The Manual of Ideas: Large-Cap Stocks: How Cheap Are They? by BeyondProxy LLC

Value-oriented Equity Investment Ideas for Sophisticated Investors A Monthly Publication of BeyondProxy LLC  Subscribe at manualofideas.com “If our efforts can further the goals of our members by giving them a discernible edge over other market participants, we have succeeded.”

Investing In The Tradition of Graham, Buffett, Klarman Year IV, Volume I January 31, 2011

LARGE CAP STOCKS: HOW CHEAP ARE THEY?

When asked how he became so successful, Buffett answered: “We read hundreds and hundreds of annual reports every year.”

► Five takes on U.S. equity market valuation

Top Ideas In This Report Cisco Systems (Nasdaq: CSCO) ………………… 50

Pfizer

► Cheapest 20 DJIA components profiled and analyzed ► Proprietary selection of Top Three investment candidates ► Plus: Superinvestor holdings update

(NYSE: PFE) ……………………... 94

Travelers (NYSE: TRV) ……………………... 98

Also Inside

► Plus: Favorite stock screens for value investors ►

Plus: Exclusive insights from VALUEx participants

Editorial Commentary ………………. 5 MOI Performance Review ………….. 9 Superinvestor Update ………………12 Five Takes on Market Valuation ….. 13 Browsing for Large-Cap Ideas …… 18 Cheapest 20 DJIA Components …… 30 Exclusive VALUEx Insights ………..110 Favorite Value Screens ……………171 This Month’s Top Web Links …….. 179

About The Manual of Ideas Our goal is to bring you investment ideas that are compelling on the basis of value versus price. In our quest for value, we analyze the top holdings of top fund managers. We also use a proprietary methodology to identify stocks that are not widely followed by institutional investors. Our research team has extensive experience in industry and security analysis, equity valuation, and investment management. We bring a “buy side” mindset to the idea generation process, cutting across industries and market capitalization ranges in our search for compelling equity investment opportunities.

Companies mentioned in this issue include 3M, Abbott Labs, Alcoa, Amazon.com, America Movil, American Express, Anglo American, Anheuser-Busch, Apple, AstraZeneca, AT&T, Australia and NZ, Banco Bradesco, Banco Santander, Bank of America, Bank of Nova Scotia, Barclays, BASF, Bayer, Berkshire Hathaway, BHP Billiton, BP, British Am. Tobacco, Canon, Caterpillar, Chevron, China Life Insurance, China Mobile, China Telecom, Cisco Systems, Citigroup, CNOOC, Co. Bebidas Americas, Coca-Cola, Comcast, ConocoPhillips, Daimler, Ecopetrol, Eni, Exxon Mobil, Ford Motor, General Electric, GlaxoSmithKline, Goldman Sachs, Google, Hewlett-Packard, Home Depot, Honda, HSBC, IBM, Intel, Itau Unibanco, Johnson & Johnson, JPMorgan Chase, Kraft Foods, McDonald’s, Merck, Microsoft, Mitsubishi UFJ, Novartis, Novo Nordisk, NTT, NTT DoCoMo, Occidental Petroleum, Oracle, PepsiCo, PetroChina, Petroleo Brasileiro, Pfizer, Philip Morris, Procter & Gamble, Qualcomm, Roche, Royal Bank of Canada, Royal Dutch Shell, SAP, Schlumberger, Siemens, Sinopec, StatoilHydro, Suncor Energy, Taiwan Semiconductor, Telefonica, The Travelers Companies, TOTAL, Toyota, UBS, Unilever, United Technologies, UPS, Vale, Verizon, Visa, Volkswagen, Wal-Mart, Walt Disney, Wells Fargo, Westpac Banking,, and more. (analyzed companies are underlined)

Copyright Warning: It is a violation of federal copyright law to reproduce all or part of this publication for any purpose without the prior written consent of BeyondProxy LLC. Email support@manualofideas.com if you wish to have multiple copies sent to you. © 2008-2011 by BeyondProxy LLC. All rights reserved.

Value-oriented Equity Investment Ideas for Sophisticated Investors

Table of Contents EDITORIAL COMMENTARY ..........................................................................5 THE MANUAL OF IDEAS PERFORMANCE REVIEW ..................................9 SUPERINVESTOR HOLDINGS UPDATE ................................................... 12 VIEW FROM THE TOP: FIVE TAKES ON MARKET VALUATION ............ 13 TOBIN’S Q............................................................................................................................. 14 SHILLER’S TEN-YEAR TRAILING P/E ........................................................................................ 15 U.S. EQUITY MARKET CAPITALIZATION TO GDP....................................................................... 16 S&P EARNINGS YIELD VERSUS INTEREST RATES ..................................................................... 16 DOW JONES INDUSTRIALS IN TERMS OF GOLD ......................................................................... 17

BROWSING FOR POTENTIAL LARGE CAP OPPORTUNITIES ............... 18 LARGEST 100 COMPANIES (BY MARKET VALUE), SORTED BY FORWARD P/E ............................... 18 LARGEST 100 COMPANIES TRADING AT <= 12X FORWARD P/E ................................................. 20 “MAGIC FORMULA,” BASED ON TRAILING OPERATING INCOME (MV > $5 BILLION)........................ 22 “MAGIC FORMULA,” BASED ON THIS YEAR’S EPS ESTIMATES (MV > $5 BILLION) ........................ 23 “MAGIC FORMULA,” BASED ON NEXT YEAR’S EPS ESTIMATES (MV > $5 BILLION) ....................... 24 VALUE WITH CATALYST: CHEAP REPURCHASERS OF STOCK (MV > $5 BILLION).......................... 25 PROFITABLE DIVIDEND PAYORS WITH DECENT BALANCE SHEETS (MV > $5 BILLION) .................. 26 DEEP VALUE: LOTS OF REVENUE, LOW ENTERPRISE VALUE (MV > $5 BILLION) ......................... 27 DEEP VALUE: NEGLECTED GROSS PROFITEERS (MV > $5 BILLION) ........................................... 28 ACTIVIST TARGETS: POTENTIAL SALES OR RECAPITALIZATIONS (MV > $5 BILLION)..................... 29

CHEAPEST 20 MEMBERS OF DOW JONES INDUSTRIAL AVERAGE ... 30 ALCOA (AA) – CAPITAL WORLD .............................................................................................. 30 AMERICAN EXPRESS (AXP) – BARES, BERKSHIRE, MARKEL ..................................................... 34 AT&T (T) – CAP RE, T ROWE................................................................................................. 38 BANK OF AMERICA (BAC) – APPALOOSA, BRK, CHOU, BRAVE WARRIOR, FAIRHOLME, PAULSON 42 CHEVRON (CVX) – BP CAPITAL, FPA ..................................................................................... 46 CISCO SYSTEMS (CSCO) – APPALOOSA, CENTAUR, EDINBURGH, GLENVIEW, PENNANT ............ 50 EXXON MOBIL (XOM) – BRK, KLEINHEINZ, MARKEL, PENNANT, VIKING ..................................... 54 GENERAL ELECTRIC (GE) – BRK, EDINBURGH, FAIRHOLME, MARKEL ....................................... 58 HEWLETT-PACKARD (HPQ) – APPALOOSA, FPA, GLENVIEW, MAVERICK, SHUMWAY .................. 62 IBM (IBM) – CAPITAL W ORLD, MARKEL, T ROWE .................................................................... 66 INTEL (INTC) – APPALOOSA, EDINBURGH, MARKEL .................................................................. 70 JOHNSON & JOHNSON (JNJ) – APPALOOSA, BRK, FAIRFAX, FPA, MARKEL, WEST COAST ......... 74 JPMORGAN (JPM) – BLUE RIDGE, CASTLE POINT, KLEINHEINZ, LONE PINE, PAULSON, VIKING ... 78 KRAFT FOODS (KFT) – BRK, EAGLE, FAIRFAX, FPA, PERSHING SQUARE, WEST COAST ............ 82 MERCK (MRK) – APPALOOSA, FAIRFAX................................................................................... 86 MICROSOFT (MSFT) – APPALOOSA, BARES, BLUE RIDGE, FPA, GREENLIGHT, MARKEL, W EITZ.. 90 PFIZER (PFE) – BLUE RIDGE, FPA, GREENLIGHT, KLEINHEINZ, MAVERICK, PAULSON, PENNANT 94 TRAVELERS (TRV) – FPA, GREENLIGHT, SOUTHEASTERN........................................................ 98 WAL-MART (WMT) – BRK, EAGLE, FAIRFAX, FPA, KLEINHEINZ, MARKEL, WEITZ .................... 102 WALT DISNEY (DIS) – CHILDREN’S, SOUTHEASTERN .............................................................. 106

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January 31, 2011 – Page 3 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

EXCLUSIVE INSIGHTS FROM VALUEX PARTICIPANTS ...................... 110 ETHAN BERG, G4 ................................................................................................................ 110 PHILIP BEST, ARGOS INVESTMENT MANAGERS ...................................................................... 113 JAMES BRADFORD, PRIVATE INVESTOR ................................................................................. 114 DAVID COYNE, SETANTA ASSET MANAGEMENT ...................................................................... 115 SHAI DARDASHTI, DARDASHTI CAPITAL MANAGEMENT ........................................................... 119 SIMON DENISON-SMITH, METROPOLIS CAPITAL ..................................................................... 120 DR. CHRISTOPHER DETWEILER, PRIVATE INVESTOR............................................................... 122 TIM DU TOIT, EUROSHARELAB .............................................................................................. 123 CHRISTIAN ECK, UBS .......................................................................................................... 127 ORI EYAL, EMERGING VALUE CAPITAL MANAGEMENT ............................................................. 127 DON FITZGERALD, TOCQUEVILLE FINANCE ............................................................................ 132 MASSIMO FUGGETTA, HORATIUS .......................................................................................... 134 BENEDIKT GERMANIER, PRIVATE INVESTOR ........................................................................... 135 PABLO GONZALEZ, ABACO CAPITAL ...................................................................................... 136 DR. OLAF HEIN, SPARTA AG ................................................................................................ 137 MARKUS HENZ, WÜTHRICH, HENZ & CO................................................................................ 139 ROBERT KARAS, SCHOELLERBANK (UNICREDIT GROUP) ........................................................ 139 ANDREAS LECHNER, PRIVATE INVESTOR ............................................................................... 141 SÉBASTIEN LEMONNIER, TOCQUEVILLE FINANCE.................................................................... 141 KAUSHAL MAJMUDAR, THE RIDGEWOOD GROUP.................................................................... 143 PAUL MCNULTY, SETANTA ASSET MANAGEMENT ................................................................... 144 WILLIAM O’CHEE, HIMALAYA CONSULTING ............................................................................ 146 BERNARD PEPERSTRAETE, NGN CAPITAL ............................................................................. 147 MATTHIAS RIECHERT, PRIVATE INVESTOR ............................................................................. 150 STEPHEN ROSEMAN, THESIS FUND MANAGEMENT ................................................................. 151 MARC SAINT JOHN W EBB, ARGOS INVESTMENT MANAGERS ................................................... 152 YUSUF SAMAD, BELFIELD CAPITAL ........................................................................................ 153 RAHUL SARAOGI, ATYANT CAPITAL ....................................................................................... 155 BENJAMIN SCHMITT, VARUS FUND ........................................................................................ 156 ALAN SCHRAM, W ELLCAP PARTNERS .................................................................................... 157 ANDREAS SCHWEITZER, PRIVATE INVESTOR .......................................................................... 159 KEVIN SLEMP, PRIVATE INVESTOR ........................................................................................ 159 GUY SPIER, AQUAMARINE CAPITAL MANAGEMENT ................................................................. 161 CHRISTOPH STAHL, PRIVATE INVESTOR ................................................................................ 161 ARMIN STRACKE, CITIGROUP................................................................................................ 162 JOSH TARASOFF, GREENLEA LANE CAPITAL MANAGEMENT .................................................... 163 PAOLO TRAMONTANA, KRAEMER, SCHWAB ........................................................................... 165 CARTER VENKAT, PRIVATE INVESTOR ................................................................................... 167 JACOB WOLINSKY, VALUE ADVISORY .................................................................................... 168 PETER WÜTHRICH, WÜTHRICH, HENZ & CO........................................................................... 170

FAVORITE STOCK SCREENS FOR VALUE INVESTORS ...................... 171 “MAGIC FORMULA,” BASED ON TRAILING OPERATING INCOME ................................................. 171 “MAGIC FORMULA,” BASED ON THIS YEAR’S EPS ESTIMATES ................................................. 172 “MAGIC FORMULA,” BASED ON NEXT YEAR’S EPS ESTIMATES ................................................ 173 VALUE WITH CATALYST: CHEAP REPURCHASERS OF STOCK ................................................... 174 PROFITABLE DIVIDEND PAYORS WITH DECENT BALANCE SHEETS............................................ 175 DEEP VALUE: LOTS OF REVENUE, LOW ENTERPRISE VALUE ................................................... 176 DEEP VALUE: NEGLECTED GROSS PROFITEERS .................................................................... 177 ACTIVIST TARGETS: POTENTIAL SALES, LIQUIDATIONS OR RECAPS ......................................... 178

THIS MONTH’S TOP 10 WEB LINKS ....................................................... 179

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Value-oriented Equity Investment Ideas for Sophisticated Investors

Editorial Commentary In this issue, we present some of the largest multinational corporations trading on U.S. stocks exchanges. We analyze twenty of the cheapest components of the Dow Jones Industrials Average (DJIA), as determined by forward P/E. Several DJIA companies recently traded at no more than ten times estimated forward earnings. These companies include Bank of America (NYSE: BAC), Chevron (NYSE: CVX), Hewlett-Packard (NYSE: HPQ), Intel (Nasdaq: INTC), JPMorgan Chase (NYSE: JPM), Merck (NYSE: MRK), Microsoft (Nasdaq: MSFT), Pfizer (NYSE: PFE), and Travelers (NYSE: TRV). Many of the superinvestors we track, including David Einhorn, John Paulson and David Tepper, have embraced large, high-quality stocks over the past year, and some have argued explicitly that large caps are significantly cheaper than small caps, setting up a scenario in which high-quality companies may finally outperform their “junkier” peers. One of the most vocal advocates for high-quality stocks has been famed asset allocator Jeremy Grantham of GMO. In a January 25th letter, the increasingly bearish Grantham argues that bulls “are living on borrowed time” and that “U.S. quality stocks are the least overpriced equities.” While we focus on bottom-up analysis, we thought it might be instructive to review five top-down measures of U.S. equity market valuation in this report, if only to establish a basis for judging Grantham’s bearish outlook. As the following table shows, four of the five indicators below suggest that U.S. equities are overvalued. The only metric that puts equities into slightly undervalued territory is the Dow Jones Industrial Average expressed in terms of gold. This metric may reveal more about the price of gold, however, than about the valuation level of the Dow.

Selected Measures of U.S. Equity Market Valuation, 1900–2011 Tobin’s Q

Shiller’s 10-Year Trailing P/E

Market Cap / GDP

Earnings Yield / Interest Rates

DJIA / Ounce of Gold

Value

Year

Value

Year

Value

Year

Value

Year

Value

Year

Low

0.3

1948

1920

35%

1948

0.3

2000

1.5

1980

High

1.9

1999

42x

1999

162%

1999

5.1

1932

39.9

2000

Average

0.7

–

16x

–

68%

–

1.8

–

10.1

–

Recent

1.1

Jan. 2011

23x

Jan. 2011

99%

Jan. 2011

1.3

Jan. 2011

8.8

Jan. 2011

Source: The Manual of Ideas analysis, Federal Reserve, Robert J. Shiller.

 As promised last month, we include an analysis of the market performance of our featured ideas in this report. Importantly, we show all the ideas we have selected as “top ideas” in past reports, thereby avoiding the credibility issues associated with selective disclosure. While you can inspect the performance of our featured ideas on a company-by-company basis, we highlight one summary statistic here: On average, our featured ideas have returned 51% from their respective feature dates through December 31, 2010, versus a comparable return of 25% for the S&P 500 Index. We are pleased with this record and believe it reflects our proprietary value-oriented approach, but we caution that past performance is in the past. It is no guarantee or even indication of future performance. We also note that our reports do not present investment recommendations but merely “food for thought.” © 2008-2011 by BeyondProxy LLC. All rights reserved.

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January 31, 2011 – Page 5 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

 A rather cautious equity market outlook notwithstanding, we find the following three DJIA components quite interesting: Cisco Systems (Nasdaq: CSCO, $21 per share; MV $119 billion) $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

Jan 11

Cisco is the dominant provider of data infrastructure products that enable the functioning of the Internet and improve network connectivity. The company enjoys favorable long-term demand prospects, based on expected growth of Internet data traffic and a proliferation of web-enabled devices, including smartphones. The company has a solid balance sheet with a net cash position, and trades at a highsingle digit trailing FCF yield, which we find quite enticing for a company of Cisco’s quality. Balancing the potential reward is the risk that technological change and competition may exacerbate existing margin pressure. A sell-off following the company’s earnings announcement in November provides an opportunity to invest in Cisco at an attractive price that is likely lower than that paid by at least three “superinvestors” — David Tepper’s Appaloosa, Larry Robbins’ Glenview and Sandy Nairn’s Edinburgh Partners, who initiated a new holding or increased their existing holding during the September 2010 quarter. Our analysis of three valuation scenarios based on our estimate of normalized operating income suggests a fair value range of $19-30 per share (see page 52).

CISCO SYSTEMS – OPERATING CASH FLOW, FY90–FY10 ($ in billions) Cisco has reported positive and, with a few exceptions, growing cash flow over two decades.

Source: Company presentation dated September 14, 2010; available at http://bit.ly/h1Hftg

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Value-oriented Equity Investment Ideas for Sophisticated Investors

Pfizer (NYSE: PFE, $18 per share; MV $147 billion) $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

Jan 11

Pfizer’s purchase of Wyeth in 2009 diversified revenue and improved the drug pipeline. An estimated 40% of 3Q10 revenue, however, remains vulnerable over the next five years due to expired or yet-to-expire drug patents (mostly by 2012, including blockbuster drug Lipitor). Nonetheless, the market’s valuation may reflect too pessimistic a judgment regarding Pfizer’s ability to stabilize and grow earnings over time. Management expects net income to grow 5% from 2010 to 2012, helped by $4-5 billion in cost reductions and revenue contributions from new products. The company is among the largest holdings of superinvestors David Tepper, David Einhorn, Alan Fournier, and John Griffin. We find Pfizer’s stock price of $18 per share rather compelling in light of consensus estimates for EPS of $2.30 in 2011. An analysis of three valuation scenarios based on our estimate of normalized operating income suggests a fair value range of $19-31 per share (see page 96).

PFIZER – KEY PATENT EXPIRATIONS Top 10 Drugs Primary indication Lipitor Reduction of LDL cholesterol Enbrel (outside N.A.) Arthritis, psoriasis, spondylitis Lyrica Epilepsy, neuralgia, fibromyalgia Prevnar Pneumococcal vaccine Celebrex Arthritis, inflammation, acute pain Viagra Erectile dysfunction Xalatan / Xalacom Glaucoma and ocular hypertension Norvasc Hypertension Zyvox Bacterial infections Geodon / Zeldox Schizophrenia, bipolar disorder Pfizer - Revenue of top 10 biopharmaceutical products

% of Q3 Revenue 16% 5% 5% 5% 4% 3% 3% 2% 2% 2% 44%

Patent1 Expiry expired (2010)2 n/m3 2018 n/m 2014 2012 2011 expired (2007) 2015 2012

Refers to the year in which the U.S. basic product patent expires (including six-month exclusivity period). The U.S. basic product patent for Lipitor, including the pediatric exclusivity period, expired in March 2010. Pfizer has a patent covering the enantiomeric form of the drug, which (including the exclusivity period) expires in June 2011. Pfizer expects it “will lose the substantial portion of our U.S. revenues from Lipitor” shortly after exclusivity expiration in November 2011). The U.S. accounted for ~50% of Lipitor revenue in 3Q10.

3 Pfizer has exclusive rights to the biologic Enbrel outside the U.S. and Canada and co-promotes Enbrel with Amgen in the U.S. and Canada. Revenue figure reflects sales outside U.S./Canada only, with U.S./Canada sales included in "Alliance" revenue (not listed in our table; "Alliance" revenue was $1.0 billion in 3Q10 including sales of Enbrel in the U.S. and Canada, Aricept, Exforge, Rebif and Spiriva). The Enbrel patent, which is owned by Amgen, expires in October 2012 in the U.S. Pfizer's U.S./Canada co-promotion agreement with Amgen expires in October 2013 (Pfizer is entitled to a royalty stream for 36 months thereafter, which is significantly less than its current share of Enbrel profits from U.S. and Canadian sales). Pfizer's rights to Enbrel outside the U.S. and Canada will not be affected by the expiration of the co-promotion agreement. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

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January 31, 2011 – Page 7 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Travelers (NYSE: TRV, $56 per share; MV $26 billion) $70 $60 $50 $40 $30 $20 $10 $0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

Jan 11

Property and casualty insurer Travelers has compounded book value per share in the high teens, on average, since 2005. While this strikes us as quite an achievement, especially given the company’s modest use of debt, the market is not impressed. Investors value the shares roughly in line with yearend 2010 shareholders’ equity and at only a modest premium to tangible book value. Given the company’s exposure to catastrophe and some long-tail risks, the downside may not be as well protected as the valuation implies. Nonetheless, the risk-reward appears favorable. Value-accretive share repurchases, which have reduced share count by one-third over the past three years, are set to continue. Superinvestors with a stake in Travelers include David Einhorn and Mason Hawkins. For Hawkins, the investment in Travelers was newly initiated during the third quarter of 2010. We find the recent stock price of $56 per Travelers share rather enticing given consensus EPS estimates of $6.09 for this year. An analysis of three valuation scenarios based on book value and our estimate of normalized net income suggests a fair value range of $45-87 per share (see page 100).  We are pleased to include a special section in this report, featuring insights and ideas from selected participants in the VALUEx investment conference in Zurich and Klosters, Switzerland, February 2-4. As you browse through the “mini-interviews,” you will undoubtedly notice a remarkable diversity of experience, focus and opinion among the respondents. We found these exchanges an invaluable learning tool and a great snapshot of the global value investing community today. It is a pleasure to be associated with such a remarkable group, and Guy Spier and I are excited to host everyone for a few days of learning, skiing, and friendship. Sincerely,

John Mihaljevic, CFA and The Manual of Ideas research team

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January 31, 2011 – Page 8 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

The Manual of Ideas Performance Review In this section, we review the performance of ideas featured as “top ideas” in past issues of The Manual of Ideas. Nothing in our reports should be construed as an investment recommendation. Past performance is no guarantee of future performance. A few observations: • From inception in November 2008 through yearend 2010, The Manual of Ideas’ featured ideas have delivered an average total return of twice the return of the S&P 500 Index ETF (+51% vs. +25%). This is not time-adjusted. • The average performance of top ideas for the one-year holding period following their featured dates is +56% versus +25% for the S&P during the equivalent time periods. • From inception in November 2008 through yearend 2010, The Manual of Ideas featured 123 top ideas in 23 monthly reports (average of five top ideas per report). 63% of top ideas were selected only once. • 80% of top ideas featured since inception in November 2008 through yearend 2010 have a positive total return. Of the 25 ideas that have a negative return, 11 were down less than 10% since their feature date through yearend 2010. • Of the top ideas featured since inception in November 2008 and prior to 2010 (59 ideas), 42 have returned more than 20%, 25 more than 50%, nine more than 100%, and four more than 200% during the one-year holding period following their feature dates. 21 of the 64 top ideas featured in 2010 were up more than 20% through yearend 2010.

TOP WINNERS – The Manual of Ideas’ monthly featured ideas

Company name Travelzoo Tempur-Pedic Premier Exhibitions Fibrek (formerly SFK Pulp Fund) Sears Holdings Greenlight Capital Re AmeriCredit (acquired on 10/1/2010) American Express Harvest Natural Resources Ticketmaster (acquired on 1/25/2010) Steinway Musical Instruments Playboy Enterprises MI Developments Apartment Investment & Management Sotheby’s InterContinental Hotels MVC Capital CapitalSource Lodgian (acquired on 4/19/2010) BreitBurn Energy Partners Hyatt Hotels LookSmart PRGX Global Lavendon

Ticker Nasdaq: TZOO NYSE: TPX Nasdaq: PRXI Toronto: FBK Nasdaq: SHLD Nasdaq: GLRE NYSE: ACF NYSE: AXP NYSE: HNR Nasdaq: TKTM NYSE: LVB NYSE: PLA Toronto: MIM.A NYSE: AIV NYSE: BID London: IHG NYSE: MVC NYSE: CSE Amex: LGN Nasdaq: BBEP NYSE: H Nasdaq: LOOK Nasdaq: PRGX London: LVD

Date First Featured 11/27/08 11/27/08 11/27/08 2/20/09 2/20/09 2/20/09 2/20/09 2/20/09 4/27/09 5/28/09 6/19/09 6/19/09 6/19/09 6/19/09 7/31/09 10/27/09 11/20/09 11/20/09 12/31/09 1/21/10 2/18/10 4/21/10 6/30/10 9/30/10

MOI Top Idea S&P 500 (SPY) Average Total Return From Featured Date Through… 1 Year 12/31/ 1 Year 12/31/ Later 2010 Later 2010 117% 533% 26% 48% 209% 476% 26% 48% 68% 184% 26% 48% 220% 168% 48% 69% 150% 94% 48% 69% 88% 104% 48% 69% 475% 531% 48% 52% 207% 241% 48% 69% 95% 175% 41% 51% 112% 112% 23% 23% 67% 81% 24% 40% 38% 91% 24% 40% 53% 206% 24% 40% 149% 191% 24% 40% 81% 201% 13% 31% 57% 62% 13% 21% 37% 53% 12% 17% 76% 89% 12% 17% 79% 79% 8% 8% n/m 59% n/m 14% n/m 53% n/m 15% n/m 84% n/m 6% n/m 53% n/m 23% n/m 118% n/m 11%

Idea Category “Magic formula” “Magic formula” “Hidden” assets Equity stub Excess assets “Jockey” stock Superinvestor Superinvestor Superinvestor Special situation “Hidden” assets “Hidden” assets Superinvestor “Hidden” assets “Hidden” assets “Hidden” assets Deep value Superinvestor “Hidden” assets “Hidden” assets “Hidden” assets Deep value “Magic formula” “Hidden” assets

# of Times Selected as Top Idea 2 1 3 2 1 1 1 1 2 1 1 2 1 1 1 1 1 2 1 1 1 1 1 1

Idea Category “Magic formula” Pricing power / low capital intensity Event driven / activism

# of Times Selected as Top Idea 2 1 1

TOP LOSERS – The Manual of Ideas’ monthly featured ideas

Company name GigaMedia Princeton Review Royal Wessanen

Ticker Nasdaq: GIGM Nasdaq: REVU Amsterdam: WES

Date First Featured 9/29/09 7/31/09 10/27/09

MOI Top Idea S&P 500 (SPY) Average Total Return From Featured Date Through… 1 Year 12/31/ 1 Year 12/31/ Later 2010 Later 2010 -61% -72% 10% 21% -54% -78% 13% 31% -35% -29% 13% 21%

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The Manual of Ideas’ monthly featured ideas – ALL IDEAS (from inception through yearend 2010)

Company Compton Petroleum Corinthian Colleges Global Cash Access Penson Worldwide Winn-Dixie Stores Alere EnCana Fibrek (formerly SFK Pulp Fund) SandRidge Energy Barclays Deutsche Bank Mitsubishi UFJ Financial Roma Financial Waterstone Financial Lavendon Nokia OMV OPAP Premier Foods African Barrick Gold Chesapeake Energy Ensco NCR Vodafone Contango Oil & Gas Cowen Group I.D. Systems GenOn Energy (formerly Mirant) Stewart Information Services CA Technologies Dell Eli Lilly GigaMedia PRGX Global Baxter International CapitalSource DirecTV Sealed Air Take-Two Interactive Gravity I.D. Systems LookSmart Market Leader Maxygen Nokia Playboy Enterprises Sony Time Warner Toyota Motor Fair Isaac Hyatt Hotels Investors Title Company Republic Airways Vodafone BreitBurn Energy Partners Contango Oil & Gas EchoStar Gravity Lockheed Martin Premier Exhibitions Seaspan Stewart Information Services Syms Take-Two Interactive Contango Oil & Gas Imation © 2008-2011 by BeyondProxy LLC. All rights reserved.

Ticker Toronto: CMT Nasdaq: COCO NYSE: GCA Nasdaq: PNSN Nasdaq: WINN NYSE: ALR Toronto: ECA Toronto: FBK NYSE: SD London: BARC Frankfurt: DBK Tokyo: 8306 Nasdaq: ROMA Nasdaq: WSBF London: LVD Helsinki: NOK1V Vienna: OMV Athens: OPAP London: PFD London: ABG NYSE: CHK NYSE: ESV NYSE: NCR London: VOD Amex: MCF Nasdaq: COWN Nasdaq: IDSY NYSE: GEN NYSE: STC Nasdaq: CA Nasdaq: DELL NYSE: LLY Nasdaq: GIGM Nasdaq: PRGX NYSE: BAX NYSE: CSE NYSE: DTV NYSE: SEE Nasdaq: TTWO Nasdaq: GRVY Nasdaq: IDSY Nasdaq: LOOK Nasdaq: LEDR Nasdaq: MAXY Helsinki: NOK1V NYSE: PLA Tokyo: 6758 NYSE: TWX Tokyo: 7203 NYSE: FICO NYSE: H Nasdaq: ITIC Nasdaq: RJET London: VOD Nasdaq: BBEP Amex: MCF Nasdaq: SATS Nasdaq: GRVY NYSE: LMT Nasdaq: PRXI NYSE: SSW NYSE: STC Nasdaq: SYMS Nasdaq: TTWO Amex: MCF NYSE: IMN

Featured Date 12/27/10 12/27/10 12/27/10 12/27/10 12/27/10 11/26/10 11/26/10 11/26/10 11/26/10 10/29/10 10/29/10 10/29/10 10/29/10 10/29/10 9/30/10 9/30/10 9/30/10 9/30/10 9/30/10 8/27/10 8/27/10 8/27/10 8/27/10 8/27/10 7/29/10 7/29/10 7/29/10 7/29/10 7/29/10 6/30/10 6/30/10 6/30/10 6/30/10 6/30/10 5/24/10 5/24/10 5/24/10 5/24/10 5/24/10 4/21/10 4/21/10 4/21/10 4/21/10 4/21/10 3/25/10 3/25/10 3/25/10 3/25/10 3/25/10 2/18/10 2/18/10 2/18/10 2/18/10 2/18/10 1/21/10 1/21/10 1/21/10 1/21/10 1/21/10 1/21/10 1/21/10 1/21/10 1/21/10 1/21/10 12/31/09 12/31/09

Stock Total Return From Featured Date To… 1 Year Later 31-Dec-10 n/m 2% n/m 11% n/m 3% n/m 0% n/m 4% n/m 16% n/m 3% n/m 5% n/m 38% n/m -4% n/m -6% n/m 17% n/m 7% n/m -13% n/m 118% n/m 5% n/m 13% n/m 16% n/m 19% n/m 3% n/m 25% n/m 30% n/m 17% n/m 10% n/m 31% n/m 11% n/m 21% n/m -3% n/m 19% n/m 33% n/m 12% n/m 8% n/m -38% n/m 53% n/m 23% n/m 64% n/m 9% n/m 26% n/m 13% n/m -21% n/m 9% n/m 84% n/m -19% n/m -44% n/m -29% n/m 40% n/m -15% n/m 5% n/m -12% n/m 5% n/m 53% n/m -13% n/m 32% n/m 23% n/m 59% n/m 11% n/m 29% n/m -1% n/m -6% n/m 45% n/m 20% n/m 6% n/m -11% n/m 31% 23% 23% 18% 18%

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S&P 500 Total Return 4 From Featured Date To… 1 Year Later 31-Dec-10 n/m 0% n/m 0% n/m 0% n/m 0% n/m 0% n/m 6% n/m 6% n/m 6% n/m 6% n/m 7% n/m 7% n/m 7% n/m 7% n/m 7% n/m 11% n/m 11% n/m 11% n/m 11% n/m 11% n/m 19% n/m 19% n/m 19% n/m 19% n/m 19% n/m 15% n/m 15% n/m 15% n/m 15% n/m 15% n/m 23% n/m 23% n/m 23% n/m 23% n/m 23% n/m 19% n/m 19% n/m 19% n/m 19% n/m 19% n/m 6% n/m 6% n/m 6% n/m 6% n/m 6% n/m 9% n/m 9% n/m 9% n/m 9% n/m 9% n/m 15% n/m 15% n/m 15% n/m 15% n/m 15% n/m 14% n/m 14% n/m 14% n/m 14% n/m 14% n/m 14% n/m 14% n/m 14% n/m 14% n/m 14% 15% 15% 15% 15% January 31, 2011 – Page 10 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Featured Company Ticker Date Lodgian (acquired 4/19/10) Amex: LGN 12/31/09 Stewart Information Services NYSE: STC 12/31/09 VASCO Data Security Nasdaq: VDSI 12/31/09 ADP Nasdaq: ADP 11/20/09 ATP Oil & Gas Nasdaq: ATPG 11/20/09 CapitalSource NYSE: CSE 11/20/09 Lockheed Martin NYSE: LMT 11/20/09 MVC Capital NYSE: MVC 11/20/09 AstraZeneca London: AZN 10/27/09 Diageo London: DGE 10/27/09 InterContinental Hotels London: IHG 10/27/09 OMV Vienna: OMV 10/27/09 Royal Wessanen Amsterdam: WES 10/27/09 GigaMedia Nasdaq: GIGM 9/29/09 Pervasive Software Nasdaq: PVSW 9/29/09 Raytheon NYSE: RTN 9/29/09 Contango Oil & Gas NYSE: MCF 8/21/09 Exterran Holdings NYSE: EXH 8/21/09 Pfizer NYSE: PFE 8/21/09 McGraw-Hill Companies NYSE: MHP 7/31/09 Princeton Review Nasdaq: REVU 7/31/09 Sotheby’s NYSE: BID 7/31/09 Apartment Investment NYSE: AIV 6/19/09 MI Developments Toronto: MIM.A 6/19/09 Playboy Enterprises NYSE: PLA 6/19/09 Steinway Musical Instruments NYSE: LVB 6/19/09 Syms Nasdaq: SYMS 6/19/09 EchoStar Nasdaq: SATS 5/28/09 EMC NYSE: EMC 5/28/09 Republic Airways Nasdaq: RJET 5/28/09 Ticketmaster (acquired 1/25/10) Nasdaq: TKTM 5/28/09 WellCare Health Plans NYSE: WCG 5/28/09 Actions Semiconductor Nasdaq: ACTS 4/27/09 Ascent Media Nasdaq: ASCMA 4/27/09 Comverse Technology OTC: CMVT 4/27/09 Harvest Natural Resources NYSE: HNR 4/27/09 K-Swiss Nasdaq: KSWS 4/27/09 American Express NYSE: AXP 2/20/09 AmeriCredit (acquired 10/1/10) NYSE: ACF 2/20/09 EchoStar Nasdaq: SATS 2/20/09 Greenlight Capital Re Nasdaq: GLRE 2/20/09 Microsoft Nasdaq: MSFT 2/20/09 Premier Exhibitions Nasdaq: PRXI 2/20/09 Sears Holdings Nasdaq: SHLD 2/20/09 Fibrek (formerly SFK Pulp Fund) Toronto: FBK 2/20/09 Sony Tokyo: 6758 2/20/09 Travelzoo Nasdaq: TZOO 2/20/09 American Eagle Outfitters NYSE: AEO 11/27/08 Garmin Nasdaq: GRMN 11/27/08 KHD Humboldt (delisted 3/31/10) NYSE: KHD 11/27/08 MEMC Electronic Materials NYSE: WFR 11/27/08 Microsoft Nasdaq: MSFT 11/27/08 Net 1 UEPS Technologies Nasdaq: UEPS 11/27/08 Premier Exhibitions Nasdaq: PRXI 11/27/08 Syneron Medical Nasdaq: ELOS 11/27/08 Tempur-Pedic International NYSE: TPX 11/27/08 Travelzoo Nasdaq: TZOO 11/27/08 Average Performance Since Inception

Stock Total Return From Featured Date To… 1 Year Later 31-Dec-10 79% 79% 3% 3% 29% 29% 8% 10% -7% 5% 76% 89% -5% -4% 37% 53% 20% 9% 24% 28% 57% 62% -4% 11% -35% -29% -61% -72% -5% 0% -3% 0% -7% 25% 20% 34% 0% 11% 1% 21% -54% -78% 81% 201% 149% 191% 53% 206% 38% 91% 67% 81% 9% 5% 34% 59% 58% 95% 1% 27% 112% 112% 42% 57% 37% 24% 20% 58% 29% 4% 95% 175% 40% 30% 207% 241% 475% 531% 22% 56% 88% 104% 63% 60% 48% 118% 150% 94% 220% 168% 96% 87% 127% 733% 57% 63% 87% 95% 50% 45% -22% -27% 45% 41% 84% 21% 68% 184% 48% 51% 209% 476% 117% 533% 56% 51%

S&P 500 Total Return 4 From Featured Date To… 1 Year Later 31-Dec-10 8% 8% 15% 15% 15% 15% 12% 17% 12% 17% 12% 17% 12% 17% 12% 17% 13% 21% 13% 21% 13% 21% 13% 21% 13% 21% 10% 21% 10% 21% 10% 21% 6% 25% 6% 25% 6% 25% 13% 31% 13% 31% 13% 31% 24% 40% 24% 40% 24% 40% 24% 40% 24% 40% 22% 43% 22% 43% 22% 43% 23% 23% 22% 43% 41% 51% 41% 51% 41% 51% 41% 51% 41% 51% 48% 69% 48% 52% 48% 69% 48% 69% 48% 69% 48% 69% 48% 69% 48% 69% 48% 69% 48% 69% 26% 48% 26% 48% 26% 36% 26% 48% 26% 48% 26% 48% 26% 48% 26% 48% 26% 48% 26% 48% 25% 25%

Based on the closing share price as of the publishing date of The Manual of Ideas report which features the company as a "top idea." Based on the closing share price as of December 31, 2010. Share prices for Lodgian, Ticketmaster and AmeriCredit are based on their respective acquisition prices (related S&P 500 prices are as of the date the respective acquisition was completed). The share price of KHD Humboldt Wedag (and related S&P 500 price) is as of March 31, 2010, subsequent to which the shares were delisted to implement a corporate re-organization. 3 Based on dividends applicable to the respective shares in the designated holding periods. For U.S./Canadian-listed shares, all dividend data is based on Yahoo! Finance. For all other shares, the information sources are the respective company websites. 4 Based on the investable SPDR S&P 500 (NYSE: SPY). The S&P 500 return figures relating to the respective returns for Lodgian, Ticketmaster, AmeriCredit and KHD Humboldt Wedag are adjusted to reflect the same time periods (see related discussion under footnote #2). 2

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January 31, 2011 – Page 11 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Superinvestor Holdings Update In the November issue of The Manual of Ideas, we profiled the top holdings of 50+ investment managers, based on Schedule 13F-HR filings with the SEC. On this page, we provide an update on the latest disclosed purchase and sale activity by the same group of investors. This information is based on Schedule 13G or 13D filings and Form 3 or 4 filings.

