U.S. Focus List. Eking out quarterly outperformance

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1 RBC Dominion Securities Inc. U.S. Focus List May 8, 2018 Quarterly Report What s inside 3 Portfolio positions 4 3M Company Recent selloff provides an opportunity to high-grade the Portfolio 4 Facebook, Inc. Too early to gauge impact of data breach on FB s business 6 Portfolio companies 12 Portfolio companies risks 14 Methodology For the quarter ended April 30, the U.S. Focus List was down 5.6%, though it outperformed the S&P 500 by about 30 basis points. Overall, the outperformance was driven by stock selection, which more than offset the negative contribution from our sector allocations. From a stock perspective, Amazon (AMZN) was by far the largest contributor to performance, followed by MasterCard (MA). Despite concerns around a market rotation out of growth, into value-oriented stocks, these companies closed the quarter up 8% and 5%, respectively. This was in no small part due to very strong earnings performances from both companies. Portfolio Advisory Group Equities Looking beyond the noise with cautious optimism Eking out quarterly outperformance In terms of laggards, Kraft Heinz (KHC) was the largest underperformer in the Portfolio. We acknowledge investors concerns around the company s future growth prospects through M&A; yet a fair portion of the weakness can be attributed to industry-wide secular headwinds faced not only by KHC, but also its peers. These headwinds are only amplified in a rising rate environment for the Consumer Staples sector. We continue to own KHC given it boasts one of the strongest management teams in the sector, while the company s operating margins are above the industry average. For an overview of the Portfolio, please click here. Click here for authors contact information. All values in U.S. dollars and priced as of April 30, 2018, market close, unless otherwise noted. Disseminated: May 8, :15ET Produced: May 8, :58ET For required disclosures, see page 15. NOT FOR DISTRIBUTION IN THE U.S. Sector weightings: U.S. Focus List vs. the S&P 500 U.S. Focus List S&P 500 Financials, 20.0% Information Tech., 20.0% Health Care, 15.0% Industrials, 15.0% Consumer Discr., 10.0% Consumer Staples, 10.0% Energy, 5.0% Materials, 5.0% Telecom Srvcs., 0.0% Utilities, 0.0% Real Estate, 0.0% Source - RBC Dominion Securities, Bloomberg; data as of 4/30/18 Information Tech., 23.7% Financials, 14.6% Health Care, 14.5% Consumer Discr., 12.3% Industrials, 10.2% Consumer Staples, 8.0% Energy, 5.9% Utilities, 3.0% Materials, 2.9% Real Estate, 2.9% Telecom Srvcs., 2.0%

2 2 U.S. Focus List Trade wars, rising rates, and midterm elections oh my! The quarter ended April 30 was punctuated by strong spikes in volatility, particularly in February. This jolted investors out of their cocooned state that seemed to have become the norm throughout 2017 one of the most serene periods in history for equities from a volatility perspective. Increased uncertainty around the potential for an all-out trade war between the U.S. and China and the specter of rising rates fed into investor angst. Coupled with solid economic fundamentals, we believe the recent valuation compression in this late stage of the bull market is healthy. As such, we intend to remain opportunistic should high-quality businesses go on sale. We believe the rhetoric from the Trump administration on trade between China and the U.S. is designed to extract concessions from China s government on issues such as limited forex intervention, better intellectual property protection, and greater market access for U.S. exports, as opposed to fomenting an all-out trade war. With conciliatory remarks already being made by both camps, and the realization that a full-blown trade war could offset the economic benefits of the tax reform instituted at the beginning of 2018, we believe that calmer heads will ultimately prevail. With respect to the tariffs that have already been announced between the two nations, we do not believe the impact to GDP growth will be detrimental for either nation in the long term. On rising rates, it s important to point out that even with the recent hikes, rates are very comfortably below the historical long-term average. Also, the Fed has been emphatic in its messaging that the rate hike cycle reflects a desire to normalize rates from historically low levels during the depths of the recession, rather than thwart the ongoing economic expansion. In terms of Portfolio positioning in a rising rate environment, we are Overweight in U.S. Financials, as this sector has historically outperformed during periods of rising rates. For the balance of the year, we remain cautiously optimistic on the U.S. economy and equities overall. Our more cautious stance stems from uncertainty related to the aforementioned risks, coupled with short-term risk related to the midterm elections in November. Should the House and Senate switch to Democrat control, we would expect investors to focus on the possibility that Democrats may attempt to extract concessions to advance their agenda at the expense of President Trump s businessfriendly policies. Yet this risk is tempered by our belief that a wholesale change in the House and Senate (to which we attribute a very low probability) is unlikely to break the economic cycle. While we concede that the economic expansion is in the later stages, we remain focused on the economic fundamentals, which remain healthy overall. On valuation, the pullback in the markets during the last three months has led to a contraction of the forward price-to-earnings (P/E) multiple for the S&P 500 from around 19.5x at the beginning of 2018, to 16.7x. Coupled with solid economic fundamentals, we believe the recent valuation compression in this late stage of the bull market is healthy. As such, we intend to remain opportunistic should highquality businesses go on sale. Focus List changes No changes were made to the Focus List for the three months ended April 30, In the table on the next page, A stands for actual earnings, E stands for estimated earnings based on FactSet Consensus estimates. Dividend yield is calculated based on the most recent distribution (not the most recent declaration). The U.S. Focus List portfolio does not reflect the returns from actual investments; actual client account returns may differ. Prices utilized are closing prices one full trading session following additions to or removals from the U.S. Focus List portfolio. Information on removed stocks is available upon request. The U.S. Focus List portfolio is provided as an informational resource and is not intended to be the primary basis for any investment decision. Investors are advised to consider investment objectives, risks, and fees before investing. Investors should also note that commissions, advisory program fees, interest charges, or other expenses will reduce overall return on an investment. Principal value and investment returns will fluctuate; when liquidated, an investor s investment value may be worth more or less than the initial investment amount. Past performance is no guarantee of future results and should not be viewed as an indicator of future results.

