THE BERMAN VALUE FOLIO A TREFIS INTERACTIVE PORTFOLIO

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1 THE BERMAN VALUE FOLIO A TREFIS INTERACTIVE PORTFOLIO APRIL 2016 TABLE OF CONTENTS MODELING AN ELECTION YEAR 1 A WAY TO INCORPORATE ELECTION YEAR UNCERTAINTY ROCHE: BIOTECH, POLITICS & RISK 3 CREDIT SUISSE: TEMPTING, BUT NOT TEMPTING ENOUGH HARLEY-DAVIDSON 5 PETROBRAS 6 EXXON MOBIL 7 ARCELORMITTAL 8 THE FULL PORTFOLIO 9 ACCESS INTERACTIVE TREFIS ANALYSIS TO GET THE MOST FROM THE FOLIO - TEST OUR ASSUMPTIONS - RUN YOUR OWN SCENARIOS - READ FORECAST RATIONALE - ACCESS TREFIS RESEARCH - ANALYZE VALUE DRIVERS 2 4 Modeling an Election Year Should investors try to factor election-year politics into their strategy? Maybe, but not by trying to predict the election results. Value investors should keep their eyes on the financial statements and inputs that determine value, not the macro factors like political outcome that are impossible to truly discern. As Peter Lynch says, "If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes." As with most things macro, there are too many moving parts to make any meaningful insights, especially with predicting election results, which are notoriously murky. And to the extent you can predict an election, the result is already priced in. Even if you could predict the next President, you could never predict what legislation would actually become law. Perhaps the John Kenneth Galbraith quote is apt: "The only function of economic forecasting is to make astrology look respectable." Same with political forecasting. People tend to overestimate the effect the President will have on the markets anyway. A sitting President only has control over monetary policy through appointing the Fed Chair and limited authority over fiscal policy through legislation. Only in foreign policy is a President powerful. So investors should worry less about politics and more about cash flows. James Berman, the president and founder of JBGlobal.com LLC, a registered investment advisory firm (SEC registered), specializes in asset management for high-net-worth individuals and trusts. Mr. Berman is a faculty member in the Finance Department of the NYU School of Professional Studies. He has appeared on CNBC and the Fox Business Channel and has been quoted and published in a variety of publications, including Barron's, Bloomberg, The Huffington Post and CNN Money. Mr. Berman holds a B.A., Magna Cum Laude, Phi Beta Kappa, in English & American Literature from Harvard and a J.D. from Harvard Law School. James Berman

2 THE TREFIS DOW Ticker Trefis Price Market AAPL AXP BA CAT CSCO CVX DD DIS GE GS HD IBM INTC JNJ JPM KO MCD MMM MRK MSFT NKE PFE PG TRV UNH UTX V VZ WMT XOM DOW 18, , A Way to Incorporate Election-Year Uncertainty There is one meaningful way, however, to incorporate the uncertainty that surrounds an election year into your stock modeling: you can increase the equity risk premium in your discounted cash flow valuations. This has the effect of increasing the cost of equity and hence the weighted average cost of capital (WACC). When the higher WACC is used as the discount rate, valuations drop commensurately, affording a greater margin of safety for any purchase. With a company that faces unusually large political or regulatory risk (i.e. a biotech company or a defense contractor), it might make sense to increase the equity risk premium significantly, even if that risk is not currently reflected in a high beta (I have never liked to rely on beta anyway, given how the market can price risk as incorrectly as value). The formula for the discount rate is as follows: [% Equity Financed * Cost of Equity] + [% Debt Financed * Cost of Debt] And the formula for Cost of Equity is as follows: [Beta Coefficient * Avg Equity Risk Premium] + [Risk Free Rate] In periods of unusual political uncertainty (like now!), I recommend adding a whole percentage point to the typical Equity Risk Premium of 5%. Raising this to 6% increases the Cost of Equity by the same amount, which then gets proportionally adjusted in the discount rate based on the equity weighting. I would hesitate to do this in just any election season, because it looks through a short-term lens that's dangerous to the value investor. But this election is among the most polarizing we've seen in a long time, with some of the leading candidates positing truly extreme positions. Caution is justified. 2 Under valuation + 8%