Increases in Superinvestor Holdings

 Latest Trade/ Filing

Filing Type

Investor

Company / Ticker

1/20/11

Icahn

Hain Celestial / HAIN

1/19/11

Second Curve

1/18/11

Second Curve

1/12/11

Fairfax

AbitibiBowater / ABH

1/12/11

13D

Fairholme

AIG / AIG 1

Stock Price ($)

Market Value ($mn)

Latest Date

Filing Date

∆ since Filing

1,140

26.64

26.63

TN Commerce / TNCC

5.05

5.27

Primus Guaranty / PRS

181

4.85

5.02

2,655

27.40

77,188

43.00

Shares Owned ∆ since 9/30/10

Holdings as % of Company

6.9

n/a

16%

-4%

1.3

45%

11%

-3%

6.5

17%

22.87

20%

17.0

new

18%

58.00

-26%

44.3

23%

2% 29%

Latest (mn)

1/7/11

MHR

Lions Gate / LGF

852

6.24

6.50

-4%

40.2

12/16/10

13D

Third Point

Accuride / ACW

666

14.40

14.10

3.7

new

12/15/10

13D

MSD

Blueknight Energy / BKEP

266

7.75

7.54

3.6

new

10%

11/30/10

Second Curve

CompuCredit / CCRT

211

5.90

6.00

-2%

4.1

12%

While Fairholme's holding in AIG has increased since 9/30/10, Fairholme has sold some AIG shares in January 2011.

Source: SEC filings, The Manual of Ideas compilation and analysis.

Decreases in Superinvestor Holdings  Latest Trade/ Filing

Filing Type

Investor

Company / Ticker

1/20/11

13D

Breeden

Zale / ZLC

1/7/11

13D

Southeastern

Pioneer Natural / PXD

1/5/11

13D

Breeden

1/3/11

12/31/10 12/20/10 12/17/10

11/30/10

Market Value ($mn)

Stock Price ($) Latest Date

Filing Date

Shares Owned

∆ since Filing

Latest (mn)

∆ since 9/30/10

Holdings as % of Company

156

4.85

4.99

-3%

8.7

-4%

27%

10,430

89.85

87.91

11.2

-28%

10%

Hillenbrand / HI

1,360

22.06

20.90

4.0

-8%

ESL

AutoZone / AZO

11,040

252.13

273.21

-8%

12.1

n/a

28%

13G

Second Curve

Tree.com / TREE

8.38

9.45

-11%

0.7

-27%

13D

Third Point

Nabi Biopharma / NABI

233

5.48

5.60

-2%

4.0

-8%

Fairfax

International Coal / ICO

1,680

8.25

7.00

18%

22.6

-50%

11%

13G

Baupost

BreitBurn Energy / BBEP

1,160

21.85

19.68

11%

5.0

-30%

11/30/10

13G

Baupost

AllianceOne / AOI

11/30/10

13G

First Pacific

Rosetta / ROSE

11/29/10

13D

Paulson

Cheniere Energy / LNG

331

3.80

3.88

-2%

8.8

10%

1,830

34.78

35.82

-3%

5.1

-14%

10%

360

6.47

5.91

2.8

-62%

Source: SEC filings, The Manual of Ideas compilation and analysis.

The Manual of Ideas follows portfolio moves by Bill Ackman, Pershing Square; Lee Ainsle, Maverick; Chuck Akre, Akre Capital; Zeke Ashton, Centaur Capital; Brian Bares, Bares Capital; Bruce Berkowitz, Fairholme; Richard Breeden, Breeden Capital; Tom Brown, Second Curve; Warren Buffett, Berkshire Hathaway; Francis Chou, Chou Associates; Chase Coleman, Tiger Global; James Crichton, Scout; Ian Cumming and Joe Steinberg, Leucadia; Boykin Curry, Eagle; David Einhorn, Greenlight; Phil Falcone, Harbinger; Alan Fournier, Pennant; Glenn Fuhrman and John Phelan, MSD Capital; Jeffrey Gates, Gates Capital; Tom Gayner, Markel Gayner; Kian Ghazi, Hawkshaw; Ed Gilhuly and Scott Stuart, Sageview; Glenn Greenberg, Brave Warrior; John Griffin, Blue Ridge; Howard Guberman, Gruss; Andreas Halvorsen, Viking Global; Mason Hawkins, Southeastern; Lance Helfert and Paul Orfalea, West Coast; Chris Hohn, Children’s Investment Fund; Carl Icahn, Icahn; Rehan Jaffer, H Partners; Seth Klarman, Baupost; John Kleinheinz, Kleinheinz Capital; Eddie Lampert, ESL Investments; Quincy Lee, Teton; Dan Loeb, Third Point; Steve Mandel, Lone Pine; Sandy Nairn, Edinburgh Partners; Mohnish Pabrai, Pabrai Funds; John Paulson, Paulson & Co.; Boone Pickens, BP Capital; Mark Rachesky, MHR; Lisa Rapuano, Lane Five; Larry Robbins, Glenview; Bob Rodriguez and Steven Romick, First Pacific; Wilbur Ross, WL Ross; Ken Shubin Stein, Spencer; Chris Shumway, Shumway Capital; David Tepper, Appaloosa; Peter Thiel, Clarium; Prem Watsa, Fairfax; Wally Weitz, Weitz Funds; and David Winters, Wintergreen.

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January 31, 2011 – Page 12 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

View From The Top: Five Takes on Market Valuation We consider five measures of U.S. equity market valuation: • Tobin’s Q, i.e., market value to replacement value • Robert Shiller’s P/E using average earnings for the past ten years • Equity market capitalization to GDP • Shiller ten-year average earnings yield divided by prevailing ten-year interest rate • Dow Jones Industrial Average in terms of gold

As the following table shows, four of the five measures are above their historical averages, suggesting that the U.S. equity market may be overvalued. One measure, the DJIA in terms of gold, has recently been slightly below its historical average, suggesting that equities may be modestly undervalued relative to gold.

Selected Measures of U.S. Equity Market Valuation, 1900–2011 Tobin’s Q

Shiller’s 10-Year Trailing P/E

Market Cap / GDP

Earnings Yield / Interest Rates

DJIA / Gold Price

Value

Year

Value

Year

Value

Year

Value

Year

Value

Year

Low

0.3

1948

1920

35%

1948

0.3

2000

1.5

1980

High

1.9

1999

42x

1999

162%

1999

5.1

1932

39.9

2000

Average

0.7

–

16x

–

68%

–

1.8

–

10.1

–

Recent

1.1

Jan. 2011

23x

Jan. 2011

99%

Jan. 2011

1.3

Jan. 2011

8.8

Jan. 2011

Source: The Manual of Ideas analysis, Federal Reserve, Robert J. Shiller.

The following chart shows Tobin’s Q since 1900, Shiller’s ten-year average P/E since 1900, Dow Industrials in terms of gold since 1900, and market cap to GDP since 1945. The four time series correlate fairly closely.

Selected Measures of U.S. Equity Market Valuation, 1900–2011 2.0

45x Tobin's Q (left axis)

1.8

40x

10-Year Average P/E (right axis) 1.6

Market Cap to GDP (since 1945) (neither axis)

35x

DJIA / Gold Price (right axis)

1.4

30x

1.2 25x 1.0 20x 0.8 15x

0.6

10x

0.4

0.2 0.0

0x 1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2011

Source: The Manual of Ideas analysis, Federal Reserve, Robert J. Shiller.

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January 31, 2011 – Page 13 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Tobin’s Q Economics Nobel Laureate James Tobin conceptualized the Q ratio as a measure of over- or undervaluation of publicly traded assets. In its simplest form, Q equals market value divided by replacement cost. If the market value of an asset exceeds the cost of replacing it (Q>1), an incentive exists to recreate the asset and immediately sell it in the market at a premium to cost. As a result, incremental real investment will tend to force high Q ratios back down to parity (Q↓1). Historically, a successful market-timing strategy over the past century would have been to buy U.S. equities when the Q ratio was at 0.40 or less, and to sell U.S. equities when then Q ratio was above 1.00. Tobin’s Q has increased from 0.92 at the end of 2009 to 1.09 as of January 2011, based on Federal Reserve data and our estimates. During this time, the numerator of Q (market value of debt and equities adjusted for land value and net liquid assets) has increased 19%, while the denominator (replacement cost) has remained flat. A Q ratio of 1.09 sends a rather bearish long-term signal for U.S. equities, though historical experience shows that Q can move even higher in the short term. Our analysis of Tobin’s Q suggests that caution is warranted in equity markets. We highlight one important caveat: Future erosion of Tobin’s Q may not necessarily translate into declining equity prices if replacement cost increases at an accelerating pace due to inflation. Replacement cost has historically increased at a single-digit annual pace, though increases have been higher during inflationary periods. If replacement cost rises sharply, Q could decline even as market value remains constant or increases. If the Fed’s “quantitative easing” produces an inflationary environment, equity prices could rise.

Tobin’s Q, 1900–2011 2.0

Sell

1.8 1.6 1.4 1.2

Sell

Sell?

1.0 0.8 0.6 0.4 0.2

Buy

1920

1930

Buy

0.0 1900

1910

1940

1950

1960

1970

1980

1990

2000

2011

Source: The Manual of Ideas analysis, Federal Reserve data.

Recent Tobin’s Q (quarterly) 1.09 0.97

1.00

0.97

0.92 0.90

0.89

0.88 0.85

0.80 0.73 0.70 0.70

0.60

0.58

0.61

0.59 0.55

0.50 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

1/11

Source: The Manual of Ideas analysis, Federal Reserve data.

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January 31, 2011 – Page 14 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Shiller’s Ten-Year Trailing P/E Robert Shiller uses average annual earnings for the past ten years as the input into his P/E data series. Using ten-year average earnings normalizes for the effects of cyclical upturns and downturns, yielding an earnings number that may be more appropriate than current earnings. The Shiller P/E recently stood at 23x, meaningfully above the historical average of 16x. The following charts show data provided by Robert Shiller going back more than one hundred years, including stock prices, earnings, ten-year average P/E ratios, and long-term interest rates.

Real S&P Stock Price Index versus Real S&P Composite Earnings, 1871–2011 10,000 Real S&P Stock Price Index Real S&P Composite Earnings 1,000 100 10 1 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011 Source: Robert J. Shiller, stock market data used in Irrational Exuberance; The Manual of Ideas analysis.

Shiller’s Ten-Year Average P/E, 1881–2011 50x

44x

40x

33x 28x

25x

30x

24x 23x

20x 10x

13x

1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011 Source: Robert J. Shiller, stock market data used in Irrational Exuberance; The Manual of Ideas analysis.

Shiller’s Ten-Year Average P/E versus Long-Term Interest Rates, 1880–2011 1999

Shiller's Ten-Year Trailing P/E Long-Term Interest Rates

18% 16%

40x

14% 1929 12%

30x

1901

10%

1966

20x

6% 4%

10x

Long_term Interest Rates

P/E Using Ten-Year Trailing Earnings

50x

2% 0x

1920

1932

1982 0%

1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011 Source: Robert J. Shiller, stock market data used in Irrational Exuberance; The Manual of Ideas analysis.

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January 31, 2011 – Page 15 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

U.S. Equity Market Capitalization to GDP The following chart shows the ratio of U.S. equity capitalization to nominal GDP. Data on aggregate equity market value is sourced from the Fed’s Z.1 statistical releases, while GDP data is provided by the Bureau of Economic Analysis.

U.S. Equity Market Capitalization to GDP, 1945–2011 1 162%

175% 150% 125%

108% 93%

100%

99%

75% 66%

50% 25%

37%

35%

0% 1945

1953

1961

1969

1977

1985

1993

2001

2009

Annual data series, except most recent data point. Source: Federal Reserve, Bureau of Economic Analysis, The Manual of Ideas analysis.

S&P Earnings Yield versus Interest Rates The following chart shows the ratio of U.S. equity capitalization to nominal GDP. Data on aggregate equity market value is sourced from the Fed’s Z.1 statistical releases, while GDP data is provided by the Bureau of Economic Analysis.

U.S. Equity Market Capitalization to GDP, 1945–2011 1 20%

S&P 500 Current Earnings Yield Shiller 10-Year Earnings Yield Long-Term Interest Rate

18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 1881

1891

1901

1911

1921

1931

1941

1951

1961

1971

1981

1991

2001

2011

Source: Robert J. Shiller, stock market data used in Irrational Exuberance; The Manual of Ideas analysis.

U.S. Equity Market Capitalization to GDP, 1945–2011 1 6x undervalued 5x 4x 3x 2x 1x overvalued

0x 1881

1891

1901

1911

1921

1931

1941

1951

1961

1971

1981

1991

2001

2011

Source: Robert J. Shiller, stock market data used in Irrational Exuberance; The Manual of Ideas analysis.

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January 31, 2011 – Page 16 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Dow Jones Industrials in Terms of Gold The following charts show the Dow Jones Industrial Average and the price of gold since 1900, along with the relationship between the two time series. It is obvious from the second chart that the DJIA, expressed in ounces of gold, has swung wildly over the past century, considerably more so than either time series has fluctuated in its own right. Gold has tended to be relatively cheap at times of equity market booms, while the metal has shown itself popular in equity bear markets. The recent reading of DJIA in terms of gold of 8.8 ounces is modestly below the historical average and suggests that equities are not overvalued, at least in terms of gold. Of course, this is no guarantee for equity outperformance, as gold prices are notoriously volatile and could conceivably decline in the future.

Dow Jones Industrial Average (DJIA) and Gold Price, 1900 – 2011 1 100,000

10,000

11,872

1,000

$1,342

100

Dow Jones Industrial Average Gold Price ($ per ounce)

1 1900

1920

1940

1960

1980

2000

Logarithmic scale. Based on average annual data for DJIA and gold prices. Source: Kitco Metals, CME Group, The Manual of Ideas analysis.

DJIA in Ounces of Gold, 1900 – 2011 1 2000: 39.9 1965: 26.2 1929: 13.3 1900: 8.3 1903: 2.7

2011: 8.8 1934: 2.9

1980: 1.5

Based on average annual data for DJIA and gold prices. Source: Kitco Metals, CME Group, The Manual of Ideas analysis.

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January 31, 2011 – Page 17 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Browsing For Potential Large Cap Opportunities Largest 100 Companies (by market value), sorted by Forward P/E Company / Ticker Anglo American / AAUKY Sinopec / SNP AstraZeneca / AZN Lloyds Banking / LYG Banco Santander / STD Pfizer / PFE BP / BP Vale / VALE Hewlett-Packard / HPQ Rio Tinto / RIO Eni / E TOTAL / TOT Barclays / BCS Ford Motor / F Volkswagen / VLKAY UBS / UBS Merck / MRK Royal Dutch Shell / RDS.A BHP Billiton Ltd / BHP Chevron / CVX StatoilHydro / STO JPMorgan Chase / JPM NTT / NTT Roche / RHHBY Goldman Sachs / GS Australia and NZ / ANZBY Intel / INTC Abbott Labs / ABT Bank of America / BAC ConocoPhillips / COP GlaxoSmithKline / GSK Microsoft / MSFT Novartis / NVS Toronto-Dominion / TD PetroChina / PTR HSBC / HBC E.ON / EONGY Royal Bank of Canada / RY Citigroup / C Westpac Banking / WBK AT&T / T CNOOC / CEO Bank of Nova Scotia / BNS Banco Bradesco / BBD Cisco Systems / CSCO BASF / BASFY Exxon Mobil / XOM Wells Fargo / WFC IBM / IBM China Mobile / CHL

Industry Metal Mining Oil & Gas - Integrated Major Drugs Money Center Banks Regional Banks Major Drugs Oil & Gas - Integrated Metal Mining Computer Hardware Metal Mining Oil & Gas - Integrated Oil & Gas - Integrated Money Center Banks Auto & Truck Makers Auto & Truck Makers Investment Services Major Drugs Oil & Gas - Integrated Metal Mining Oil & Gas - Integrated Oil & Gas - Integrated Investment Services Comms Services Major Drugs Investment Services Money Center Banks Semiconductors Major Drugs Money Center Banks Oil & Gas - Integrated Major Drugs Software & Programming Major Drugs Money Center Banks Oil & Gas - Integrated Regional Banks Electric Utilities Money Center Banks Money Center Banks Money Center Banks Comms Services Oil & Gas Operations Money Center Banks Regional Banks Computer Peripherals Chemical Manufacturing Oil & Gas Operations Regional Banks Computer Hardware Comms Services

Price ($) 26 101 48 4 11 18 49 36 46 71 48 57 20 19 31 18 34 68 91 93 24 45 23 36 175 23 21 47 15 68 39 28 57 77 138 56 32 54 5 112 28 247 57 20 21 77 78 33 150 50

∆ to 52-Week Low High -37% 3% -31% 2% -15% 13% -35% 10% -25% 48% -24% 11% -46% 27% -35% 2% -19% 18% -45% 3% -26% 12% -25% 14% -22% 22% -48% 2% -49% 2% -30% 5% -10% 21% -28% 1% -36% 4% -28% 0% -25% 6% -22% 7% -14% 6% -11% 27% -26% 7% -29% 13% -17% 16% -5% 21% -28% 30% -31% 2% -18% 8% -20% 12% -23% 6% -25% 1% -28% 0% -23% 4% -16% 29% -15% 15% -39% 0% -23% 19% -16% 6% -44% 2% -28% 1% -32% 12% -10% 31% -36% 7% -28% 0% -30% 5% -23% 0% -11% 9%

MV ($bn) 69 88 67 75 94 147 154 190 101 139 95 128 60 65 73 67 105 213 252 187 78 176 60 123 89 59 118 72 154 102 102 242 130 67 253 199 61 78 149 67 168 110 60 72 118 71 393 172 186 201

EV ($bn) 80 120 66 nm nm 168 180 206 113 152 128 145 nm 163 138 -9 113 247 255 183 90 24 96 151 353 nm 98 87 nm 115 115 209 149 nm 271 nm 102 nm nm nm 234 107 nm nm 94 86 399 nm 203 155

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P/E Last FY 26x 9x 9x 10x 8x 15x 9x 36x 13x 24x 15x 12x 14x 22x 51x nm 6x 17x 20x 18x 25x 11x 10x 15x 8x 13x 10x 13x nm 21x 12x 13x 15x 14x 16x 33x 5x 17x nm 11x 13x 25x 15x 14x 16x 38x 20x 19x 15x 12x

This FY 8x 8x 7x 32x 9x 8x 9x 12x 9x 10x 9x 9x 12x 9x 10x 9x 10x 11x 15x 10x 12x 12x 10x 11x 13x 11x 11x 11x 15x 11x 14x 12x 11x 12x 13x 15x 9x 13x 13x 11x 12x 14x 13x 13x 13x 12x 13x 15x 13x 14x

P/E (Est.) Next In FY 2 Yrs 6x 5x 7x 6x 7x 8x 8x 3x 8x 7x 8x 8x 8x 8x 8x 8x 8x 8x 8x 9x 8x 8x 8x 7x 8x 8x 9x 9x 9x 6x 9x 8x 9x 8x 9x 7x 9x 8x 9x 8x 9x 8x 10x 8x 10x 9x 10x 2x 10x 9x 10x 9x 10x 9x 10x 9x 10x 8x 10x 9x 11x 17x 11x 9x 11x 10x 11x 9x 11x 9x 11x 8x 11x 11x 11x 10x 11x 9x 11x 11x 11x 10x 11x 9x 11x 10x 12x 10x 12x 11x 12x 10x 12x 10x 12x 9x 12x 11x 12x 13x

EV/ LTM Sales 4x 1x 2x nm nm 3x 1x 9x 1x 4x 1x 1x nm 1x 1x nm 4x 1x 5x 1x 1x x 1x 3x 7x nm 2x 3x nm 1x 3x 3x 3x nm 2x nm 1x nm nm nm 2x 7x nm nm 2x 1x 1x nm 2x 2x

Price/ Tang. Book 3x 1x nm 1x 2x nm 2x 3x nm 5x 2x 2x 1x nm 2x 2x >99x 2x 5x 2x 3x 2x 1x nm 1x 2x 3x nm 1x 2x nm 7x >99x 3x 2x 2x 3x 3x 1x 2x nm 4x 3x nm 5x 6x 3x 3x nm 3x

Div. Yield 0% 3% 6% 7% 4% 2% 1% 1% 5% 5% 1% 1% 4% 5% 2% 3% 4% 0% 3% 4% 1% 5% 3% 4% 0% 3% 5% 2% 3% 3% 3% 3% 6% 4% 6% 6% 2% 3% 4% 3% 2% 1% 2% 4%

January 31, 2011 – Page 18 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Company / Ticker Mitsubishi UFJ / MTU Itau Unibanco / ITUB Siemens / SI NTT DoCoMo / DCM Wal-Mart / WMT Johnson & Johnson / JNJ Bayer / BAYRY Honda / HMC Petroleo Brasileiro / PBR British Am. Tobacco / BTI Visa / V Daimler / DDAIF Philip Morris / PM Taiwan Semiconductor / TSM Oracle / ORCL Occidental Petroleum / OXY America Movil / AMX Telefonica / TEF Walt Disney / DIS Unilever / UN 3M / MMM PepsiCo / PEP General Electric / GE China Telecom / CHA BG Group / BRGYY McDonald's / MCD United Technologies / UTX Procter & Gamble / PG Apple / AAPL Anheuser-Busch / BUD Suncor Energy / SU Comcast / CMCSA SAP / SAP Verizon / VZ Home Depot / HD Caterpillar / CAT Coca-Cola / KO Qualcomm / QCOM UPS / UPS Berkshire Hathaway / BRK.A Ecopetrol / EC Co. Bebidas Americas / ABV Google / GOOG Canon / CAJ Toyota / TM Novo Nordisk / NVO China Life Insurance / LFC LVMH / LVMUY Schlumberger / SLB Amazon.com / AMZN

Industry Money Center Banks Money Center Banks Conglomerates Comms Services Retail (dep't & discount) Major Drugs Major Drugs Auto & Truck Makers Oil & Gas - Integrated Tobacco Retail Financial Services Auto & Truck Makers Tobacco Semiconductors Software & Programming Oil & Gas Operations Comms Services Comms Services Broadcasting & Cable Food Processing Conglomerates Beverages (non-alcoholic) Conglomerates Comms Services Oil & Gas Operations Restaurants Misc. Capital Goods Household Products Computer Hardware Beverages (alcoholic) Oil & Gas - Integrated Broadcasting & Cable Software & Programming Comms Services Retail (home improvement) Construction Machinery Beverages (non-alcoholic) Comms Equipment Air Courier Property & Casualty Oil & Gas Operations Beverages (alcoholic) Computer Services Computer Peripherals Auto & Truck Makers Biotechnology & Drugs Life Insurance Conglomerates Oil Well Services Retail (specialty)

Price ($) 6 24 122 18 55 63 74 41 37 75 71 75 57 14 31 97 58 71 39 31 88 67 19 55 105 74 79 66 348 58 39 23 54 35 36 94 63 52 72 122K 43 28 624 51 86 111 62 31 87 189

∆ to 52-Week Low High -19% 1% -31% 10% -32% 3% -19% 0% -13% 3% -9% 6% -28% 7% -30% 0% -17% 27% -25% 7% -9% 37% -46% 0% -49% 7% -32% 0% -32% 3% -26% 2% -28% 2% -25% 17% -27% 2% -15% 7% -22% 4% -12% 2% -27% 5% -27% 5% -34% 1% -16% 9% -20% 1% -40% 0% -45% 0% -25% 12% -29% 2% -34% 1% -24% 2% -30% 6% -26% 3% -46% 1% -22% 4% -39% 2% -23% 2% -21% 15% -45% 21% -38% 14% -31% 1% -29% 2% -21% 7% -42% 4% -9% 20% -38% 9% -41% 0% -44% 0%

MV ($bn) 78 108 106 74 195 172 61 73 241 75 60 77 103 71 158 79 94 108 74 86 63 106 200 82 71 78 73 186 321 93 61 64 64 100 59 60 147 84 72 202 86 87 200 63 135 75 118 77 119 85

EV ($bn) nm nm 110 70 241 162 74 108 318 89 56 133 117 67 150 79 109 181 84 94 63 124 617 91 78 87 80 218 295 135 72 90 66 147 67 86 147 75 78 nm 92 87 168 54 233 73 112 81 123 79

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P/E Last FY 7x 12x 20x 12x 15x 14x 33x 23x 11x 18x 20x nm 17x 23x 26x 27x 16x 10x 19x 20x 19x 18x 18x 20x 33x 18x 19x 19x 23x 20x 51x 18x 27x 27x 23x 66x 22x 27x 34x 24x 32x 24x 31x 40x 54x 35x 24x 32x 33x 93x

This FY 12x 13x 14x 13x 14x 13x 13x 11x 12x 14x 15x 15x 15x 14x 15x 17x 16x 15x 16x 15x 15x 16x 17x 18x 17x 16x 17x 16x 18x 18x 25x 18x 18x 16x 18x 24x 18x 19x 21x 18x 24x 20x 22x 21x 37x 25x 24x 25x 31x 76x

P/E (Est.) Next In FY 2 Yrs 12x 11x 12x 11x 12x 9x 12x 12x 12x 11x 13x 12x 13x 12x 13x 10x 13x 13x 13x 12x 13x 11x 13x 12x 13x 12x 14x 15x 14x 12x 14x 11x 14x 13x 14x 13x 14x 12x 14x 13x 14x 13x 15x 13x 15x 12x 15x 12x 15x 14x 15x 13x 15x 13x 15x 14x 15x 13x 15x 13x 16x 12x 16x 13x 16x 14x 16x 14x 16x 14x 16x 12x 16x 15x 17x 16x 17x 15x 18x 17x 18x 22x 18x 17x 19x 16x 19x 16x 21x 13x 21x 21x 22x 18x 22x 21x 23x 18x 54x 39x

EV/ LTM Sales nm nm 1x 1x 1x 3x 2x 1x 3x 4x 7x 1x 2x 7x 6x 5x 3x 2x 2x 2x 3x 3x 4x 3x 8x 4x 2x 3x 5x 4x 3x 3x 5x 1x 1x 3x 5x 7x 2x nm 6x 6x 7x 1x 1x 8x 2x 4x 5x 3x

Price/ Tang. Book 1x nm 10x 2x 4x 7x nm 1x 2x nm 29x 2x nm 4x 32x 2x 6x nm 21x nm 8x nm 5x 3x 5x 7x nm nm 7x nm 2x nm nm nm 3x 9x 9x 5x 12x 2x nm 30x 6x 2x 1x 13x 4x 34x 10x 17x

Div. Yield 3% 3% 3% 3% 2% 3% 2% 1% 3% 4% 1% 5% 3% 1% 2% 2% 7% 1% 4% 2% 3% 3% 2% 1% 3% 2% 3% 1% 1% 2% 1% 5% 3% 2% 3% 1% 3% 2% 4% 2% 1% 1% 2% 2% 1% -

January 31, 2011 – Page 19 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Largest 100 Companies Trading at <= 12x Forward P/E Price

∆ to

Market

Enter.

P/E

52-Week

Value

Last

P/E (Est.) This

EV/

Price/

LTM

Tang.

Div.

Company / Ticker

Industry

($)

Low

High

($bn)

2 Yrs

Sales

Book

Yield

Exxon Mobil / XOM

Oil & Gas Operations

-28%

393

399

20x

13x

12x

10x

1.3x

2.7x

2.3%

PetroChina / PTR

Oil & Gas - Integrated

138

-28%

253

271

16x

13x

11x

1.7x

1.9x

3.1%

BHP Billiton / BHP

Metal Mining

-36%

252

255

20x

15x

4.8x

5.3x

1.9%

Microsoft / MSFT

Software & Programming

-20%

12%

242

209

13x

12x

11x

3.3x

7.3x

2.3%

Royal Dutch Shell / RDS.A

Oil & Gas - Integrated

-28%

213

247

17x

11x

.9x

1.5x

4.9%

China Mobile / CHL

Comms Services

-11%

201

155

12x

14x

12x

13x

2.3x

2.6x

3.7%

HSBC / HBC

Regional Banks

-23%

199

33x

15x

11x

1.8x

2.8%

Vale / VALE

Metal Mining

-35%

190

206

36x

12x

8.8x

2.9x

2.1%

Chevron / CVX

Oil & Gas - Integrated

-28%

187

183

18x

10x

1.1x

1.9x

3.1%

IBM / IBM

Computer Hardware

150

-23%

186

203

15x

13x

12x

11x

2.1x

1.7%

JPMorgan Chase / JPM

Investment Services

-22%

176

11x

12x

10x

1.7x

.4%

Wells Fargo / WFC

Regional Banks

-30%

172

19x

15x

12x

2.6x

.6%

AT&T / T

Comms Services

-16%

168

234

13x

12x

11x

10x

1.9x

6.0%

BP / BP

Oil & Gas - Integrated

-46%

27%

154

180

.7x

2.3x

Bank of America / BAC

Money Center Banks

-28%

30%

154

15x

10x

1.4x

.3%

Citigroup / C

Money Center Banks

-39%

149

13x

11x

1.2x

Pfizer / PFE

Major Drugs

-24%

11%

147

168

15x

3.4x

4.4%

Rio Tinto / RIO

Metal Mining

-45%

139

152

24x

10x

3.6x

5.4x

1.2%

Novartis / NVS

Major Drugs

-23%

130

149

15x

11x

10x

3.3x

>99x

3.4%

TOTAL / TOT

Oil & Gas - Integrated

-25%

14%

128

145

12x

1.0x

2.0x

5.1%

Roche / RHHBY

Major Drugs

-11%

27%

123

151

15x

11x

10x

3.0x

3.9%

Intel / INTC

Semiconductors

-17%

16%

118

10x

11x

10x

2.2x

2.6x

3.4%

Cisco Systems / CSCO

Computer Peripherals

-10%

31%

118

16x

13x

12x

11x

2.3x

4.7x

CNOOC / CEO

Oil & Gas Operations

247

-44%

110

107

25x

14x

11x

6.7x

3.8x

2.1%

Merck / MRK

Major Drugs

-10%

21%

105

113

10x

4.1x

>99x

4.4%

ConocoPhillips / COP

Oil & Gas - Integrated

-31%

102

115

21x

11x

10x

.8x

1.6x

3.2%

GlaxoSmithKline / GSK

Major Drugs

-18%

102

115

12x

14x

11x

17x

2.6x

5.1%

Hewlett-Packard / HPQ

Computer Hardware

-19%

18%

101

113

13x

.9x

.7%

Eni / E

Oil & Gas - Integrated

-26%

12%

128

15x

1.2x

1.9x

5.4%

Banco Santander / STD

Regional Banks

-25%

48%

2.1x

6.9%

Goldman Sachs / GS

Investment Services

175

-26%

13x

10x

1.4x

.8%

Sinopec / SNP

Oil & Gas - Integrated

101

-31%

120

.6x

1.5x

2.8%

StatoilHydro / STO

Oil & Gas - Integrated

-25%

25x

12x

1.1x

2.9x

3.8%

Lloyds Banking / LYG

Money Center Banks

-35%

10%

10x

32x

1.2x

Volkswagen / VLKAY

Auto & Truck Makers

-49%

138

51x

10x

1.0x

1.9x

1.4%

Abbott Labs / ABT

Major Drugs

-5%

21%

13x

11x

10x

2.8x

3.8%

Banco Bradesco / BBD

Regional Banks

-32%

12%

14x

13x

12x

10x

3.9% 2.9%

BASF / BASFY

Chemical Manufacturing

-36%

38x

12x

10x

1.3x

6.4x

Anglo American / AAUKY

Metal Mining

-37%

26x

3.8x

2.8x

.5%

AstraZeneca / AZN

Major Drugs

-15%

13%

2.0x

6.3% 5.7%

Westpac Banking / WBK

Money Center Banks

112

-23%

19%

11x

2.5x

Ford Motor / F

Auto & Truck Makers

-48%

163

22x

1.4x

E.ON / EONGY

Electric Utilities

-16%

29%

102

11x

.9x

2.7x

5.9%

NTT / NTT

Comms Services

-14%

10x

.8x

3.0%

Barclays / BCS

Money Center Banks

-22%

22%

14x

12x

.9x

1.4%

Australia and NZ / ANZBY

Money Center Banks

-29%

13%

13x

11x

10x

2.2x

5.1%

General Motors / GM

Auto & Truck Makers

-13%

13x

.4x

France Telecom / FTE

Comms Services

-19%

20%

15x

1.4x

8.2%

Freeport-McMoRan / FCX

Gold & Silver

Amgen / AMGN

Biotechnology & Drugs

118

-52%

20x

13x

11x

3.8x

4.9x

1.7%

-11%

13x

11x

10x

3.4x

5.1x

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January 31, 2011 – Page 20 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Price Company / Ticker

Industry

($)

∆ to

Market

Enter.

P/E

EV/

Price/

52-Week

Value

Last

This

LTM

Tang.

Div.

High

($bn)

2 Yrs

Sales

Book

Yield 3.9%

Low

P/E (Est.)

Credit Suisse / CS

Investment Services

-19%

20%

11x

2.1x

Sterlite Industries / SLT

Metal Mining

-21%

26%

61x

11x

9.1x

6.3x

.5%

Tesco / TSCDY

Retail (grocery)

-14%

10%

14x

13x

11x

10x

.8x

3.2x

3.2% 5.8%

Nat'l Australia Bank / NABZY

Money Center Banks

-24%

11%

13x

10x

1.6x

Santander Brasil / BSBR

Money Center Banks

-27%

17%

14x

11x

2.0x

4.0%

Teva Pharma / TEVA

Biotechnology & Drugs

-13%

20%

24x

12x

10x

4.1x

>99x

1.4%

Altria Group / MO

Tobacco

-21%

16x

13x

12x

11x

2.6x

6.3%

Lukoil / LUKOY

Oil & Gas Operations

-30%

.7x

.9x

2.7%

MetLife / MET

Insurance (miscellaneous)

-28%

11x

1.1x

1.6%

Apache / APA

Oil & Gas Operations

126

-35%

14x

12x

10x

6.1x

2.2x

.5%

Societe Generale / SCGLY

Money Center Banks

-42%

17%

>99x

.7x

UnitedHealth / UNH

Health Insurance

-33%

13x

10x

11x

10x

.5x

1.2%

AXA / AXAHY

Life Insurance

-28%

25%

10x

13x

1.3x

3.5%

Bristol Myers Squibb / BMY

Major Drugs

-14%

16x

12x

11x

13x

2.3x

5.5x

5.1%

Morgan Stanley / MS

Investment Services

-23%

11%

13x

10x

1.2x

.7%

Banco Argentaria / BBVA

Regional Banks

-23%

65%

1.4x

5.0%

Eli Lilly / LLY

Major Drugs

-8%

1.9x

5.0x

5.6%

ING Groep / ING

Life Insurance

-36%

.7x

Medtronic / MDT

Medical Equipment

-17%

25%

13x

11x

10x

3.0x

11.0x

2.4%

News Corp. / NWSA

Broadcasting & Cable

-18%

20%

15x

13x

11x

10x

1.3x

8.7x

1.1%

Repsol / REP

Oil & Gas - Integrated

-38%

18x

13x

11x

10x

.9x

2.2x

4.0%

Telstra / TLSYY

Comms Services

-19%

10%

12x

11x

1.9x

7.5x

9.2%

Sasol / SSL

Chemical Manufacturing

-36%

13x

12x

11x

1.9x

2.5x

2.9%

PNC Financial / PNC

Regional Banks

-23%

10%

15x

12x

11x

10x

1.7x

.6%

POSCO / PKX

Iron & Steel

106

-17%

29%

10x

1.0x

1.9x

1.9%

Mizuho Financial / MFG

Regional Banks

-36%

4.1%

Mitsui / MITSY

Misc. Capital Goods

345

-32%

17x

1.1x

1.2x

1.2%

Gilead Sciences / GILD

Biotechnology & Drugs

-17%

30%

14x

10x

4.6x

7.5x

Corning / GLW

Comms Equipment

-22%

15x

10x

5.3x

1.7x

1.0%

Marathon Oil / MRO

Oil & Gas - Integrated

-35%

26x

12x

.7x

1.4x

2.3%

Baxter International / BAX

Medical Equipment

-20%

23%

14x

13x

12x

11x

2.5x

7.4x

2.5%

Prudential Financial / PRU

Life Insurance

-25%

10x

.9x

1.9%

Exelon / EXC

Electric Utilities

-61%

15%

10x

11x

14x

2.2x

2.5x

4.9%

Newmont Mining / NEM

Gold & Silver

-23%

18%

21x

14x

11x

12x

3.6x

2.3x

1.1%

Comp. Siderurgica / SID

Misc. Fabricated Products

-27%

17%

21x

5.9x

36.6x

4.6%

General Dynamics / GD

Aerospace and Defense

-23%

12x

11x

10x

.9x

2.3% 2.1%

AFLAC / AFL

Health Insurance

-31%

18x

10x

2.4x

Dell / DELL

Computer Hardware

-19%

25%

19x

10x

.4x

27.1x

Lockheed Martin / LMT

Aerospace and Defense

-9%

17%

10x

11x

.6x

4.0%

Telenor / TELNY

Comms Services

-31%

17x

15x

12x

11x

1.8x

4.5x

2.4%

Viacom / VIA.B

Broadcasting & Cable

-33%

22x

13x

11x

10x

3.3x

1.4%

Travelers / TRV

Property & Casualty

-13%

1.1x

2.6%

WellPoint / WLP

Health Insurance

-27%

10%

10x

.5x

8.2x

Hitachi / HIT

Misc. Capital Goods

-41%

12x

.4x

2.3x

1.1%

KPN / KKPNY

Comms Services

-20%

16%

10x

2.2x

6.4%

United Overseas / UOVEY

Regional Banks

-16%

17x

12x

10x

1.8x

3.0%

BT Group / BT

Comms Services

-46%

15x

13x

1.2x

3.7%

Swisscom / SCMWY

Comms Services

-29%

11x

13x

11x

2.5x

4.2%

Capital One / COF

Retail Financial Services

-30%

49x

10x

1.9x

.4%

Archer Daniels / ADM

Food Processing

-28%

11x

12x

10x

.4x

1.4x

1.8%

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January 31, 2011 – Page 21 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

“Magic Formula,” based on Trailing Operating Income (MV > $5 billion) Companies with high returns on capital employed, trading at high trailing EBIT-to-enterprise value yield Move To 52-Week Low High

▼

▼ EBIT/ Capital Employed

Tax Rate

Price/ Tangible Book

MV ($mn)

EV ($mn)

EV/ Sales

Trailing EBIT/ EV

Insiders % Buys/ Own. Sells

Company

Ticker

Price ($)

1 2 3 4 5

Apollo Group Dell Forest Labs Microsoft McGraw-Hill

APOL DELL FRX MSFT MHP

42.35 13.47 31.66 28.02 37.64

-20% -16% -24% -19% -28%

57% 30% 8% 13% 5%

6,062 26,001 9,043 239,726 11,556

5,203 18,614 5,599 206,218 11,398

1.0x .3x 1.3x 3.1x 1.9x

27% 15% 18% 13% 13%

1053% infinite 165% infinite infinite

48% 24% 27% 25% 36%

6.3x >9.9x 2.1x 7.2x n/m

3% 12% 1% 11% 0%

2 / 12 13 / 6 15 / 12 15 / 13 2/-

6 7 8 9 10

SanDisk DISH Network Reynolds American AmerisourceBergen CA

SNDK DISH RAI ABC CA

49.97 21.61 32.12 36.10 25.31

-50% -20% -39% -28% -30%

7% 12% 7% 1% 1%

11,718 9,575 18,728 9,939 12,949

10,502 13,430 20,586 9,625 11,991

2.2x 1.1x 2.4x .1x 2.7x

14% 15% 12% 11% 11%

338% 172% infinite infinite infinite

22% 36% 39% 38% 30%

2.3x n/m n/m >9.9x n/m

0% 0% 0% 1% 0%

7/8 4/5 -/10 / 4 2/3

11 12 13 14 15

Gilead Sciences Lockheed Martin Research In Motion Raytheon Bristol Myers Squibb

GILD LMT RIMM RTN BMY

38.19 79.22 61.55 52.15 26.06

-17% -15% -31% -18% -15%

30% 10% 25% 15% 7%

31,005 28,529 32,117 19,011 44,607

32,149 30,125 30,341 19,188 42,970

4.0x .7x 1.6x .8x 2.2x

13% 14% 15% 14% 14%

192% 139% 125% 134% 119%

27% 33% 28% 25% 20%

7.5x n/m 5.1x n/m 5.6x

1% 0% 0% 0% 0%

8/4 1/-/4/3 4/8

16 17 18 19 20

Altria Group Accenture Western Union Expedia Intel

MO ACN WU EXPE INTC

24.09 51.04 19.31 25.98 20.82

-21% -65% -24% -30% -15%

9% 1% 1% 15% 17%

50,296 35,619 12,665 7,391 116,134

60,790 31,456 13,965 7,482 96,364

2.5x 1.3x 2.7x 2.3x 2.2x

10% 10% 10% 10% 17%

5108% infinite infinite infinite 90%

31% 29% 22% 26% 29%

n/m >9.9x n/m n/m 2.6x

0% 0% 0% 0% 0%

5/5 -/7/4 7/6 3/3

21 22 23 24 25

Cisco Systems Moody's SAIC Time Warner Harris Corp.