3 3 U.S. Focus List Price 52-Wk Calendar Year EPS P/E Dividend Market Symbol Company Name 4/30/18 Range 2017A 2018E 2019E 2018E 2019E Yield Cap (B) Consumer Discretionary AMZN Amazon.com, Inc. $1, $4.56 $12.38 $ x 80.7x 0.00% $ YUM Yum! Brands, Inc. $ $2.96 $3.39 $ x 21.5x 1.75% $27.07 Consumer Staples COST Costco Wholesale Corporation $ $6.24 $7.19 $ x 24.6x 1.17% $85.65 KHC Kraft Heinz Company $ $3.55 $3.78 $ x 14.6x 4.31% $70.72 Energy EOG EOG Resources, Inc. $ $1.12 $4.67 $ x 20.6x 0.65% $66.37 Financials BRK.B Berkshire Hathaway Inc. Class B $ $5.86 $9.16 $ x 20.1x 0.00% $ JPM JPMorgan Chase & Co. $ $6.87 $8.98 $ x 11.0x 2.07% $ PNC PNC Financial Services Group, Inc. $ $8.50 $10.57 $ x 12.5x 2.06% $68.36 USB U.S. Bancorp $ $3.42 $4.05 $ x 11.5x 2.38% $82.68 Health Care JNJ Johnson & Johnson $ $7.30 $8.12 $ x 14.5x 2.71% $ TMO Thermo Fisher Scientific Inc. $ $9.49 $10.91 $ x 17.3x 0.32% $84.52 UNH UnitedHealth Group Inc. $ $10.07 $12.63 $ x 16.5x 1.27% $ Industrials MMM 3M Company* $ $9.17 $10.39 $ x 17.6x 2.73% $ HON Honeywell International Inc. $ $7.11 $8.03 $ x 16.4x 2.07% $ RTN Raytheon Co.* $ $7.54 $9.90 $ x 17.8x 1.71% $58.18 UNP Union Pacific Corporation $ $5.79 $7.60 $ x 15.8x 2.18% $ Information Technology GOOG Alphabet Inc. - Class C $1, $35.90 $43.79 $ x 22.1x 0.00% $ AAPL Apple Inc. $ $9.79 $11.93 $ x 13.6x 1.59% $ FB Facebook, Inc. - Class A* $ $6.16 $7.59 $ x 19.4x 0.00% $ MA MasterCard Incorporated - Class A $ $4.58 $6.32 $ x 25.5x 0.53% $ MSFT Microsoft Corporation* $ $3.55 $3.91 $ x 21.9x 1.77% $ Materials DWDP DowDuPont Inc. $ $3.40 $4.16 $ x 13.1x 2.36% $ CASH 0.00% Average market cap $ * FB, MMM, MSFT, and RTN are half positions (2.5%). Dividend yield is calculated based on the most recent distribution (not the most recent declaration). Source - FactSet, and our national research correspondents. For full disclosures see the bottom of page 2.