3 Roche: Biotech, Politics & Risk One of the leading biotech companies in the world, Roche Holdings (RHHBY), acquired many of its best-selling oncology drugs from its acquisition of Genentech in According to the Trefis model (below), three of these drugs (Avastin, Herceptin and Rituxan) comprise approximately half the company's revenues as well as half the stock's $246 billion estimated value. Given Hillary Clinton's comments on the biotech industry and the bipartisan populist appeal of targeting drug companies, businesses like Roche could face heavy pricing pressure next year. Regardless of whether populist sentiment will result in actual legislation, the tenor of the rhetoric calls for care. This is best done by raising the risk premium accordingly. With Roche, a company that otherwise looks attractive and undervalued, I would add one whole percentage point for general election year uncertainty and another whole point for the regulatory risks posed for a biotech company by the next administration, whoever it might be. Trefis currently assigns a company-wide discount rate of 6.36%, a figure which vastly understates the company's risks. If I raise the discount rate to 9%, a level which adds a risk premium for the political uncertainties, fair value drops to $160 billion. This equates to $24 per share, well below the $30 market price. It may not be possible to predict the next President, but it's simple enough to afford yourself a conservative margin of error in your stock purchases. 3

4 Credit Suisse: Tempting, But Not Tempting Enough Respected value investor Christopher Davis has said that with banks, the CEO should be the "Chief Risk Officer." In other words, the constant management of risk at a large financial institution cannot be delegated. This was the lesson learned form the 2008 financial crisis, during which AIG and Citigroup suffered catastrophic losses because the head didn't truly understand what the tail was doing. Indeed, every large money center bank is a black box, hidden from the sight of passive investors. Jamie Dimon of JP Morgan Chase (JPM) is the prototypical CEO as risk officer? a leader so well-versed in the nitty-gritty that he can actually manage an unmanageable colossus like JPM. At Credit Suisse (CS), relatively new CEO Tidjane Thiam is trying to learn what the tail is doing. Turns out, it's not pretty. Out-sized, dangerous trades were lurking on the bank's balance sheet like so many landmines. Thiam is closing these bets and shrinking the investment bank. This will crush revenue in the short-term but is likely the right move. At $14.32, CS has lost 35% of its value year-to-date, putting its price well below the Trefis $21 estimate of intrinsic value. I would be tempted, but CS is still highly leveraged with assets at 18 times equity. Get that leverage level down to the mid-teens and CS might start to look like a bank where the CEO is actually in charge of risk. 4

5 COMPANY HIGHLIGHTS Harley-Davidson (HOG) has rallied strongly over the past month, as a weaker dollar stokes hope of an earnings surprise. In the past two years, HOG had been punished by a strong dollar as the company resolutely maintained premium pricing and lost market share abroad. The return of dollar weakness will expose whether the bulls or bears are right on HOG. The latter claim HOG's loss of market share is a secular erosion of the HOG brand. Along with other bulls, I think the brand remains strong and the company's emphasis on pricing power? while losing customers in the short run? will protect this storied motorcycle brand in the future. Strengthening foreign currencies should resolve this debate one way or the other. TREFIS KEY DRIVERS Harley Davidson saw a slight revenue decline in 2015, driven by market share declines in the U.S. and Europe and a slowdown in the Japanese and Australian markets. Its average selling prices in the U.S. and Europe dropped slightly as well, though a portion of that was driven by currency fluctuations. Trefis expects a modest recovery going forward. Market Capitalization Annual Revenues Dividend/ Yield 52 Week Range $9.5 B $6.0 B $1.24 / 2.40% $