CSCO MCO SAI TWX HRS

20.73 28.99 16.48 32.79 47.56

-8% -36% -10% -19% -15%

34% 7% 20% 4% 15%

114,874 6,790 6,128 36,374 6,101

91,227 7,245 6,588 48,922 7,212

2.2x 3.7x .6x 1.9x 1.3x

10% 10% 14% 11% 14%

3384% 1342% 91% 134% 89%

18% 33% 36% 34% 33%

4.6x n/m >9.9x n/m n/m

0% 0% 0% 0% 1%

21 / 12 13 / 2 17 / 13 5/4 10 / 10

26 27 28 29 30

McKesson Viacom LyondellBasell Lam Research Hewlett-Packard

MCK VIA.B LYB LRCX HPQ

73.21 42.28 35.05 49.98 47.23

-22% -34% -58% -36% -21%

3% 2% 6% 6% 16%

18,527 25,560 19,787 6,147 103,454

17,756 31,475 22,280 5,234 114,824

.2x 2.3x .6x 2.0x .9x

11% 10% 18% 12% 11%

132% 308% 69% 112% 118%

33% 34% n/m 16% 20%

7.1x n/m 2.4x 3.7x n/m

0% 0% 0% 0% 0%

10 / 10 8/8 -/6 / 10 14 / 11

31 32 33 34 35

Linear Technology Corp. Gap Quest Diagnostics Ross Stores Boeing

LLTC GPS DGX ROST BA

34.53 20.10 54.51 64.92 71.68

-25% -17% -25% -33% -20%

5% 31% 11% 3% 6%

7,783 12,349 9,289 7,731 52,583

7,811 10,695 12,087 7,146 55,036

5.4x .7x 1.6x .9x .8x

10% 18% 11% 12% 10%

188% 67% 115% 99% 164%

26% 40% 35% 38% 32%

>9.9x 2.9x n/m 6.0x n/m

1% 2% 0% 1% 0%

6 / 12 7/6 -/2/5 5/7

36 37 38 39 40

Johnson & Johnson Eli Lilly L-3 Comms TJX Companies Analog Devices

JNJ LLY LLL TJX ADI

62.66 34.76 77.57 47.23 38.77

-9% -8% -15% -22% -32%

6% 10% 26% 3% 3%

172,080 40,083 8,780 18,694 11,579

161,979 41,080 12,272 18,015 9,292

2.6x 1.8x .8x .8x 3.4x

12% 16% 14% 13% 10%

92% 65% 68% 75% 132%

22% 23% 36% 38% 21%

6.9x 4.9x n/m 6.4x 3.9x

0% 0% 0% 0% 1%

9/7 12 / 2 9 / 11 5/6 15 / 11

41 42 43 44 45

Amdocs Western Digital Seagate Technology Omnicom Interpublic Group

DOX WDC STX OMC IPG

28.68 31.51 13.28 45.53 10.94

-11% -27% -26% -26% -43%

13% 43% 63% 5% 12%

5,500 7,241 6,262 13,715 5,347

4,266 4,481 6,373 15,238 5,574

1.4x .5x .6x 1.2x .9x

10% 26% 22% 9% 9%

132% 59% 59% infinite infinite

11% 8% n/m 34% 46%

4.0x 1.5x 2.3x n/m n/m

0% 1% 0% 1% 0%

-/16 / 9 -/14 / 4 1/1

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January 31, 2011 – Page 22 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

“Magic Formula,” based on This Year’s EPS Estimates (MV > $5 billion) Companies with high returns on capital employed, trading at high earnings yields (based on this FY EPS estimates) Move To 52-Week Low High

▼

▼ EBIT/ Capital Employed

Tax Rate

Price to Tangible Book

MV ($mn)

EV ($mn)

EV/ Sales

This FY EPS Yield

Insiders % Buys/ Own. Sells

Company

Ticker

Price ($)

1 2 3 4 5

Apollo Group Dell Forest Labs Lam Research Microsoft

APOL DELL FRX LRCX MSFT

42.35 13.47 31.66 49.98 28.02

-20% -16% -24% -36% -19%

57% 30% 8% 6% 13%

6,062 26,001 9,043 6,147 239,726

5,203 18,614 5,599 5,234 206,218

1.0x .3x 1.3x 2.0x 3.1x

11% 10% 13% 12% 9%

1053% infinite 165% 112% infinite

48% 24% 27% 16% 25%

6.3x >9.9x 2.1x 3.7x 7.2x

3% 12% 1% 0% 11%

2 / 12 13 / 6 15 / 12 6 / 10 15 / 13

6 7 8 9 10

Gilead Sciences SanDisk Cisco Systems Intel Marvell Technology

GILD SNDK CSCO INTC MRVL

38.19 49.97 20.73 20.82 20.08

-17% -50% -8% -15% -31%

30% 7% 34% 17% 14%

31,005 11,718 114,874 116,134 13,062

32,149 10,502 91,227 96,364 10,388

4.0x 2.2x 2.2x 2.2x 2.9x

10% 9% 8% 10% 8%

192% 338% 3384% 90% 204%

27% 22% 18% 29% 2%

7.5x 2.3x 4.6x 2.6x 4.3x

1% 0% 0% 0% 0%

8/4 7/8 21 / 12 3/3 2/3

11 12 13 14 15

Eli Lilly Bristol Myers Squibb SAIC Apple KLA-Tencor

LLY BMY SAI AAPL KLAC

34.76 26.06 16.48 326.72 41.83

-8% -15% -10% -42% -36%

10% 7% 20% 7% 3%

40,083 44,607 6,128 301,000 6,988

41,080 42,970 6,588 274,023 6,215

1.8x 2.2x .6x 3.6x 2.9x

14% 8% 9% 7% 10%

65% 119% 91% infinite 64%

23% 20% 36% 23% 30%

4.9x 5.6x >9.9x 5.6x 3.7x

0% 0% 0% 0% 1%

12 / 2 4/8 17 / 13 10 / 9 13 / 6

16 17 18 19 20

Amgen Medtronic Gap Adobe Systems Johnson & Johnson

AMGN MDT GPS ADBE JNJ

56.97 38.51 20.10 33.27 62.66

-12% -20% -17% -24% -9%

8% 20% 31% 12% 6%

53,826 41,340 12,349 16,925 172,080

50,069 48,361 10,695 15,980 161,979

3.3x 3.1x .7x 4.2x 2.6x

9% 9% 9% 7% 8%

72% 76% 67% 812% 92%

16% 22% 40% 18% 22%

5.2x >9.9x 2.9x >9.9x 6.9x

0% 0% 2% 0% 0%

3/9 11 / 7 7/6 3/4 9/7

21 22 23 24 25

Xilinx Western Digital Applied Materials AmerisourceBergen Linear Technology

XLNX WDC AMAT ABC LLTC

31.28 31.51 15.01 36.10 34.53

-27% -27% -32% -28% -25%

2% 43% 2% 1% 5%

8,105 7,241 19,929 9,939 7,783

7,583 4,481 17,550 9,625 7,811

3.3x .5x 1.8x .1x 5.4x

7% 10% 8% 7% 7%

110% 59% 67% infinite 188%

18% 8% 32% 38% 26%

4.2x 1.5x 3.4x >9.9x >9.9x

0% 1% 0% 1% 1%

3/3 16 / 9 12 / 11 10 / 4 6 / 12

26 27 28 29 30

Activision Blizzard Altera Lubrizol Corp. Texas Instruments Freeport-McMoRan

ATVI ALTR LZ TXN FCX

11.25 37.13 102.78 33.91 108.40

-12% -44% -33% -34% -48%

12% 7% 13% 3% 13%

13,562 11,606 6,745 39,816 51,043

10,713 9,691 7,184 37,306 52,060

2.3x 5.5x 1.4x 2.8x 2.7x

7% 7% 10% 7% 11%

236% 337% 54% 83% 49%

18% 9% 27% 30% 35%

5.4x 6.0x 5.8x 4.6x 4.2x

0% 0% 0% 0% 1%

9/7 9/9 8 / 12 13 / 13 13 / 12

31 32 33 34 35

Ross Stores Oracle Biogen Idec Analog Devices TJX Companies

ROST ORCL BIIB ADI TJX

64.92 32.51 66.77 38.77 47.23

-33% -35% -31% -32% -22%

3% 1% 3% 3% 3%

7,731 164,254 15,911 11,579 18,694

7,146 156,444 16,167 9,292 18,015

.9x 4.9x 3.5x 3.4x .8x

7% 6% 7% 7% 7%

99% infinite 72% 132% 75%

38% 26% 26% 21% 38%

6.0x >9.9x 7.3x 3.9x 6.4x

1% 22% 0% 1% 0%

2/5 17 / 18 7/9 15 / 11 5/6

36 37 38 39 40

McKesson Best Buy News Corp. Autoliv Mattel

MCK BBY NWSA ALV MAT

73.21 35.11 15.32 76.94 23.51

-22% -12% -24% -48% -19%

3% 39% 11% 9% 14%

18,527 13,840 40,220 6,826 8,436

17,756 14,737 44,724 7,175 8,691

.2x .3x 1.4x 1.0x 1.5x

7% 9% 7% 8% 8%

132% 48% 59% 49% 50%

33% 37% 18% 29% 18%

7.1x 4.3x 9.4x 6.4x 4.6x

0% 0% 0% 0% 0%

10 / 10 8/3 6/5 8/8 12 / 12

41 42 43 44 45

Broadcom eBay Lear Whirlpool Tyson Foods

BRCM EBAY LEA WHR TSN

44.51 30.02 104.99 88.45 17.25

-41% -37% -63% -20% -21%

6% 5% 7% 34% 19%

22,776 39,138 5,334 6,724 6,506

20,382 34,310 4,593 8,345 8,064

3.3x 3.7x .4x .5x .3x

6% 6% 8% 11% 11%

329% 141% 47% 30% 31%

1% 14% n/m n/m 36%

6.8x 4.6x 3.1x >9.9x 2.1x

0% 11% 0% 0% 0%

9 / 14 7 / 10 9/8 1/11 / 7

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January 31, 2011 – Page 23 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

“Magic Formula,” based on Next Year’s EPS Estimates (MV > $5 billion) Companies with high returns on capital employed, trading at high earnings yields (based on next FY EPS estimates) Move To 52-Week Low High

▼

▼ EBIT/ Capital Employed

Tax Rate

Price to Tangible Book

MV ($mn)

EV ($mn)

EV/ Sales

Next FY EPS Yield

Insiders % Buys/ Own. Sells

Company

Ticker

Price ($)

1 2 3 4 5

Dell Apollo Group Forest Labs Microsoft Gilead Sciences

DELL APOL FRX MSFT GILD

13.47 42.35 31.66 28.02 38.19

-16% -20% -24% -19% -17%

30% 57% 8% 13% 30%

26,001 6,062 9,043 239,726 31,005

18,614 5,203 5,599 206,218 32,149

.3x 1.0x 1.3x 3.1x 4.0x

11% 11% 14% 10% 11%

infinite 1053% 165% infinite 192%

24% 48% 27% 25% 27%

>9.9x 6.3x 2.1x 7.2x 7.5x

12% 3% 1% 11% 1%

13 / 6 2 / 12 15 / 12 15 / 13 8/4

6 7 8 9 10

Cisco Systems Lam Research Intel Eli Lilly Marvell Technology

CSCO LRCX INTC LLY MRVL

20.73 49.98 20.82 34.76 20.08

-8% -36% -15% -8% -31%

34% 6% 17% 10% 14%

114,874 6,147 116,134 40,083 13,062

91,227 5,234 96,364 41,080 10,388

2.2x 2.0x 2.2x 1.8x 2.9x

9% 10% 11% 13% 8%

3384% 112% 90% 65% 204%

18% 16% 29% 23% 2%

4.6x 3.7x 2.6x 4.9x 4.3x

0% 0% 0% 0% 0%

21 / 12 6 / 10 3/3 12 / 2 2/3

11 12 13 14 15

Western Digital Bristol Myers Squibb Walter Energy Apple Medtronic

WDC BMY WLT AAPL MDT

31.51 26.06 119.99 326.72 38.51

-27% -15% -52% -42% -20%

43% 7% 17% 7% 20%

7,241 44,607 6,347 301,000 41,340

4,481 42,970 6,304 274,023 48,361

.5x 2.2x 4.4x 3.6x 3.1x

12% 9% 11% 8% 10%

59% 119% 60% infinite 76%

8% 20% 30% 23% 22%

1.5x 5.6x >9.9x 5.6x >9.9x

1% 0% 0% 0% 0%

16 / 9 4/8 3/6 10 / 9 11 / 7

16 17 18 19 20

Amgen SAIC Gap KLA-Tencor Adobe Systems

AMGN SAI GPS KLAC ADBE

56.97 16.48 20.10 41.83 33.27

-12% -10% -17% -36% -24%

8% 20% 31% 3% 12%

53,826 6,128 12,349 6,988 16,925

50,069 6,588 10,695 6,215 15,980

3.3x .6x .7x 2.9x 4.2x

9% 9% 9% 10% 8%

72% 91% 67% 64% 812%

16% 36% 40% 30% 18%

5.2x >9.9x 2.9x 3.7x >9.9x

0% 0% 2% 1% 0%

3/9 17 / 13 7/6 13 / 6 3/4

21 22 23 24 25

Applied Materials Lubrizol Corp. AmerisourceBergen Freeport-McMoRan SanDisk

AMAT LZ ABC FCX SNDK

15.01 102.78 36.10 108.40 49.97

-32% -33% -28% -48% -50%

2% 13% 1% 13% 7%

19,929 6,745 9,939 51,043 11,718

17,550 7,184 9,625 52,060 10,502

1.8x 1.4x .1x 2.7x 2.2x

9% 11% 8% 12% 8%

67% 54% infinite 49% 338%

32% 27% 38% 35% 22%

3.4x 5.8x >9.9x 4.2x 2.3x

0% 0% 1% 1% 0%

12 / 11 8 / 12 10 / 4 13 / 12 7/8

26 27 28 29 30

Biogen Idec Johnson & Johnson Activision Blizzard McKesson Best Buy

BIIB JNJ ATVI MCK BBY

66.77 62.66 11.25 73.21 35.11

-31% -9% -12% -22% -12%

3% 6% 12% 3% 39%

15,911 172,080 13,562 18,527 13,840

16,167 161,979 10,713 17,756 14,737

3.5x 2.6x 2.3x .2x .3x

8% 8% 7% 8% 10%

72% 92% 236% 132% 48%

26% 22% 18% 33% 37%

7.3x 6.9x 5.4x 7.1x 4.3x

0% 0% 0% 0% 0%

7/9 9/7 9/7 10 / 10 8/3

31 32 33 34 35

Ross Stores TJX Companies Oracle News Corp. Analog Devices

ROST TJX ORCL NWSA ADI

64.92 47.23 32.51 15.32 38.77

-33% -22% -35% -24% -32%

3% 3% 1% 11% 3%

7,731 18,694 164,254 40,220 11,579

7,146 18,015 156,444 44,724 9,292

.9x .8x 4.9x 1.4x 3.4x

8% 8% 7% 8% 7%

99% 75% infinite 59% 132%

38% 38% 26% 18% 21%

6.0x 6.4x >9.9x 9.4x 3.9x

1% 0% 22% 0% 1%

2/5 5/6 17 / 18 6/5 15 / 11

36 37 38 39 40

Texas Instruments Autoliv Lear Cliffs Natural Linear Technology

TXN ALV LEA CLF LLTC

33.91 76.94 104.99 81.66 34.53

-34% -48% -63% -52% -25%

3% 9% 7% 12% 5%

39,816 6,826 5,334 11,062 7,783

37,306 7,175 4,593 11,805 7,811

2.8x 1.0x .4x 2.9x 5.4x

8% 9% 9% 13% 7%

83% 49% 47% 30% 188%

30% 29% n/m 30% 26%

4.6x 6.4x 3.1x 3.6x >9.9x

0% 0% 0% 0% 1%

13 / 13 8/8 9/8 6/8 6 / 12

41 42 43 44 45

Tyson Foods Mattel Avnet Chevron Xilinx

TSN MAT AVT CVX XLNX

17.25 23.51 34.98 93.78 31.28

-21% -19% -36% -29% -27%

19% 14% 5% 0% 2%

6,506 8,436 5,316 188,726 8,105

8,064 8,691 6,412 184,811 7,583

.3x 1.5x .3x .9x 3.3x

11% 8% 12% 11% 7%

31% 50% 28% 29% 110%

36% 18% 30% 42% 18%

2.1x 4.6x 2.2x 1.9x 4.2x

0% 0% 0% 0% 0%

11 / 7 12 / 12 17 / 15 3/8 3/3

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January 31, 2011 – Page 24 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Value with Catalyst: Cheap Repurchasers of Stock (MV > $5 billion) Companies that may be creating value by reducing their shares outstanding at relatively cheap prices ▼ MV ($mn)

EV ($mn)

Q-Q Change in Shares

Next FY P/E

Price to Tangible Book

Net Cash as % of MV

Insiders % Buys/ Own. Sells

Company

Ticker

Price ($)

1 2 3 4 5

Gilead Sciences Banco Santander WellPoint Best Buy Lukoil

GILD STD WLP BBY LUKOY

38.19 12.39 61.45 35.11 64.11

31,005 101,955 24,187 13,840 50,093

32,149 n/m n/m 14,737 57,431

-5.5% -5.0% -4.7% -4.0% -3.9%

9x 8x 9x 10x 6x

7.5x 2.3x 8.0x 4.3x .9x

-4% n/m n/m -6% -15%

1% 0% 0% 0% 0%

8/4 -/7/9 8/3 -/-

6 7 8 9 10

Walgreen Devon Energy Hewlett-Packard Bunge Forest Labs

WAG DVN HPQ BG FRX

41.69 83.51 47.23 70.04 31.66

38,456 36,068 103,454 10,148 9,043

38,796 38,089 114,824 12,330 5,599

-3.4% -3.4% -3.1% -3.1% -2.9%

14x 14x 8x 13x 7x

3.1x 2.8x n/m 1.1x 2.1x

-1% -6% -11% -22% 38%

0% 1% 0% 0% 1%

16 / 5 12 / 10 14 / 11 -/15 / 12

11 12 13 14 15

PartnerRe Cardinal Health Zimmer Holdings Aetna Garmin

PRE CAH ZMH AET GRMN

81.00 41.30 56.36 33.28 30.79

6,034 14,412 11,128 13,315 5,954

n/m 13,840 11,285 n/m 4,696

-2.8% -2.6% -2.5% -2.4% -2.2%

9x 14x 12x 10x -

.9x 6.2x 4.9x 3.1x 2.2x

n/m 4% -1% n/m 21%

0% 0% 0% 0% 0%

-/20 / 10 2/2 5/6 -/-

16 17 18 19 20

Ameriprise Financial Lockheed Martin Northrop Grumman Walt Disney Raytheon

AMP LMT NOC DIS RTN

60.36 79.22 69.53 39.74 52.15

14,967 28,529 20,302 75,251 19,011

n/m 30,125 21,983 85,009 19,188

-2.2% -2.0% -2.0% -1.9% -1.8%

11x 12x 10x 14x 11x

1.4x n/m n/m 21.1x n/m

n/m -6% -8% -13% -1%

0% 0% 0% 0% 0%

7 / 10 1/17 / 4 18 / 7 4/3

21 22 23 24 25

CIGNA Cisco Systems Activision Blizzard Baxter International Credit Suisse

CI CSCO ATVI BAX CS

40.97 20.73 11.25 49.49 45.35

11,099 114,874 13,562 28,839 53,708

n/m 91,227 10,713 30,934 n/m

-1.7% -1.6% -1.6% -1.5% -1.4%

9x 11x 14x 12x 9x

3.3x 4.6x 5.4x 7.2x 2.1x

n/m 21% 21% -7% n/m

0% 0% 0% 0% 0%

14 / 13 21 / 12 9/7 6/5 -/-

26 27 28 29 30

Time Warner McGraw-Hill Noble Corp. SAIC KLA-Tencor

TWX MHP NE SAI KLAC

32.79 37.64 37.64 16.48 41.83

36,374 11,556 9,496 6,128 6,988

48,922 11,398 11,852 6,588 6,215

-1.4% -1.3% -1.1% -1.1% -1.1%

12x 13x 12x 10x

n/m n/m 1.3x 10.5x 3.7x

-34% 1% -25% -8% 11%

0% 0% 0% 0% 1%

5/4 2/8 / 10 17 / 13 13 / 6

31 32 33 34 35

Expedia XL Capital Tokio Marine Rockwell Collins Ahold

EXPE XL TKOMY COL AHONY

25.98 22.69 30.04 63.71 13.12

7,391 7,334 23,342 9,880 15,498

7,482 n/m n/m 10,141 16,696

-1.0% -1.0% -1.0% -0.9% -0.9%

13x 15x 14x 11x

n/m .7x 1.2x 25.1x 2.3x

-1% n/m n/m -3% -8%

0% 0% 0% 0% 0%

7/6 -/-/18 / 15 -/-

36 37 38 39 40

Merck AmerisourceBergen Becton Dickinson TOTAL Telenor

MRK ABC BDX TOT TELNY

33.90 36.10 83.20 58.04 46.04

104,442 9,939 18,824 129,695 25,194

111,965 9,625 18,778 147,760 28,667

-0.9% -0.8% -0.8% -0.7% -0.7%

9x 13x 14x 8x 11x

662.7x 91.2x 4.9x 2.0x 4.3x

-7% 3% 0% -14% -14%

0% 1% 0% 0% 0%

6/6 10 / 4 10 / 11 -/-/-

41 42 43 44 45

Mattel Dell Companhia Paranaense CA ConocoPhillips

MAT DELL ELP CA COP

24.19 13.60 25.66 23.87 68.97

8,436 26,001 7,195 12,949 101,965

8,691 18,614 7,227 11,991 114,714

-0.7% -0.7% -0.7% -0.6% -0.6%

12x 9x 14x 12x 10x

4.6x 26.0x 1.3x n/m 1.6x

-3% 28% 0% 7% -13%

0% 12% 0% 0% 0%

12 / 12 13 / 6 -/2/3 6/7

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January 31, 2011 – Page 25 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Profitable Dividend Payors with Decent Balance Sheets (MV > $5 billion) Dividend-paying companies with no net debt and EPS estimates in excess of 75% of the indicated annual dividend ▼ Move To 52-Week Low High

MV ($mn)

EV ($mn)

Dividend Yield Last 12 Annual Months Indicated

Est. P/E This Next FY FY

Price to Tangible Book

Insiders % Buys/ Own. Sells

Company

Ticker

Price ($)

1 2 3 4 5

Banco Santander AstraZeneca Lorillard Nat'l Australia Bank Westpac Banking

STD AZN LO NABZY WBK

12.39 48.10 74.20 24.15 112.10

-30% -16% -5% -24% -24%

24% 11% 21% 11% 19%

101,955 68,015 11,101 51,521 66,743

n/m 67,095 10,805 n/m n/m

4% 3% 6% 6% 6%

6% 6% 6% 6% 6%

10x 7x 11x 10x 11x

8x 7x 10x 9x 11x

2.3x n/m n/m 1.6x 2.5x

0% 0% 0% 0% 0%

-/-/11 / 3 -/-/-

6 7 8 9 10

Telecom Argentina Bristol Myers Squibb Australia and NZ Nokia Santander Brasil

TEO BMY ANZBY NOK BSBR

26.70 26.06 23.26 10.78 12.58

-45% -15% -30% -26% -22%

2% 7% 11% 47% 24%

5,257 44,607 59,539 40,371 47,810

5,026 42,970 n/m 34,159 n/m

8% 5% 5% 5% 2%

5% 5% 5% 5% 4%

12x 12x 11x 14x 13x

10x 12x 10x 12x 11x

4.2x 5.6x 2.3x 5.5x 2.0x

0% 0% 0% 0% 0%

-/4/8 -/-/-/-

11 12 13 14 15

Credit Suisse Turkcell Paychex Microchip Technology China Mobile

CS TKC PAYX MCHP CHL

45.35 15.98 32.60 36.47 49.79

-20% -24% -24% -30% -11%

20% 25% 1% 3% 10%

53,708 14,062 11,791 6,814 199,789

n/m 12,681 11,327 5,779 154,318

5% 4% 4% 4% 4%

4% 4% 4% 4% 4%

11x 11x 23x 16x 13x

9x 11x 22x 15x 11x

2.1x 3.1x >9.9x 4.5x 2.6x

0% 0% 11% 0% 0%

-/-/1/4 11 / 9 -/-

16 17 18 19 20

Co. Bebidas Americas Intel Johnson & Johnson NTT DoCoMo Genuine Parts

ABV INTC JNJ DCM GPC

27.08 20.82 62.66 17.68 50.49

-35% -15% -9% -18% -27%

18% 17% 6% 2% 4%

84,029 116,134 172,080 73,556 7,954

83,437 96,364 161,979 69,768 7,922

1% 3% 3% 5% 3%

4% 3% 3% 3% 3%

20x 10x 13x 13x 17x

18x 9x 13x 12x 15x

>9.9x 2.6x 6.9x 1.5x 3.1x

0% 0% 0% 0% 1%

-/3/3 9/7 -/5/5

21 22 23 24 25

Maxim Integrated Chevron Automatic Data United Overseas Bank HSBC

MXIM CVX ADP UOVEY HBC

26.13 93.78 49.04 30.18 55.58

-40% -29% -46% -17% -22%

8% 0% 0% 1% 3%

7,736 188,726 24,187 23,093 196,599

7,238 184,811 23,006 n/m n/m

3% 3% 3% 3% 3%

16x 10x 20x 12x 15x

15x 9x 18x 11x 11x

4.1x 1.9x >9.9x 1.8x 1.8x

1% 0% 0% 0% 0%

17 / 11 3/8 23 / 6 -/-/-

26 27 28 29 30

Philips Electronics PartnerRe Ensco McGraw-Hill Mitsubishi UFJ

PHG PRE ESV MHP MTU

33.44 81.00 52.16 37.64 5.35

-21% -15% -36% -28% -16%

8% 1% 5% 5% 5%

31,635 6,034 7,459 11,556 75,637

31,625 n/m 6,820 11,398 n/m

6% 2% 1% 2% 2%

3% 3% 3% 3% 3%

18x 11x 15x 14x 12x

16x 9x 13x 13x 12x

6.2x .9x 1.3x n/m .9x

0% 0% 0% 0% 0%

-/-/5/9 2/-/-

31 32 33 34 35

China Life Insurance Canon STMicroelectronics KLA-Tencor Ericsson

LFC CAJ STM KLAC ERIC

60.23 49.34 11.64 41.83 11.79

-5% -25% -44% -36% -20%

25% 6% 5% 3% 5%

113,495 60,820 10,262 6,988 38,588

n/m 51,299 9,068 6,215 32,200

3% 3% 3% 2% 3%

3% 2% 2% 2% 2%

24x 20x 16x 10x 16x

21x 18x 13x 10x 14x

3.7x 2.0x 1.9x 3.7x 2.9x

0% 0% 0% 1% 0%

-/-/-/13 / 6 -/-

36 37 38 39 40

3M Microsoft Analog Devices Bancolombia CNOOC

MMM MSFT ADI CIB CEO

89.29 28.02 38.77 58.48 238.82

-23% -19% -32% -31% -42%

2% 13% 3% 19% 5%

63,830 239,726 11,579 11,574 106,682

63,735 206,218 9,292 n/m 102,775

2% 2% 2% 4% 2%

2% 2% 2% 2% 2%

16x 11x 15x 16x 13x

15x 10x 14x 13x 11x

7.7x 7.2x 3.9x 3.1x 3.7x

0% 11% 1% 0% 0%

13 / 10 15 / 13 15 / 11 -/-/-

41 42 43 44 45

Northern Trust Kyocera ABB Xilinx Hormel Foods

NTRS KYO ABB XLNX HRL

52.91 99.95 23.36 31.28 50.76

-14% -21% -31% -27% -25%

12% 7% 2% 2% 3%

12,819 18,342 53,353 8,105 6,757

n/m 12,275 48,064 7,583 6,589

2% 1% 2% 2% 2%

2% 2% 2% 2% 2%

17x 14x 20x 13x 16x

14x 13x 16x 14x 15x

1.9x 1.2x 5.8x 4.2x 4.1x

0% 0% 0% 0% 0%

2/9 -/-/3/3 27 / 28

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January 31, 2011 – Page 26 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Deep Value: Lots of Revenue, Low Enterprise Value (MV > $5 billion) Companies that trade at low multiples of net revenue ▼ Move To 52-Week Low High

MV ($mn)

EV ($mn)

EV/ Sales

Est. P/E This Next FY FY

Price to Tangible Book

Insiders % Buys/ Own. Sells

Company

Ticker

Price ($)

1 2 3 4 5

AmerisourceBergen Cardinal Health McKesson Valero Energy Flextronics

ABC CAH MCK VLO FLEX

36.10 41.30 73.21 24.13 8.01

-28% -28% -22% -36% -39%

1% 1% 3% 6% 6%

9,939 14,412 18,527 13,663 6,135

9,625 13,840 17,756 19,347 6,768

.12x .14x .16x .23x .24x

15x 16x 15x 15x -

13x 14x 13x 11x -

>9.9x 6.2x 7.1x .9x 3.2x

1% 0% 0% 0% 0%

10 / 4 20 / 10 10 / 10 6/7 -/-

6 7 8 9 10

Kroger Sears Holdings Tyson Foods General Motors Best Buy

KR SHLD TSN GM BBY

21.56 74.57 17.25 37.24 35.11

-12% -21% -21% -11% -12%

12% 68% 19% 6% 39%

13,711 8,203 6,506 55,860 13,840

20,761 11,450 8,064 37,948 14,737

.26x .26x .28x .29x .29x

12x 58x 9x 13x 11x

11x 74x 9x 9x 10x

3.3x 2.2x 2.1x n/m 4.3x

0% 0% 0% 10% 0%

16 / 9 1/2 11 / 7 22 / 11 8/3

11 12 13 14 15

Manpower Panasonic Safeway Avnet Dell

MAN PC SWY AVT DELL

64.18 13.79 21.02 34.98 13.47

-38% -12% -11% -36% -16%

7% 25% 29% 5% 30%

5,235 28,549 7,836 5,316 26,001

5,343 30,363 12,495 6,412 18,614

.30x .30x .31x .31x .31x

39x 25x 14x 9x 10x

23x 43x 12x 9x 9x

5.2x 2.1x 1.8x 2.2x >9.9x

0% 0% 1% 0% 12%

10 / 4 -/10 / 10 17 / 15 13 / 6

16 17 18 19 20

Bunge Costco Wholesale Motorola Solutions Alcatel-Lucent Delhaize

BG COST MSI ALU DEG

70.04 72.77 37.15 3.23 78.06

-35% -27% -33% -30% -16%

4% 1% 9% 16% 9%

10,148 31,766 12,470 7,299 7,927

13,883 28,649 6,972 7,641 10,544

.32x .36x .36x .37x .38x

19x 22x 16x n/m 11x

13x 19x 16x 17x 10x

1.1x 2.8x 1.7x n/m 4.3x

0% 1% 0% 0% 0%

-/22 / 19 5/-/-/-

21 22 23 24 25

Hitachi Lear Archer Daniels Sinopec Western Digital

HIT LEA ADM SNP WDC

54.02 104.99 33.45 101.64 31.51

-40% -63% -28% -31% -27%

5% 7% 3% 2% 43%

24,394 5,334 21,371 88,127 7,241

44,517 4,593 25,972 119,850 4,481

.39x .40x .41x .45x .45x

9x 13x 12x 8x 10x

12x 11x 10x 7x 8x

2.3x 3.1x 1.4x 1.5x 1.5x

0% 0% 0% 0% 1%

-/9/8 26 / 25 -/16 / 9

26 27 28 29 30

Sony Whirlpool Medco Health J.C. Penney LG Display

SNE WHR MHS JCP LPL

34.22 88.45 63.93 30.34 16.26

-24% -20% -32% -36% -15%

18% 34% 4% 16% 33%

34,340 6,724 27,132 7,178 11,694

29,409 8,345 31,208 8,611 10,997

.45x .46x .49x .49x .49x

48x 9x 19x 21x 11x

18x 10x 16x 18x >99x

1.6x >9.9x n/m 1.5x 1.2x

0% 0% 0% 1% 0%

-/1/9 / 14 3/-/-

31 32 33 34 35

Fluor SYSCO Marathon Oil Magna International Jacobs Engineering

FLR SYY MRO MGA JEC

71.02 29.94 42.04 57.56 49.72

-42% -10% -34% -53% -31%

3% 7% 7% 8% 3%

12,698 17,517 29,845 13,950 6,272

10,648 19,563 36,144 12,415 5,413

.51x .52x .52x .54x .55x

34x 15x 12x 19x

22x 14x 9x 18x

3.6x 7.6x 1.4x 2.1x 3.6x

0% 0% 0% 0% 1%

9 / 10 20 / 13 12 / 1 -/10 / 1

36 37 38 39 40

LyondellBasell Walgreen TRW Automotive Seagate Technology Plains All American

LYB WAG TRW STX PAA

35.05 41.69 57.58 13.28 63.53

-58% -37% -63% -26% -31%

6% 1% 9% 63% 3%

19,787 38,456 6,943 6,262 8,667

22,280 38,796 7,973 6,373 14,239

.57x .57x .57x .57x .58x

16x 10x 22x

14x 9x 21x

2.4x 3.1x n/m 2.3x 3.2x

0% 0% 1% 0% 0%

-/16 / 5 7 / 12 -/3/1

41 42 43 44 45

Wal-Mart BP Computer Sciences Cemex SAIC

WMT BP CSC CX SAI

55.73 47.61 53.03 10.08 16.48

-14% -44% -25% -26% -10%

1% 28% 5% 20% 20%

198,510 149,121 8,192 9,692 6,128

244,688 174,746 9,482 8,830 6,588

.58x .59x .59x .59x .60x

14x 9x 10x n/m 11x

13x 8x 9x n/m 12x

4.1x 2.3x 4.8x .6x >9.9x

0% 0% 0% 0% 0%

9 / 11 -/3/2 -/17 / 13

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January 31, 2011 – Page 27 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Deep Value: Neglected Gross Profiteers (MV > $5 billion) Companies that trade at low multiples of gross profit ▼ Move To 52-Week Low High

MV ($mn)

EV ($mn)

Enterprise Value / Gross Sales Profit EBIT

Est. P/E This Next FY FY

Price/ Tang. Book

Insiders % Buys/ Own. Sells

Company

Ticker

Price ($)