4 4 U.S. Focus List Portfolio movers 3M Company (MMM) Recent selloff provides an opportunity to high-grade the Portfolio 3M s stock price slid roughly 22% in the three-month period ending April 30, vastly underperforming the broader Industrials sector (down 9.5%) and the S&P 500 Index (down around 6%). As a result, 3M has lost its 15% premium valuation to the Multiindustrial group and now trades at a 5% discount on a forward P/E multiple basis. 3M is a high-quality, attractively valued Multiindustrial company, in our view, with leading operating margins. 3M s downward re-rating over the past quarter was largely due to the 2018 guidance cut and Q1 operating miss, driven largely by softness in its end markets of automobiles, dental products, and consumer electronics. While a disappointment, we believe these issues do not reflect any overall cracks in the U.S. economy, but relate more to 3M. We expect these issues to be transitory and resolved within a few months, and they are not indicative of shoddy execution on 3M s part. 3M is a high-quality Multi-industrial company, in our view, with leading operating margins. The stock is attractively valued, trading at a 17x forward P/E multiple, roughly one multiple point above its long-term average. The company is an Industrials staple and at this stage of the late bull market we would prefer to own higher-quality defensive growth names. Furthermore, 3M offers a 2.8% dividend yield, which would be appealing for income-oriented investors. 3M has a track record of growing operating margin 25% 24% 23% 22% 21% 20% 19% 18% Facebook, Inc. (FB) Too early to gauge impact of data breach on FB s business Facebook s stock price has largely recovered from the negative fallout over Cambridge Analytica inappropriately accessing private data on millions of Facebook users. This was in no small part due to a banner quarter during which Facebook beat expectations on earnings per share and grew revenues and EBITDA by 43% and 51% y/y, respectively. Early indications from Q1 reporting are that users and advertisers have stuck with the platform through the maelstrom of bad news.

5 5 U.S. Focus List Facebook s monthly active users continue to grow In millions 1,654 1,712 1,787 1,859 1,936 2,006 2,072 2,129 2,196 Q1 '16 Q2 '16 Q3 '16 Q4 '16 Q1 '17 Q2 '17 Q3 '17 Q4 '17 Q1 '18 Early indications from Q1 reporting are that users and advertisers have stuck with Facebook through the maelstrom of bad news. The forward P/E multiple is attractive relative to the long-term average, in our view. Further, the company is one of the most compelling large-cap growth stories in the technology industry. Going forward, we believe Facebook has multiple opportunities to grow its average revenue per user (ARPU) and could monetize its Messenger, WhatsApp, and Instagram assets in the long term. That said, given that the Cambridge Analytica scandal broke headlines shortly before the end of calendar Q1 2018, we await further information from Q2 reporting to better gauge any lasting damage to the company s business.

6 6 U.S. Focus List Portfolio companies 3M Company (MMM) 3M has a track record of industry-leading profitability (with best-in-class operating margins), free cash flow conversion, and dividend growth. The company has recently taken a more aggressive stance on M&A. Through 2020, 3M has roughly $24B $29B of available capital for deployment on M&A and share buybacks. 3M has no revenue exposure to energy-related end markets. Instead it benefits from lower commodity prices, given sizeable resin-based input costs. Amazon.com, Inc. (AMZN) Amazon.com is the largest global online retailer, with operations in seven countries and over 270 million customers worldwide. The company accounts for about 20% of U.S. online retail sales, a market in which penetration is rising by 100 bps each year. Management has gained a strong reputation for its consistency, forward thinking, focus on innovation and customer service, and long-term shareholder orientation. Amazon Web Services and the company s media content are new revenue and margin expansion opportunities, which we believe are underappreciated by the market. MMM seven-year dividends per share $2.20 $2.36 $2.54 $3.42 Source - Bloomberg, Company reports $4.10 $4.44 $ Alphabet Inc. - Class C (GOOG) Alphabet is the world s No. 1 search engine with more than 70% of the global market share in search revenue and roughly 65% of the world s search queries. Competitive advantage is anchored in its cutting-edge technology, specifically its powerful search algorithms that provide a highly satisfied user experience. Numerous business platforms that could represent nearterm multibillion-dollar revenue opportunities include: optimizing local search, enterprise services, and Google Play. AMZN revenue breakdown - FY2017 5% 3%3% Online Stores 10% 61% Retail Third-Party Seller Services 18% Source - Bloomberg, Company reports Apple Inc. (AAPL) Amazon Web Services (AWS) Retail Subscription Services Physical Stores Other Apple is a leading manufacturer of hardware, such as smartphones, tablet devices, computers, and portable digital media players. It also sells a variety of related software, services, and accessories. RBC Capital Markets believes Apple has multiple catalysts to help drive revenue and earnings growth, including a robust hardware cycle. Apple intends to return cash to shareholders through quarterly dividends and share repurchases. GOOG revenue breakdown by segment - FY % 14% Advertising revenues Licensing and other revenues AAPL revenue breakdown - FY % 62% iphone Services & other hardware 11% Mac Other 13% Source - Bloomberg, Company reports Source - FactSet, Company reports