6 COMPANY HIGHLIGHTS Is the air finally clearing around Petrobras (PBR)? A strengthening oil price and the possible impeachment of President Dilma Rouseff have convinced investors there may be life after bribery scandals, the commodities plunge and the collapse of the Brazilian economy. Proving that stocks don't need good news to rally? just less of the bad kind? PBR has more than doubled since the lows of $2.71 a month ago. I bought it in the Folio at $7.30, so this rise is scant comfort. The question remains: will PBR go bust? As I wrote in November, I don't believe it will. Despite over $200 billion in combined debt and operating lease liabilities, PBR has nearly $500 billion in net proven oil reserves. That should be enough to persuade lenders to stick by the company. TREFIS KEY DRIVERS Petrobras, like other oil producers, has been grappling with a weak oil pricing environment in in the last few years. A 36% decline in average realized prices in the last five years has offset 13% growth in domestic refining and marketing volumes, leading to around a 20% decline in revenues and around a 50% drop in EBITDA since Trefis does not expect significant improvement in the near term, so the company could see further declines going forward. Market Capitalization Annual Revenues Dividend/ Yield 52 Week Range $37.3 B $89.2 B N/ A $

7 COMPANY HIGHLIGHTS Exxon Mobil (XOM) remains the company most likely to weather the oil collapse. Along with a profitable downstream refining segment that profits from lower oil prices and boasts superb returns on invested capital, XOM makes money on oil's upside as well, through upstream drilling and exploration. This all takes place on the back of a stellar balance sheet, with a debt to equity ratio of less than 20%. With a reasonably safe dividend yield of 3.45% and a history of stellar stewardship of shareholder capital, what's not to like? Trefis estimates the company's intrinsic value at $85.21 per share. I think fair value is closer to $100, and I recommend buying the stock at any price below $90. TREFIS KEY DRIVERS The low crude oil price environment continues to weigh on Exxon Mobil's upstream operations. Benchmark crude oil prices declined sharply in 2015, and Trefis does not expect any significant recovery in the near term. Accordingly, the company is taking measures to reduce its capital spending and share buybacks in order to be able to better steer through the pricing environment. Market Capitalization Annual Revenues Dividend/ Yield 52 Week Range $348 B $237 B $2.92 / 3.52% $

8 COMPANY HIGHLIGHTS ArcelorMittal (MT) has been an even more profound disaster than Petrobras (PBR), but this stock, too, is finally showing some life. At $4.52, the stock is up 54% from the $2.93 low, but still a whopping 72% below our purchase price. Here too, I believe Trefis is undervaluing the company at $3.97 per share. Assuming some normalization in steel prices? an inevitability if not soon, at least eventually? MT is worth over $8 and represents a bargain at the current price. Rationalization in Chinese steel production is finally taking place, which bodes well for MT over the next few years. TREFIS KEY DRIVERS ArcelorMittal's automotive steel shipments could decline by as much as 15% from 2015 levels by 2020, as automakers shift towards using a greater proportion of lighter materials such as aluminum in order to comply with increasingly stringent regulations pertaining to fuel efficiency and automobile emissions. However, if ArcelorMittal is able to add to its market share it could be able to offset some of these declines. Market Capitalization Annual Revenues Dividend/ Yield 52 Week Range $8.0 B $63.6 B N/ A $

9 THE BERMAN VALUE FOLIO No changes this month. Symbol Company Name Buy/Hold, Sell Purchase Date Purchase Price Market Price Total Return Since Purchase Trefis Estimate Basic Materials MT Arcelor-Mittal Buy 9/21/2012 RIO Rio Tinto Buy 1/31/2014 $16.06 $4.58 (70.0%) $3.97 $53.15 $28.27 (41.8%) $30.28 Consumer HOG Harley Davidson Buy 4/30/2015 $56.22 $51.33 (6.4%) $48.17 Energy SLB Schlumberger Buy 9/30/2014 $98.66 $73.75 (23.0%) $76.34 BP BP Buy 12/21/2011 $41.33 $30.18 (10.6%) $36.05 PBR Petrobras Buy 12/31/2014 $7.30 $5.84 (19.9%) $5.85 XOM Exxon Mobil Buy 1/30/2015 $87.42 $ % $85.21 Financial Services BK BNY Mellon Buy 12/21/2011 $19.43 $ % $46.00 BLK BlackRock Buy 8/29/2014 $ $ % $365 C Citigroup Hold 12/21/2011 $25.74 $ % $61.00 JPM JPMorgan Chase Buy 12/21/2011 $32.12 $ % $71.00 STT State Street Buy 1/31/2016 $55.73 $ % $67.50 Tech, Media, Telecom IBM IBM Buy 2/28/2014 $ $ (12.8%) $138 PAYX Paychex Hold 12/21/2011 $29.14 $ % $49.74 Industrials & Transportation BA Boeing Buy 2/29/2016 $ $ % $140 UPS UPS Hold 12/21/2011 $72.40 $ % $105 UTX United Tech. Buy 4/21/2012 $80.40 $ % $120 DE Deere Hold 3/31/2015 $87.69 $76.99 (9.4%) $91.88 Total Return 71.0% Total return is calculated since inception date of 12/21/2011 and includes reinvested dividends. When a stock is bought in the portfolio, it is added on an equal cash-weighted basis at the time of purchase.