1 2 3 4 5

Humana Sears Holdings Motorola Solutions ArcelorMittal Safeway

HUM SHLD MSI MT SWY

58.01 74.57 37.15 36.84 21.02

-26% -21% -33% -29% -11%

6% 68% 9% 28% 29%

9,764 8,203 12,470 55,644 7,836

1,611 11,450 6,972 77,703 12,495

.0x .3x .4x 1.0x .3x

.2x 1.0x 1.0x 1.0x 1.1x

.8x 20.4x 12.4x 18.7x n/m

8x 58x 16x 16x 14x

10x 74x 16x 13x 12x

2.1x 2.2x 1.7x 1.2x 1.8x

1% 0% 0% 0% 1%

5/5 1/2 5/-/10 / 10

6 7 8 9 10

Panasonic Alcatel-Lucent Kroger Best Buy J.C. Penney

PC ALU KR BBY JCP

13.79 3.23 21.56 35.11 30.34

-12% -30% -12% -12% -36%

25% 16% 12% 39% 16%

28,549 7,299 13,711 13,840 7,178

30,363 7,641 20,761 14,737 8,611

.3x .4x .3x .3x .5x

1.1x 1.1x 1.1x 1.2x 1.2x

8.2x n/m 9.7x 6.2x 11.4x

25x n/m 12x 11x 21x

43x 17x 11x 10x 18x

2.1x n/m 3.3x 4.3x 1.5x

0% 0% 0% 0% 1%

-/-/16 / 9 8/3 3/-

11 12 13 14 15

NTT CIGNA Delhaize Hitachi Electronic Arts

NTT CI DEG HIT ERTS

22.57 40.97 78.06 54.02 15.13

-13% -29% -16% -40% -7%

6% 0% 9% 5% 34%

59,726 11,099 7,927 24,394 5,021

95,381 12,531 10,544 44,517 3,364

.8x .6x .4x .4x .9x

1.3x 1.4x 1.5x 1.6x 1.6x

6.6x 1.4x 8.2x 9.1x n/m

10x 9x 11x 9x 24x

10x 9x 10x 12x 18x

.8x 3.3x 4.3x 2.3x 3.6x

0% 0% 0% 0% 0%

-/14 / 13 -/-/-/-

16 17 18 19 20

WPP Tele Norte Leste Forest Labs Macy's Manpower

WPPGY TNE FRX M MAN

63.52 16.04 31.66 23.14 64.18

-32% -20% -24% -34% -38%

1% 20% 8% 14% 7%

15,984 6,138 9,043 9,799 5,235

20,699 17,718 5,599 16,671 5,343

1.5x 1.0x 1.3x .7x .3x

1.6x 1.6x 1.7x 1.7x 1.7x

14.8x 5.8x 5.5x 10.3x 20.3x

71x 6x 7x 12x 39x

62x 7x 7x 10x 23x

n/m n/m 2.1x >9.9x 5.2x

0% 0% 1% 0% 0%

-/-/15 / 12 8/6 10 / 4

21 22 23 24 25

Aetna Dell Apollo Group WellPoint Gap

AET DELL APOL WLP GPS

33.28 13.47 42.35 61.45 20.10

-25% -16% -20% -24% -17%

8% 30% 57% 9% 31%

13,315 26,001 6,062 24,187 12,349

16,137 18,614 5,203 31,860 10,695

.5x .3x 1.0x .5x .7x

1.7x 1.8x 1.8x 1.8x 1.8x

5.6x 6.7x 5.1x 3.7x 5.5x

9x 10x 9x 9x 11x

10x 9x 9x 9x 11x

3.1x >9.9x 6.3x 8.0x 2.9x

0% 12% 3% 0% 2%

5/6 13 / 6 2 / 12 7/9 7/6

26 27 28 29 30

Sprint Nextel Advance Auto Parts UnitedHealth Nokia Advanced Micro

S AAP UNH NOK AMD

4.31 63.51 40.41 10.78 7.54

-28% -38% -33% -26% -27%

23% 9% 2% 47% 36%

12,874 5,338 44,449 40,371 5,141

28,506 5,496 44,396 34,159 5,773

.9x .9x .5x .6x .9x

1.9x 1.9x 1.9x 1.9x 1.9x

n/m 9.8x 1.9x 10.8x 6.8x

n/m 16x 11x 14x 16x

n/m 14x 10x 12x 12x

n/m 4.9x 1.7x 5.5x 7.9x

0% 1% 1% 0% 0%

1/3 18 / 12 12 / 13 -/8/7

31 32 33 34 35

StatoilHydro Family Dollar Stores Huaneng Power Walgreen TIM Participacoes

STO FDO HNP WAG TSU

24.38 43.80 22.11 41.69 37.23

-25% -31% -8% -37% -39%

3% 18% 17% 1% 3%

77,738 5,536 6,664 38,456 9,217

89,267 5,649 26,279 38,796 10,383

1.0x .7x 1.9x .6x 1.3x

2.0x 2.0x 2.0x 2.0x 2.1x

4.1x 9.6x 17.9x 10.8x 16.7x

12x 14x 13x 16x 31x

9x 12x 12x 14x 17x

3.0x 4.5x 2.0x 3.1x 3.6x

0% 4% 0% 0% 0%

-/9/9 -/16 / 5 -/-

36 37 38 39 40

Cemex Avon Products Western Digital Cenovus Energy NTT DoCoMo

CX AVP WDC CVE DCM

10.08 28.72 31.51 32.40 17.68

-26% -13% -27% -29% -18%

20% 26% 43% 5% 2%

9,692 12,326 7,241 24,365 73,556

8,830 14,570 4,481 27,501 69,768

.6x 1.3x .5x 2.1x 1.3x

2.1x 2.1x 2.1x 2.1x 2.1x

10.1x 12.9x 3.8x 16.6x 6.5x

n/m 15x 10x 13x

n/m 13x 8x 12x

.6x >9.9x 1.5x 2.7x 1.5x

0% 0% 1% 0% 0%

-/4/4 16 / 9 -/-/-

41 42 43 44 45

Kohl's Ameren Berkshire Hathaway Xcel Energy Eli Lilly

KSS AEE BRK.A XEL LLY

51.75 28.63 120,000 23.91 34.76

-15% -19% -16% -17% -8%

14% 4% 17% 2% 10%

15,131 6,866 199,046 11,001 40,083

14,788 13,996 223,248 20,212 41,080

.8x 1.9x 1.7x 2.0x 1.8x

2.1x 2.2x 2.2x 2.2x 2.3x

8.1x 14.5x 2.4x 12.1x 6.4x

14x 10x 18x 15x 7x

12x 12x 17x 14x 8x

1.8x .9x 2.0x 1.4x 4.9x

0% 0% 0% 0% 0%

4/4 11 / -/1/12 / 2

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January 31, 2011 – Page 28 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Activist Targets: Potential Sales or Recapitalizations (MV > $5 billion) Companies that may unlock value through a corporate event ▼ Move To 52-Week Low High

MV ($mn)

EV ($mn)

Price to Tangible Book

Net Cash (% of MV)

NCAV (% of MV)

EV/ Sales

Next FY P/E

Insiders % Buys/ Own. Sells

Company

Ticker

Price ($)

1 2 3 4 5

Forest Labs Western Digital Garmin Cree Genuine Parts

FRX WDC GRMN CREE GPC

31.66 31.51 30.79 51.26 50.49

-24% -27% -15% -8% -27%

8% 43% 31% 63% 4%

9,043 7,241 5,954 5,606 7,954

5,599 4,481 4,696 4,495 7,922

2.1x 1.5x 2.2x 3.2x 3.1x

38% 38% 21% 20% 0%

36% 34% 26% 22% 22%

1.3x .5x 1.6x 4.4x .7x

7x 8x 21x 15x

1% 1% 0% 1% 1%

15 / 12 16 / 9 -/11 / 7 5/5

6 7 8 9 10

Analog Devices Humana Marvell Technology Lam Research KLA-Tencor

ADI HUM MRVL LRCX KLAC

38.77 58.01 20.08 49.98 41.83

-32% -26% -31% -36% -36%

3% 6% 14% 6% 3%

11,579 9,764 13,062 6,147 6,988

9,292 1,611 10,388 5,234 6,215

3.9x 2.1x 4.3x 3.7x 3.7x

20% 83% 20% 15% 11%

20% 20% 20% 19% 18%

3.4x .0x 2.9x 2.0x 2.9x

14x 10x 12x 10x 10x

1% 1% 0% 0% 1%

15 / 11 5/5 2/3 6 / 10 13 / 6

11 12 13 14 15

Bed Bath & Beyond Stryker Verisign Activision Blizzard Applied Materials

BBBY SYK VRSN ATVI AMAT

48.11 57.65 32.21 11.25 15.01

-45% -26% -34% -12% -32%

6% 4% 15% 12% 2%

12,255 22,894 5,540 13,562 19,929

10,815 19,395 3,569 10,713 17,550

3.2x 4.0x 4.7x 5.4x 3.4x

12% 15% 36% 21% 12%

18% 18% 18% 17% 17%

1.3x 2.7x 4.7x 2.3x 1.8x

14x 16x 22x 14x 11x

0% 0% 1% 0% 0%

1/1 2/1 13 / 11 9/7 12 / 11

16 17 18 19 20

Nike Intel Google Motorola Solutions Jacobs Engineering

NKE INTC GOOG MSI JEC

82.30 20.82 611.83 37.15 49.72

-26% -15% -29% -33% -31%

12% 17% 5% 9% 3%

39,380 116,134 195,648 12,470 6,272

35,189 96,364 164,138 6,972 5,413

4.2x 2.6x 5.0x 1.7x 3.6x

11% 17% 16% 44% 14%

16% 16% 15% 15% 15%

1.8x 2.2x 5.6x .4x .5x

16x 9x 16x 16x 18x

0% 0% 0% 0% 1%

13 / 13 3/3 12 / 12 5/10 / 1

21 22 23 24 25

Altera Magna International NVIDIA Cisco Systems Franklin Resources

ALTR MGA NVDA CSCO BEN

37.13 57.56 22.22 20.73 118.43

-44% -53% -61% -8% -29%

7% 8% 8% 34% 6%

11,606 13,950 12,909 114,874 26,528

9,691 12,415 10,945 91,227 21,954

6.0x 2.1x 5.3x 4.6x 4.6x

16% 11% 15% 21% 17%

15% 15% 14% 13% 13%

5.5x .5x 3.0x 2.2x 3.8x

16x 22x 11x 13x

0% 0% 0% 0% 31%

9/9 -/5/5 21 / 12 12 / 14

26 27 28 29 30

Electronic Arts Dolby Laboratories Amdocs Nat.-Oilwell Varco Celgene

ERTS DLB DOX NOV CELG

15.13 60.29 28.68 67.51 56.03

-7% -21% -11% -52% -14%

34% 16% 13% 4% 17%

5,021 6,768 5,500 28,330 26,370

3,364 5,920 4,266 26,130 22,840

3.6x 5.9x 4.0x 4.8x 7.3x

33% 13% 22% 8% 13%

13% 12% 12% 12% 12%

.9x 6.4x 1.4x 2.2x 6.9x

18x 19x 18x 17x

0% 0% 0% 0% 0%

-/8/7 -/6/6 7/3

31 32 33 34 35

Skyworks Solutions eBay Broadcom Fluor Microchip Technology

SWKS EBAY BRCM FLR MCHP

29.19 30.02 44.51 71.02 36.47

-57% -37% -41% -42% -30%

13% 5% 6% 3% 3%

5,350 39,138 22,776 12,698 6,814

4,925 34,310 20,382 10,648 5,779

5.9x 4.6x 6.8x 3.6x 4.5x

8% 12% 11% 16% 15%

12% 11% 11% 11% 11%

4.2x 3.7x 3.3x .5x 4.6x

15x 15x 15x 22x 15x

1% 11% 0% 0% 0%

12 / 12 7 / 10 9 / 14 9 / 10 11 / 9

36 37 38 39 40

Cognizant Tech Expeditors Int'l Fastenal Company Research In Motion Cameron

CTSH EXPD FAST RIMM CAM

73.05 53.44 59.51 61.55 50.28

-42% -39% -31% -31% -38%

5% 7% 3% 25% 4%

22,169 11,348 8,774 32,117 12,196

20,241 10,291 8,604 30,341 11,973

7.3x 6.6x 6.8x 5.1x 4.4x

9% 9% 2% 6% 2%

11% 11% 10% 10% 10%

4.8x 1.8x 3.8x 1.6x 2.1x

27x 29x 22x 18x

0% 1% 8% 0% 1%

10 / 10 13 / 14 2/3 -/12 / 17

41 42 43 44 45

MasterCard Texas Instruments Yahoo! Gap Urban Outfitters

MA TXN YHOO GPS URBN

233.53 33.91 15.97 20.10 35.03

-18% -34% -19% -17% -17%

15% 3% 20% 31% 17%

30,565 39,816 20,810 12,349 5,747

26,950 37,306 18,130 10,695 5,243

7.4x 4.6x 2.6x 2.9x 4.4x

12% 6% 13% 13% 9%

10% 9% 9% 9% 9%

5.0x 2.8x 2.8x .7x 2.4x

14x 13x 20x 11x 18x

10% 0% 0% 2% 2%

10 / 4 13 / 13 9/3 7/6 3/4



Company website

SEC

Proxy

Price Charts

Criteria: ► Tangible book > 12.5% of MV ► Net cash ► MV > $5 billion

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January 31, 2011 – Page 29 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Cheapest 20 Members of Dow Jones Industrial Average Alcoa (AA) – Capital World Pittsburgh, PA, 412-553-4545

Basic Materials: Metal Mining, Member of S&P 500 Trading Data Price: $15.79 (as of 1/21/11) 52-week range: $9.81 - $16.72 Market value: $16.1 billion Enterprise value: $23.8 billion Shares out: 1,022.0 million Ownership Data

www.alcoa.com

Consensus EPS Estimates

Valuation

This quarter Next quarter FYE 12/31/11

Latest $0.26 0.31 1.23

Month Ago $0.24 0.28 1.10

# of Ests 14 12 16

P/E FYE 12/31/10 P/E FYE 12/31/11 P/E FYE 12/30/12 P/E FYE 12/30/13 EV/ LTM revenue

61x 13x 11x 9x 1.1x

FYE 12/30/12

1.45

1.33

EV/ LTM EBIT

23x

Insider ownership: <1%

FYE 12/30/13

1.76

1.51

P / tangible book

1.9x

Insider buys (last six months): 2

LT growth

n/a

Insider sales (last six months): 4 Institutional ownership: 64%

EPS Surprise 1/10/11

Actual $0.21

Greenblatt Criteria

Estimate $0.19

LTM EBIT yield LTM pre-tax ROC

4% 5%

Operating Performance and Financial Position ($ millions, except per share data) Revenue Gross profit Operating income Net income Diluted EPS Shares out (avg) Cash from operations Capex Free cash flow Cash & investments Total current assets Intangible assets Total assets Short-term debt Total current liabilities Long-term debt Total liabilities Common equity EBIT/capital employed

12/31/04 22,609 4,681 2,153 1,308 1.56 870 2,199 1,137 1,062 457 7,442 7,399 32,609 954 6,276 5,345 19,309 13,245 15%

12/31/05 25,568 4,864 1,970 1,231 1.43 872 1,676 2,116 (440) 762 8,213 7,095 33,696 1,266 7,062 5,276 20,323 13,318 14%

Fiscal Years Ended 12/31/06 12/31/07 12/31/08 28,950 29,280 26,901 6,995 6,477 4,726 3,515 4,802 792 2,246 2,562 (76) 2.54 3.24 0.28 869 861 811 2,567 3,111 1,234 3,182 3,614 3,413 (615) (503) (2,179) 506 483 762 8,353 7,574 8,150 5,499 5,401 5,591 37,183 38,803 37,822 1,312 1,621 2,069 6,879 7,037 7,279 5,909 6,371 8,509 22,552 22,787 26,087 14,576 15,961 11,680 23% 28% 4%

12/31/09 18,439 1,537 (1,498) (1,153) (1.06) 935 1,365 1,617 (252) 1,481 7,022 5,641 38,472 845 5,414 9,014 26,052 12,365 -7%

12/31/10 21,013 3,839 548 254 0.26 1,018 2,261 1,015 1,246 1,543 6,869 5,119 39,254 323 5,236 8,842 25,567 13,632 3%

LTME 12/31/10 21,013 3,839 1,040 251 0.22 1,018 2,261 1,015 1,246 1,543 6,869 5,119 39,254 323 5,236 8,842 25,567 13,632 5%

FQE 12/31/09 5,433 528 (394) (278) (0.27) 974 1,124 363 761 1,481 7,022 5,051 38,472 845 5,414 9,014 26,052 12,365 n/m

FQE 12/31/10 5,652 1,114 348 258 0.23 1,022 1,370 365 1,005 1,543 6,869 5,119 39,254 323 5,236 8,842 25,567 13,632 n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

$60

$50

$40

$30

$20

$10

$0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

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January 31, 2011 – Page 30 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA

Alcoa is a vertically integrated aluminum producer.

INVESTMENT HIGHLIGHTS • •

•

#1 global producer of primary and fabricated aluminum, as well as the largest miner of bauxite (the key raw material) and refiner of alumina.* Asset replacement cost may be higher than recent enterprise value, as implied by the $11 billion cost to build an aluminum complex in Saudi Arabia. The cost of the project, a JV between local miner Ma’aden (75%) and Alcoa (25%), is ~$15k per metric ton of integrated smelting capacity versus Alcoa’s ~$7k/ton, as implied by its enterprise value. Cost-competitive and vertically-integrated, with a top 30th percentile rank on the refining cost curve, and ~50th on the aluminum curve. Alcoa owns longlife bauxite ore rights in Brazil, Australia, Jamaica, Guinea and Suriname. ~80% of needed ore for 2009 production was from Alcoa-controlled sources. It generates 20+% of electric power used at its smelters. Expects demand for aluminum to double by 2020 (up 50+% 2000-10), implying the need for 3 million tons of new annual supply (4-5 Ma’aden JV-like smelters). Aluminum is durable and lightweight and is used in aerospace (~50% of engineered segment revenue), cans (~40% of rolled segment revenue), auto, construction, and electronics markets.

1 2 3

INVESTMENT RISKS & CONCERNS •

•

Commodity-driven business. While Alcoa may have an edge due to scale and vertical integration, business remains driven by the aluminum price, which Alcoa cannot control. According to Alcoa, a $100/ton decline in the aluminum price (~5%) reduces its annual net income by $200 million. “China factor.” China’s aluminum demand/supply dynamics may have adverse effects. China, which is a modest net importer, is to account for ~45% of the ~44 million tons of world aluminum demand in ‘11. $8 billion of net debt (~2.8x 2010 adj. EBITDA) and ~$5 billion of unfunded pension liabilities. Alcoa is contributing ~37 million new shares (~4%) and $300 million of cash to its pension plan in 2011. Inventory overhang of ~3 months’ consumption due to ~11 million tons of excess aluminum (incl. ~5 million unreported tons), as estimated by Norsk Hydro). Rising supply may delay an adjustment.

Aluminum is produced from bauxite, an ore containing aluminum in the form of aluminum oxide, commonly referred to as alumina.

FYE December 31 2006 2007 2008 2009 2010 Aluminum price (LME avg; $/ton) 2,570 2,641 2,572 1,664 2,173 ∆ avg aluminum price 35% 3% -3% -35% 31% ∆ global aluminum demand n/a 10% -1% -8% 13% ∆ global aluminum production n/a 12% 5% -6% 2% ∆ global aluminum inventory n/a 3% 63% 39% -4% ∆ Alcoa aluminum production 0% 4% 9% -11% 1% ∆ revenue 19% -4% -8% -31% 14% Alumina segment EBITDA $/ton1 110 104 81 20 47 Aluminum segment EBITDA $/ton1 784 626 392 -159 320 Revenue ($bn)2 30.4 29.3 26.9 18.4 21.0 % of revenue by major segment: Alumina (refines bauxite) 9% 9% 11% 12% 13% Primary metal (makes aluminum) 20% 22% 30% 28% 34% Flat-rolled products 27% 32% 33% 33% 30% Engineered products 18% 20% 23% 25% 22% Adj. EBITDA margin by selected segment (excludes discontinued operations): 1 Alumina 60% 58% 42% 13% 27% Primary metal 45% 35% 20% -11% 16% Flat-rolled products 6% 5% 3% 4% 9% Engineered products 12% 13% 15% 13% 17% Total adj. EBITDA margin 20% 18% 13% 2% 13% Selected items as % of revenue: Gross profit 23% 22% 18% 8% 18% EBIT 13% 17% 3% -6% 5% Net income 7% 9% 0% -6% 1%3 Net cash from ops 0% 11% 4% 7% 11% D&A 4% 4% 5% 7% 7% Capex 11% 12% 13% 9% 5% Return on tangible equity 26% 24% -1% -18% 3% Tangible equity to assets 28% 32% 26% 20% 22% ∆ shares out (avg) 0% -1% -6% 15% 9%

Adjusted for discontinued operations, restructuring and other special items. Includes divested businesses, mainly in 2006/07, unless stated otherwise. Includes negative impact of restructuring and other items of $297 million.

COMPARABLE PUBLIC COMPANY ANALYSIS

ACH NHYDY AWC CENX AA

MV ($mn) 13,060 11,670 5,780 1,300 16,140

EV ($mn) 22,420 10,180 6,090 1,340 23,820

EV / Rev. 1.4x .8x n/m 1.2x 1.1x

P/ Tang. Book 1.9x 1.2x 2.1x 1.2x 1.9x

This FY P/E n/m 53x 86x 22x 13x

Next FY P/E 402x 15x 33x 13x 11x

MAJOR HOLDERS Insiders <1% | Cap World 5% | State Street 5% | FMR 2%

RATINGS

VALUE Intrinsic value materially higher than market value? DOWNSIDE PROTECTION Low risk of permanent loss? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends?

      

THE BOTTOM LINE Integrated aluminum powerhouse Alcoa is benefiting from a rebound in the price of the metal, the key profitability driver. While aluminum prices are impossible to predict, global demand for aluminum should continue to rise as population growth and economic development lead to more use in end-markets such as transportation, construction and packaging. The extent to which Alcoa benefits is likely driven by how cost-competitive it stays relative to lower-cost capacity entering the market. While Alcoa’s existing capacity appears undervalued compared to an $11 billion integrated aluminum complex being built in Saudi Arabia, valuation is not cheap on an earnings-basis with EV-to-2010 EBITDA at ~12x and EV-to-prior peak EBITDA at ~6x. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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January 31, 2011 – Page 31 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

ALCOA – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE ($ in billions, unless stated otherwise)

Valuation methodology

Cost of building a metric ton of integrated aluminum smelting capacity ($/t)1 Discount factor applied2 Implied value of a metric ton of integrated aluminum smelting capacity ($/t) Alcoa's existing aluminum smelting capacity (million metric tons)3 Estimated EV of Alcoa's bauxite, alumina, aluminum, and rolling mill assets Plus: Value of Alcoa's engineered products business4 Minus: Net debt5 Minus: Net post-retirement liability5 Estimated fair value of the equity of Alcoa6 Implied EV-to-average 2005-10 adjusted EBITDA7 Implied EV-to-2010 adjusted EBITDA7 Implied EV-to-peak 2005-10 adjusted EBITDA (2006)7 Implied trailing FCF yield8 Implied fair value of the equity to tangible book9 Implied EV-to-gross PP&E Implied EV-to-net PP&E Implied EV per metric ton of aluminum smelting capacity10

Conservative

Base Case

Aggressive

60% discount to newbuild cost of integrated alu. smelting capacity, plus engineered products business

50% discount to newbuild cost of integrated alu. smelting capacity, plus engineered products business

40% discount to newbuild cost of integrated alu. smelting capacity, plus engineered products business

$14,595 60% $5,838 4.5 $26.3 3.8 (7.6) (5.4) $17 billion $16.60 per share 9.1x 11.1x 5.6x 7% 2.1x 0.9x 1.5x $6,677

$14,595 50% $7,297 4.5 $32.8 3.8 (7.6) (5.4) $24 billion $23.10 per share 11.1x 13.6x 6.8x 5% 2.9x 1.1x 1.8x $8,136

$14,595 40% $8,757 4.5 $39.4 3.8 (7.6) (5.4) $30 billion $29.50 per share 13.1x 16.0x 8.0x 4% 3.8x 1.3x 2.2x $9,596

Based on the Ma'aden joint venture project announced by the namesake Saudi Arabian mining company and Alcoa in December 2009. According to Alcoa, which owns 25% of the JV, the project is aimed at creating the "world’s lowest cost, integrated aluminum facility." While there are many pitfalls inherent in an implied valuation of this nature, the cyclical aluminum industry leads us to search for non-earnings based approaches (selected implied earnings-based metrics are included at the bottom of the table). In addition, the integrated nature of the project lends itself to be compared to an integrated business such as Alcoa. The Ma'aden facility is due to become operational in 2013/14 and cost $11 billion to build. The joint venture plans to develop a fully integrated industrial complex that will include a bauxite mine with an initial capacity of 4.0 million mt per year (mtpy); an alumina refinery with an initial capacity of 1.8 million mtpy; an aluminum smelter with an initial capacity of ingot, slab and billet of 740,000 mtpy; and a rolling mill, with initial hot-mill capacity of between 250,000 and 460,000 mtpy. The mill is expected to focus on the production of sheet, end and tab stock for the manufacture of aluminum cans, and potentially other products to serve the 2 construction industry. A discount factor is warranted for two main reasons: 1) the possibility that the project is overvalued; and 2) due to the lower-cost nature of the new capacity relative to Alcoa's existing capacity, which may get bumped further up the cost curve as a result of this and other lower-cost capacity entering the market. On the other hand, a comparison based on the ratio of smelting capacity alone likely underestimates Alcoa's bauxite and alumina interests relative to 3 the their respective size in the Ma'aden project. Based on Alcoa's estimated wholly-owned capacity as well as its share of non-wholly owned capacity at 4 year-end 2010. As a result, we do not deduct non-controlling interest from our estimated enterprise value. Based on 5x average 2006-10 adjusted EBITDA of Alcoa's engineered products and solutions segment. We add a value for this downstream business as it is not reflected in the smelting capacity analysis. Based on the same principle, we do not include a value for Alcoa's flat-rolled products segment (another downstream business) because the Ma'aden project includes rolling 5 6 7 mill capacity. Based on December 31, 2010 balance sheet values. Based on 1,022 million shares outstanding. EBITDA is adjusted for discontinued operations, accounting changes, restructuring and other charges. Relative to 2005, Alcoa's capacity in alumina and aluminum production is modestly higher at yearend 2010. For reference, Norsk Hydro (Oslo: NHY/OTC: NHYDY) announced the purchase of Vale’s aluminum business for an enterprise value of $4.9 billion in 2010. Hydro is paying >6x peak EBITDA of $0.8 billion generated by assets being bought from Vale, mainly bauxite and alumina operations, with 8 little smelting capacity and downstream presence. Includes benefits from a reduction in working capital (at 34 days at yearend 2010 versus 37 days at 9 yearend 2009). Tangible book may not be a good measure to use given that accumulated depreciation likely overstates the economic deterioration of PP&E. While difficult to estimate, the cost of replacing Alcoa's asset base is likely materially higher than the ~$20 billion depreciated value of PP&E on its balance sheet 10 (the Ma'aden project cost may be an indicator of this). For reference, competitor Norsk Hydro (Oslo: NHY/OTC: NHYDY) trades at an implied enterprise value per metric ton of aluminum capacity of ~$7,500/ton, adjusted for the pending acquisition of Vale assets. The implied deal EV paid per metric ton of acquired alumina capacity (primarily a bauxite/alumina acquisition) is ~$850/ton. While this is about half of Alcoa's recent valuation based on this metric, the difference likely arises due to Alcoa's significant smelting and downstream assets as well as potential differences in bauxite/alumina asset characteristics. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

ALCOA’S MA’ADEN SAUDI ARABIA JOINT VENTURE – IMPLIED VALUATION ANALYSIS Annual Capacity Existing Alcoa Capacity / Completion Project (million metric tons) Project Capacity Year Bauxite mine 4.00 9x 2014 Alumina refinery 1.80 10x 2014 Aluminum smelter 0.74 6x 2013 Rolling mill 0.38 5x 2013 Estimated total project cost Implied cost of integrated smelting capacity ($/t): Alcoa's recent enterprise value per ton of existing smelting capacity ($/t) Alcoa's implied discount to project value

$10.8 billion $14,595 $6,643 -54%

Alcoa’s recent enterprise value implies a ~50% discount to the cost of building new capacity

Source: Company information, Manual of Ideas analysis.

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January 31, 2011 – Page 32 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

2011 ALUMINUM SUPPLY/DEMAND BALANCE, CHINA vs. WESTERN WORLD (in thousands of metric tons – kmt)

ALCOA – ADJUSTED EBITDA, 2000–2010 1

Alcoa defines Adjusted EBITDA as net income plus depreciation, depletion, and amortization. Net income equals sales minus the following items: cost of goods sold, SG&A expenses, R&D expenses, and provision for depreciation, depletion, and amortization.

2011 PROJECTED PRIMARY ALUMINUM CONSUMPTION, BY REGION (in millions of metric tons – mmt)

Source for above charts: Company Q4 2010 earnings presentation, available at http://bit.ly/fmWLUg

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January 31, 2011 – Page 33 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

American Express (AXP) – Bares, Berkshire, Markel New York, NY, 212-640-2000

Financial: Consumer Financial Services, Member of S&P 500 Trading Data

www.americanexpress.com

Consensus EPS Estimates

Price: $46.00 (as of 1/21/11) 52-week range: $36.60 - $49.19 Market value: $55.4 billion Shares out: 1,203.8 million

This quarter Next quarter

Ownership Data

Latest $0.94 0.88

Month Ago $0.94 0.88

Valuation # of Ests 19 15

P/E FYE 12/31/09 P/E FYE 12/31/10 P/E FYE 12/31/11 P/E FYE 12/30/12

30x 13x 12x 11x

P / tangible book

3.5x

FYE 12/31/10

3.41

3.40

Insider ownership: <1%

FYE 12/31/11

3.76

Insider buys (last six months): 11 Insider sales (last six months): 11 Institutional ownership: 81%

FYE 12/30/12 LT growth

4.03 11.3%

4.02 11.0%

14 4

Latest EPS Surprise Report date: Estimated EPS: Actual EPS:

10/21/10 $0.86 $0.90

Operating Performance and Financial Position ($ millions, except per share data) Interest income Interest expense

Fiscal Years Ended December 31, 2005 2006 2007

2003

2004

19,549

21,897

24,404

27,692

860

814

1,979

2,866

2008

2009

LTME 9/30/10

FQE 9/30/09

FQE 9/30/10

31,540

31,920

26,730

29,366

6,559

7,643

3,981

3,555

2,207

2,380

543

610

Pretax income

4,067

4,590

4,725

5,234

5,554

3,394

2,506

5,407

908

1,627

Net income

2,987

3,445

3,734

3,707

3,986

2,684

1,802

3,664

632

1,080

Diluted EPS

1.80

2.09

2.43

2.93

3.44

2.47

1.54

3.06

0.54

0.90

Shares out (avg)

1,284

1,259

1,233

1,212

1,173

1,154

1,168

1,174

1,178

1,193

Cash from ops

2,538

9,143

8,045

9,112

8,011

8,141

6,384

8,699

2,311

2,777

Cash

6,156

7,808

7,126

5,306

1,700

1,574

881

2,159

1,704

2,159

56,637

21,675

21,334

18,274

20,639

33,242

39,798

36,352

40,742

36,352

LT investments Fixed assets, net

3,184

2,380

2,230

2,350

2,692

2,948

2,782

2,799

2,759

2,799

Loans, other assets

108,570

162,353

83,270

100,774

123,000

85,292

77,582

104,746

75,240

104,746

Total assets

174,547

194,216

113,960

128,329

149,743

126,074

124,088

146,056

120,445

146,056

Short-term debt

19,046

14,316

15,633

15,236

17,761

8,993

2,344

1,919

2,202

1,919

Long-term debt

20,654

32,676

30,781

42,747

55,285

60,041

52,338

68,828

52,850

68,828

Deposits, other liab.

119,524

131,204

56,997

59,835

65,668

45,199

55,000

59,389

51,450

59,389

Preferred stock

Common equity

15,323

16,020

10,549

10,511

11,029

11,841

14,406

15,920

13,943

15,920

Ten-Year Stock Price Performance and Trading Volume Dynamics

$70 $60 $50 $40 $30 $20 $10 $0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

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January 31, 2011 – Page 34 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA

American Express (AmEx) offers credit card products and travel-related services to consumers and businesses globally. U.S. card services: Issues cards and provides services to consumers and merchants in the U.S. AmEx represents ~24% of credit and charge card spending in the U.S. (Visa, MasterCard, and Discover comprise the remaining ~76%), and is accepted by 4.9 million merchants (versus 8+ million that accept Visa and MasterCard; Discover has ~7.5 million merchants, but accounts for only ~6% of card spending). International card services: Issues cards outside the U.S. Global commercial services: Offers corporate payment and travel-related products and services to businesses worldwide. Global network & merchant services: Operates a global credit card network, which includes both proprietary cards and cards issued under network partnership agreements. Corporate & other: Includes prepaid business, among others.

INVESTMENT HIGHLIGHTS •

•

• •

Premium consumer finance brand, focused on prime customers. Since launching the first card in 1958, the company has built a brand serving 75+ million cardmembers globally (~50% outside U.S.). “Spend-centric” model. AmEx focuses on member spending by offering rewards and other benefits tied to card use. Spend is higher than at Visa/MasterCard, driving AmEx’s value proposition to merchants. “Closed-loop” network provides control over merchants and cardmembers and the potential for revenue streams from value-added services.* 4Q10 credit quality indicators are “now back to – or better than – historical levels.” 2010 loss provision declined 58% y-y to $2.2 billion, which drove a y-y net income increase in the same amount. “Cardmember spending at record levels,” up 15% y-y to $713 billion in 2010 (~33% non-U.S.). Targets long-term revenue growth in high single digits, mid-teens EPS growth and mid-30s ROE.

•

2009 18% 124 8% 24.5

2010 35% 147 9% 27.8

55% 9% 7% 7% 2% 9% 18% 4% -2% -7%

54% 8% 6% 7% 0% 7% 24% 2% -2% -7%

48% 18% 16% 15%

53% 17% 16% 14%

2% 7% 10% 24% 7%

15% 12% 11% 27% 14%

68% 13% 10% 10% 1%

n/a n/a n/a n/a 2%

Represents fees charged to merchants when cardmembers use an American Express card to purchase goods and services on the company’s network.

COMPARABLE PUBLIC COMPANY ANALYSIS

V MA DFS

70.20 233.50 20.50

Market Value ($mn) 58,720 30,560 11,150

AXP

46.00

55,373

Price ($)

Price to Tangible Book 28.1x 7.4x 2.0x

This FY P/E 15x 17x 11x

Next FY P/E 13x 14x 9x

3.5x

13x

12x

FY End Date Sep-30 Dec-31 Nov-30 Dec-31

MAJOR HOLDERS Insiders <1% | BRK 13% | Davis 6% | T. Rowe 4%

INVESTMENT RISKS & CONCERNS •

FYE December 31 2006 2007 2008 Return on avg tangible equity 41% 45% 31% Total assets, period-end ($bn) 128 150 126 Tangible equity to avg assets 7% 7% 7% Revenue, net of interest exp. ($bn) 25.2 27.6 28.4 % of revenue net of interest expense, by type: Discount revenue1 52% 53% 53% Net card fees 8% 7% 8% Travel commissions and fees 7% 7% 7% Other commissions and fees 9% 9% 8% Securitization income, net 6% 5% 4% Other revenue 7% 6% 8% Interest income: lending 18% 23% 22% Interest income: other 5% 4% 4% Interest expense: lending -5% -5% -4% Interest expense: other -6% -10% -9% % of revenue net of interest expense by major segment: U.S. card services 50% 51% 49% International card services 16% 16% 17% Global commercial services 16% 15% 17% Global network/merchant services 13% 14% 14% Net income margin by segment: U.S. card services 17% 13% 6% International card services 9% 7% 7% Global commercial services 12% 13% 11% Global network/merchant services 23% 26% 24% Total net income margin 14% 15% 10% % of net revenue by geography: U.S. 69% 70% 68% Europe 13% 13% 13% Asia Pacific 8% 8% 9% Other 10% 9% 10% ∆ diluted shares out (avg) -2% -4% -3%

Adverse regulatory action, including a recent U.S. Justice Department antitrust lawsuit against the firm (as well as Visa/MasterCard, who already settled it). AmEx may find itself in a long fight with the U.S. government to prevent new rules that would allow merchants to “steer” AmEx customers to use other cards at the retail point of sale. AmEx’s merchant contracts generally do not allow this at the moment. Risks tied to the U.S. economy including high consumer debt and potentially rising interest rates.

RATINGS

      

* “Open-loop” networks such as Visa and MasterCard do not have direct relationships with cardholders and merchants, as they rely on banks and other third-parties to issue cards to customers and acquire merchants.