7 7 U.S. Focus List Berkshire Hathaway Inc. - Class B (BRK.B) Berkshire Hathaway operates as a holding company with interests in insurance (GEICO and General Re), reinsurance (Berkshire Hathaway Reinsurance), retail (Precision Castparts, Marmon, Iscar, Lubrizol, Shaw, etc.), energy (MidAmerican and PacifiCorp), and railways (Burlington Northern Santa Fe). The company also owns equity investments and is the largest shareholder of Wells Fargo, Bank of America, Coca-Cola, and American Express. Berkshire Hathaway is a collection of best-in-class businesses that are growing book value faster than the overall markets. The businesses are operated by capable managers. Valuation is attractive relative to the company s history. BRK.B cash levels continue to grow (in millions) 120, ,000 80,000 60,000 40,000 20, Costco Wholesale Corporation (COST) Costco s high level of visibility and predictability in earnings is driven by its membership fee model, which constitutes about 70%+ of operating profit. By maintaining a lower number of SKUs, Costco is able to leverage greater buying power over a select number of goods. This increased scale translates into lower prices for customers, which subsequently builds membership loyalty. COST takes a measured approach to growing its store base, but has a considerable growth runway in international markets. DowDuPont Inc. (DWDP) DowDuPont is a holding company formed through the merger of equals between Dow Chemical and DuPont. DowDuPont s opportunities for value creation for shareholders include the raising of its $3B cost savings target. The eventual breakup of the company over the next 18 months into three publicly traded businesses should unlock shareholder value. DowDuPont is a strong cash flow generator which can support capex investments and the dividend. DWDP revenue breakdown - FY2017 6% 6% 28% Packaging & Specialty Plastics 6% Agriculture Ind'l. Intermediates & Infrastructure 8% Performance Materials & Coatings Nutrition & Biosciences Safety & Construction 11% 16% 18% Transportation & Advanced Polymers Electronics & Imaging EOG Resources, Inc. (EOG) EOG Resources is an independent E&P company engaged in the development of oil and natural gas properties. The company has established positions in most emerging, liquid-rich shale plays in the U.S. (Eagle Ford, Bakken, and Permian). Its superior technical abilities have driven consistent annual production growth north of 30% annualized since The company possesses a strong balance sheet and is free cash flow positive. COST warehouses by geography - FY2017 4% 4%2% 1% U.S. 69% Canada 5% Mexico U.K. 13% Japan Korea Taiwan Australia EOG 2017 production and proved reserve data United States Trinidad Other international (China, U.K., and Argentina) Total company Production (M BOE/d) Net proved reserves (MM BOE) Some breakdowns in the report may not add to 100% due to rounding.

