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Investment Portfolio Decisions

We post summaries of portfolio transactions here for the purposes of transparency and education of our investors.

February, 2010

Purchases / Additions

PepsiCo (PEP)
The Investment Committee has decided to add to our US and global portfolio's position in PepsiCo. PepsiCo's strong stable of diversified brands, including Frito-Lay, Gatorade, Tropicana, Quaker, and strength in international markets all provide growth long-term growth opportunities well beyond the mature carbonated-soft-drink (CSD) market and the company is well positioned to deliver consistent double-digit earnings growth as the economic recovery matures. The imminent closing of the bottler acquisition will provide a further catalyst to the stock, as we believe company management will articulate a clear framework for earnings growth through merger synergies, share buy-backs, and reinvestment in strategic growth initiatives. We believe the stock currently offers significant upside and limited downside thanks to its subdued valuation and our expectation for future earnings growth. We expect PepsiCo, which has historically generated 12% earnings per share growth, to continue to do so for the foreseeable future and the stock trades at only 15x 2010 and 13x 2011 expected earnings versus a historical average of 18-20 times forward earnings.

Abbott Laboratories (ABT)
The Investment Committee has decided to add to the US and global portfolio's position in Abbott Labs. Abbott is a diversified healthcare company with market-leading positions in four categories: pharmaceuticals, diagnostics, cardiovascular, and nutritional products. After successfully navigating the patent expiration of blockbuster-drug Depakote in 2008, the pharmaceutical division is currently experiencing high growth thanks to Humira (for the treatment of rheumatoid arthritis, psoriasis, and Crohn's Disease) and its hypertension franchise (Tricor, Trilipix, Niaspan). Another major growth driver for Abbott continues to be its cardiovascular division, with its new drug-eluting stent, Xience V, which is gaining market share in all major geographies. The nutritional products (Similac, Ensure) and diagnostics divisions, while more mature, provide the company with consistent and predictable cash flow generation. Abbott Labs has an excellent track record with mergers and acquisitions, and recently closed the purchase of Solvay Pharmaceuticals. Solvay will be immediately accretive to earnings and gives Abbott additional exposure to emerging markets. Abbott has posted historical EPS growth of about 11%, and consensus projections call for earnings growth in the 10%-12% range over the next five years. The stock trades at a very reasonable 13 times 2010 earnings, generates substantial free cash flow, and offers a current dividend of about 3%.

Trims / Deletions

AT&T (T)
The Investment Committee has decided to eliminate AT&T from all portfolios. The company has been enjoying substantial subscriber growth as the exclusive carrier of the iPhone, but the growth in the wireless business has not been able to offset secular declines in the traditional wire-line telephone business. At the same time, the company faces a potential price war with Verizon Wireless, and has significantly higher capital spending requirements to upgrade its wireless network for the tremendous increase in data usage stemming from the success of the iPhone. The stock still offers investors high current income through its generous dividend, but its relatively lackluster estimated earnings growth precludes its continued inclusion in our portfolios.

January 2010

Purchases / Additions

McDonald's Corp. (MCD)
The Investment Committee has decided to initiate a position in McDonald's in our US and Global strategies. McDonald's is a leading global retailer with more than 32,000 system wide (includes franchised and company-owned) restaurants in 118 countries. The company generated 2008 revenues of $23.5 billion with system wide sales of close to $70 billion. McDonald's is a geographically diverse company - the U.S. accounts for only 34% of revenues, Europe 42%, with the remainder generated in Asia, Africa, South America, and the Middle East. After outperforming in 2008, MCD shares have significantly lagged their industry group and the overall market in 2009. This is primarily due to the market's correct perception of the company's stock as being a safe haven investment. Despite the company's global footprint, MCD's remains under-penetrated in many markets. Growth in these international markets is central to our advisor's thesis in purchasing the company. We believe the company can deliver 10% earnings per share growth and continue to generate substantial cash flow to fund future dividend growth. The stock, currently trading 14x next year's estimated earnings, is priced at a discount to the S&P, and well below its historic average. After their recent dividend hike the stock yields 3.5%. McDonald's is one of the highest quality and best run consumer companies in the world. Their global exposure, highly predictable growth outlook, and defensive characteristics improve the overall characteristics of the portfolio.

International Business Machines (IBM)
The Investment Committee has decided to initiate a position in International Business Machines. IBM provides a wide range of services, software, and hardware solutions across multiple industries. With annual revenues of over $100 billion, approximately 400,000 employees, and operations in more than 170 countries, the company is the world's largest services vendor, largest enterprise hardware provider (ex PCs), and second largest software vendor. IBM has long been a company synonymous with quality. During the past decade, the company has divested low-margin, commoditized businesses such as personal computers, and strengthened their position in software and services through strategic investments in more than 100 companies. The company is now focused on the next generation of client needs, including business intelligence and analytics, virtualization, and green solutions. With roughly 65% of revenues generated from outside the U.S., IBM is well diversified globally and will continue to benefit from the global synchronized recovery currently underway. They are focused and well positioned to benefit from ongoing infrastructure growth in emerging markets; these growth markets currently account for 18% of total revenue, but are growing 5x faster than developed markets. IBM's transformation to a services oriented company should allow them to continue to grow earnings at a double-digit pace. The company's highly predictable earnings growth (100% Value Line earnings predictability score), attractive valuation (less than 12x 2010 earnings), diversified high-margin businesses, and global reach makes it a worthy addition to the portfolio.

Trims / Deletions

Nokia (NOK)
The Investment Committee has decided to sell our position of Nokia. Nokia has underperformed its peers, both fundamentally and in terms of price performance, since the portfolio's purchase in mid-2009. The company's number one market share position continues to be eroded by both high-end smartphone alternatives and low-end entrants to the market. We have also been disappointed by the pace and success of new product introductions and missteps at Nokia Siemens Networks (NSN). The Investment Committee believes the portfolio can be improved and better positioned for the next phase of the economic cycle by investing the proceeds from Nokia's sale in more predictable, lower volatility alternatives such as IBM.

Target (TGT)
The Investment Committee has decided to eliminate its position in Target. The company has performed well during the market rebound, increasing 90% from its lows in March, outpacing both the broader market and its sector. This dramatic performance is indicative of a stock reliant on discretionary consumer spending, which usually tends to lead the market during the initial stages of a market recovery. As the market recovery matures we believe leadership will rotate away from stocks such as Target that have participated significantly during the recovery and into more defensive positions.

Lowe's Cos. (LOW)
The Investment Committee has decided to eliminate the portfolio's position in Lowe's Company. As the market recovery matures we believe discretionary companies such as LOW's will lag the market as investors favor more predictable stocks. We also believe that as consumers deleverage spending will continue to grow at a sub-par pace. In addition, much tighter credit standards and the difficult housing market will continue to weigh on the shares. The portfolio's risk/reward characteristics and positioning for the next stage of the economic recovery and market rally will be improved by deploying LOW's proceeds into more attractive opportunities.

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