THE BOTTOM LINE American Express, which remains the #2 holding of Berkshire Hathaway, is the quintessential Buffett company: a high-ROIC business with a defensible moat and good long-term growth prospects. Discount to intrinsic value has narrowed materially as the share price has recovered following record results in 2010. While shares are not cheap, long-term investors should benefit from superior value creation of this great business. Recent regulatory noise, if it persists, may provide a better entry point. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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January 31, 2011 – Page 35 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

AMERICAN EXPRESS – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE ($ in billions)

Valuation methodology

Conservative case metrics: Common shareholders’ equity as of 12/31/2010 Fair value multiple Estimated equity value Base case metrics: “Normalized” net income to common Fair value multiple Estimated equity value Aggressive case metrics: “Normalized” net income to common Fair value multiple Estimated equity value

Conservative

Base Case

Aggressive

2.0x common shareholders’ equity1

15x “normalized” net income to common (based on implied net income assuming a 25% return on equity)2

15x “normalized” net income to common (based on implied net income assuming a 35% return on equity)3

$16.2 2.0x $32.4 $4.1 15.0x $60.8

Estimated fair value of the equity of American Express4 Implied earnings yield based on 2010 net income to common Implied earnings yield based on "trough" earnings (2009) Implied earnings yield based on prior "peak" earnings (2007) Implied recent dividend yield5 Implied equity fair value to tangible book Implied fair value of the equity per "basic" card in force ($)6 2010 average basic cardmember spend ($)

$32 billion $27 per share 12.3% 5.6% 12.7% 2.7% 2.5x $430 $13,259

$5.7 15.0x $85.1 $85 billion $71 per share 4.7% 2.1% 4.8% 1.0% 6.4x $1,129 $13,259

$61 billion $51 per share 6.6% 3.0% 6.7% 1.4% 4.6x $807 $13,259

Even in a conservative scenario, AmEx deserves a premium valuation to book due to its attractive business model and defensible moat, which enable it to generate consistently superior returns on equity. The company achieved returns on equity of ~15% in 2009 (during one of the worst operating times in history) and ~28% in 2010 (in a more normalized economic environment). Ken Chenault, who became chairman and CEO in 2001, remains at the helm of the company. 2 Return on average equity was ~28% in 2010 and ~15% in 2009. Our ROE calculation is based on year-end 2010 equity. 3 A 35% ROE corresponds to management's stated long-term target of a return on equity in the "mid-30s" based on revenue growth in high single-digits and midteens EPS growth. The implied net income based on a 35% ROE to year-end 2010 equity is $5.7 billion, which would be ~45% higher than net income achieved in 2010 and ~40% higher than net income achieved in 2007, a prior peak. 4 5 Based on 1,194 million common shares outstanding. Based on annualizing the recent quarterly dividend of $0.18 per share. 6 Based on 75 million basic cards in force as of year-end 2010 (~50% of which in the U.S.). Proprietary basic consumer cards-in-force includes basic cards issued to the primary account owner and does not include additional supplemental cards issued on that account. Proprietary basic small business and corporate cards-inforce include basic and supplemental cards issued to employee cardmembers. Non-proprietary cards-in-force includes all cards issued and outstanding under network partnership agreements, except for retail co-brand cardmember accounts which have no out-of-store spend activity during the prior 12 month period. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

AMERICAN EXPRESS – LONG-TERM GROWTH MODEL Estimated Growth Rate Nominal GDP:

Factors driving incremental change in growth rate

3%-5%

Payment card spending:

6%-9%

Continued adoption of card payments at expense of cash and checks

AmEx card billed business:

8%-10%

Market share gains by American Express*

8%-10%

Change in merchant discount rate, average annual card fee, and other

8%-10%

Change in net interest margin

Income before loss provisions:

9%-11%

Change in operating expenses as % of revenue

Pre-tax income:

9%-11%

Change in loss provisions as % of revenue

Net income:

9%-11%

Change in effective tax rate

12%-15%

Reduction in shares outstanding due to share repurchases***

Non-interest revenue: Revenue, net of interest cost:

EPS:

Including spending on proprietary and non-proprietary American Express cards. Management has articulated goal of growing revenue, net of interest, by at least 8%, and EPS by 12%-15% over the long term, “on average and over time.” *** The company targets 33-36% ROE, “on average and over time.” Using the formula, reinvestment rate = growth rate / ROE, we conclude that AmEx needs to reinvest ~30% of earnings to generate net income growth of ~10%. This enables the company to spend up to 70% of earnings on repurchases and dividends. Source: Company filings, The Manual of Ideas analysis. **

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January 31, 2011 – Page 36 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

AMERICAN EXPRESS – EARNINGS DRIVERS AND LINE ITEMS ($ in millions, unless stated otherwise) A B C D E F G H I J K L M N O P

2006 2007 2008 2009 Selected Performance Drivers Basic cards in force - U.S. (mn) 37 41 42 38 Basic cards in force - int'l (mn) 25 29 33 34 Basic cards in force - total (mn) 63 70 75 73 Card billed business - U.S. $406,800 $459,300 $471,100 $423,700 Card billed business - int'l $154,700 $188,000 $212,200 $196,100 Card billed business - total $561,500 $647,300 $683,300 $619,800 Avg fee per card ($) $32 $32 $34 $36 Avg other comm & fees / card ($) $36 $34 $31 $25 Avg discount rate (%) 2.57% 2.56% 2.55% 2.54% Travel sales - Global Corporate $18,500 $20,500 $21,000 $14,600 Travel sales - U.S. Consumer $2,400 $3,000 $3,113 $2,561 Travel sales - Int'l Consumer $922 $1,113 $1,267 $985 Travel fees - Global Corporate 8.1% 7.7% 7.8% 8.8% Travel fees - U.S. Consumer 8.4% 8.0% 8.2% 8.4% Travel fees - Int'l Consumer 8.7% 8.6% 8.1% 8.6% Avg cash & investments (b/s) $25,860 $25,431 $30,337 $36,476 Income Statement (GAAP, ie, on-book basis; excluding non-recurring items) Discount revenue

2010 38 37 75 $479,300 $234,000 $713,300 $38 $27 2.55% $17,500 n/a n/a 8.2% n/a n/a $35,440

$12,978

$14,596

$15,025

$13,389

$15,111

~F*I

$1,994

$1,919

$2,150

$2,151

$2,102

~F* G

Net card fees

Travel commissions and fees

$1,778

$1,926

$2,010

$1,594

$1,779

Other commissions and fees

$2,233

$2,417

$2,307

$1,778

$2,031

Securitization income, net

$1,489

$1,507

$1,070

$400

Other revenue

$1,689

$1,751

$2,157

$2,087

$1,927

Interest income, members

$4,586

$6,351

$6,159

$4,468

$6,783

$1,147

$1,073

$1,042

$863

$509

Interest expense, members

Interest income, other

($1,192)

($1,297)

($1,015)

($462)

($549)

Interest expense, charge card

($1,548)

($2,684)

($2,540)

($1,745)

($1,874)

$25,154

$27,559

$28,365

$24,523

$27,819

Marketing & member services

$6,504

$7,817

$7,361

$6,467

$8,644

Human resources Professional services Occupancy and equipment Communications

$5,040 $2,269 $1,384 $434

$5,438 $2,280 $1,436 $461

$6,090 $2,413 $1,641 $466

$5,080 $2,408 $1,619 $414

$5,566 $2,806 $1,562 $383

Other, net

$1,358

$330

$1,015

$381

$687

$16,989

$17,762

$18,986

$16,369

$19,648

$935 $1,623 $468 $3,026 $5,139 $1,528 $3,611

$1,140 $2,761 $202 $4,103 $5,694 $1,568 $4,126

$1,363 $4,231 $204 $5,798 $3,581 $710 $2,871

$857 $4,266 $190 $5,313 $2,841 $704 $2,137

$595 $1,527 $85 $2,207 $5,964 $1,907 $4,057

$3,611

$4,100

$2,856

$1,809

$4,006

$2.92 1,238

$3.44 1,193

$2.47 1,156

$1.54 1,171

$3.35 1,195

Net revenue

Operating expenses Provisions for losses Charge card Cardmember lending Other Total provisions Pre-tax income Income tax provision Net income Net income to common holders Diluted EPS to common Diluted shares out

=J* M+K *N+ L*O ~F* H

Fees charged to merchants with which AXP has entered into card agreements; may not equal F * I due to payments unrelated to merchant acceptance Fees are recognized over 12-month card membership period, net of deferred direct card acquisition costs and cancellation reserve Transaction or mgmt fees for airline or other transactions; commissions on plane tickets, hotels and car rentals, paid by travel suppliers Foreign exchange conversion fees and other cardrelated assessments The adoption of new GAAP on 1/1/10 resulted in accounting both securitized and non-securitized loans in the financial statements. As a result, there is no reported securitization income in 2010. Insurance premiums earned from cardmember travel, revenue from contracts with Global Network Services partners including royalties and signing fees, publishing revenue, and other revenue Assessed using average daily balance method Relates to performing fixed-income securities held by AmEx; accrued using effective interest method Interest incurred to fund cardmember lending Interest incurred to fund charge card product receivables and general corporate purposes Costs of rewards programs and protection plans for cardmembers, and advertising costs

Opex, gains (losses) on sale of assets, and litigation and insurance costs or settlements

2010 net income is calculated by deducting share awards and other items from net income

Source: Company filings, The Manual of Ideas analysis.

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January 31, 2011 – Page 37 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

AT&T (T) – Cap Re, T Rowe Dallas, TX, 210-821-4105

Services: Communications Services, Member of S&P 500 Trading Data

www.att.com

Consensus EPS Estimates

Price: $28.33 (as of 1/21/11) 52-week range: $23.78 - $30.10 Market value: $167.4 billion Enterprise value: $233.2 billion Shares out: 5,910.0 million Ownership Data

Valuation

This quarter Next quarter FYE 12/31/10

Latest $0.55 0.62 2.28

Month Ago $0.55 0.62 2.29

# of Ests 30 21 34

P/E FYE 12/31/09 P/E FYE 12/31/10 P/E FYE 12/31/11 P/E FYE 12/30/12 EV/ LTM revenue

13x 12x 11x 10x 1.9x

FYE 12/31/11

2.49

2.50

EV/ LTM EBIT

10x

Insider ownership: <1%

FYE 12/30/12

2.70

2.74

P / tangible book

n/m

Insider buys (last six months): 14

LT growth

5.7%

6.1%

Insider sales (last six months): 3 Institutional ownership: 58%

EPS Surprise 10/21/10

Actual $0.55

Greenblatt Criteria

Estimate $0.55

LTM EBIT yield LTM pre-tax ROC

10% 24%

12/31/03 40,498 23,641 6,284 8,505 1.76 3,318 13,562 5,219 8,343 5,184 14,023 1,611 100,233 1,879 14,300 16,097 61,985 0 38,248 13%

12/31/04 40,733 23,372 5,901 5,887 1.50 3,310 10,694 5,099 5,595 760 9,962 2,054 110,265 5,734 20,355 21,231 69,761 0 40,504 13%

Fiscal Years Ended 12/31/05 12/31/06 12/31/07 43,764 63,055 118,928 24,591 34,201 72,223 6,168 10,288 20,404 4,786 7,356 11,951 1.42 1.89 1.94 3,368 3,882 6,127 12,664 15,688 34,242 5,576 8,320 17,717 7,088 7,368 16,525 1,224 2,418 1,970 14,654 25,553 24,686 22,558 127,397 129,115 145,632 270,634 275,644 4,455 9,733 6,860 25,418 40,482 39,274 26,115 50,063 57,255 90,942 155,094 160,277 0 0 0 54,690 115,540 115,367 13% 15% 24%

12/31/08 124,028 74,472 22,596 12,867 2.16 5,927 33,656 19,676 13,980 1,792 22,556 135,541 265,245 14,119 42,290 60,872 168,898 0 96,347 25%

12/31/09 123,018 72,613 21,390 12,535 2.12 5,900 34,445 16,595 17,850 3,802 24,334 135,082 268,752 7,361 36,705 64,720 166,852 0 101,900 23%

LTME 9/30/10 123,777 72,742 22,446 21,856 3.55 5,902 34,351 18,731 15,620 3,246 21,977 134,454 269,252 6,426 32,674 62,540 156,258 0 112,994 24%

FQE 9/30/09 30,734 17,827 5,372 3,192 0.54 5,901 9,672 4,017 5,655 6,167 25,921 133,143 266,568 6,755 33,268 65,909 166,995 0 99,573 n/m

FQE 9/30/10 31,581 18,062 5,464 12,339 1.95 5,909 9,540 5,314 4,226 3,246 21,977 134,454 269,252 6,426 32,674 62,540 156,258 0 112,994 n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

$60

$50

$40

$30

$20

$10

$0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

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Jan 08

Jan 09

Jan 10

Jan 11

January 31, 2011 – Page 38 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA1

AT&T provides telecommunications services in the U.S.

INVESTMENT HIGHLIGHTS •

•

One of the top two U.S. wireless service providers with 96 million customers* as of year-end 2010, similar to Verizon Wireless, and ahead of Sprint Nextel (~49 million) and T-Mobile (~34 million). “Cash cow” valuation may be too low if wireless and broadband transitions start to grow EBITDA. Shares trade at a high-single digit 2010 FCF yield, including a 6% dividend yield. Revenue from wireless, wireline data and managed services (~73% of 3Q10 revenue) grew 9% y-y in 4Q10. Growing wireless segment represents 48% of 4Q10 revenue, up from 35% of revenue in 2007. Even if subscriber growth slows, wireless revenue could grow due to the potential of data-driven ARPU increases.** Wireless EBITDA margins may rise on operating leverage and as the adverse impact of equipment sales reduces (wireless service margins were 43-45% on lower smartphone sales in 1H10). Rollout of U-verse broadband/video connections is slowing the decline of wireline segment revenue. While wireline voice revenue is declining by ~10% annually, growth in data revenue (~45% of segment revenue, up from ~35% in 2007) is an offset. 1

INVESTMENT RISKS & CONCERNS •

•

• •

U.S. wireless market is mature and competitive.** * With high subscriber counts and margins, AT&T faces revenue and margin growth challenges. Datadriven ARPU growth likely requires ongoing capex. Returns on capital may not be attractive given high network build-out and upgrade costs (e.g. from “3G” to “LTE” planned for 2011), competition from traditional and new sources (cable/satellite/”VoIP”), as well as regulatory and technology-related risks. Spent $75 billion on capex since 2007, while EBITDA has stayed flat through 2010. 2011 capex guidance is in the “low- to mid-$19 billion range.” $65 billion of net debt (~1.6x 2010 adj. EBITDA) and ~$29 billion of unfunded retirement liabilities.

~70% of which are “postpaid” (ie on a contract versus on a pre-paid basis). Wireless data revenue, which grew 27% y-y in 4Q10 on high smartphone adoption, was 32% of wireless revenue. 4Q10 postpaid ARPU grew 2% y-y. *** 95+% of the U.S. population lives in areas with three mobile telephone operators and 50+% lives in areas with at least five competing carriers. **

MAJOR HOLDERS Insiders <1% | Cap Re 4% | BlackRock 3% | Wellington 2%

FYE December 31 2006 ∆ wireless ARPU2 -1% ∆ wireless customers 13% ∆ wireless revenue n/m ∆ wireline revenue 49% ∆ revenue 44% ∆ employees 60% Revenue ($bn) 63.1 % of revenue by selected segment: Wireless 0% Wireline 91% Other (includes advertising) 8% EBITDA margin by selected segment:3 Wireless n/m Wireline 31% Total EBITDA margin 32% Selected items as % of revenue: Gross profit 55% EBIT3 16% Net income 12% Net cash from ops 25% D&A 16% Capex 13% Wireless customers (mn)5 61.0 Monthly wireless churn 1.8% Wireline access lines (mn)6 66.5 Δ wireline access lines 35% % of wireline revenue by major type: Voice 59% Data 32% Tangible equity/assets7 -8% ∆ shares out (avg) 15%

2007 2% 15% n/m 21% 89% 2% 118.9

2008 1% 10% 16% -3% 4% -2% 124.0

2009 0% 11% 9% -6% -1% -7% 123.0

2010 -1% 12% 9% -3% 1% -6% 124.3

36% 58% 6%

40% 55% 6%

43% 51% 5%

47% 49% 3%

33% 37% 35%

34% 36% 35%

36% 33% 33%

37% 33% 33%

61% 17% 10% 29% 18% 15% 70.1 1.7% 61.6 -7%

60% 19% 10% 27% 16% 16% 77.0 1.7% 55.6 -10%

59% 17% 10% 28% 16% 14% 85.1 1.5% 49.4 -11%

59% 16% 16%4 28% 16% 16% 95.5 1.3% 43.4 -12%

58% 34% -9% 58%

55% 36% -30% -3%

50% 41% -24% 0%

46% 45% -16% 0%

Financials reflect the acquisition of BellSouth and AT&T Mobility (ex-Cingular Wireless) in December 2006. Previously, AT&T Mobility was a JV, in which AT&T owned 60% and accounted for it under the equity method. Operating data for the wireless business in 2006/07 reflect AT&T Mobility in both periods. 2 Total wireless average service revenue per user. 2010 figure is estimated. 3 Excludes share of profits in equity-accounted investments. 4 Reflects a favorable IRS tax settlement. 5 71% of 2010 customers are postpaid; the rest is prepaid, reseller and other. 6 ~52% of 2010 lines are retail consumer, ~42% retail business, rest wholesale. 7 FCC licenses and customer lists are treated as intangibles in the calculation.

COMPARABLE PUBLIC COMPANY ANALYSIS

VZ S Q T

MV ($mn) 98,800 12,870 12,040 167,430

EV ($mn) 146,000 28,500 23,050 233,150

EV / Rev. 1.4x .9x 1.9x 1.9x

P/ Tang. Book n/m n/m n/m n/m

This FY P/E 16x n/m 17x 12x

Next FY P/E 16x n/m 17x 11x

RATINGS

      

THE BOTTOM LINE U.S. telecommunications giant AT&T benefits from network scale advantages, high barriers to entry and a widely-known brand. The secular decline in wireline/wireless voice business is masking strong revenue growth and margin expansion in wireless/wireline data. As the latter two comprise 35+% of revenue, they will increasingly determine company financials. On this basis, the high-single digit trailing FCF yield appears enticing. Holding us back, however, are concerns that returns on capital are likely to be subpar as a result of high capital intensity, competition, as well as regulatory and technology risk. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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January 31, 2011 – Page 39 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

AT&T – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE ($ in billions) Valuation methodology 2010 revenue1 Normalized EBITDA margin2 Normalized EBITDA Minus: Normalized capex3 Estimated normalized EBITDA minus capex Fair value multiple Estimated enterprise value Plus: Equity-accounted investments4 Minus: Net debt5 Minus: Net post-retirement liability5, 6 Minus: Non-controlling interest5 Estimated fair value of the equity of AT&T7 Implied 2010 FCF yield Implied FCF yield on average 2007-09 FCF Implied dividend yield8 Implied EV-to-2010 adj. EBITDA Implied EV-to-2010 revenue Implied EV per (subscriber+access line)9

Conservative

Base Case

Aggressive

10x estimated normalized EBITDA minus capex of $22 billion (approximates 2010 adj. EBITDA minus capex)

11x estimated normalized EBITDA minus capex of $25 billion (~15% above 2010 adj. EBITDA minus capex)

12x estimated normalized EBITDA minus capex of $28 billion (~30% above 2010 adj. EBITDA minus capex)

$124.3 32.5% $40.4 (18.6) $21.7 10.0x $217.5 4.5 (64.7) (28.8) (0.3) $128 billion $22 per share 11.5% 12.2% 8.0% 5.2x 1.7x $1,565

$124.3 35.0% $43.5 (18.6) $24.9 11.0x $273.4 4.5 (64.7) (28.8) (0.3) $184 billion $31 per share 8.0% 8.5% 5.6% 6.6x 2.2x $1,968

$124.3 37.5% $46.6 (18.6) $28.0 12.0x $335.6 4.5 (64.7) (28.8) (0.3) $246 billion $41 per share 6.0% 6.3% 4.1% 8.1x 2.7x $2,415

Revenue splits roughly 50/50 into wireless and wireline revenue. While wireless revenue is growing (up 9% y-y in 2010), wireline revenue is declining (down 3% y-y in 2010). Wireless revenue growth is driven by volume growth, with average revenue per user down ~1% y-y in 2010. The decline in wireline revenue is due to 2 declining voice revenue (~50% of wireline revenue), partly offset by data revenue growth (~45% of wireline revenue). 2010 EBITDA margin is 33% (adjusted to exclude an actuarial loss), which compares to the 33-35% EBITDA margins during 2007-09. While wireless EBITDA margin is up from 33% in 2007 to 37% in 2010, wireline EBITDA margin is down from 37% in 2007 to 33% in 2010. Excluding equipment sales (~10% of wireless segment revenue), wireless service EBITDA margin was 41% in 2010). The company expects to achieve consolidated operating margin expansion in 2011, driven by growth in both wireless and 3 wireline operating margins. Near record-level smartphone sales and upgrades have negatively affected 2010 margins. Normalized capital expenditure is assumed at 15% of revenue, which approximates average 2007-10 capex as a percentage of revenue. 2011 capex guidance is in the “low- to mid-$19 billion 4 5 range.” Per balance sheet value as of December 31, 2010 (~$3.5 billion relates to AT&T's stake in América Móvil). Based on respective balance sheet 6 values as of December 31, 2010. The $29 billion figure represents the underfunding as of December 31, 2010 (mostly relating to post-retirement benefits). As of year-end 2009, gross post-retirement benefits were $36 billion (of which $25 billion unfunded), while the gross pension benefit obligation was $51 billion (of 7 8 9 which $4 billion unfunded). Based on 5,941 million diluted shares outstanding. Based on annualizing the 4Q10 dividend of $0.43 per share. Based on ~95 million total wireless subscribers (of which ~70% are postpaid) and ~43 million total network access lines in service (of which ~50% are retail consumer customers, ~40% retail business customers and the rest are wholesale customers). Source: Company, MOI analysis, assumptions and estimates.

AT&T – WIRELINE SEGMENT DRIVERS

Source: Company 3Q10 earnings release supplement.

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Value-oriented Equity Investment Ideas for Sophisticated Investors

AT&T – WIRELESS SEGMENT DRIVERS

Source: Company 3Q10 earnings release supplement.

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January 31, 2011 – Page 41 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Bank of America (BAC) – Appaloosa, BRK, Chou, Brave Warrior, Fairholme, Paulson Charlotte, NC, 704-386-5681

Financial: Money Center Banks, Member of S&P 500 Trading Data

www.bankofamerica.com

Consensus EPS Estimates

Price: $14.25 (as of 1/21/11) 52-week range: $10.91 - $19.86 Market value: $144 billion Shares out: 10.1 billion

This quarter Next quarter

Ownership Data

Valuation

Latest $0.14 0.32

Month Ago $0.25 0.31

# of Ests 18 21

P/E FYE 12/31/10 P/E FYE 12/31/10 P/E FYE 12/31/11 P/E FYE 12/30/12

n/m 15x 10x 7x

P / tangible book

1.3x

FYE 12/31/10

0.98

1.10

Insider ownership: <1%

FYE 12/31/11

1.48

1.46

Insider buys (last six months): 9 Insider sales (last six months): 5 Institutional ownership: 63%

FYE 12/30/12 LT growth

2.02 8.7%

2.01 8.7%

24 3

Latest EPS Surprise Report date: Estimated EPS: Actual EPS:

10/19/10 $0.16 $0.27

Operating Performance and Financial Position ($ millions, except per share data) Interest income Interest expense Pretax income Net income Diluted EPS Shares out (avg) Cash from ops Cash ST investments LT investments Fixed assets, net Loans, other assets Intangible assets Total assets Short-term debt Long-term debt Deposits, other liab. Preferred stock Common equity

12/31/04 42,953 14,993 20,892 13,931 3.64 3,759

12/31/05 58,626 27,889 24,462 16,447 4.04 4,009

22,986 28,936 197,308 225,308 7,517 599,733 51,630 1,110,432 119,741 115,044 775,412 271 99,964

(3,522) 36,999 294,292 245,315 7,786 656,057 51,354 1,291,803 240,655 115,848 833,767 271 101,262

Fiscal Years Ended 12/31/06 12/31/07 12/31/08 78,585 87,304 85,684 43,991 52,863 40,324 31,951 20,634 2,907 21,111 14,692 2,487 4.59 3.29 0.54 4,527 4,424 4,592 (12,223) 36,429 302,482 216,285 9,255 817,157 78,129 1,459,737 217,527 162,339 944,599 2,851 132,421

14,509 42,531 303,389 283,142 11,240 984,271 91,173 1,715,746 221,435 219,931 1,127,577 4,409 142,394

11,036 32,857 226,363 371,295 13,161 1,070,742 103,525 1,817,943 206,598 299,001 1,135,292 37,701 139,351

12/31/09 77,916 30,807 (4,126) (2,210) (0.29) 7,729

12/31/10 75,497 23,974 (2,680) (3,595) (0.37) 9,790

LTME 12/31/10 75,497 30,104 (96) (1,011) (0.33) 9,790

FQE 12/31/09 17,645 6,086 (6,367) (5,142) (0.60) 8,635

FQE 12/31/10 18,290 5,851 (3,916) (1,565) (0.16) 10,037

4,034 121,339 396,341 442,937 15,500 1,136,001 118,114 2,230,232 255,185 489,182 1,254,421 37,208 194,236

129,731 108,427 430,720 446,112 14,306 1,166,383 98,961 2,264,909 245,359 504,345 1,286,957 16,562 211,686

n/a 108,427 430,720 446,112 14,306 1,166,383 98,961 2,264,909 245,359 504,345 1,286,957 16,562 211,686

32,054 121,339 396,341 442,937 15,500 1,136,001 118,114 2,230,232 255,185 489,182 1,254,421 37,208 194,236

n/a 108,427 430,720 446,112 14,306 1,166,383 98,961 2,264,909 245,359 504,345 1,286,957 16,562 211,686

Ten-Year Stock Price Performance and Trading Volume Dynamics

$60

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January 31, 2011 – Page 42 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA1

FYE December 31 2007 ∆ tangible book/share -5% ∆ assets 18% ∆ employees 3% ∆ net interest income -1% ∆ pre-provision profit -21% Assets ($tn) 1.7 Selected items as % of assets: Securities/trading assets 31% Loans, net 50% Other assets 18% Customer deposits 47% Other liabilities 45% Common equity 8% Revenue ($bn) 66.8 % of revenue by type: Net interest income 51% Non-interest income 49% Net income by segment ($bn): Global banking and markets -3.8 Deposits 5.1 Global commercial banking 4.1 Global wealth/investment mgmt 2.0 Home loans and insurance 0.1 Global card services 4.3 All other 3.3 Total net income 15.0 Selected income statement items ($bn): Pre-provision profit 29.3 Loss provision 8.4 Net charge-offs 6.5 Net income to common 14.8 Selected credit data: Loan loss reserve ratio 1.3% Non-performing to gross loans 0.6% Net charge-off ratio 0.8% Net interest margin 2.6% Return on assets 0.9% Return on tangible common equity3 28.1% Tangible common equity/assets (avg)3 3.5% Tier 1 capital ratio 6.9% ∆ shares out (avg) -2%

Bank of America (BofA) operates in seven segments: Global Banking and Markets (29% of year-end 2010 assets; 2010 net income: $6.3 billion): #2 share of global investment banking revenue in 2010. BofA acquired Merrill Lynch in ‘09. Deposits (19% of assets; net income: $1.4 billion): #1 in U.S. retail deposits with ~5,850 branches in the U.S. Global Commercial Banking (14% of assets; net income: $3.2 billion): Largest commercial bank in the U.S. Global Wealth Management (13% of assets; net income: $1.3 billion): Top wealth manager ($2.2 trillion of client assets). Home Loans and Insurance (9% of assets; net income*: -$6.9 billion): #1 mortgage servicer, #2 mortgage originator and #1 home equity originator in the U.S. in the first half of 2010. Global Card Services (7% of assets; net income*: $3.8 billion): #2 market share in U.S. credit cards, #1 in Europe. All Other (8% of assets; net income: $1.1 billion): Includes investments, certain mortgages, central costs and other items.

INVESTMENT HIGHLIGHTS •

•

• •

Among top “superinvestor” holdings per 13-F filings at September 2010 (BofA share price: ~$13). While Appaloosa and Paulson sold some shares, BofA remained the #2 position of each fund. Chou Associates, Fairholme and Edinburgh Partners added shares in 3Q10, while Scout initiated a new position. Shares trade at ~3.5x 2010 pre-tax, pre-provision profit* and 1.3x tangible book.** While the P/E ratio based on 2010 net income* is in the mid teens, P/E is an undemanding ~7x assuming a 10% ROE. Significant earning power helps absorb credit losses and other liabilities. $40 billion of 2010 pretax, pre-provision profit* is 1.2x net charge-offs. Credit quality appears to be improving with reserve coverage of 4Q10 annualized net chargeoffs at 1.6x at year-end 2010 versus 1.1x a year-ago.

INVESTMENT RISKS & CONCERNS •

•

• •

Balance sheet. Despite capital ratios that are deemed “strong” by BofA, tangible common equity at 5% of assets makes equity holders vulnerable to small negative shifts in the value of assets and liabilities. Legal risks tied to mortgage repurchase requests and “faulty” foreclosures. While BofA achieved settlements with some mortgage investors recently, it had $11 billion of unresolved loan repurchase claims at yearend 2010, and may be liable for more. $127 billion of “run-off” loans at yearend 2010, as reported by BofA (~80% are consumer loans). U.S. accounts for ~80% of assets, making BofA highly dependent on the health of the U.S. consumer.

1 2 3

2008 -38% 6% 15% 32% 7% 1.8

2009 23% 22% 18% 4% 69% 2.2

2010 27% 2% 1% 9% -25%2 2.3

31% 50% 19% 49% 44% 8% 72.8

34% 39% 27% 45% 47% 9% 119.6

36% 40% 24% 45% 46% 9% 110.2

62% 38%

39% 61%

47% 53%

-4.9 5.5 4.5 1.4 -2.5 1.2 -1.2 4.0

7.2 2.5 3.0 2.5 -3.8 -5.6 0.5 6.3

6.3 1.4 3.2 1.3 -6.92 3.82 1.1 10.2

31.3 26.8 16.2 2.6

52.9 48.6 33.7 -2.2

39.52 28.4 34.3 8.82

2.5% 1.8% 1.8% 3.0% 0.2% 6.0% 2.6% 9.2% 4%

4.1% 3.7% 3.6% 2.7% 0.3% n/m 2.9% 10.4% 68%

4.5% 3.3% 3.6% 2.8% 0.4%2 9.3%2 4.4% 11.2% 27%

Figures reflect acquisitions of Merrill Lynch in 2009 and Countrywide in 2008. Excludes goodwill impairment charges. Mortgage servicing rights are excluded from tangible equity.

RATINGS

      

Excludes goodwill impairment charges. Mortgage servicing rights are excluded from tangible equity.

THE BOTTOM LINE BofA shares have come under pressure due to highly-publicized mortgage repurchase requests and “faulty” foreclosures. This may provide an opportunity for long-term investors to buy shares in one of America’s largest banks at a modest premium to tangible book value and ~7x normalized earnings (assuming a 10% ROE). While some investors may never be comfortable owning a “black-box” balance sheet, funds run by “superinvestors” Paulson, Tepper, Berkowitz and others own large stakes. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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January 31, 2011 – Page 43 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BANK OF AMERICA – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE Conservative

Base Case

Aggressive

1.0x tangible common equity

10x “normalized” net income (based on implied net income assuming a 10% return on total equity)1

6x 2010 pre-provision, pre-tax profit2

($ in billions)

Valuation methodology

Conservative case metrics: Tangible common equity as of 12/31/20103 Fair value multiple Estimated equity value Base case metrics: “Normalized” net income to common Fair value multiple Estimated equity value Aggressive case metrics: 2010 pre-provision, pre-tax profit (ex. goodwill) Fair value multiple Estimated equity value

$113 1.0x $113 $20 10.0x $198

$113 billion $11.20 per share 1.0x 12.8x 0.4%

Estimated fair value of the equity of Bank of America4 Implied equity fair value to tangible book Implied equity fair value to 2010 net income to common5 Implied dividend yield6

$198 billion $19.60 per share 1.8x 22.5x 0.2%

$40 6.0x $237 $237 billion $23.50 per share 2.1x 26.9x 0.2%

BofA's return on total equity was 4-5% based on 2010 net income, excluding goodwill impairment charges. Pre-provision, pre-tax profit is stated before the provision for credit losses, income taxes, minority interests, and preferred dividends. It is also stated before a $12.4 billion goodwill impairment charge in 2010, largely “related to limits to be placed on debit interchange fees under the financial reform legislation enacted in July 2010, which will reduce future revenue in the Global Card Services business.” 3 Mortgage servicing rights are excluded from tangible equity. 4 Based on 10.1 billion common shares outstanding. 5 Net income excludes goodwill impairment charges. 6 Based on a dividend of $0.04 per share in 2010. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

COMPARISON OF SELECTED U.S. BANKS1 Selected trading data:

Company Bank of America Citigroup JPMorgan Chase Wells Fargo

Share Price 1/21/11 $14.25 $4.89 $45.29 $32.51

Market Value (MV) billions $144 $142 $180 $171

Assets billions $2,265 $1,915 $2,118 $1,258 Average: Median:

MV / TCE2 1.3x 1.1x 1.8x 2.6x 1.7x 1.5x

MV / Pre-provision Profit (2010)7 3.6x 3.6x 4.1x 4.9x 4.1x 3.9x

MV / Normalized8 Net Income 7.3x 8.6x 11.2x 14.5x 10.4x 9.9x

MV / 2010 Net Income9 16.3x 13.4x 11.4x 14.7x 14.0x 14.0x

2010 Dividend Yield 0.3% 0.0% 0.4% 0.6% 0.3% 0.4%

Selected financial strength data:

Company Bank of America Citigroup JPMorgan Chase Wells Fargo

Share Price 1/21/11 $14.25 $4.89 $45.29 $32.51

Assets billions $2,265 $1,915 $2,118 $1,258 Average: Median:

TCE / Assets 5.0% 6.5% 4.8% 5.2% 5.4% 5.1%

(TCE + LLR)3 / Assets 6.8% 8.6% 6.3% 7.0% 7.2% 6.9%

Tier 1 Capital Ratio4 11.2% 12.9% 12.1% 11.3% 11.9% 11.7%

Tier 1 Common Ratio5 8.6% 10.7% 9.8% 8.4% 9.4% 9.2%

2010 ROE6 4.4% 6.8% 10.2% 10.5% 8.0% 8.5%

Pre-provision Profit / Net Charge-Offs10 1.2x 1.3x 1.8x 2.0x 1.6x 1.6x

LLR / Net Charge-Offs 1.2x 1.3x 1.4x 1.3x 1.3x 1.3x

All financials are based on figures for the year ended or as of December 31, 2010, unless stated otherwise. 2 TCE = tangible common equity. Mortgage servicing rights are excluded from tangible equity. In addition, the tangible common equity figure for JPMorgan also excludes purchased credit card relationships and all other intangibles, as disclosed. The figure for Wells Fargo also excludes an estimated $12 billion of core deposit, customer relationship and other intangibles. 3 LLR = loan loss reserve. 4 Tier 1 capital divided by risk-weighted assets, as reported by each company. 5 Tier 1 common capital divided by risk-weighted assets, as reported by each company. 6 Return on total equity. The figure for Bank of America is based on net income excluding goodwill charges. 7 Pre-provision profit is stated before the provision for credit losses, income taxes, minority interests, and preferred dividends, and may include/exclude other items. Accordingly, if a company has significant minority interests and preferred stockholders, pre-provision profit needs to be adjusted to reflect only that portion which is applicable to common equity holders. While we do not make such adjustments in the above table, the ratio of market value to pre-provision profit may nonetheless be a helpful indicator to assess valuation. The figure for Bank of America is based on net income excluding goodwill charges. 8 Based on the implied net income to common assuming a 10% return on total equity at year-end 2010 (dilution from minority interests and non-common securities is estimated). 9 Based on net income applicable to common equity holders. The figure for Bank of America is based on net income excluding goodwill charges. 10 Based on net charge-offs on a "managed" basis. The definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications that assume securitized credit card loans remain on the balance sheet. Source: Company filings, The Manual of Ideas analysis.

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Value-oriented Equity Investment Ideas for Sophisticated Investors

BANK OF AMERICA – NET INTEREST INCOME 1,2

Fully taxable-equivalent basis. Periods prior to January 1, 2010 are presented on a managed basis and assume that credit card loans that were securitized were not sold and earnings on these loans are presented in a manner similar to the way loans that have not been sold (i.e., held loans) were presented.

BANK OF AMERICA – BALANCE SHEET DRIVERS OF NET INTEREST INCOME

BANK OF AMERICA – CREDIT TRENDS: “POSITIVE”

Credit card shown on managed basis prior to 2010. 2 FHA insured loans excluded. 3 Includes U.S. commercial (excluding small business) and non-U.S. commercial, excluding leasing. Source for the above charts: Company presentation dated January 21, 2011; available at http://bit.ly/g6Od5i

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January 31, 2011 – Page 45 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Chevron (CVX) – BP Capital, FPA San Ramon, CA, 925-842-1000

Energy: Oil & Gas - Integrated, Member of S&P 500 Trading Data

www.chevron.com

Consensus EPS Estimates

Price: $93.78 (as of 1/21/11) 52-week range: $66.83 - $93.94 Market value: $188.7 billion Enterprise value: $184.8 billion Shares out: 2,012.4 million Ownership Data

This quarter Next quarter FYE 12/31/10

Latest $2.40 2.50 9.39

Valuation

Month Ago $2.32 2.33 9.26

# of Ests 16 12 13

P/E FYE 12/31/09 P/E FYE 12/31/10 P/E FYE 12/31/11 P/E FYE 12/30/12 EV/ LTM revenue

FYE 12/31/11

10.39

9.96

EV/ LTM EBIT

Insider ownership: <1%

FYE 12/30/12

11.80

11.43

P / tangible book

Insider buys (last six months): 3

LT growth

19.5%

18.6%

Insider sales (last six months): 8 Institutional ownership: 63%

EPS Surprise 10/29/10

Actual $1.87

18x 10x 9x 8x 0.9x 6x 1.9x

Greenblatt Criteria

Estimate $2.15

LTM EBIT yield LTM pre-tax ROC

16% 29%

12/31/03 121,277 49,967 12,676 7,402 3.55 2,125 12,315 5,625 6,690 5,267 19,426 0 81,470 1,703 16,111 10,894 45,175 0 36,295 29%

12/31/04 155,300 60,881 20,551 13,331 6.14 2,116 14,690 6,310 8,380 10,742 28,503 0 93,208 816 18,795 10,456 47,978 0 45,230 46%

Fiscal Years Ended 12/31/05 12/31/06 12/31/07 198,200 210,118 220,904 70,232 81,967 87,595 25,197 31,976 32,274 14,101 17,139 18,688 6.55 7.80 8.77 2,144 2,186 2,118 20,105 24,323 24,977 8,701 13,813 16,678 11,404 10,510 8,299 11,144 11,446 8,094 34,336 36,304 39,377 4,636 4,623 4,637 125,833 132,628 148,786 739 2,159 1,162 25,011 28,409 33,798 12,131 7,679 6,070 63,157 63,693 71,698 0 0 0 62,676 68,935 77,088 47% 49% 45%

12/31/08 273,005 101,608 43,057 23,931 11.67 2,038 29,632 19,666 9,966 9,560 36,470 4,619 161,165 2,818 32,023 6,083 74,517 0 86,648 52%

12/31/09 171,636 71,983 18,528 10,483 5.24 1,992 19,373 19,843 (470) 8,822 37,216 4,618 164,621 384 26,211 10,130 72,707 0 91,914 20%

LTME 9/30/10 199,577 66,462 29,156 16,799 8.38 1,993 30,122 19,463 10,659 14,534 44,483 4,618 177,199 170 26,850 10,449 74,956 0 102,243 29%

FQE 9/30/09 46,625 19,656 6,188 3,831 1.91 1,992 6,665 4,074 2,591 7,689 35,541 4,619 162,561 240 25,393 10,302 71,915 0 90,646 n/m

FQE 9/30/10 49,718 21,108 6,873 3,768 1.88 1,998 7,982 5,589 2,393 14,534 44,483 4,618 177,199 170 26,850 10,449 74,956 0 102,243 n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

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January 31, 2011 – Page 46 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA

Chevron is an integrated oil and gas producer.