8 8 U.S. Focus List Facebook, Inc. - Class A (FB) Facebook is the world s most popular social networking site with over 2 billion users. Through its flagship website, facebook.com, as well as mobile apps and several other tools, Facebook enables users to connect, share, discover, and communicate with each other. The company generates revenues through two channels: advertising (97%) and payments/other (3%). Johnson & Johnson (JNJ) Johnson & Johnson is one of the largest and most diversified health care businesses in the world, with over 250 operating companies encompassing a broad range of products across the health care field. The company s worldwide business is divided into three main segments: pharmaceutical (about 47% of sales), medical devices & diagnostics (about 35%), and consumer (about 19%). FB daily active users worldwide (in millions) JNJ revenue breakdown - FY2017 1,500 1, Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q '18 18% 47% Pharmaceutical Medical Devices & Diagnostics Consumer 35% Honeywell International Inc. (HON) Over the years, Honeywell has refocused its portfolio toward a more favorable mix. The focus is geared toward exposure to megatrend catalysts in energy efficiency alongside greater share in higher-growth regions. M&A is its top capex priority. Management has demonstrated a discipline toward valuation of targets. Acquisitions are intended to improve mix, drive margin accretion, and increase long-term earnings resilience and FCF. Recently, management has taken a more favorable view on share buybacks (in the absence of any attractive M&A targets), which could drive further stock upside. JPMorgan Chase & Co. (JPM) JPMorgan is a leading global financial services company with assets of $2.1T as of December 2017 and operations in more than 50 countries. The company has a well-diversified business mix that should allow it to remain profitable through most cycles: 45% of revenues from consumer banking, 35% from corporate and investment banking, 12% from asset management, and 7% from commercial banking. Management remains focused on deleveraging its balance sheet, which could lead to more consistent results and stock performance over time. HON revenue breakdown - FY2017 JPM diverse revenue stream - FY % 14% 24% 36% Aerospace Home & Building Technologies Performance Materials & Tech Safety and Productivity Solutions 8% 13% 34% 45% Consumer Banking Corporate/Investment Banking Commercial Banking Asset Management Source - Bloomberg, Company reports Source - RBC Capital Markets

9 9 U.S. Focus List The Kraft Heinz Company (KHC) 3G Capital, what we view as one of the best management teams globally, is at the helm of the company with a track record of driving down costs, and growing EBITDA and free cash flow. Until recently, we believe the Kraft business was mismanaged with gross margins in the middle of the pack, relative to peers. We believe 3G Capital is expected to drive efficiencies and expand operating margins. Kraft s merger with Heinz has actually strengthened their combined balance sheets, and could pave the way for future M&A (most likely in international markets). Microsoft Corporation (MSFT) Microsoft is more focused on margin expansion, shareholder capital returns, and has aggressively pushed forward with a successful cloud strategy. Microsoft is in the midst of a successful transition of its core software offerings from an on-premises purchase model to a subscription-based as-a-service model. Microsoft s Azure cloud offering is one of two major cloudbased workload vendors that has built a credible amount of scale. KHC geographic revenue exposure - FY2017 MSFT annual dividend growth and payout ratio 13% 9% 8% 70% United States Rest of world Europe Canada Fiscal year Annual dividend Y/Y growth Payout ratio FY17 $ % 68% FY16 $ % 49% FY15 $ % 46% FY14 $ % 40% FY13 $ % 34% FY12 $ % 28% FY11 $ % 22% Source - Bloomberg MasterCard Incorporated - Class A (MA) MasterCard may benefit from strong earnings growth as global payment activity continues to shift to electronic methods from cash. The core business carries high barriers to entry and a limited number of competitors while avoiding credit card payment risk. MasterCard s earnings growth (approximately 20% on average over the next two years based on consensus estimates) is leveraged to global economic growth. Source - Bloomberg The PNC Financial Services Group, Inc. (PNC) PNC is engaged in retail banking, corporate and institutional banking, asset management, residential mortgage banking, and global investment servicing. The company has exhibited strong organic growth while controlling expenses in a difficult bank operating environment. RBC Capital Markets believes the company is developing into a top-tier U.S. bank capable of delivering aboveaverage long-term shareholder returns. MA revenue breakdown by segment - FY % 34% Transaction Processing Fees Domestic Assessments Cross-border Volume Fees Other Revenues 23% 28% Source - Bloomberg, Company reports PNC revenue breakdown - FY % 42% Retail Banking 7% Corporate & Institutional Banking Asset Management Group Other, including BlackRock 35%