10 DISCLAIMER The Berman Value Folio (TBVF) is published monthly and provides information and investment ideas on stocks. All material in TBVF is copyright, 2011 through the present, by Trefis and JBGlobal.com LLC and may not be reproduced in whole or in part in any form without written consent. TBVF is written by James Berman with assistance from Trefis staff. TBVF is distributed by both Trefis and Forbes. Forbes acts only as distributor and is not responsible for, nor does it endorse, any TBVF content or investment ideas. All stock buys and sells are the sole decision of James Berman. In the TBVF portfolio, James Berman is restricted to buying only stocks that are covered by Trefis. TBVF is intended for experienced investors, who understand the risks, costs, mechanics and consequences of investing. None of the content in this newsletter is intended to be, nor should be interpreted as, a solicitation to buy or sell securities. The selection of portfolio stocks is based on fundamental analysis. There is, however, no assurance that these securities will produce profits. They may instead produce serious losses. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of any prior securities mentioned in the TBVF. All investing involves risk of serious loss. No graph, chart, formula or other device offered or portrayed in TBVF can in and of itself be used to make trading or investment decisions. Any graph, chart, formula or other device is inherently unreliable in making a trading or investment decision due to the intrinsically misleading nature of such items. Performance results are based on model portfolios and do not reflect actual trading. Actual performance will vary based on a variety of factors, including market conditions and trading costs. TBVF results may not reflect the impact that material economic and market factors might have had on the adviser's decision-making if the adviser were actually managing clients' money in this portfolio. TBVF contains stocks that are managed with a view towards capital appreciation. James Berman and JBGlobal.com may manage other portfolios with different strategies and returns that may materially differ from TBVF results with substantially higher or lower performance. TBVF model results do not reflect the deduction of any management fees, advisory fees, brokerage or other commissions, bid-ask spreads, tax consequences, and any other expenses that a client would have to actually pay or would have actually paid in a real portfolio. All return figures assume the reinvestment of all dividends. When a stock is bought in the portfolio, it is added on an equal cash-weighted basis at the time of purchase. Past performance does not guarantee future results. Any forward-looking statement is inherently uncertain and cannot be relied upon as a statement of actual performance. If you would like a spreadsheet furnishing a list of all recommendations made by TBVF since inception on 12/21/2011, please send an request to: info@jbglobal.com. Although all content is derived from data believed to be reliable, accuracy cannot be guaranteed. James Berman, JBGlobal.com LLC, Insight Guru Inc., Trefis, TBVF?s publisher and distributor(s) and their employees assume no liability whatsoever for any investment losses as a result of securities purchased on TBVF recommendations. TBVF is not intended to provide personalized investment advice. Readers and subscribers should consult their financial adviser before investment. James Berman is an investor in Insight Guru Inc., the parent company of Trefis, both personally and through the venture fund he subadvises. James Berman, therefore, has a financial interest in Trefis aside from his interest in TBVF. James Berman, JBGlobal.com LLC and employees of TBVF, Insight Guru Inc., JBGlobal.com L.L.C. and Trefis may hold positions in some or all of the stocks mentioned here, both personally and in the accounts and funds they manage for others. No compensation for recommending particular securities, services, or financial advisors is solicited or accepted. If you are unwilling or unable to abide by any conditions of this disclaimer, then you may obtain a refund for the unused portion of your subscription at any time. The Berman Value Folio info@jbglobal.com 10