INVESTMENT HIGHLIGHTS •

•

#2 U.S.-based oil and gas producer, behind Exxon Mobil and ahead of ConocoPhillips, based on net proved reserves of 11+ billion oil-equivalent barrels (boe) at year-end 2009 and 2.7 million boe of net daily production in 2009 (implied reserve life is ~12 years). Reserves are split roughly 60/40 between oil and natural gas; more than 60% are developed. EV/boe of “resources” is ~$3, based on 60+ billion boe of 3P reserves plus potentially recoverable resources. EV-to-proved boe is largely in-line with U.S. and European peers at ~$17/boe (excl. BP). Trades at an implied EV-to-trailing EBITDA of ~4.5x despite 10+ years of proved reserves, most of which are producing. Trailing EBITDA is close to the 2005-09 average and ~20% below ‘07 EBITDA. “Continue to show gains in upstream production and progress on our downstream restructuring.” Downstream net income doubled to $565 million in 3Q10, yet remains at roughly half the income in ’06. Among the lowest-cost producers in the sector with ~$10/boe of average cash production costs in 2005-09, including equity investees (includes exploration expense and non-income related taxes). $4 billion of net cash. Dividends/buybacks of ~$45 billion in 2005-09 are ~25% of recent market value.

INVESTMENT RISKS & CONCERNS •

•

Reinvestment risk. The cost of adding reserves may rise as much, if not more, than selling prices. Higher oil/gas prices may not translate into (much) higher profits over time. Cash production costs per boe have increased at a ~10% CAGR from 2004-2009. Cost pressures may increase further due to regulatory and competitive dynamics. ~85% of proved reserves are outside of the U.S., mainly in potentially volatile parts of the world.

COMPARABLE PUBLIC COMPANY ANALYSIS

XOM RDS.A BP COP CVX

MV ($mn) 398,260 215,490 149,120 101,970 188,730

EV ($mn) 404,300 249,290 174,750 114,720 184,820

EV / Rev. 1.1x .7x .6x .6x .9x

P/ Tang. Book 2.7x 1.6x 2.3x 1.6x 1.9x

This FY P/E 13x 11x 9x 11x 10x

Next FY P/E 12x 9x 8x 10x 9x

FYE December 31 Proved reserves (Bboe)1 ∆ proved reserves ∆ production - liquids ∆ production - natural gas ∆ production - total ∆ avg realized oil price – U.S. ∆ avg realized gas price – U.S. ∆ cash production cost2 ∆ refinery throughput ∆ refined product sold ∆ revenue ∆ EBIT ∆ diluted EPS ∆ employees PV-10, after-tax ($bn)3 Revenue ($bn) % of revenue by major segment: Upstream Downstream Net income margin by segment: Upstream Downstream Total net margin % of net income from upstream Selected items as % of revenue: Exploration expense EBIT Net cash from ops DD&A Capex Div’s and buybacks ($bn) Return on capital employed 4 Return on tangible equity Tangible equity to assets ∆ shares out (avg)

2006 11.6 -2% 2% 17% 6% 21% -15% 15% 6% - % 6% 26% 19% 5% 92 205

2007 10.8 -7% -3% 1% -2% 11% -3% 23% -8% -4% 4% 1% 12% 4% 139 214

2008 11.2 4% -6% 2% -3% 40% 29% 23% 1% -2% 24% 33% 33% 2% 35 265

2009 11.3 1% 12% -3% 7% -39% -53% -10% 2% -5% -37% -57% -55% -4% 78 167

YTD 9/30/10 n/a n/a 4% 1% 3% 41% 26% n/a 0% -5% 22% 83% 84% n/a n/a 146

16% 84%

16% 83%

13% 86%

14% 86%

40% 3% 8% 77%

44% 2% 9% 79%

51% 2% 9% 91%

46% 1% 6% 100%

62% 1% 9% 93%

1% 16% 12% 4% 7% 8.9 23% 28% 49% 2%

1% 15% 12% 4% 8% 11.2 23% 27% 50% -3%

0% 16% 11% 4% 7% 12.0 27% 31% 51% -4%

1% 11% 12% 7% 12% 5.1 11% 12% 53% -2%

1% 16% 16% 7% 10% 4.0 16% 20% 56% 0%

In billions of oil-equivalent barrels, net (includes share of equity investees). Includes production costs, exploration expenses and taxes (other than income taxes). Figures include share of equity investees. 3 Computed through 2008 by applying year-end prices (2009: first-day-of-themonth average prices), year-end costs and legislated tax rates and a 10% discount rate to estimated after-tax cash flows of net proved reserves. Includes proportional interest in cash flows from proved reserves of equity companies. 4 Return on average capital employed (after-tax) as disclosed by the company. 2

RATINGS

      

THE BOTTOM LINE Long-time CEO O’Reilly, who retired in 2010, left a financially strong and operationally promising business to his successor John Watson. Chevron’s net cash balance sheet, low-cost leadership, and a vast base of 60+ billion barrels of oil-equivalent resources (>5x proved reserves), should sustain cash generation over time. Trading at an implied EV-to-trailing EBITDA of ~4.5x, shares appear cheap on proved reserves only. As reserves are long-lived and mostly producing, the required capex may be low. Trailing EBITDA approximates the 2005-09 average and remains ~20% below the 2007 level. While volatile oil prices and reinvestment risk render historical profitability largely meaningless, Chevron may deserve more in-depth scrutiny. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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January 31, 2011 – Page 47 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

CHEVRON – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE ($ in billions) Valuation methodology Value of proved reserves:1 Proved reserves, net 12/31/09 Fair value "multiple"2 Fair value of proved reserves (1) Value of additional "resources":3 Additional "resources" as of 12/31/09 Fair value "multiple"4 Fair value of additional "resources" (2) Estimated total enterprise value (1) + (2) Plus: Net cash5 Minus: Post-retirement benefits reserves5 Minus: Non-controlling interest5 Minus: Ecuador litigation and potential other liabilities6 Estimated fair value of the equity of Chevron7 Implied trailing earnings yield Implied trailing FCF yield Implied dividend yield8 Implied fair value of the equity to tangible book Implied EV-to-trailing EBITDA Implied EV per boe of estimated proved reserves Implied EV per boe of estimated total "resources" Implied fair value of the equity as a % of PV-10 at yearend 20079

Conservative

Base Case

Aggressive

Valuation of proved reserves only

Valuation of proved reserves plus additional "resources"

11 billion boe $15.00 per boe $170 billion

11 billion boe $17.50 per boe $198 billion

11 billion boe $20.00 per boe $226 billion

52 billion boe $0 per boe $0 billion

52 billion boe $0.50 per boe $26 billion

52 billion boe $1.00 per boe $52 billion

$170 billion $4 billion -6 billion -1 billion -2 billion $165 billion $81 per share 10% 6% 3% 1.7x 4.0x $15 $3 119%

$224 billion $4 billion -6 billion -1 billion -1 billion $220 billion $109 per share 8% 5% 3% 2.3x 5.3x $19 $3 158%

$278 billion $4 billion -6 billion -1 billion 0 billion $275 billion $136 per share 6% 4% 2% 2.8x 6.6x $24 $4 198%

As of year-end 2009, Chevron had proved reserves of 11+ billion oil-equivalent barrels (boe) with an implied reserve life of 11-12 years based on 2009 production. Reserves are split roughly 60/40 between oil/liquids and natural gas; 60+% of proved reserves are developed. ~85% of reserves are located outside of 2 the U.S. ~25% of reserves are at equity investees (mainly at Tengizchevroil in Kazakhstan; mainly liquids). For reference, the recent valuation of U.S.-based competitors Exxon Mobil and ConocoPhillips implies an enterprise value to barrel of oil-equivalent of net proved reserves of ~$17/boe and ~$12/boe, respectively, based on year-end 2009 net proved reserves (Exxon Mobil's reserves are adjusted to reflect the acquisition of XTO Energy in 2010) Based on our analysis, a select peer group of European-based integrated oil and gas producers has recently traded at an average implied enterprise value to barrel of oil-equivalent proved reserves of $17-18/boe (with a range of $15-19/boe). The peer group includes Shell, Total, Eni and OMV. For reference, BP's recent "multiple" is ~$12/boe. Our 3 calculations are based on year-end 2009 proved reserves including each company's share of reserves at equity investees. Per the company's disclosure at a presentation at the Security Analyst Meeting in March 2010, it had 60+ billion barrels of oil-equivalent "resources" (including proved reserves) at year-end 2009. Per Chevron, the term “resource" is defined as "un-risked proved, probable and possible reserves plus potential recoverable resources contingent on 4 commerciality." The resource figure Includes oil volume associated with Athabasca Oil Sands mining. As timing and ultimate recoverability of additional "resources" is rather uncertain (see discussion under footnote 3), we attach zero or little value per barrel of oil-equivalent "resources" in our calculations. 5 6 Per balance sheet values as of September 30, 2010. Our liability estimates are "guesses." We encourage a read through the 2009 10-K section related to 7 8 legal proceedings. Based on 2,021 million shares outstanding. Based on annualizing the 3Q10 dividend of $0.68 per share. 9 PV-10 is per SEC methodology at the time (computed by applying year-end 2007 prices, costs and legislated tax rates and a 10% discount rate to estimated after-tax cash flows of net proved reserves). The figure includes the company's proportional interest in cash flows from proved reserves of equity companies. Net proved reserves at year-end 2007 approximate the company's year-end 2009 net proved reserves. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

CHEVRON – INDUSTRY-LEADING UPSTREAM MARGIN

Source: Company presentation dated November 11, 2010; available at http://bit.ly/gRufFu

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Value-oriented Equity Investment Ideas for Sophisticated Investors

CHEVRON – AVERAGE CAPITAL EMPLOYED, 1999 vs. 2009 ($ in billions)

Source: Company presentation dated November 11, 2010; available at http://bit.ly/gRufFu

CHEVRON – NET PRODUCTION OUTLOOK

Source: Company presentation dated November 11, 2010; available at http://bit.ly/gRufFu

CHEVRON – LIQUEFIED NATURAL GAS OPPORTUNITY

Source: Company presentation dated November 11, 2010; available at http://bit.ly/gRufFu

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January 31, 2011 – Page 49 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Cisco Systems (CSCO) – Appaloosa, Centaur, Edinburgh, Glenview, Pennant San Jose, CA, 408-526-4000

Technology: Communications Equipment, Member of S&P 500 Trading Data

www.cisco.com

Consensus EPS Estimates

Price: $20.73 (as of 1/21/11) 52-week range: $19.00 - $27.74 Market value: $114.9 billion Enterprise value: $91.2 billion Shares out: 5,541.4 million Ownership Data

This quarter Next quarter FYE 7/31/11

Latest $0.35 0.39 1.61

Month Ago $0.35 0.39 1.61

Valuation # of Ests 39 38 44

P/E FYE 7/31/10 P/E FYE 7/31/11 P/E FYE 7/30/12 P/E FYE 7/30/13 EV/ LTM revenue

16x 13x 11x 10x 2.2x

FYE 7/30/12

1.83

EV/ LTM EBIT

10x

Insider ownership: <1%

FYE 7/30/13

2.00

1.99

P / tangible book

4.6x

Insider buys (last six months): 21

LT growth

12.0%

Insider sales (last six months): 12 Institutional ownership: 72%

EPS Surprise 11/10/10

Actual $0.42

Estimate $0.40

Greenblatt Criteria LTM EBIT yield LTM pre-tax ROC

10% >100%

LTME 10/30/10 41,769 26,510 9,391 7,910 1.36 5,698 10,352 1,174 9,178 38,925 50,406 19,918 80,015 3,064 18,120 12,214 35,340 0 44,675 >100%

FQE 10/30/10 10,750 6,755 2,351 1,930 0.34 5,595 1,667 326 1,341 38,925 50,406 19,918 80,015 3,064 18,120 12,214 35,340 0 44,675 n/m

2004 22,045 15,126 6,292 4,401 0.70 6,840 6,962 613 6,349 8,669 14,343 4,523 35,594 0 8,703 0 9,768 0 25,826 >100%

Fiscal Years Ended July 31, 2006 2007 2008 28,484 34,922 39,540 18,747 22,259 25,346 6,996 8,621 9,442 5,580 7,333 8,052 0.89 1.17 1.31 6,158 6,055 5,986 7,899 10,104 12,089 772 1,251 1,268 7,127 8,853 10,821 17,814 22,266 26,235 25,676 31,574 35,699 11,388 14,661 14,481 43,315 53,340 58,734 0 0 500 11,313 13,358 13,858 6,332 6,408 6,393 19,403 21,860 24,381 0 0 0 23,912 31,480 34,353 n/m n/m >100%

2005 24,801 16,671 7,416 5,741 0.87 6,487 7,568 692 6,876 16,055 22,010 5,844 33,883 0 9,511 0 10,709 0 23,174 >100%

2009 36,117 23,094 7,322 6,134 1.05 5,828 9,897 1,005 8,892 35,001 44,177 14,627 68,128 0 13,655 10,295 29,481 0 38,647 n/m

2010 40,040 25,643 9,164 7,767 1.33 5,732 10,173 1,008 9,165 39,861 51,421 19,948 81,130 3,096 19,233 12,188 36,863 0 44,267 n/m

FQE 10/24/09 9,021 5,888 2,124 1,787 0.30 5,767 1,488 160 1,328 35,365 44,697 14,494 68,680 0 13,162 10,273 28,678 0 40,002 n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

$45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

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January 31, 2011 – Page 50 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA1

Cisco provides data networking products and services.

INVESTMENT HIGHLIGHTS •

•

• • •

Dominant provider of IP networking equipment with ~75% share in switches and ~60% in routers. It also has high share in newer products enabling web conferencing/collaboration, wireless networks (e.g. at home), security, and data center applications. Growth prospects and margin resilience may not be properly reflected in a 7-8% trailing FCF yield on a net cash balance sheet. Internet traffic growth and proliferation of web-enabled devices is to drive a ~10% industry revenue CAGR according to Cisco. Exploiting dominance in core IP switches/routers to expand into faster-growing markets such as connectivity products for data centers. These “new products” accounted for ~30% of F1Q11 revenue. $24 billion of net cash and investments, mainly in U.S. government securities, as of October, 30, 2010. Likely to initiate a dividend in 2011, based on management comments. Cisco also increased its share buyback authorization by $10 billion in 2010. Chairman and CEO Chambers (61) joined in 1991.

INVESTMENT RISKS & CONCERNS •

•

Gross margin pressure may accelerate as Cisco’s core products become commoditized. It also faces more competition in new product markets. While Cisco has scale and patents, key networking technologies are governed by open standards. Technological changes in the way information is stored and delivered to users may undermine Cisco’s dominance. Some products are vulnerable to price competition from Chinese competitors. EPS to “likely decline” in the Jan. 2011 quarter despite revenue growth guidance of 3-5%. Cisco is seeing “deceleration in business momentum” in Europe, the public sector and data service providers. FY11 growth guidance of 9-12% includes M&A.

COMPARABLE PUBLIC COMPANY ANALYSIS

JNPR CTXS FFIV ALU CSCO

MV ($mn) 18,240 12,250 8,880 7,300 114,870

EV ($mn) 16,140 11,350 8,390 7,640 91,220

EV / Rev. 4.2x 6.3x 8.7x .4x 2.2x

P/ Tang. Book 7.3x 8.9x 10.6x n/m 4.6x

This FY P/E 27x 32x 30x n/m 13x

Next FY P/E 23x 29x 25x 17x 11x

FYE July 31 2006 2007 2008 ∆ revenue 15% 23% 13% ∆ deferred revenue2 12% 25% 26% ∆ product backlog3 50% 30% 23% ∆ employees 30% 23% 7% Revenue ($bn) 28.5 34.9 39.5 % of revenue by segment: Switches 38% 36% 34% New products4 20% 23% 24% Routers 21% 20% 20% Other 5% 6% 6% Products - total 84% 84% 84% Services 16% 16% 16% Revenue growth by segment: Switches 9% 15% 8% New products 39% 41% 21% Routers 9% 18% 12% Other 6% 39% 7% Products - total 15% 23% 12% Services 16% 20% 18% Gross margin by segment: Products 66% 64% 65% Services 64% 62% 61% Total gross margin 66% 64% 64% % of revenue by customer location: U.S./Canada 55% 55% 54% Europe 22% 21% 21% Asia-Pacific/Japan 15% 14% 14% Emerging markets 9% 9% 11% Revenue growth by selected customer location: U.S./Canada 17% 24% 10% Europe 8% 20% 10% Selected items as % of revenue: R&D 14% 13% 13% EBIT 25% 25% 24% Net income 20% 21% 20% Net cash from ops 28% 29% 31% D&A 5% 4% 4% Capex 3% 4% 3% ∆ shares out (avg) -5% -2% -1%

2009 -9% 6% -19% -1% 36.1

2010 11% 18% 5% 8% 40.0

YTD 10/30/10 19% -3% n/a 14% 10.8

3 % 25% 17% 4% 81% 19%

34% 24% 16% 7% 81% 19%

33% 29% 17% 2% 81% 19%

-10% -5% -20% -27% -12% 8%

12% 6% 4% 64% 11% 9%

25% 22% 13% 13% 21% 13%

64% 64% 64%

63% 64% 63%

54% 21% 14% 11%

54% 20% 15% 11%

55% 19% 15% 11%

-9% -5%

12% 5%

18% 11%

14% 20% 17% 27% 5% 3% -3%

13% 23% 19% 25% 5% 3% -2%

13% 22% 18% 16% 5% 3% -3%

Major acquisitions during the period include Tandberg and Starent Networks in FY10, WebEx Communications in FY07 and Scientific-Atlanta in FY06. Deferred revenue was $10.7 billion as of October 30, 2010. 3 Product backlog was $4.1 billion as of July 31, 2010. 4 Includes connectivity, collaboration, security, wireless, and data center products. 2

RATINGS

      

THE BOTTOM LINE Cisco is the dominant provider of infrastructure products that enable the functioning of the Internet and improve network connectivity. Given good demand prospects based on Internet traffic growth and a proliferation of web-enabled devices, a high-single digit trailing FCF yield on a net cash balance sheet appears enticing. Balancing potential reward is the risk that technological change and competition may accelerate margin pressure. Nonetheless, a sell-off after the earnings announcement last November has provided an opportunity to pick up shares at a price that is likely lower than that paid by “superinvestors” including Appaloosa, Glenview and Edinburgh Partners, who initiated or increased holdings in the September 2010 quarter. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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January 31, 2011 – Page 51 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

CISCO SYSTEMS – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE ($ in billions) Valuation methodology Trailing revenue (year ended October 2010)1 Normalized EBIT margin2 Estimated normalized EBIT Fair value multiple3 Estimated enterprise value Plus: Net cash4 Estimated fair value of the equity of Cisco Systems5 Implied trailing earnings yield Implied trailing FCF yield Implied EV-to-trailing revenue Implied EV-to-trailing EBIT

Conservative

Base Case

Aggressive

10x estimated normalized EBIT of $8.4 billion (~10% below trailing reported EBIT)

12x estimated normalized EBIT of $9.4 billion (approximates trailing reported EBIT)

14x estimated normalized EBIT of $10.4 billion (~10% above trailing EBIT)

$41.8 20.0% $8.4 10.0x $83.5 23.6 $107 billion $19 per share 7.4% 8.6% 2.0x 8.9x

$41.8 22.5% $9.4 12.0x $112.8 23.6 $136 billion $24 per share 5.8% 6.7% 2.7x 12.0x

$41.8 25.0% $10.4 14.0x $146.2 23.6 $170 billion $30 per share 4.7% 5.4% 3.5x 15.6x

Revenue was $40.0 billion for the year ended July 31, 2010 (including only part-contributions from the acquisitions of Tandberg in April 2010 and Starent Networks in December 2009). Cisco is guiding for revenue growth of 9-12% y-y in FY11 ending July 31, 2010. 2 Trailing reported EBIT margin was 22.5%. Average EBIT margin during FY 2006-10 was 23% with a high of 25% in 2006/07 and a low of 20% in FY 2009. 3 A relatively high-range of 10-14x reflects the company's strong market position and prospects for continued revenue growth. 4 Based on balance sheet values of cash and debt as of October 30, 2010. $39 billion of gross cash includes $35 billion of investments, 95+% of which are in fixed income securities (mostly U.S. government securities due in 2 years or less). 5 Based on 5,675 million diluted shares outstanding. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

CISCO SYSTEMS – OPERATING CASH FLOW, FY90–FY10 ($ in billions)

Source: Company presentation dated September 14, 2010; available at http://bit.ly/h1Hftg

CISCO SYSTEMS – MANAGEMENT’S VIEW ON DIVIDEND PAYMENTS

Source: Company presentation dated September 14, 2010; available at http://bit.ly/h1Hftg

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Value-oriented Equity Investment Ideas for Sophisticated Investors

CISCO SYSTEMS – LONG-TERM TARGET BUSINESS MODEL

Non-GAAP basis.

MARKET SIZE AND LONG-TERM MARKET GROWTH OUTLOOK: 9-10%

CISCO SYSTEMS – MANAGEMENT’S LONG-TERM REVENUE GROWTH TARGET: 12-17%

CISCO SYSTEMS – MARGIN SENSITIVITY

Source for above charts: Company presentation dated September 14, 2010; available at http://bit.ly/h1Hftg

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January 31, 2011 – Page 53 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Exxon Mobil (XOM) – BRK, Kleinheinz, Markel, Pennant, Viking Irving, TX, 972-444-1000

Energy: Oil & Gas - Integrated, Member of S&P 500 Trading Data

www.exxonmobil.com

Consensus EPS Estimates

Price: $78.98 (as of 1/21/11) 52-week range: $55.94 - $79.10 Market value: $398.3 billion Enterprise value: $404.3 billion Shares out: 5,042.6 million Ownership Data

Valuation

This quarter Next quarter FYE 12/31/10

Latest $1.58 1.67 5.91

Month Ago $1.54 1.56 5.87

# of Ests 16 12 17

P/E FYE 12/31/09 P/E FYE 12/31/10 P/E FYE 12/31/11 P/E FYE 12/30/12 EV/ LTM revenue

FYE 12/31/11

6.77

6.46

EV/ LTM EBIT

Insider ownership: <1%

FYE 12/30/12

7.92

7.64

P / tangible book

Insider buys (last six months): 30

LT growth

12.1%

Insider sales (last six months): 20 Institutional ownership: 49%

EPS Surprise 10/28/10

Actual $1.44

20x 13x 12x 10x 1.1x 8x 2.7x

Greenblatt Criteria

Estimate $1.39

LTM EBIT yield LTM pre-tax ROC

12% 31%

12/31/03 246,738 117,820 31,966 21,510 3.15 6,634 28,498 12,859 15,639 10,626 45,960 0 174,278 4,789 38,386 4,756 84,363 0 89,915 30%

12/31/04 298,035 135,586 41,241 25,330 3.89 6,482 40,551 11,986 28,565 18,531 60,377 0 195,256 3,280 42,981 5,013 93,500 0 101,756 38%

Fiscal Years Ended 12/31/05 12/31/06 12/31/07 370,680 377,635 404,552 158,642 165,561 173,169 59,432 67,402 71,479 36,130 39,500 40,610 5.71 6.62 7.26 6,266 5,913 5,557 48,138 49,286 52,002 13,839 15,462 15,387 34,299 33,824 36,615 28,671 28,244 34,500 73,342 75,777 85,963 0 0 0 208,335 219,015 242,082 1,771 1,702 2,383 46,307 48,817 58,312 6,220 6,645 7,183 97,149 105,171 120,320 0 0 0 111,186 113,844 121,762 55% 61% 62%

12/31/08 477,359 190,000 83,397 45,220 8.66 5,194 59,725 19,318 40,407 32,007 72,266 0 228,052 2,400 49,100 7,025 115,087 0 112,965 72%

12/31/09 310,586 124,753 34,777 19,280 3.98 4,832 28,438 22,491 5,947 10,862 55,235 0 233,323 2,476 52,061 7,129 122,754 0 110,569 28%

LTME 9/30/10 367,876 114,670 48,023 27,260 5.64 4,896 43,862 25,964 17,898 12,259 62,633 0 299,994 3,046 61,740 15,248 154,963 0 145,031 31%

FQE 9/30/09 82,260 32,474 9,204 4,730 0.98 4,803 8,827 5,490 3,337 12,623 57,324 0 229,307 2,418 52,933 7,185 122,042 0 107,265 n/m

FQE 9/30/10 95,298 37,441 12,858 7,350 1.44 5,089 13,077 7,801 5,276 12,259 62,633 0 299,994 3,046 61,740 15,248 154,963 0 145,031 n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

$120

$100

$80

$60

$40

$20

$0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

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January 31, 2011 – Page 54 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA

Oil and gas major Exxon Mobil acquired shale gas producer XTO for $25 billion in June 2010 ($36 billion EV).

INVESTMENT HIGHLIGHTS •

•

Industry-leading oil and gas reserve base with net proved reserves of 23+ billion oil-equivalent barrels (boe) at year-end 2009 and 3.9 million boe of net daily production in 2009 (implied reserve life is 16+ years). Reserves are split roughly 50/50 between natural gas/oil; roughly two thirds are developed. Low-cost producer with $15/boe of average cash production costs in 2005-09 (including exploration expense and non-income related taxes). Finding and acquisition costs averaged $0.85/boe in 2005-09. EV/boe of “resources” is ~$5 based on 80+ billion of “ultimately recoverable” oil/gas (~7.5 billion boe at XTO). Taking ~26 billion boe of proved reserves only, EV/boe is ~$17 (in-line with peers, excl. BP). XTO deal accelerates unconventional natural gas development and expands proved reserves and production by 10-12%. XTO’s production is 80+% natural gas (mainly shale/tight gas and coal-bed methane). The deal, one of Exxon’s biggest ever, is a vote of confidence on natural gas. The implied deal EV/proved boe is ~$15 (~$5 EV/”resource” boe). Benefits from integrated business model. Exxon is the world’s largest global refiner with 6.3 million barrels per day of capacity. ~75+% of capacity is integrated with lubes and chemical businesses. The chemical segment includes less-cyclical specialty businesses, all of which rank #1 or #2 globally. Strong balance sheet and track record of capital return to shareholders. Tangible equity to assets is 45+% and net debt to trailing EBITDA is ~0.1x. Dividends and buybacks totaled $155+ billion in 2005-09 (~40% of recent market value).

INVESTMENT RISKS & CONCERNS •

•

Reinvestment risk. Oil and gas are depleting assets. The cost of finding new reserves may go up just as much, if not more, than selling prices. Historical profits may lag reality due to GAAP accounting. Higher oil/gas prices may not translate into (much) higher profits over time. While cash production costs per boe have increased at a modest ~5% CAGR from 2004-2009, cost pressures may accelerate due to regulatory/competitive dynamics. ~50% of proved reserves are in potentially volatile regions such as in Asia Pacific, Mideast and Russia.

FYE December 31 2005 Proved reserves (Bboe)1 22.4 ∆ proved reserves 1% ∆ production - liquids -2% ∆ production - natural gas -6% ∆ production - total -4% ∆ avg realized oil price 39% ∆ avg realized gas price 2 % ∆ cash production cost2 23% ∆ refinery throughput 0% ∆ chemical product sold -4% ∆ revenue 23% ∆ EBIT 45% ∆ diluted EPS 47% ∆ employees -3% PV-10, after-tax ($bn)3 173 Revenue ($bn) 359 % of revenue by segment: Upstream 8% Downstream 83% Chemical 9% Net income margin by segment: Upstream 81% Downstream 3% Chemical 13% Total net margin 10% Selected items as % of revenue: Exploration expense 0% EBIT 17% Net cash from ops 13% DD&A 3% Capex 4% Div’s and buybacks ($bn) 23 Return on capital empl. 4 31% Return on tangible equity 37% Tangible equity to assets 51% ∆ shares out (avg) -3%

2006 22.7 1% 6% 1% 4% 21% 8% 30% -2% 2% 2% 14% 16% -2% 137 365

2007 22.7 0% -2% 1% -1% 13% -7% 4% -1% 0% 7% 4% 10% -2% 221 390

2008 22.8 0% -8% -3% -6% 35% 43% 35% -3% -9% 18% 17% 19% -1% 86 460

2009 23.3 2% -1% 2% 0% -37% -44% -18% -1% -1% -34% -58% -54% 1% 115 302

YTD 9/30/10 n/a n/a 0% 29% 11% 15% 25% n/a -2% 8% 26% 51% 61% n/a n/a 269

9% 82% 9%

7% 83% 9%

9% 83% 8%

8% 83% 9%

9% 81% 10%

80% 3% 13% 11%

92% 3% 12% 10%

91% 2% 8% 10%

69% 1% 9% 6%

70% 1% 15% 8%

0% 19% 13% 3% 4% 33 32% 37% 51% -6%

0% 18% 13% 3% 4% 36 32% 37% 50% -7%

0% 18% 13% 3% 4% 40 34% 41% 49% -7%

1% 12% 9% 4% 7% 26 16% 18% 47% -7%

1% 14% 13% 4% 7% 12 n/a 24% 46% 0%

In billions of oil-equivalent barrels, net (incl. Exxon's share of equity investees). Includes production costs, exploration expenses and taxes (other than income taxes). Costs also reflect non-consolidated and Canadian oil sands operations. 3 Computed through 2008 by applying year-end prices (2009: first-day-of-themonth average prices), year-end costs and legislated tax rates and a 10% discount rate to estimated after-tax cash flows of net proved reserves. Includes proportional interest in cash flows from proved reserves of equity companies. 4 Return on average capital employed (after-tax) as disclosed by the company. 2

RATINGS

      

THE BOTTOM LINE Exxon Mobil has an industry-leading reserve base and benefits from an integrated, low-cost production model. It is not only one of the major owners of oil and gas globally, but is also the largest refiner/marketer of petroleum products. Its chemical business in among the world’s biggest. Expecting that “gas will grow more rapidly than any other major energy source,” Exxon expanded its natural gas exposure by buying XTO Energy in 2010. While the post-deal enterprise value appears attractive based on the large “resource” base, it is in-line with major peers (excluding BP) on a proved-reserves only basis. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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January 31, 2011 – Page 55 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

EXXON MOBIL – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE ($ in billions)

Valuation methodology

Conservative

Base Case

Aggressive

Valuation of proved reserves only

Valuation of proved reserves plus additional "resources"

Value of proved reserves (excludes XTO):1 Proved reserves, net 12/31/09 Fair value "multiple"2 Fair value of proved reserves (excl. XTO) (1)

23 billion boe

$15.00 per boe

$17.50 per boe

$20.00 per boe

$349 billion

$407 billion

$465 billion

Value of additional "resources" (excludes XTO): Additional "resources" as of 12/31/093

52 billion boe

Fair value "multiple"4

$0 per boe

$0.50 per boe

$1.00 per boe

Fair value of additional "resources" (excl. XTO) (2)

$0 billion

$26 billion

$52 billion

Value of XTO: Estimated proved reserves

2.5 billion boe

Fair value "multiple"

$15.00 per boe

$17.50 per boe

$20.00 per boe

$37 billion

$43 billion

$49 billion

103%

120%

137%

$386 billion

$476 billion

$566 billion

-$6 billion

-18 billion

-6 billion

$356 billion

$446 billion

$536 billion

$70 per share

$88 per share

$106 per share

Implied trailing earnings yield

Implied trailing FCF yield

Implied dividend yield7

Implied fair value of the equity to tangible book

2.6x

3.3x

3.9x

Implied EV-to-trailing EBITDA

6.3x

7.7x

9.2x

Implied EV per boe of estimated total proved reserves (incl. XTO)

$14

$17

$21

Implied EV per boe of estimated total "resources" (incl. XTO) Implied fair value of the equity as a % of PV-10 at yearend 2007 (plus XTO at deal value)8

139%

174%

209%

Fair value of XTO proved reserves (3) as a % of enterprise value paid by Exxon Mobil Estimated total enterprise value (1) + (2) + (3) Minus: Net debt5 Minus: Post-retirement benefits reserves

Minus: Non-controlling interest5 Estimated fair value of the equity of Exxon Mobil6

The company acquired XTO Energy for $25 billion in June 2010 ($36 billion including net debt). XTO’s resources include shale gas, tight gas, coal bed methane, shale oil and conventional oil and gas production. We value XTO separately in order to show reported year-end 2009 figures for proved reserves and resources of Exxon Mobil prior to the acquisition. Accordingly, as of year-end 2009, Exxon Mobil had proved reserves of 23+ billion oil-equivalent barrels (boe) with an implied reserve life of 16+ years based on 2009 production. Reserves are split roughly 50/50 between natural gas and oil and roughly two thirds are developed. ~30% of reserves are in the Americas, ~45% in Asia Pacific, Middle East and Russia/Caspian, and the rest in Europe and Africa.

For reference, the recent valuation of U.S.-based competitors Chevron and ConocoPhillips implies an enterprise value to barrel of oil-equivalent of net proved reserves of ~$17/boe and ~$12/boe, respectively, based on year-end 2009 net proved reserves. Based on our analysis, a select peer group of European-based integrated oil and gas producers has recently traded at an average implied enterprise value to barrel of oil-equivalent proved reserves of $17-18/boe (with a range of $15-19/boe). The peer group includes Shell, Total, Eni and OMV. For reference, BP's recent "multiple" is ~$12/boe. Our calculations are based on year-end 2009 proved reserves including each company's share of reserves at equity investees.

Per the company's disclosure, it had 75 billion barrels of oil-equivalent "resources" (including proved reserves) at year-end 2009. Per Exxon Mobil, the term “resource base” is not intended to correspond to SEC definitions such as “probable” or “possible” reserves, but refers to the "total remaining estimated quantities of oil and gas that are expected to be ultimately recoverable."

As timing and ultimate recoverability of additional "resources" is rather uncertain (see discussion under footnote 3), we attach zero or little value per barrel of oilequivalent "resources" in our calculations.

Per balance sheet values as of September 30, 2010.

Based on 5,056 million shares outstanding.

Based on annualizing the 3Q10 dividend of $0.44 per share.

PV-10 is per SEC methodology at the time (computed by applying year-end 2007 prices, costs and legislated tax rates and a 10% discount rate to estimated after-tax cash flows of net proved reserves). The figure includes the company's proportional interest in cash flows from proved reserves of equity companies. Net proved reserves at year-end 2007 approximate the company's year-end 2009 net proved reserves. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

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Value-oriented Equity Investment Ideas for Sophisticated Investors

THE BIG ENERGY PICTURE

POWER GENERATION BY FUEL

ECONOMIC CHOICES FOR U.S. POWER

Source for above charts: Company presentation dated January 12, 2011; available at http://bit.ly/eWeQAS

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January 31, 2011 – Page 57 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

General Electric (GE) – BRK, Edinburgh, Fairholme, Markel Fairfield, CT, 203-373-2211

Financial: Consumer Financial Services, Member of S&P 500 Trading Data

www.ge.com

Consensus EPS Estimates

Price: $19.74 (as of 1/21/11) 52-week range: $13.75 - $19.97 Market value: $210.1 billion Enterprise value: $565.8 billion Shares out: 10,645.7 million Ownership Data

Valuation

This quarter Next quarter FYE 12/31/10

Latest $0.32 0.29 1.12

Month Ago $0.32 0.28 1.12

# of Ests 14 7 17

P/E FYE 12/31/10 P/E FYE 12/31/10 P/E FYE 12/31/11 P/E FYE 12/30/12 EV/ LTM revenue

17x 18x 15x 12x 3.8x

FYE 12/31/11

1.29

1.30

EV/ LTM EBIT

40x

Insider ownership: <1%

FYE 12/30/12

1.58

1.56

P / tangible book

4.7x

Insider buys (last six months): 9

LT growth

11.8%

13.3%

Insider sales (last six months): 9 Institutional ownership: 52%

EPS Surprise 10/15/10

Actual $0.29

Greenblatt Criteria

Estimate $0.27

LTM EBIT yield LTM pre-tax ROC

3% n/m

Operating Performance and Financial Position ($ millions, except per share data)

Fiscal Years Ended December 31, 2006 2007 2008

2009

2010

LTME 12/31/10

FQE 12/31/09

FQE 12/31/10

182,515

155,278

150,211

41,046

41,377

75,601

72,534

23,639

24,411

6,174

5,726

27,528

19,782

9,995

14,208

2,574

3,570

22,208

17,335

10,725

11,344

16,207

2,938

4,460

2004

2005

134,291

136,580

151,568

172,488

Gross profit

60,916

61,985

65,916

Operating income

20,297

21,178

23,288

Net income

17,160

16,720

20,742

Revenue

Diluted EPS

1.59

1.64

1.86

2.20

1.78

1.00

1.15

0.27

0.36

Shares out (avg)

10,400

10,570

10,359

10,182

10,080

10,614

10,661

10,656

10,636

Cash from operations

29,229

36,493

37,691

31,455

43,322

48,601

24,593

n/a

10,481

n/a

9,751

12,936

13,762

15,788

17,803

16,010

8,634

n/a

2,826

n/a

Free cash flow

19,478

23,557

23,929

15,667

25,519

32,591

15,959

n/a

7,655

n/a

Cash & investments

12,152

8,825

14,099

15,731

48,187

121,800

122,900

121,800

122,900

Intangible assets

78,456

81,630

84,314

97,258

96,736

76,800

74,400

76,800

74,400

Total assets

750,617

673,321

696,683

795,683

797,769

781,900

751,200

781,900

751,200

Long-term debt

207,871

212,281

260,752

319,013

359,701

503,400

478,600

503,400

478,600

Total liabilities

639,709

563,970

585,174

680,124

693,104

664,600

632,300

664,600

632,300

Preferred stock

Common equity

110,908

109,351

111,509

115,559

104,665

117,300

118,900

117,300

118,900

10%

11%

14%

n/m

Capex

EBIT/capital employed

Ten-Year Stock Price Performance and Trading Volume Dynamics

$60

$50

$40

$30

$20

$10

$0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

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Jan 08

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Jan 11

January 31, 2011 – Page 58 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA – INDUSTRIAL1

General Electric (GE) owns the following main assets: Industrial business: includes equipment and services related mainly to energy (e.g. turbine manufacturing) and aviation markets (e.g. aircraft engine manufacturing). The rest is comprised of products and services related to healthcare (e.g. medical diagnostics), transportation (e.g. locomotive manufacturing) and other businesses such as security sensors and plant automation for the home and enterprise markets. GE Capital (financial services): Owns ~$580 billion of assets, the majority of which are finance receivables. Midmarket commercial lending and leasing represents ~35% of assets, consumer-related credit ~25%, and real estate ~15%. The rest includes financing for core industry verticals such as aviation. ~50% of assets are in the U.S. and ~25% in Europe. NBC Universal (media): Pending a deal with Comcast, GE will own 49% of a new joint venture related to NBC. We estimate the JV accounts for just ~5% of GE’s intrinsic value.