10 10 U.S. Focus List Raytheon Company (RTN) Raytheon provides investors with exposure to critical defence markets, including missile defence systems and missiles that are both seeing intense investment. Raytheon provides investors with the highest exposure to international sales of the major defence companies. Raytheon invests significant capital in R&D, creating strong technologies in high-demand product categories, including radar, electronic warfare, and cyber. U.S. Bancorp (USB) The business with subsidiaries represents the fifth-largest U.S. commercial bank holding company, with total assets approaching $420B. Banking and investment services are offered through 3,000+ offices, primarily in the Midwest and West regions. Management has a stated goal of returning 60% 80% of earnings to shareholders via cash dividends and share buybacks. Our research sources believe the company is gaining market share and is well positioned competitively to benefit from economic expansion and a rising rate environment. RTN integrated defence system revenue exposure - FY2017 USB revenue breakdown - FY2017 2% 24% 22% 29% 23% Integrated Defence Systems Intelligence, Information & Services Missile Systems Space & Airborne Systems Forcepoint 11% 34% Consumer Banking 15% Payment Services Treasury and Corporate Support Wholesale Banking Wealth Management 13% 27% Thermo Fisher Scientific Inc. (TMO) Thermo Fisher is a leading provider of life science equipment and laboratory analytical tools. Over 60% of the company s sales are in consumable-type products. Thermo has a significant biopharma offering, providing logistics, packaging, bio-repository, storage, and analytical services for clinical trials. Roughly 25% of TMO s sales are exposed to the drug therapy R&D market, an end market that is typically very sticky. Union Pacific Corporation (UNP) Union Pacific boasts the most balanced and well-diversified book of business amongst the North American rails, in our view. It possesses a healthy balance sheet, unparalleled access to Mexico, and unique growth opportunities in chemicals and intermodal. UNP targets an operating ratio in the low 60s by 2019, which we believe is achievable given its demonstrated ability to grow at low incremental cost. TMO adjusted EPS performance $9.49 $8.27 $6.96 $7.39 $4.94 $5.42 $4.16 $3.02 $2.92 $ UNP revenue breakdown - FY % 21% 13% 19% 10% 18% Agricultural Automotive Chemicals Coal Industrial Products Intermodal Source - Bloomberg, Company reports

11 11 U.S. Focus List UnitedHealth Group Inc. (UNH) UnitedHealth Group is the largest managed care company operating in the U.S. The company is well diversified across customer type (employer market, individual market, and Medicare & Medicaid market) and business mix (risk, ASO, supplemental, international, and PBM). Health care coverage in the U.S. is largely provided by the managed care industry. The companies integrate the financing and delivery of health care, implement cost controls, and manage utilization. UnitedHealth is a well-operated company with high ROEs, ROICs, and FCF generation. The management team is well regarded for being disciplined and creating long-term shareholder value. UNH medical loss ratios 80.6% 80.8% 80.4% 81.5% 81.2% 81.7% 81.2% 82.1% Yum! Brands, Inc. (YUM) Yum! Brands operates more than 37,000 quick-service restaurants in about 125 countries worldwide, and owns domestic brands KFC, Pizza Hut, and Taco Bell. The shift to a roughly 100% franchised company should accelerate FCF growth through minimized capex and G&A expenses, which, in turn, should drive higher shareholder capital returns. A focus on creating strategic franchisee partnerships should result in unit expansion, which could accelerate systemwide sales growth. YUM units by concept Units Source - Bloomberg, Company reports Taco Bell Pizza Hut KFC

