhough poLenLlally
relaLedly, an lncredlbly smarL and Lhorough documenL coverlng Lhe company's perspecLlve on
lnnovaLlon ln conLenL creaLlon, dlsLrlbuLlon and consumpLlon was leaked. lor anyone wlLh even a
passlng lnLeresL ln medla, we recommend glvlng Lhe plece a look for lL lncludes a well-rounded summary
of boLh Lhe hlsLory and Lhe landscape Loday wlLhln whlch Lhe company ls operaLlng.


UC Inc (NSL: UC) -9.23
We commenced our poslLlon ln uC aL Lhe Lall end of lasL quarLer. uC ls a spln-off from a dlverslfled
holdlng company/lnsurer, lCC Poldlngs (nASuAC: lCC). uurlng Lhe crlsls, lCC/uC boughL up lands
ln Callfornla, around buL noL ln Lhe San lranclsco area, and ln WashlngLon SLaLe, around buL noL ln
SeaLLle. Pomebullders sLruggled ln Lhe flrsL half of Lhls year as wlnLer generally speaklng ls noL Lhe real
esLaLe selllng season," Lhe parLlcularly cold wlnLer negaLlvely lmpacLed clarlLy on forward expecLaLlons
of sales, and Lhe splke ln lnLeresL raLes LhaL sLarLed lasL summer and lasLed lnLo Lhe early new ?ear lefL
many quesLlonlng wheLher lL would hurL sales movlng forward. 1haL belng sald, we Lhlnk an lmprovlng
employmenL slLuaLlon, lower expecLaLlon for Lhe Lra[ecLory of lnLeresL raLes, sofLenlng of underwrlLlng
sLandards (from exLremely cauLlous Lo cauLlous, so noL concernlng ease), and an expecLed upLlck ln
household formaLlon all bode well.
Speclflc Lo uC, we Lhlnk Lhelr ownershlp of valuable loLs aL low cosL bases bodes well movlng forward.
Cne of Lhe blggesL problems for homebullders has been a lack of good, developable loLs as evldenced by
an nAP8 survey of homebullders:

Clven uC owns an abundance of loLs ln prlme areas, Lhey have a leg up on compeLlLlon and Lhey also
could have sLraLeglc value Lo some larger homebullders. Cne facLor we parLlcularly llke wlLh uC ls LhaL
lCC, who lL was spun off from, ls an owner-operaLor wlLh a value-drlven lnvesLmenL phllosophy. 1helr
goal ls Lo creaLe value vla Lhelr near 38 equlLy ownershlp, and ln LhaL sense, Lhe lncenLlve sLrucLure of

mlnorlLy shareholders ls properly allgned wlLh managemenL. 1o LhaL end, several noLed value shops
have also Laken subsLanLlal sLakes ln uC, and we Lhlnk Lhls creaLes a sLable, long-Lerm lnvesLor base.

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

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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