•

• • •

Key value driver is the industrial business, which we estimate accounts for 70+% of intrinsic value. With a large installed equipment base and technical expertise, GE has advantages over rivals to capitalize on new equipment demand and sell related services. Shares appear modestly undervalued on a sumof-the-parts basis. Assuming the industrial business has an EV of $180 billion (12x “normalized” EBIT of $15 billion) and GE Capital is worth ~$65 billion (1.5x tangible book), yields a price in the mid-$20s. GE Capital may be a source of cash again. Higher profitability due to lower loss provisions (down ~50% y-y in 4Q10) is improving the capital position. “Highest orders since 2007” have contributed to a record $175 billion industrial business backlog (~75% in services), representing ~2x 2010 revenue. Additional capital return is likely with $10+ billion of “parent” net cash and improving profitability.

INVESTMENT RISKS & CONCERNS • •

•

Value creation seems to depend on “good times” when easy credit drives up the demand for big-ticket items and facilitates management’s M&A strategy. Already high industrial margins, as well as $105 billion of “red” assets at GE Capital, may hold back any profitability improvements. Ongoing restructuring should continue to absorb some cash. Vulnerable to reducing government “stimulus,” which has likely driven some of the recent demand.

2010 5% 0% -4% 84.0

4Q10 13% 0% 3% 24.2

45% 45% 10%

-8% -2%

-3% 9%

19% 17% 17%

20% 17% 18%

Unless noted otherwise, above financials refer to continuing operations of GE’s industrial businesses, excluding NBC Universal.

SELECTED OPERATING DATA – FINANCIAL1

INVESTMENT HIGHLIGHTS •

FYE December 31 2009 ∆ new orders -14% ∆ backlog 2% ∆ revenue -7% Revenue ($bn) 87.6 % of revenue by segment: Energy (incl. energy and oil/gas infrastructure) 46% Technology (incl. aviation, healthcare, transport) 44% Home & business 10% Revenue growth by major segment: Energy -5% Technology -7% Adj. EBIT margin by major segment (pre-corporate costs): Energy 17% Technology 18% Total adj. EBIT margin (pre-corporate) 16%

FYE December 31 ($ in billions, period-end) Assets “Ending net investment”2 Financing receivables, net Tangible common equity (attributable to GE) as % of total assets Tier 1 common ratio Net assets of businesses held for sale Net assets of discontinued operations Pre-tax income Net income (attributable to GE) 3 Loss provision (income statement)

2009

2010

4Q10

622.8 526.3 326.9 40.2 6.5% 7.6% 0.1 7.0 -2.3 1.5 10.6

581.1 477.4 319.3 42.2 7.3% 8.9% 2.5 3.3 2.3 3.3 7.2

581.1 477.4 319.3 42.2 7.3% 8.9% 2.5 3.3 1.0 1.1 1.4

Unless noted otherwise, above financials reflect the continuing operations of General Electric Capital Corp. (GECC), also known as “GE Capital”. 2 Assets of continuing operations less non-interest bearing liabilities. 3 Includes ~$1.7 billion and ~$0.4 billion of real estate losses in ‘09 and 4Q’10.

MAJOR HOLDERS Insiders <1% | BlackRock 3% | FMR 2% | Dodge & Cox 1%

COMPARABLE PUBLIC COMPANY ANALYSIS

SI ABB PHG GE

MV ($mn) 106,230 53,350 31,630 210,150

RATINGS

EV ($mn) 110,170 48,060 31,620 565,850

EV / Rev. 1.1x 1.5x .9x 3.8x

P/ Tang. Book 10.4x 5.8x 6.2x 4.7x

This FY P/E 14x 20x 18x 18x

Next FY P/E 12x 16x 16x 15x

      

THE BOTTOM LINE Despite management’s much touted ability to assemble acquisitions into a value-creating conglomerate structure, GE has not delivered superior returns to shareholders over the past decade. While business is clearly improving, and the recent valuation appears enticing, we wonder whether GE could find itself again in a situation where it has to look for costly preferred equity, or worse. With GE Capital a smaller part of the total business, and much of the damage already done, the risk is remote. The extent to which GE delivers value through the cycle, however, likely depends on whether management will be able to restrain its appetite for M&A and credit growth during the next boom. On balance, the risk-reward is only modestly attractive. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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Value-oriented Equity Investment Ideas for Sophisticated Investors

GENERAL ELECTRIC – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE ($ in billions)

Conservative

Base Case

Aggressive

Valuation Methodology

Sum-of-theparts valuation (see detailed assumptions below)

Value of industrial businesses, excluding NBC Universal (NBCU): Normalized revenue of continuing operations Normalized EBIT margin (including corporate costs) Estimated normalized EBIT of continuing operations Fair value multiple Estimated enterprise value of Industrial ex NBCU and discontinued operations implied EV-to-2010 revenue from continuing operations implied EV-to-4Q10 annualized revenue from continuing operations implied EV-to-2010 adj. EBIT from continuing operations

$90 15% $14 12x $162 1.9x 1.7x 15x

$100 15% $15 12x $180 2.1x 1.9x 17x

$110 15% $17 12x $198 2.4x 2.0x 18x

Value of NBC Universal JV between GE and Comcast:1 Implied value of 100% of NBCU based on Vivendi transaction2 Value of content assets contributed by Comcast Estimated JV net debt at closing Estimated JV equity value GE equity stake in the JV Estimated value of GE's equity stake in the NBCU/Comcast JV

$29 7 (9) $27 49% $13

Value of financial services (GE Capital): Tangible common equity attributable to GE shareholders3 Fair value multiple Estimated equity value of Financial Services (GE Capital) implied multiple based on 2010 pre-tax income4 implied multiple based on 4Q10 annualized pre-tax income

$42 1.0x $42 18x 11x

$42 1.5x $63 27x 17x

$42 2.0x $84 36x 22x

$12 0 (7) (5) (10) $207 billion $19 per share 2.9%

$12 0 (7) (3) (5) $254 billion $24 per share 2.4%

$12 0 (7) (0) (0) $300 billion $28 per share 2.0%

Value of other items: Plus: Estimated net cash post-NBCU deal closing (at industrial businesses only) Plus: Net assets/(liabilities) of discontinued operations within industrial Minus: Non-controlling interests and preferred stock within industrial5 Minus: Estimated restructuring costs/operating losses of non-core industrial businesses Minus: Estimate for pension-related liabilities Estimated fair value of the equity of General Electric6 Implied dividend yield7 1

Assumes the transaction with Vivendi and Comcast related to NBC Universal closes as announced.

Vivendi is selling its 20% equity stake in NBC Universal for $5.8 billion in cash based on the December 2009 agreement between Vivendi and GE. GE, in turn, has agreed with Comcast to transfer the assets of the NBCU business to a newly formed entity, which will consist of GE's NBCU business and Comcast’s programming assets (cable networks, regional sports networks, certain digital properties and certain unconsolidated investments). GE will own a 49% interest in the newly formed entity, which it will account for under the equity method. For further background on the Comcast-GE joint venture, we refer readers to the related presentations on the JV announcement in December 2009.

Based on year-end 2010 financials of General Electric Capital Corporation (GECC), which represents GE's financial services business.

Based on pre-tax income from continuing operations at GECC, also referred to as GE Capital by management. GECC has certain non-controlling interests, but these are not very meaningful.

Includes Berkshire Hathaway's $3 billion preferred equity investment, yielding 10% per annum. The preferred stock is redeemable at the company's option starting in October 2011 at 110% of liquidation value plus accrued and unpaid dividends.

Based on 10.7 billion diluted shares outstanding (base and aggressive cases include dilution from ~135 million warrants issued to Berkshire Hathaway as part of the 2008 preferred stock investment. The warrants are exercisable until October 2013 at an exercise price of $22.25 per share of common stock.

Based on annualizing the 4Q10 common dividend of $0.14 per share (up 40% y-y).

Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

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GENERAL ELECTRIC – 2011 OPERATING FRAMEWORK “Strong business segment profit growth, partially offset by NBCU dilution”

GENERAL ELECTRIC – OPERATING EPS EXPECTATIONS

GENERAL ELECTRIC – Q4 2010 ORDERS AND BACKLOG ($ in billions) “Highest orders since 2007”

Source: Company presentation dated January 21, 2011; available at http://bit.ly/gcIJuM

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Hewlett-Packard (HPQ) – Appaloosa, FPA, Glenview, Maverick, Shumway Palo Alto, CA, 650-857-1501

Technology: Computer Hardware, Member of S&P 500 Trading Data

www.hp.com

Consensus EPS Estimates

Price: $47.23 (as of 1/21/11) 52-week range: $37.32 - $54.75 Market value: $103.5 billion Enterprise value: $114.8 billion Shares out: 2,190.4 million Ownership Data

Valuation

This quarter Next quarter FYE 10/31/11

Latest $1.29 1.25 5.23

Month Ago $1.29 1.25 5.23

# of Ests 26 31 26

P/E FYE 10/31/10 P/E FYE 10/31/11 P/E FYE 10/30/12 P/E FYE 10/30/13 EV/ LTM revenue

13x 9x 8x 8x 0.9x

FYE 10/30/12

5.70

5.69

EV/ LTM EBIT

10x

Insider ownership: <1%

FYE 10/30/13

6.08

6.05

P / tangible book

n/m

Insider buys (last six months): 14

LT growth

11.0%

9.5%

Insider sales (last six months): 11 Institutional ownership: 76%

EPS Surprise 11/22/10

Actual $1.33

Greenblatt Criteria

Estimate $1.27

LTM EBIT yield LTM pre-tax ROC

10% >100%

LTME 10/31/10 126,033 29,944 11,479 8,761 3.69 2,319 11,922 4,133 7,789 10,934 54,184 46,331 124,503 7,046 49,403 15,258 84,054 0 40,449 >100%

FQE 10/31/10 33,278 8,254 3,295 2,538 1.10 2,249 3,151 1,232 1,919 10,934 54,184 46,331 124,503 7,046 49,403 15,258 84,054 0 40,449 n/m

10/31/04 79,905 19,094 4,157 3,497 1.15 3,024 5,088 2,126 2,962 12,974 42,901 19,931 76,138 2,511 28,588 4,623 38,574 0 37,564 40%

10/31/05 86,696 20,256 3,367 2,398 0.82 2,879 8,028 1,995 6,033 13,929 43,334 20,030 77,317 1,831 31,460 3,392 40,141 0 37,176 40%

Fiscal Years Ended 10/31/06 10/31/07 10/31/08 91,658 104,286 118,364 22,231 25,399 28,665 6,560 8,719 10,473 6,198 7,264 8,329 2.18 2.68 3.25 2,782 2,630 2,483 11,353 9,615 14,591 2,536 3,040 2,990 8,817 6,575 11,601 16,422 11,445 10,246 48,264 47,402 51,728 20,205 25,852 40,297 81,981 88,699 113,331 2,705 3,186 10,176 35,850 39,260 52,939 2,490 4,997 7,676 43,837 50,173 74,389 0 0 0 38,144 38,526 38,942 >100% >100% >100%

10/31/09 114,552 27,028 10,136 7,660 3.14 2,388 13,379 3,695 9,684 13,334 52,539 39,709 114,799 1,850 43,003 13,980 74,282 0 40,517 >100%

10/31/10 126,033 29,944 11,479 8,761 3.69 2,319 11,922 4,133 7,789 10,934 54,184 46,331 124,503 7,046 49,403 15,258 84,054 0 40,449 >100%

FQE 10/31/09 30,777 7,302 3,133 2,412 0.99 2,366 3,433 946 2,487 13,334 52,539 39,709 114,799 1,850 43,003 13,980 74,282 0 40,517 n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

$60

$50

$40

$30

$20

$10

$0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

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January 31, 2011 – Page 62 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA1

Hewlett-Packard (HP) operates in three major segments: Enterprise Business provides consulting and outsourcing, storage and server products, as well as software. Personal Systems provides notebooks, desktops, handhelds, workstations, and other technology products. Imaging & Printing provides printers, scanners and supplies.

INVESTMENT HIGHLIGHTS •

•

World’s largest IT company by revenue. HP ships one of every three servers worldwide, ~52 million printers, and ~48 million PCs annually. Large installed product base enables recurring revenue from services and supplies. Enterprise services and printing/imaging supplies represent 40+% of revenue and a majority of EBIT. Valuation may not adequately reflect ongoing shift from product company to services provider. EV-to-revenue is 0.9x, excluding the financing business. Shares trade at a trailing FCF yield of 8%. Guiding for GAAP EPS of $4.42-4.52 in FY11 (up 20-22% y-y), on revenue up 5-6% y-y. NonGAAP EPS is guided at $5.16-5.26 (up 13-15% y-y).

INVESTMENT RISKS & CONCERNS •

•

5-year high EBIT margins across segments. With gross margin stable at ~24% since FY06, further EBIT margin improvement may be challenging. Will CEO change affect strategy? Much of HP’s transition to a services model is due to ex-CEO Hurd who joined in 2005. Hurd resigned in late ‘10 over a sexual harassment claim and was replaced by Leo Apotheker (57), ex-CEO of software giant SAP. Technological change and competition. The products businesses have short life-cycles. HP’s drive into technology outsourcing and consulting services brings with it new rivals such as Accenture. $11 billion of net debt and $27 billion of pension liabilities ($5 billion unfunded) at 10/31/10. Net debt includes ~$10 billion within financial services.

COMPARABLE PUBLIC COMPANY ANALYSIS

IBM ACN DELL ALU HPQ

MV ($mn) 193,190 35,620 26,000 7,300 103,450

EV ($mn) 210,160 31,460 18,610 7,640 114,820

EV / Rev. 2.1x 1.3x .3x .4x .9x

P/ Tang. Book n/m 17.7x 26.0x n/m n/m

This FY P/E 12x n/a 10x n/m 9x

Next FY P/E 11x n/a 9x 17x 8x

FYE October 31 2006 6% ∆ revenue Δ EBIT, as reported 89% Δ EBIT, ex restructuring charges 30% 4% ∆ employees Revenue ($bn) 92 % of revenue by segment: Enterprise 37% Personal 32% Imaging and printing 29% Financial services 2% Revenue growth by selected segment: Enterprise 3% Personal 9% Imaging and printing 6% EBIT margin by segment: Enterprise 9% Personal 4% Imaging and printing 15% Financial services 7% Corporate -2% Total EBIT margin (as reported) 7% % of revenue by type: Products 81% Services 19% Revenue growth by type: Products 7% Services 2% Gross margin by type: Products 25% Services 22% Total gross margin 24% % of revenue by geography: U.S. 35% International 65% Selected items as % of revenue: R&D 4% EBIT, ex. restructuring items 7% Net income 7% Net cash from ops 12% D&A 3% Capex 3% ∆ shares out (avg) -3%

2007 14% 33% 36% 10% 104

2008 13% 20% 18% 87% 118

2009 -3% -3% 0% -5% 114

2010 10% 13% 17% 7% 126

36% 35% 27% 2%

38% 36% 25% 2%

47% 31% 21% 2%

45% 32% 20% 2%

10% 25% 7%

19% 16% 4%

20% -17% -19%

7% 15% 7%

11% 5% 15% 7% -2% 8%

13% 6% 15% 7% -2% 9%

14% 5% 18% 8% -3% 9%

15% 5% 17% 9% -3% 9%

81% 19%

78% 22%

65% 35%

68% 32%

15% 11%

9% 33%

-19% 53%

15% 2%

25% 24% 25%

24% 24% 24%

24% 23% 24%

23% 25% 24%

33% 67%

31% 69%

36% 64%

35% 65%

3% 9% 7% 9% 3% 3% -5%

3% 9% 7% 12% 3% 3% -6%

2% 9% 7% 12% 4% 3% -4%

2% 10% 7% 9% 4% 3% -3%

Major acquisitions during the period include 3Com (included in Corporate segment) in April 2010 and EDS (Enterprise segment) in August 2008.

RATINGS

      

THE BOTTOM LINE HP has enjoyed a successful transformation from a product-based company to an IT services provider under ex-CEO Hurd. It is therefore not surprising that Hurd’s recent resignation, and replacement by ex-SAP CEO Apotheker, has left investors wondering about future strategy. This appears reflected in an undemanding valuation, with shares trading at a low-double digit forward earnings yield based on FY11 non-GAAP guidance. While risks around technology change and competition are omnipresent, the market may underappreciate the sustainability of a model increasingly based on recurring revenue and high FCF generation. Over the last five years, HP returned nearly 50% of recent market value to investors via buybacks/dividends. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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Value-oriented Equity Investment Ideas for Sophisticated Investors

HP – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE ($ in billions)

Valuation methodology

Normalized revenue (excluding financial services)1 Normalized EBIT margin2 Estimated normalized EBIT Fair value multiple Estimated enterprise value (excluding financial services) Plus: Estimated equity value of financial services business3 Minus: Net debt (excluding financial services)4, 5 Minus: Net post-retirement liability4, 6 Minus: Non-controlling interest4 Estimated fair value of the equity of Hewlett-Packard7 Implied earnings yield based on FY11 GAAP EPS guidance midpoint8 Implied earnings yield based on FY11 non-GAAP EPS guidance midpoint8 Implied trailing GAAP earnings yield Implied trailing non-GAAP earnings yield Implied trailing FCF yield Implied dividend yield9 Implied EV-to-trailing revenue (excl. financial services revenue) Implied EV-to-trailing EBIT (excl. financial services EBIT) Implied EV per employee ($)10

Conservative

Base Case

Aggressive

10x estimated normalized EBIT of $9.2 billion (~20% below FY10 reported EBIT)

10x estimated normalized EBIT of $11.3 billion (approximates FY10 reported EBIT)

10x estimated normalized EBIT of $13.5 billion (~20% above FY10 reported EBIT)

$115.0 8.0% $9.2 10.0x $92.0 1.0 (1.5) (5.3) (0.3) $86 billion $38 per share 12% 14% 10% 12% 9% 1% 0.75x 8.2x $283,426

$125.0 9.0% $11.3 10.0x $112.5 1.0 (1.5) (5.3) (0.3) $106 billion $47 per share 9% 11% 8% 10% 7% 1% 0.91x 10.0x $346,580

$135.0 10.0% $13.5 10.0x $135.0 1.0 (1.5) (5.3) (0.3) $129 billion $57 per share 8% 9% 6% 8% 6% 1% 1.10x 12.1x $415,896

Revenue was $126 billion during the fiscal year ended October 2010 (includes $3 billion of financial services revenue). Reported EBIT margin was 9% in FY10 (ex. restructuring items, EBIT margin was 10%). Reported EBIT margin of financial services segment was 9% in FY10. 3 Financial services had net portfolio assets of ~$11 billion as of October 31, 2010 (up 14% y-y). Based on attributable debt of ~$10 billion, it has roughly $1.0 billion of equity value. Given that this is not material to our valuation, we simply value the business at 1x estimated equity value in all three valuation cases. 4 Based on balance sheet values as of October 31, 2010. 5 Based on $1.5 billion of net debt, excluding estimated net debt attributable to the financial services business. 6 The projected benefit obligation of defined benefit plans was $27 billion as of October 31, 2010. 7 Based on 2,243 million shares outstanding. 8 FY11 GAAP EPS guidance is $4.424.52 (up 20-22% on revenue of $132.0-133.5 billion, up 5-6%) and non-GAAP EPS guidance is $5.16-5.26 (up 13-15%). 9 Based on annualizing the most recent quarterly dividend of $0.08 per share. 10 Based on ~325,000 employees as of October 31, 2010. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

HP – SHARE REPURCHASE ACTIVITY

1 In Q1 FY06, HP entered into a prepaid variable share purchase program. $1.7 billion in cash was used in Q1 FY06 to fully fund this plan. See our Form 10-Q for the period ended January 31, 2006 for more information. HP completed all repurchases under this plan in March 2007 and received a total of 53M shares. Source: Company presentation dated November 22, 2010; available at http://bit.ly/hOQyK2

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January 31, 2011 – Page 64 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

HP – REVENUE BREAKDOWN FYE October 31 ($ in billions) CEO timeline:

Revenue by business unit / segment: Infrastructure technology outsourcing Technology services Application services Business process outsourcing Other Services Industry standard servers Storage Business critical systems Enterprise Storage and Servers Business technology optimization Other software HP Software HP Enterprise Business Notebooks Desktops Workstations Handhelds/Other Personal Systems Group Supplies Commercial hardware Consumer hardware Imaging and Printing Group HP Financial Services Corporate Investments Total segment revenue Eliminations of inter-segment revenue/other Total company revenue

2005 Hurd replaces Fiorina

2006

2007

2008

2009

2010

4.1 8.6

4.4 8.2

2.8

2.9

15.5 9.4 3.5 3.8 16.7 0.7 0.4 1.1 33.3 9.8 14.4 1.2 1.4 26.7 14.1 6.6 4.5 25.2 2.1 0.5 87.8 -1.1 86.7

15.6 10.0 3.6 3.7 17.2 0.9 0.5 1.4 34.2 12.0 14.6 1.4 1.2 29.2 15.6 6.7 4.5 26.8 2.1 0.6 92.8 -1.2 91.7

4.7 9.4 1.1 0.1 0.0 15.3 11.4 3.7 3.6 18.6 2.3 1.4 3.6 37.6 17.7 15.9 1.7 1.1 36.4 17.0 7.4 4.2 28.6 2.3 0.8 105.7 -1.4 104.3

7.8 10.0 2.4 0.7 0.1 21.0 11.7 4.2 3.5 19.4 2.8 1.4 4.2 44.6 22.7 16.6 1.9 1.1 42.3 18.5 7.4 3.7 29.6 2.7 1.0 120.2 -1.8 118.4

15.6 9.7 6.2 3.0 0.2 34.7 9.3 3.5 2.6 15.4 2.4 1.2 3.6 53.6 20.2 12.9 1.3 1.0 35.3 16.5 4.8 2.7 24.0 2.7 0.8 116.4 -1.8 114.6

16.0 9.7 6.1 2.9 0.3 34.9 12.6 3.8 2.3 18.7 2.4 1.1 3.6 57.2 22.5 15.5 1.8 0.9 40.7 17.2 5.6 2.9 25.8 3.0 1.9 128.6 -2.6 126.0

2011 Apotheker replaces Hurd

Source: Company filings, The Manual of Ideas analysis.

HP – MANAGEMENT GUIDANCE

Q1 FY11 non-GAAP diluted earnings per share estimates exclude after-tax costs of approximately $0.22 per share, related primarily to the amortization of purchased intangible assets acquisition charges assets, restructuring charges and acquisition-related charges. 2 Full year FY11 non-GAAP diluted earnings per share estimates exclude after-tax costs of approximately $0.74 per share, related primarily to the amortization of purchased intangible assets, restructuring charges and acquisition-related charges. Source: Company presentation dated November 22, 2010; available at http://bit.ly/hOQyK2

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January 31, 2011 – Page 65 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

IBM (IBM) – Capital World, Markel, T Rowe Armonk, NY, 914-499-1900

Technology: Computer Services, Member of S&P 500 Trading Data

www.ibm.com

Consensus EPS Estimates

Price: $155.50 (as of 1/21/11) 52-week range: $116.00 - $156.78 Market value: $193.2 billion Enterprise value: $210.2 billion Shares out: 1,242.4 million Ownership Data

Valuation

This quarter Next quarter FYE 12/31/11

Latest $2.29 3.01 12.99

Month Ago $2.23 2.90 12.58

# of Ests 17 15 22

P/E FYE 12/31/10 P/E FYE 12/31/11 P/E FYE 12/30/12 P/E FYE 12/30/13 EV/ LTM revenue

13x 12x 11x 10x 2.1x

FYE 12/30/12

14.39

13.90

EV/ LTM EBIT

12x

Insider ownership: <1%

FYE 12/30/13

15.82

n/a

P / tangible book

n/m

Insider buys (last six months): 16

LT growth

11.5%

11.3%

Insider sales (last six months): 16 Institutional ownership: 60%

EPS Surprise 1/18/11

Actual $4.18

Greenblatt Criteria

Estimate $4.08

LTM EBIT yield LTM pre-tax ROC

9% >100%

LTME 12/31/10 99,870 46,013 18,149 14,833 11.58 1,269 19,500 4,433 15,067 11,651 48,116 28,624 113,450 6,778 40,562 21,846 90,404 0 23,046 >100%

FQE 12/31/10 29,018 14,226 6,697 5,257 4.18 1,240 6,746 1,552 5,194 11,651 48,116 28,624 113,450 6,778 40,562 21,846 90,404 0 23,046 n/m

12/31/04 96,293 35,569 9,616 7,479 4.39 1,675 15,266 5,056 10,210 10,570 47,143 10,226 111,003 8,099 39,786 14,828 79,315 0 31,688 48%

12/31/05 91,134 36,532 9,376 7,934 4.91 1,601 14,874 4,634 10,240 13,686 45,661 11,104 105,748 7,216 35,152 15,425 72,650 0 33,098 50%

Fiscal Years Ended 12/31/06 12/31/07 12/31/08 91,423 98,786 103,630 38,294 41,729 45,661 11,928 13,516 15,938 9,491 10,418 12,334 6.06 7.15 8.89 1,531 1,434 1,369 15,006 16,088 18,812 5,166 5,505 4,887 9,840 10,583 13,925 10,656 16,146 12,907 44,659 53,177 49,003 15,057 16,392 21,105 103,233 120,432 109,524 8,902 12,235 11,237 40,090 44,310 42,436 13,780 23,039 22,689 74,727 91,963 96,058 0 0 0 28,506 28,469 13,466 68% 72% 81%

12/31/09 95,759 43,787 17,011 13,425 10.01 1,327 20,773 4,077 16,696 13,974 48,936 22,703 109,022 4,168 36,003 21,932 86,385 0 22,637 93%

12/31/10 99,870 46,014 18,151 14,834 11.52 1,269 19,500 4,000 15,500 11,651 48,116 28,624 113,450 6,778 40,562 21,846 90,404 0 23,046 >100%

FQE 12/31/09 27,232 13,148 6,124 4,812 3.59 1,318 6,449 1,480 4,969 13,974 48,936 22,703 109,023 4,168 36,003 21,932 86,386 0 22,637 n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

$180 $160 $140 $120 $100 $80 $60 $40 $20 $0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

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January 31, 2011 – Page 66 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA1

IBM operates in the following major segments: Global Technology Services (38% of 2010 revenue) provides IT outsourcing, maintenance and project-based services. Global Business Services (18% of revenue) provides systems integration, consulting, and application management services. Software (23% of revenue) provides middleware (~80% of segment revenue), operating systems, and other software. Systems and Technology (18% of revenue) provides Linuxbased servers, data storage and other IT products.

INVESTMENT HIGHLIGHTS •

•

• • •

One of the largest integrated IT services and software/equipment providers, matched in global scale and brand recognition by only few other firms. 60+% of services and software revenue is annuitybased, coming from outsourcing, maintenance and recurring software license fees.* Services backlog of $142 billion equals ~1.5x 2010 company revenue. 7-8% trailing earnings yield is enticing if EPS guidance of “at least $20 in 2015” is realized. Guidance, which excludes M&A and pension-related charges, implies a 2010-15 EPS CAGR of 11-12%. 2015 EPS target assumes ongoing transition to software/services, with hardware/financing to drive only ~10% of EPS in 2015 (from 30+% in 2000). Balance sheet to aid EPS growth, with one third of it to come from buybacks. Net cash is $6 billion, excl. $23 billion of net debt in the financing unit. Returned $18.6 billion to shareholders in 2010 (~10% of market value), mainly via share buybacks.

INVESTMENT RISKS & CONCERNS • • •

Software business (~45% of pre-tax income) is vulnerable to technological change. If IBM loses on the product front, services signings may suffer. IT consulting, and to a lesser extent outsourcing, are people businesses with fairly low entry barriers despite IBM’s brand, scale and integrated offerings. Risks due to pension liabilities/financing business.

COMPARABLE PUBLIC COMPANY ANALYSIS

MSFT ORCL HPQ ACN IBM

MV ($mn) 239,730 164,250 103,450 35,620 193,190

EV ($mn) 206,220 156,440 114,820 31,460 210,160

EV / Rev. 3.1x 4.9x .9x 1.3x 2.1x

P/ Tang. Book 7.2x 32.9x n/m 17.7x n/m

This FY P/E 11x 16x 9x n/a 12x

Next FY P/E 10x 14x 8x n/a 11x

FYE December 31 2006 ∆ revenue 4% ∆ revenue, constant currency 3% 5% ∆ services backlog 8% ∆ employees Revenue ($bn) 91.4 % of revenue by segment: Global technology services 35% Global business services 17% Software 20% Systems and technology 24% Global financing 3% Revenue growth by selected segment: Global technology services 3% Global business services 0% Software 8% Systems and technology 5% Pre-tax income margin by segment: Global technology services 10% Global business services 11% Software 30% Systems and technology 8% Global financing 62% Total pre-tax margin 15% % of revenue by geography: Americas 43% Europe/Middle East/Africa 33% Asia-Pacific 19% Other/OEM 4% Selected items as % of revenue: Gross profit 42% R&D 7% EBIT2 16% Net income 10% Net cash from ops 16% D&A 5% Capex3 5% Employees, period-end (k) 355.8 ∆ shares out (avg) -4%

2007 8% 4% 2% 9% 98.8

2008 5% 2% 10% 3% 103.6

2009 -8% -5% 5% 0% 95.8

2010 4% 3% 4% n/a 99.9

37% 18% 20% 22% 3%

38% 19% 21% 19% 2%

39% 18% 22% 17% 2%

38 18% 23% 18% 2%

12% 13% 10% -3%

9% 9% 11% -10%

-5% -10% -3% -16%

2% 3% 5% 11%

10% 11% 30% 10% 55% 15%

12% 14% 32% 8% 63% 16%

15% 14% 38% 9% 75% 19%

15% 14% 40% 9% 88% 20%

42% 35% 20% 4%

41% 36% 20% 3%

42% 34% 22% 2%

42% 32% 23% 3%

42% 6% 16% 11% 16% 5% 5% 386.6 -7%

44% 6% 18% 12% 18% 5% 4% 398.5 -4%

46% 6% 20% 14% 22% 5% 4% 399.4 -3%

46% 6% 21% 15% 20% 5% 4% n/a -4%

One of the more sizeable of IBM’s many acquisitions during 2006-10 is the Cognos purchase (2008). 2010 M&A includes Netezza and Sterling Commerce. Stated before total interest on debt (including financing business portion). 3 Includes investment in PP&E (including software) and disposition of PP&E. 2

RATINGS

      

* While services often include IBM-branded software and IT equipment, other suppliers’ products are also used if a client requires it.

THE BOTTOM LINE By exiting commoditizing businesses like PCs and hard disk drives over the last decade, IBM has become mainly a software and IT services provider. The company’s focus on high-value projects for large enterprises and governments makes revenue growth dependent on incremental IT spending by these customers. At a high-single digit trailing earnings yield, shares should produce a long-term return that meaningfully exceeds such IT spending growth. While the software business is vulnerable to technology risk and consulting has fairly low entry barriers, IBM’s integrated service/product offerings, global reach, and a large patent portfolio (#1 in U.S. patent awards for 17 consecutive years) should aid growth and protect margins over time. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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Value-oriented Equity Investment Ideas for Sophisticated Investors

IBM – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE ($ in billions)

Valuation methodology

Trailing revenue (excluding financial services)1 Normalized EBIT margin2 Estimated normalized EBIT Fair value multiple Estimated enterprise value (excluding financial services) Plus: Estimated equity value of financial services business3 Plus: Net cash (excluding financial services net debt)4, 5 Minus: Net post-retirement liability4, 6 Minus: Non-controlling interest4 Estimated fair value of the equity of IBM7 Implied trailing earnings yield (2010 GAAP EPS)8 Implied trailing earnings yield (2010 non-GAAP EPS)8 Implied earnings yield (2011 GAAP EPS guidance)8 Implied earnings yield (2011 non-GAAP EPS guidance)8 Implied trailing FCF yield Implied dividend yield9 Implied EV-to-trailing revenue (excl. financial services revenue) Implied EV-to-trailing EBIT (excl. financial services EBIT) Implied EV per employee ($)10

Conservative

Base Case

Aggressive

10x estimated normalized EBIT of $14.6 billion (~20% below 2010 EBIT, ex. finance segment)

11x estimated normalized EBIT of $18.1 billion (approx. 2010 EBIT, ex. finance segment)

12x estimated normalized EBIT of $21.5 billion (~20% above 2010 EBIT, ex. finance segment)

$97.6 15.0% $14.6 10.0x $146.4 3.0 5.8 (16.0) (0.1) $139 billion $111 per share 10.4% 10.6% 11.4% 11.8% 11.2% 2.4% 1.50x 8.1x $367K

$97.6 18.5% $18.1 11.0x $198.7 3.0 5.8 (16.0) (0.1) $191 billion $152 per share 7.6% 7.7% 8.3% 8.5% 8.1% 1.7% 2.04x 11.0x $497K

$97.6 22.0% $21.5 12.0x $257.7 3.0 5.8 (16.0) (0.1) $250 billion $199 per share 5.8% 5.9% 6.3% 6.5% 6.2% 1.3% 2.64x 14.2x $645K

Revenue was $99.9 billion in 2010 (includes $2.2 billion of financial services revenue). EBIT margin was 18-19% in 2010, excluding EBIT and revenue associated with the financial services segment. For reference, Accenture has EBIT margins of ~13% (higher IBM margins are largely due to its high-margin software revenue; IBM's services EBIT margins are in the mid-teens). 3 The financial services business had net financing receivables of ~$27 billion at year-end 2010. Based on attributable debt of ~$23 billion, it has roughly $3.0 billion of equity value. Given that this is not material to our valuation, we simply value the business at 1x estimated equity value in all three valuation cases. 4 Based on balance sheet values as of December 31, 2010. 5 Based on $5.8 billion of net cash, excluding estimated net debt attributable to the financial services business. 6 The figure represents total underfunding as of year-end 2010. As of year-end 2009, IBM had total post-retirement obligations of $96 billion gross, of which $61 billion related to overfunded plans and $35 billion to underfunded plans. 7 Based on 1,258 million shares outstanding. 8 Non-GAAP guidance excludes amortization of purchased intangibles, other acquisition-related charges and certain retirement-related costs that the company has defined as non-operating. 2011 GAAP EPS guidance is "at least" $12.56 (up 9% y-y) and non-GAAP EPS guidance is "at least" $13.00 (up 11% y-y). 9 Based on annualizing the most recent quarterly dividend of $0.65 per share. 10 Based on ~400,000 employees as of December 31, 2009. This figure includes IBM/wholly owned subsidiaries only (excludes employees at less-than-wholly owned subsidiaries as well as staff hired on a temporary, part-time and limited-term employment basis). Source: Company filings, The Manual of Ideas analysis, assumptions and estimates. 2

IBM – REVENUE BY END MARKET FYE December 31 ($ in millions) Revenue by end-market: Financial services General business Public Industrial Distribution Communications Other Revenue growth by selected end-market: Financial services General business Public Industrial Distribution Communications

2006

2007

2008

2009

2010

25,200 17,000 13,400 11,500 9,000 8,700 6,624 91,424

27,500 18,800 14,600 11,800 9,800 9,700 6,586 98,786

29,300 19,500 15,800 12,300 10,200 10,400 6,130 103,630

27,200 19,100 15,600 10,100 9,000 9,400 5,358 95,758

29,300 19,400 16,000 10,300 9,800 9,500 5,570 99,870

5% 6% -2% 0% 2% 2%

9% 11% 9% 3% 9% 11%

7% 4% 8% 4% 4% 7%

-7% -2% -1% -18% -12% -10%

8% 2% 3% 2% 9% 1%

Source: Company filings, The Manual of Ideas analysis.

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Value-oriented Equity Investment Ideas for Sophisticated Investors

IBM – OPERATING EARNINGS

Non-GAAP: Excludes acquisition-related charges and non-operating retirement-related charges.

IBM – MANAGEMENT GUIDANCE FOR 2011

Includes acquisitions as of December 31, 2010.