12 12 U.S. Focus List Portfolio companies risks 3M: A downward macro inflection would likely have a significant impact on 3M s results given the company s higher exposure to early-cycle products. 3M is exposed to currency fluctuations as it generates 64% of its sales outside the U.S. Alphabet: Downside risks include a potential for a return to heavy capex accompanied by margin pressure; continued competition for engineering talent; and increased regulatory scrutiny. Amazon.com: Key risks include an increase in competitive intensity, either from online competitors or online segments of traditional retailers; operating margin pressure from continued investments in technology; and/or additional international expansion initiatives. Apple: Risks include, but are not limited to, adverse global economic conditions; currency translation; increased competition; raw material costs; and senior management changes. Berkshire Hathaway: The main risk is the change in senior management with the potential retirements of CEO and Chairman Warren Buffett and Vice Chairman Charlie Munger. Other risks include the sensitivity of the company s businesses from an economic slowdown as well as the drag on returns in a rising market from holding a significant position in cash. Costco: Consumers limiting spending on higher-margin, discretionary product categories; a deterioration in membership renewal rates; and slowing comps are all risks for Costco. DowDuPont: Risks include the cyclical nature of demand of the chemicals business. Commodity chemical margins are volatile, which can impact cash flows. Missed synergy targets could also result in share price underperformance. EOG Resources: Weaker-than-expected commodity prices could cause stock underperformance. If well performance does not meet expectations, this could also cause EOG shares to underperform relative to peers. Facebook: Key risks include decreasing engagement trends, as new competitors could take market share; failure to drive adoption from advertisers; and regulatory actions on privacy concerns. Honeywell International: The potential of a macroeconomic slowdown in the U.S. or Europe poses risks to Honeywell s earnings performance. Accelerating forex headwinds and emerging market weakness could also undermine earnings performance and weigh on stock performance. Johnson & Johnson: Risks include, but are not limited to, competition, foreign currency exposure, litigation, reimbursement, clinical trial risk, a prolonged economic slump, and navigating regulatory landscapes. JPMorgan Chase: Key risks include a U.S. recession, which could lead to an acceleration in nonperforming assets, lower revenues, further declines in capital markets revenues, further mortgage banking revenue declines, and lingering expenses associated with litigation. Kraft Heinz: Risks include, but are not limited to, changing consumption patterns, increased promotional activity, and the merger integration. MasterCard: A slowdown in payment volumes and crossborder travel or a pushback from large financial institutions on pricing could impede stock performance. Furthermore, greater regulatory scrutiny, inability to maintain pricing, and a prolonged global recession could cause the stock to underperform. Microsoft: Heavy competition in the enterprise market from the likes of AWS is one risk. In addition, the company s commitment to the hardware business has yielded limited profits. Finally, its Windows and Office businesses have been persistently pressured by piracy. PNC Financial Services Group: PNC s earnings are sensitive to general business conditions. Changes in interest rates, credit risk profile, capital structure, and in overall economic and loan growth conditions represent material risks to the business. Raytheon: Risks include a slower-than-expected ramp up in defence spending, and a slowdown in international spending. Thermo Fisher Scientific: Risks to the investment thesis include a slowdown in global economic activity, foreign exchange exposure, synergies from the recent LIFE acquisition not meeting expectations, and the fact that the company must constantly invest in R&D to adapt to rapidly changing technologies. U.S. Bancorp: U.S. Bancorp s earnings are sensitive to general business conditions. Changes in interest rates, credit risk profile, capital structure, and in overall economic and loan growth conditions represent material risks to the business. Union Pacific: Risks include, but are not limited to, extreme fluctuations in fuel prices, unusual weather conditions that could impact railroad volumes, and weaker economic conditions.

13 13 U.S. Focus List UnitedHealth Group: Risks include any unfavourable legislation that gets implemented, a spike in medical cost trends, and mispricing of contracts. Yum! Brands: The fast food industry is highly competitive. Food safety issues also represent a material risk for the business. YUM shares trade at a premium to the market; the elevated valuation may increase the stock s volatility.

14 14 U.S. Focus List Methodology The Investment Committee members listed on the next page of this report select and monitor the companies included in U.S. Focus List. The portfolio is constructed using a combination of top-down sector allocation and bottom-up stock selection. The sector allocation is driven by the US Equity Strategy group at RBC Capital Markets, and designed to structure the portfolio according to expectations of the economic and investment outlook. The portfolio will generally offer exposure to most of the 11 GICS sectors underlying the S&P 500 Index. The bottom-up stock selection is based off a multidisciplined approach that involves fundamental, quantitative, and technical research. Furthermore, a qualitative analysis is undertaken by the Committee, with a particular focus on risk assessment, given the concentrated nature of the portfolio. The portfolio will have positions. Most positions are assigned a 5% weight, though half-positions (i.e., 2.5%) are also possible up to a maximum of 15% of the portfolio (i.e., six positions). The universe of companies available for selection encompasses stocks under fundamental research coverage by RBC Capital Markets and third-party research providers. A minimum rating of Hold, or its equivalent, is necessary for inclusion. There is no minimum market capitalization for stock eligibility, though the portfolio is expected to be broadly large cap in nature. Additions to the portfolio require an average daily reported trading in excess of $10M over the prior five days as a minimum liquidity requirement. Cash can be held in lieu of a stock position short term up to a 5% weighting. Annual portfolio turnover is targeted to be less than 100% in typical market conditions, but potential for higher turnover exists in periods of unusual market volatility. Given the desire to create a portfolio and not a list of companies, equity selection may be influenced by diversification decisions, including industry weightings, relative valuations, and macroeconomic considerations associated with cyclical markets. Implementation of changes to the U.S. Focus List The Investment Committee for the U.S. Focus List will make changes to the portfolio for any of the following reasons: (1) The fundamentals and business outlook of the included company appear to be diminished compared with prior expectations; (2) the Investment Committee deems the current valuation of the shares as above our fundamental valuation and suggests a switch to another company with a more compelling valuation or to cash; (3) a deterioration in a stock s multidisciplined score; (4) a fundamental downgrade or elimination of opinion by our research sources (noted in the prior section) that warrants removal in the estimation of the Investment Committee; and (5) the desire to include a company whose fundamentals are superior to that of a company currently included in the portfolio. Stocks will be monitored on those criteria.

15 15 U.S. Focus List Disclosures and disclaimers U.S. Focus List Investment Committee Tasneem Azim-Khan, CFA, Portfolio Advisor RBC Dominion Securities Inc. Gopa Nair, CFA, Portfolio Advisor RBC Dominion Securities Inc. This report is issued by the Portfolio Advisory Group ( PAG ) which is part of the retail division of RBC Dominion Securities Inc. ( RBC DS ). The PAG provides portfolio advisory services to RBC DS Investment Advisors. Reports published by the PAG may be made available to clients of RBC DS through its Investment Advisors. The PAG relies on a number of different sources when preparing its reports including, without limitation, research reports published by RBC Capital Markets ( RBC CM ). RBC CM is not independent of RBC DS or the PAG. RBC CM is a business name used by Royal Bank of Canada and certain of its affiliates, including RBC DS, in connection with its corporate and investment banking activities. As a result of the relationship between RBC DS, the PAG and RBC CM, there may be conflicts of interest relating to the RBC CM analyst that is responsible for publishing research on a company referred to in a report issued by the PAG. Analyst certification All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report. Required Disclosures RBC Capital Markets Distribution of Ratings For purposes of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories Buy, Hold/Neutral, or Sell regardless of a firm s own rating categories. Although RBC Capital Markets ratings of Top Pick/Outperform, Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described below). Distribution of Ratings - RBC Capital Markets, LLC Equity Research As of March 31, 2018 Inv estment Banking Serv ices Provided During Past 12 Months Rating C ount Percent C ount Percent Buy [Top Pick & Outperform] Hold [Sector Perform] Sell [Underperform] Explanation of RBC Capital Markets, LLC Equity Rating System An analyst s sector is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to a particular stock represents solely the analyst s view of how that stock will perform over the next 12 months relative to the analyst s sector average. Ratings Top Pick (TP): Represents analyst s best idea in the sector; expected to provide significant absolute total return over 12 months with a favorable risk-reward ratio. Outperform (O): Expected to materially outperform sector average over 12 months. Sector Perform (SP): Returns expected to be in line with sector average over 12 months. Underperform (U): Returns expected to be materially below sector average over 12 months. Risk Rating: The Speculative risk rating reflects a security s lower level of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or limited operating history that result in a higher expectation of financial and/or stock price volatility. RBC Capital Markets has fundamental research of the following companies: 3M Company (MMM; Outperform; $194.39) Alphabet Inc. (GOOG; Outperform; $1,017.33) Amazon.com, Inc. (AMZN; Outperform; $1,566.13) Apple Inc. (AAPL; Outperform; $165.26) Costco Wholesale Corporation (COST; Outperform; $197.16) DowDuPont Inc. (DWDP; Top Pick; $63.24) EOG Resources, Inc. (EOG; Sector Perform; $118.17) Facebook, Inc. (FB; Outperform; $172.00) Honeywell International Inc. (HON; Sector Perform; $144.68) Johnson & Johnson (JNJ; Outperform; $126.49) JPMorgan Chase & Co. (JPM; Outperform; $108.78) The Kraft Heinz Company (KHC; Outperform; $56.38) MasterCard Inc. (MA; Outperform; $178.27) Microsoft Corporation (MSFT; Outperform; $93.52) The PNC Financial Services Group, Inc. (PNC; Top Pick; $145.61) Raytheon Company (RTN; Outperform; $204.94) U.S. Bancorp (USB; Outperform; $50.45) Union Pacific Corporation (UNP; Sector Perform; $133.63) UnitedHealth Group Inc. (UNH; Outperform; $236.40) Yum! Brands, Inc. (YUM; Outperform; $87.10) Our third-party research providers have fundamental research of: Berkshire Hathaway Inc. (BRK.B; Buy; $193.73) Thermo Fisher Scientific Inc. 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