IBM – MANAGEMENT’S ROADMAP FOR $20+ IN OPERATING EPS IN 2015

* Non-GAAP: Excludes acquisition-related charges and non-operating retirement-related charges Source for above charts: Company presentation dated January 18, 2011; available at http://ibm.co/dVf60J

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January 31, 2011 – Page 69 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Intel (INTC) – Appaloosa, Edinburgh, Markel Santa Clara, CA, 408-765-8080

Technology: Semiconductors, Member of S&P 500 Trading Data

www.intel.com

Consensus EPS Estimates

Price: $20.82 (as of 1/21/11) 52-week range: $17.60 - $24.37 Market value: $116 billion Enterprise value: $96 billion Shares out: 5,578 million Ownership Data

Valuation

This quarter Next quarter FYE 12/31/11

Latest $0.52 0.46 2.11

Month Ago $0.44 0.42 1.95

# of Ests 43 41 46

P/E FYE 12/25/10 P/E FYE 12/31/11 P/E FYE 12/30/12 P/E FYE 12/30/13 EV/ LTM revenue

FYE 12/30/12

2.20

2.06

EV/ LTM EBIT

Insider ownership: <1%

FYE 12/30/13

2.23

2.28

P / tangible book

Insider buys (last six months): 3

LT growth

11.8%

Insider sales (last six months): 3 Institutional ownership: 62%

EPS Surprise 1/13/11

Actual $0.59

10x 10x 9x 9x 2.2x 6x 2.6x

Greenblatt Criteria

Estimate $0.53

LTM EBIT yield LTM pre-tax ROC

17% 89%

12/25/04 34,209 19,746 10,130 7,516 1.16 6,400 11,515 3,656 7,859 17,172 24,058 3,719 48,143 201 8,006 703 9,564 0 38,579 68%

12/31/05 38,826 23,049 11,882 8,664 1.40 6,106 13,119 3,843 9,276 12,772 21,194 4,527 48,314 313 9,234 2,106 12,132 0 36,182 76%

Fiscal Years Ended 12/30/06 12/29/07 12/27/08 35,382 38,334 37,586 18,218 19,904 20,844 5,580 8,021 7,422 5,044 6,976 5,292 0.86 1.18 0.92 5,797 5,816 5,663 14,851 10,632 12,625 5,871 5,860 5,000 8,980 4,772 7,625 10,002 15,363 11,843 18,280 23,885 19,871 4,848 4,876 4,707 48,368 55,651 50,472 180 142 102 8,514 8,571 7,818 1,848 1,980 1,185 11,616 12,889 10,926 0 0 0 36,752 42,762 39,546 33% 46% 43%

12/26/09 35,127 19,561 5,711 4,369 0.77 5,557 10,926 5,197 5,729 13,920 21,157 5,304 53,095 172 7,591 2,049 11,391 0 41,704 33%

12/25/10 43,623 28,815 15,912 11,672 2.05 5,555 11,170 4,515 6,655 21,885 31,563 4,531 63,138 38 9,070 2,077 13,500 0 49,638 89%

LTME 12/25/10 43,623 28,815 15,912 17,001 2.05 5,555 n/a n/a n/a 21,885 31,563 4,531 63,138 38 9,070 2,077 13,500 0 49,638 89%

FQE 12/26/09 10,569 6,840 2,497 2,282 0.40 5,522 3,405 1,081 2,324 13,920 21,157 5,304 53,095 172 7,591 2,049 11,391 0 41,704 n/m

FQE 12/25/10 11,457 7,730 4,347 3,388 0.59 5,554 n/a n/a n/a 21,885 31,563 4,531 63,138 38 9,070 2,077 13,500 0 49,638 n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

$45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

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January 31, 2011 – Page 70 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA1

Chip manufacturer Intel operates in three segments: PC Client Group provides microprocessors and related chipsets and motherboards for desktops, notebooks, and netbooks; and wireless connectivity products. Data Center Group provides microprocessors and related chipsets and motherboards for the server, workstation, and storage computing markets; and wired connectivity products. Other includes chips for embedded apps and other products.

INVESTMENT HIGHLIGHTS •

•

• •

World’s largest semiconductor chip maker, based on revenue. Main products include microprocessors (70+% of revenue), chipsets, and flash memory for the computing and communications markets. Shares are undervalued if recent performance can be sustained. Shares trade at a ~10% trailing FCF yield (including a 3-4% dividend yield) on a net cash balance sheet. EV-to-trailing EBIT is 6x. “2010 was the best year in Intel’s history. We believe that 2011 will be even better,” said CEO Otellini (60) in January. For 2011, Intel is guiding revenue growth of ~10% y-y on “low to mid teens PC unit market growth” (excluding tablets) and a gross margin of ~65% (2010 gross margin: 66%). $20 billion of net cash and short-term investments as of 12/25/10. However, this should reduce by ~$8 billion pending M&A, including McAfee (MFE). Sources of competitive advantage: scale, brand, own microprocessor designs/manufacturing (~65% of wafer fabrication is at own facilities in the U.S.).

INVESTMENT RISKS & CONCERNS •

•

• • •

Recent performance may not be sustainable as 2010 revenue and margins are well above historical averages. Extrapolating record recent results may not be prudent given the industry’s cyclicality. Large exposure to desktop/hardware end-markets relative to faster-growing mobile/software-related markets. Recent bids for McAfee and the wireless business of Infineon are unlikely to change this. High R&D due to technology change. 2011 R&D + capex guidance of $16+ billion approximates the market value of ARM and AMD combined. Asset-heavy model due to own manufacturing results in higher fixed costs versus “fabless” firms such as Broadcom, Nvidia, Qualcomm and Via. Rival chip designs such as Cell Broadband Engine (IBM, Sony, Toshiba), ARM, and SPARC (Oracle).

FYE December 31 2006 ∆ revenue -9% ∆ EBIT -53% ∆ employees -6% Revenue ($bn) 35.4 % of revenue by segment: PC client n/a Data center n/a Other n/a EBIT margin by selected segment: PC client n/a Data center n/a Total EBIT margin 16% % of revenue by customer location: Asia-Pacific 49% Americas/Europe/Japan 51% Selected items as % of revenue: Gross profit 51% R&D 17% EBIT 16% Net income 14% Net cash from ops 30% D&A 14% Capex 17% Employees (000s) 94 Return on tangible equity 16% Tangible equity to assets 74% ∆ shares out (avg) -5%

2007 8 45% -8% 38.3

2008 -2% 9% -3% 37.6

2009 -7% -36% -5% 35.1

2010 24% 179%2 3% 43.6

71% 17% 12%

74% 18% 8%

75% 18% 7%

72% 20% 8%

31% 33% 21%

34% 32% 24%

29% 36% 16%

43% 51% 36%

51% 49%

55% 45%

57% 43%

52% 15% 21% 18% 33% 13% 13% 86 20% 75% 0%

55% 15% 24% 14% 29% 12% 14% 84 14% 76% -3%

56% 16% 16% 12% 32% 14% 13% 80 12% 76% -2%

66% 15% 36% 27% 38% 11% 12% 83 29% 76% 0%

Intel completed no major acquisitions in the periods reflected above. 2010 growth reflects record volume, higher selling prices and “lowest platform cost.” 2010 EBIT growth is 83% excluding $3.0 billion of special charges in 2009.

COMPARABLE PUBLIC COMPANY ANALYSIS

QCOM TXN BRCM NVDA ARMH AMD INTC

MV ($mn) 84,070 39,820 22,780 12,910 10,940 5,140 116,130

EV ($mn) 74,880 37,310 20,390 10,950 10,550 5,770 96,360

EV / Rev. 6.8x 2.8x 3.3x 3.0x 17.4x .9x 2.2x

P/ Tang. Book 5.1x 4.6x 6.8x 5.3x 22.1x 7.9x 2.6x

This FY P/E 18x 14x 16x 36x 62x 16x 10x

Next FY P/E 17x 13x 15x 22x 56x 12x 9x

RATINGS

      

THE BOTTOM LINE As the world’s largest chip producer, Intel has benefited from an upturn in demand which has resulted in record profitability in 2010. However, investors may be ill-advised to extrapolate recent results given industry cyclicality and technology change. Taking 2006-10 average EBIT as a measure of through-the-cycle earnings, shares appear fairly valued trading at an implied EV-to-EBIT of ~11x. Even so, if normalized performance lies between record 2010 results and historical profitability, recent valuation does appear undemanding. Management’s forecast for an “even better” 2011 should enable additional return of capital due to the strong balance sheet and FCF generation (despite cash outflow related to higher capex and pending M&A). © 2008-2011 by BeyondProxy LLC. All rights reserved.

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January 31, 2011 – Page 71 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

INTEL – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE Conservative

Base Case

Aggressive

10x estimated normalized EBIT of $9 billion (approximates 2006-10 average EBIT)

10x estimated normalized EBIT of $12.5 billion (midpoint of record 2010 EBIT and average 2006-10 EBIT)

10x estimated normalized EBIT of $16 billion (approximates record EBIT achieved in 2010)

Normalized EBIT estimate

$9.0

$12.5

$16.0

Fair value multiple

10.0x

Estimated enterprise value

$90.0

$125.0

$160.0

Plus: Net cash1

19.8

Plus: Other assets2

1.0

(1.0)

($ in billions)

Valuation methodology

Less: Nvidia patent settlement liability3

$110 billion

$145 billion

$180 billion

$19 per share

$25 per share

$32 per share

Implied FCF yield based on 2006-10 avg FCF

Implied FCF yield based on 2010 FCF

10%

Implied dividend yield5

2% 10x

Estimated fair value of the equity of Intel4

Implied EV-to-2010 EBIT

Implied EV-to-EBIT based on 2006-10 average EBIT

10x

14x

18x

Implied EV-to-2010 revenue

2.1x

2.9x

3.7x

Implied EV-to-revenue based on 2006-10 avg revenue

2.4x

3.3x

4.2x

Based on yearend 2010 balance sheet values of cash (including short-term investments and trading assets of $11.3 billion and $5.1 billion, respectively) and debt. Cash should reduce by ~$8 billion pending the completion of acquisitions including McAfee (MFE) and Infineon’s wireless operations, both expected in 2011. Includes long-term marketable equity securities of $1.0 billion. 3 Intel and Nvidia ended all outstanding legal disputes between the companies through a new patent cross license agreement in January 2011. As a result of the agreement, Intel will pay Nvidia $1.5 billion over the next 5 years (our value is a present value estimate). 4 Based on 5.7 billion diluted shares outstanding. 5 Based on a quarterly dividend of $0.18 per share ($0.72 annualized), which reflects the dividend increase announced in November 2010. The quarterly dividend was $0.1575 per share previously. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates. 2

INTEL – DIVIDENDS PER SHARE

* 2011 annualized figure for dividend is an Intel forecast based on the rate of 18.1125 cents per quarter approved by the Board of Directors in November 2010; all dividends are subject to actual declaration by the Board of Directors in the future. ^ represents $21.69 Intel stock price close on 12/3/2010. Source: Company presentation dated December 8, 2010; available at http://bit.ly/ib74Kr

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January 31, 2011 – Page 72 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

PC AFFORDABILITY WORLDWIDE – WEEKS OF INCOME TO BUY CONSUMER NOTEBOOK PC

INSTALLED BASE OF PCs PER HOUSEHOLD

ARCHITECTURAL CONTESTS – HISTORICAL PROCESSOR MARKET SHARES

Source for above charts: Company presentation dated December 8, 2010; available at http://bit.ly/ib74Kr

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January 31, 2011 – Page 73 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Johnson & Johnson (JNJ) – Appaloosa, BRK, Fairfax, FPA, Markel, West Coast New Brunswick, NJ, 732-524-0400

Health Care: Major Drugs, Member of S&P 500 Trading Data

www.jnj.com

Consensus EPS Estimates

Price: $62.66 (as of 1/21/11) 52-week range: $56.86 - $66.20 Market value: $172.1 billion Enterprise value: $162.0 billion Shares out: 2,746.3 million Ownership Data

Valuation

This quarter Next quarter FYE 12/31/10

Latest $1.03 1.29 4.75

Month Ago $1.03 1.29 4.75

# of Ests 16 5 21

P/E FYE 1/3/10 P/E FYE 12/31/10 P/E FYE 12/31/11 P/E FYE 12/30/12 EV/ LTM revenue

FYE 12/31/11

4.97

4.99

EV/ LTM EBIT

Insider ownership: <1%

FYE 12/30/12

5.36

5.37

P / tangible book

Insider buys (last six months): 9

LT growth

5.9%

6.0%

Insider sales (last six months): 7 Institutional ownership: 64%

EPS Surprise 10/19/10

Actual $1.23

14x 13x 13x 12x 2.6x 9x 6.9x

Greenblatt Criteria

Estimate $1.15

LTM EBIT yield LTM pre-tax ROC

11% 87%

12/28/03 41,862 29,686 10,308 7,197 2.40 2,968 10,595 2,262 8,333 9,523 22,995 11,539 48,263 1,139 13,448 2,955 21,394 0 26,869 94%

1/2/05 47,348 33,874 12,331 8,180 2.74 2,968 11,089 2,175 8,914 12,884 27,320 11,842 53,317 280 13,927 2,565 21,504 0 31,813 >100%

1/1/06 50,514 36,504 13,116 10,060 3.35 2,974 11,799 2,632 9,167 16,138 31,480 12,175 58,864 668 12,635 2,017 20,154 0 38,710 >100%

Fiscal Years Ended 12/31/06 12/30/07 53,324 61,095 38,267 43,344 14,587 13,283 11,053 10,576 3.73 3.63 2,936 2,883 14,248 15,022 2,666 2,942 11,582 12,080 4,084 9,315 22,975 29,945 28,688 28,763 70,556 80,954 4,579 2,463 19,161 19,837 2,014 7,074 31,238 37,635 0 0 39,318 43,319 92% 76%

12/28/08 63,747 45,236 16,929 12,949 4.57 2,803 14,972 3,066 11,906 12,809 34,377 27,695 84,912 3,732 20,852 8,120 42,401 0 42,511 93%

1/3/10 61,897 43,450 15,755 12,266 4.40 2,760 16,571 2,365 14,206 19,425 39,541 31,185 94,682 6,318 21,731 8,223 44,094 0 50,588 82%

LTME 10/3/10 62,494 43,430 17,638 13,598 4.87 2,758 17,848 2,269 15,579 22,126 42,717 32,443 98,247 2,843 17,414 9,182 40,956 0 57,291 87%

FQE 9/27/09 15,081 10,647 4,245 3,345 1.20 2,756 5,094 519 4,575 14,337 35,602 31,653 91,558 3,341 19,245 8,259 41,174 0 50,384 n/m

FQE 10/3/10 14,982 10,388 4,219 3,417 1.23 2,752 5,034 528 4,506 22,126 42,717 32,443 98,247 2,843 17,414 9,182 40,956 0 57,291 n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

$80 $70 $60 $50 $40 $30 $20 $10 $0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

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January 31, 2011 – Page 74 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA1

J&J develops and markets branded healthcare products.

INVESTMENT HIGHLIGHTS •

• •

•

~70% of revenue is attributable to products or businesses with #1 or #2 global market share. J&J’s world-leading health care product franchises provide diversified and high-margin income streams. Shares trade at an ~8% earnings yield (3-4% dividend yield) on 2011 non-GAAP EPS guidance of $4.80-4.90, up 1-3% y-y (on revenue up 2-3%*). Market may underappreciate earnings quality and the strong balance sheet with ~$10 billion of net cash and marketable securities. J&J faces no major patent expirations (largest product Remicade, 7-8% of revenue, is protected until 2018 in the U.S.). The steady income of most of J&J’s business enables it to return more capital to shareholders. Medical device business (~40% of revenue) is #1 player in a ~$350 billion global market in 2009. J&J expects a 2009-14 CAGR of 5% for the total devices and diagnostics market and a 6% CAGR for the segments in which it competes (~60% of total). Pharma business (~35% of revenue) is one of the largest players in a ~$650 billion global market. EvaluatePharma expects a 2009-16 market CAGR of 3-4%, driven by emerging markets (~25% of J&J revenue is from non-U.S./European markets). Consumer business (~25% of revenue) owns some of the world’s most recognizable brands including Tylenol, Acuvue and Neutrogena. OTC drugs/skin care items are ~55% of segment revenue. One of the largest holdings of Warren Buffett’s Berkshire, which added shares in 3Q10.

INVESTMENT RISKS & CONCERNS •

•

Earnings growth is a challenge given the size of the business and record EBIT margins. However, revenue loss from near-term patent expirations (Levaquin, 2% of revenue, loses U.S. exclusivity in 2011) and U.S. health care reform (~$400 million higher sales rebates in 2010) appears manageable. Use of cash. Management may overpay for acquisitions in its quest to drive growth. While the recent €1.8 billion bid for Crucell is small, larger M&A may be a risk given accumulating net cash.

Based operational sales growth (at constant currency exchange rates).

MAJOR HOLDERS Insiders <1% | State Street 5% | Vanguard 4% | Berkshire 2%

1 2

FYE December 31 2005 ∆ revenue 7% ∆ due to volume 5% ∆ due to price 1% ∆ due to currency 1% ∆ employees 5% ∆ EBIT (excl. items) 3% Revenue ($bn) 50.5 % of revenue by segment: Pharmaceutical 44% Medical devices 38% Consumer 18% Revenue growth by segment: Pharmaceutical 1% Medical devices 13% Consumer 9% EBIT margin by segment:2 Pharmaceutical 29% Medical devices 27% Consumer 18% Total EBIT margin 25% U.S. as % of revenue 56% U.S. revenue growth 2% International growth 13% Int’l at constant forex 11% Selected items as % of revenue: Gross profit 72% R&D3 13% EBIT (excl. items) 25% Net income 20% Net cash from ops 23% D&A 4% Capex 5% ∆ shares out (avg) 0%

2006 6% 4% 2% 0% 6% 9% 53.3

2007 15% 10% 1% 3% -2% 0% 61.1

2008 4% 1% 1% 2% 0% 23% 63.7

2009 -3% 0% 0% -3% -3% 1% 61.9

2010 -1%

44% 38% 18%

41% 36% 24%

39% 36% 25%

36% 38% 26%

36% 40% 24%

4% 6% 7%

7% 7% 48%

-1% 6% 11%

-8% 2% -2%

-1% 4% -8%

30% 30% 14% 26% 56% 5% 6% 6%

26% 22% 16% 21% 53% 9% 22% 15%

31% 31% 17% 27% 51% 0% 10% 5%

31% 32% 18% 28% 50% -4% -1% 4%

34% 31% 16% 29% 48% -5% 4% 2%

72% 13% 26% 21% 27% 4% 5% -1%

71% 13% 23% 17% 25% 5% 5% -2%

71% 12% 27% 20% 23% 4% 5% -3%

70% 11% 28% 20% 27% 4% 4% -2%

69% 11% 29% 22% 27%4 5%4 3%4 0%

} -1% 1% -1% 2% 61.6

J&J acquired Pfizer’s consumer healthcare business for $17 billion in 12/06. 2009-10 ex. special items. 3 Ex. in-process R&D. 4 Based on 1Q-3Q 2010.

COMPARABLE PUBLIC COMPANY ANALYSIS

PFE NVS ABT MDT LLY CENX JNJ

MV ($mn) 147,050 129,180 74,080 41,340 40,080 1,300 172,080

RATINGS

EV ($mn) 168,030 148,150 88,950 48,360 41,080 1,340 161,980

EV / Rev. 2.5x 2.9x 2.6x 3.1x 1.8x 1.2x 2.6x

P/ Tang. Book n/m >99x n/m 11.4x 4.9x 1.2x 6.9x

This FY P/E 8x 11x 11x 11x 7x 22x 13x

Next FY P/E 8x 10x 10x 11x 8x 13x 13x

      

THE BOTTOM LINE J&J has world-leading franchises in branded medical devices, pharmaceuticals and consumer healthcare products. As ~25% of revenue derives from products introduced in the last five years, innovation remains critical to value creation. Earnings growth may be a challenge given the size of the business, record EBIT margins, and some revenue pressure from regulatory reforms and patent expirations. However, at a high single-digit trailing earnings yield (including a 3-4% dividend yield), the market may underappreciate the quality of J&J’s income streams and the net cash balance sheet. More aggressive return of capital would be our preferred use of cash as this would lower the risk of potentially value-destroying acquisitions. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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January 31, 2011 – Page 75 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

JOHNSON & JOHNSON – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE ($ in billions) Valuation methodology 2010 revenue 2010 adjusted EBIT margin1 Estimated normalized EBIT Fair value multiple Estimated enterprise value Plus: Net cash 9/30/2010 Minus: Net post-retirement liability 9/30/2010 Estimated fair value of the equity of Johnson & Johnson2 Implied earnings yield based on 2011 adj. EPS guidance midpoint3 Implied earnings yield based on 2010 adj. EPS Implied dividend yield4 Implied EV-to-2010 revenue Implied EV per employee ($mn)5

Conservative

Base Case

Aggressive

10x estimated normalized EBIT

11x estimated normalized EBIT

12x estimated normalized EBIT

$61.6 28.5% $17.6 10.0x $175.5 10.1 (6.4) $179 billion $64 per share 7.4% 7.4% 3.4% 2.9x $1.5

$61.6 28.5% $17.6 11.0x $193.1 10.1 (6.4) $197 billion $71 per share 6.7% 6.7% 3.1% 3.1x $1.7

$61.6 28.5% $17.6 12.0x $210.6 10.1 (6.4) $214 billion $77 per share 6.2% 6.2% 2.8% 3.4x $1.8

1 2 The average adjusted EBIT margin during 2005-09 is 25-26%, excluding restructuring charges and other special items. Based on 2,786 million shares 3 outstanding. Based on EPS guidance of $4.80-4.90 for 2011 (up 1-3% y-y). Guidance excludes special items and is based on currency exchange rates as of 4 January 20, 2011. Guidance is based on operational sales growth of 2-3% y-y (excludes currency impact). Based on annualizing the 3Q10 dividend of $0.54 5 per share. Based on 114,000 employees as of October 3, 2010. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

JOHNSON & JOHNSON – 2010 FINANCIAL HIGHLIGHTS

Non-GAAP measure; excludes special items.

Non-GAAP financial measure: defined as operating cash flow less capital spending; estimated as of 1/25/11.

JOHNSON & JOHNSON – 2010 SEGMENT OPERATING PROFIT

JOHNSON & JOHNSON – 2011 GUIDANCE

** Non-GAAP measure; excludes special items. As of 1/20/2011. Source for above charts: Company Q4 2010 presentation.

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January 31, 2011 – Page 76 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

JOHNSON & JOHNSON – REVENUE ANALYSIS FYE December 31 ($ in millions) Selected revenue drivers: Revenue by category/product: Remicade (inflammation) Procrit/Eprex (anemia) Risperdal Consta (schizophrenia) Levaquin/Floxin (bacterial infections) Concerta (attention deficit disorders) Aciphex/Pariet (ulcers) Topamax (epilepsy) Other Total pharmaceutical DePuy (orthopedics) Ethicon Endo-Surgery (surgical) Ethicon (surgical) Vision Care Cordis (vascular) Diabetes Care Ortho-clinical diagnostics (screening) Total medical devices/diagnostics OTC pharmaceuticals & nutritionals Skin care Baby care Women’s health Oral care Wound Care/Other Total consumer Total revenue % of revenue by category/product: Remicade (inflammation) Procrit/Eprex (anemia) Risperdal Consta (schizophrenia) Levaquin/Floxin (bacterial infections) Concerta (attention deficit disorders) Aciphex/Pariet (ulcers) Topamax (epilepsy) Other Total pharmaceutical DePuy (orthopedics) Ethicon Endo-Surgery (surgical) Ethicon (surgical) Vision Care Cordis (vascular) Diabetes Care Ortho-clinical diagnostics (screening) Total medical devices/diagnostics OTC pharmaceuticals & nutritionals Skin care Baby care Women’s health Oral care Wound Care/Other Total consumer Total revenue ∆ revenue due to: ∆ volume ∆ price ∆ currency ∆ employees Employees (000s)

2005

2006

2007

2008

2009

2010

2,535 3,324 n/a 1,492 774 1,169 1,680 11,348 22,322 3,847 3,105 3,092 1,694 3,982 1,909 1,467 19,096 2,678 2,401 1,561 1,568 319 569 9,096 50,514

3,013 3,180 n/a 1,530 930 1,239 2,027 11,348 23,267 4,105 3,376 3,213 1,879 4,088 2,074 1,548 20,283 2,742 2,633 1,740 1,666 406 587 9,774 53,324

3,327 2,885 1,128 1,646 1,028 1,357 2,453 11,042 24,866 4,698 3,834 3,603 2,209 3,314 2,373 1,705 21,736 5,142 3,051 1,982 1,806 1,488 1,024 14,493 61,095

3,748 2,460 1,309 1,591 1,247 1,158 2,731 10,323 24,567 5,136 4,286 3,840 2,500 2,988 2,535 1,841 23,126 5,894 3,381 2,214 1,911 1,624 1,030 16,054 63,747

4,304 2,245 1,425 1,550 1,326 1,096 1,151 9,423 22,520 5,372 4,492 4,122 2,506 2,679 2,440 1,963 23,574 5,630 3,467 2,115 1,895 1,569 1,127 15,803 61,897

4,610 1,934 1,500 1,357 1,319 1,006 538 10,132 22,396 5,585 4,758 4,503 2,680 2,552 2,470 2,053 24,601 4,549 3,452 2,209 1,844 1,526 1,010 14,590 61,587

5% 7% n/a 3% 2% 2% 3% 22% 44% 8% 6% 6% 3% 8% 4% 3% 38% 5% 5% 3% 3% 1% 1% 18% 100% 7%

6% 6% n/a 3% 2% 2% 4% 21% 44% 8% 6% 6% 4% 8% 4% 3% 38% 5% 5% 3% 3% 1% 1% 18% 100% 6%

5% 5% 2% 3% 2% 2% 4% 18% 41% 8% 6% 6% 4% 5% 4% 3% 36% 8% 5% 3% 3% 2% 2% 24% 100% 15%

6% 4% 2% 2% 2% 2% 4% 16% 39% 8% 7% 6% 4% 5% 4% 3% 36% 9% 5% 3% 3% 3% 2% 25% 100% 4%

7% 4% 2% 3% 2% 2% 2% 15% 36% 9% 7% 7% 4% 4% 4% 3% 38% 9% 6% 3% 3% 3% 2% 26% 100% -3%

7% 3% 2% 2% 2% 2% 1% 16% 36% 9% 8% 7% 4% 4% 4% 3% 40% 7% 6% 4% 3% 2% 2% 24% 100% -1%

5% 1% 1% 5% 116

4% 2% 0% 6% 122

10% 1% 3% -2% 119

1% 1% 2% 0% 119

0% 0% -3% -3% 116

-1% 1% -1% 114

Source: Company data, Manual of Ideas analysis.

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January 31, 2011 – Page 77 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

JPMorgan (JPM) – Blue Ridge, Castle Point, Kleinheinz, Lone Pine, Paulson, Viking New York, NY, 212-270-6000

Financial: Regional Banks, Member of S&P 500 Trading Data

www.jpmorganchase.com

Consensus EPS Estimates

Price: $45.29 (as of 1/21/11) 52-week range: $35.16 - $48.20 Market value: $177.1 billion Shares out: 3,910.3 million

This quarter Next quarter

Ownership Data

Valuation

Latest $1.15 1.15

Month Ago $1.06 1.11

# of Ests 21 21

P/E FYE 12/31/10 P/E FYE 12/31/11 P/E FYE 12/30/12 P/E FYE 12/30/13

11x 10x 8x 8x

P / tangible book

1.7x

FYE 12/31/11

4.72

4.61

Insider ownership: 0%

FYE 12/30/12

5.54

5.43

Insider buys (last six months): 21 Insider sales (last six months): 18 Institutional ownership: 75%

FYE 12/30/13 LT growth

5.91 7.5%

5.97 7.5%

7 4

Latest EPS Surprise Report date: Estimated EPS: Actual EPS:

1/14/11 $1.00 $1.12

12/31/04 30,460 13,933 6,010 4,414 1.48 2,780

12/31/05 45,075 25,520 12,055 8,470 2.32 3,492

14,275 35,168 419,583 141,940 9,145 493,525 57,887 1,157,248 127,787 153,779 770,029 339 105,314

(15,147) 36,670 460,393 122,204 9,081 512,414 58,180 1,198,942 125,925 162,083 803,723 139 107,072

Fiscal Years Ended 12/31/06 12/31/07 12/31/08 59,107 71,387 73,018 37,865 44,981 34,239 20,677 22,364 3,816 14,440 14,924 4,742 3.82 4.33 0.81 3,470 3,404 3,501 (30,236) 40,412 526,168 165,663 8,735 550,504 60,038 1,351,520 162,173 161,814 911,743 0 115,790

(49,579) 40,144 673,772 169,634 9,319 609,277 60,001 1,562,147 154,398 213,026 1,071,502 0 123,221

n/a 26,895 851,237 124,000 10,045 1,099,864 63,011 2,175,052 192,546 281,244 1,534,378 31,939 134,945

12/31/09 66,350 15,198 13,189 8,774 2.24 3,863

12/31/10 63,782 12,781 23,253 15,764 3.96 3,956

LTME 12/31/10 63,782 12,781 23,257 15,768 3.97 3,956

FQE 12/31/09 15,615 3,237 3,547 2,949 0.74 3,946

FQE 12/31/10 15,612 3,510 6,593 4,412 1.12 3,917

23,098 26,206 669,762 119,630 11,118 1,136,764 68,509 2,031,989 261,413 281,543 1,323,668 8,152 157,213

121,897 27,567 734,119 123,587 13,355 1,152,435 66,542 2,117,605 276,644 325,318 1,339,537 7,800 168,306

n/a 27,567 734,119 123,587 13,355 1,152,435 66,542 2,117,605 276,644 325,318 1,339,537 7,800 168,306

11,013 26,206 669,762 119,630 11,118 1,136,764 68,509 2,031,989 261,413 281,543 1,323,668 8,152 157,213

n/a 27,567 734,119 123,587 13,355 1,152,435 66,542 2,117,605 276,644 325,318 1,339,537 7,800 168,306

Ten-Year Stock Price Performance and Trading Volume Dynamics

$60

$50

$40

$30

$20

$10

$0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

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January 31, 2011 – Page 78 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA1

JPMorgan Chase operates in seven segments: Investment Bank (25% of equity; 17% ROE):* Ranks #1 in 2010 global investment banking fees with ~8% market share. Retail Financial Services (17% of equity; 9% ROE): ~5,270 branches with $337 billion of avg deposits in 2010 (#3 share in the U.S.). Ranks #3 in mortgage originations (~9% share). Card Services (9% of equity; 14% ROE): ~20% share of allpurpose credit card balances. Chase is #1 Visa card issuer. Commercial Banking (5% of equity; 26% ROE): Among the top three asset-based lending lead arrangers in the U.S. Asset management (4% of equity; 26% ROE): $1.30 trillion of assets under management at year-end 2010 (up 4% y-y). Treasury & Securities Services (4% of equity; 17% ROE): Ranks #2 in global assets under custody ($16.1 trillion at 12/31/10, up 8% y-y). Ranks #1 in US$ clearing (20+% share). Corporate/Private Equity (36% of equity; n/a): Comprises all central functions as well as a private equity portfolio with a $9 billion carrying value at 12/31/10 ($10 billion at cost).

INVESTMENT HIGHLIGHTS •

•

• • •

Grew tangible common equity per share at a 13% CAGR since yearend 2005, when chairman and CEO Jamie Dimon (54) took the helm. “Have the earnings power to generate substantial capital, well beyond what we will need to prudently grow our business.” Pre-tax, preprovision profit is ~1.8x net charge-offs in 2010. Targets $22-24 billion of “steady-state” net income (‘10: $17 billion) on segment ROEs: IB (17%), RFS (30%), CS (20%), CB (20%), AM (35%), TSS (30%).** To “return to dividend payout ratio of 30-40% of normalized earnings” over time. The symbolic ‘10 dividend is likely to be materially raised in 2Q11. Bought back $3 billion worth of shares in 2010.

INVESTMENT RISKS & CONCERNS • • •

“Steady-state” ROE targets may be optimistic given the potential for higher capital requirements and inherent volatility in main operating businesses. Shares appear fairly valued assuming a 10% ROE and a 10x multiple of implied net income to common of $16 billion, in-line with the 2010 result. ~50% of 2010 net income derives from volatile investment banking and private equity business.

Based on average equity and returns on equity for 2010. ** These are segment targets (ignores capital needed at corporate).

FYE December 31 2005 2006 ∆ tangible book/share 5% 15% ∆ assets 4% 13% ∆ employees 5% 3% ∆ net interest income 32% 3% ∆ pre-provision profit 38% 7% ∆ diluted EPS 3% 37% Assets ($tn) 1.2 1.4 Selected items as % of assets: Securities/trading assets 47% 50% Loans, net 34% 35% Other assets 19% 15% Customer deposits 46% 47% Other liabilities 45% 44% Common equity 9% 9% Revenue ($bn) 59.1 65.1 % of revenue by type: Net interest income 45% 42% Non-interest income 55% 58% % of revenue by segment: Investment bank 25% 29% Retail financial services 25% 23% Card services 26% 23% Commercial banking 6% 6% Asset management 10% 10% Other2 9% 9% Net income margin by selected segment: Investment bank 25% 20% Retail financial services 23% 22% Card services 12% 22% Commercial banking 28% 27% Asset management 21% 21% Total net margin 18% 22% Selected income statement items ($bn): Pre-provision profit 23.6 25.4 Loss provision 7.3 5.5 Net charge-offs 7.6 5.3 Net income to common3 10.5 14.4 Selected credit data: Loan loss reserve ratio 1.7% 1.5% NPLs/gross loans 0.6% 0.4% Net charge-off ratio 1.7% 1.1% Net interest margin 1.9% 1.8% Return on assets 0.8% 1.1% Return on tang. equity4 22% 28% Tang equity/assets (avg) 4 4% 4% Tier 1 capital ratio 9% 9% ∆ shares out (avg) 25% 0%

2007 17% 16% 4% 19% 24% 8% 1.6

2008 3% 39% 25% 43% -7% -69% 2.2

2009 17% -7% -1% 28% 92% 67% 2.0

2010 16% 4% 8% -13% -22% 75% 2.1

53% 33% 14% 47% 45% 8% 74.8

48% 33% 19% 46% 47% 6% 72.8

53% 30% 17% 46% 46% 8% 108.6

54% 31% 15% 44% 48% 8% 104.8

43% 57%

64% 36%

55% 45%

49% 51%

24% 23% 20% 5% 12% 15%

17% 32% 23% 7% 10% 11%

26% 30% 19% 5% 7% 13%

25% 30% 16% 6% 9% 14%

17% 17% 19% 28% 23% 21%

-10% 4% 5% 30% 18% 8%

25% 0% -11% 22% 18% 11%

25% 8% 12% 35% 19% 17%

31.3 9.2 6.9 14.9

29.3 24.6 13.4 4.7

56.3 38.5 29.4 8.8

43.6 16.6 23.7 15.8

1.8% 0.7% 1.3% 2.1% 1.1% 25% 4% 8% -2%

3.1% 1.2% 2.1% 2.7% 0.3% 7% 4% 11% 0%

5.0% 2.8% 3.9% 3.0% 0.6% 11% 4% 11% 10%

4.7% 2.1% 3.4% 3.0% 0.9% 17% 5% 12% 3%

Figures reflect purchase of Bank One (2004) and WaMu (2008) and are on a “managed” basis (includes securitized credit card loans; fully-taxable revenue). Includes Treasury & Securities Services and Corporate/Private Equity. 3 2009 net income by geography: EMEA (47%), U.S. (38%), Asia (10%). 4 Based on common equity and excl. mortgage servicing rights in tang. equity. 2

RATINGS

      

THE BOTTOM LINE JPMorgan is a premier financial services franchise with each business commanding a strong position in its market. Under the leadership of chairman and CEO Jamie Dimon, the company has compounded tangible common equity per share at 13% from 2005 through 2010. Despite these positives, the risk-reward is not compelling: assuming a 10% normalized ROE (in-line with 2010 ROE), shares appear fairly valued at 11x implied net income. Market value to year-end 2010 tangible book is 1.8x. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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January 31, 2011 – Page 79 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

JPMORGAN CHASE – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE ($ in billions)

Valuation methodology

Conservative case metrics: Tangible common equity as of 12/31/20104 Fair value multiple Estimated equity value Base case metrics: "Normalized" net income to common Fair value multiple Estimated equity value Aggressive case metrics: "Normalized" net income to common Fair value multiple Estimated equity value

Conservative

Base Case

Aggressive

1.25x tangible common equity1

10x "normalized" net income to common (based on implied net income assuming a 10% return on total equity)2

10x "normalized" net income to common (based on implied net income assuming a 15% return on total equity)3

$102 1.25x $127 $16 10.0x $161

Estimated fair value of the equity of JPMorgan Chase5 Implied equity fair value to tangible book Implied equity fair value to 2010 net income to common Implied equity fair value to "steady-state" net income guidance6 Implied recent dividend yield7 Implied estimated dividend yield8

$127 billion $32 per share 1.3x 8.1x 5.5x 0.6% 6.3%

$161 billion $41 per share 1.6x 10.2x 7.0x 0.5% 5.0%

$24 10.0x $241 $241 billion $61 per share 2.4x 15.3x 10.5x 0.3% 3.3%

Under present leadership, JPMorgan deserves a premium valuation to tangible book based on chairman and CEO Jamie Dimon's capital allocation and track record of generating consistently positive return on equity. JPMorgan's return on total equity was 10% based on 2010 net income. 3 The resulting net income of ~$24 billion approximates the high-end of JPMorgan's target of $22-24 billion of “steady-state” net income. 4 Mortgage servicing rights are excluded from tangible equity. 5 Based on 3.97 billion common shares outstanding. 6 Based on the midpoint of JPMorgan's target of $22-24 billion of “steady-state” net income. 7 Based on a dividend of $0.20 per share in 2010. 8 Based on JPMorgan's comments to aim to "return to dividend payout ratio of 30-40% of normalized earnings” over time. JPMorgan targets $22-24 billion of “steady-state” net income. The estimated dividend in our valuation is $8.0 billion (35% of $23 billion). Source: Company filings, The Manual of Ideas analysis, assumptions and estimates. 2

JPMORGAN – 2010 RESULTS (managed basis) ($ in millions)

Footnotes generally refer to information provided on other slides of the presentation referenced as the source below. Source: Company presentation dated January 14, 2011; available at http://bit.ly/hmOUGi

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Value-oriented Equity Investment Ideas for Sophisticated Investors

JPMORGAN – BALANCE SHEET HIGHLIGHTS ($ in billions)

Footnotes generally refer to information provided on other slides of the presentation referenced as the source below.

JPMORGAN – LOAN LOSS RESERVING ($ in millions)

JPMORGAN – CONSUMER CREDIT DELINQUENCY TRENDS

Source for above charts: Company presentation dated January 14, 2011; available at http://bit.ly/hmOUGi

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January 31, 2011 – Page 81 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Kraft Foods (KFT) – BRK, Eagle, Fairfax, FPA, Pershing Square, West Coast Northfield, IL, 847-646-2000

Consumer Non-Cyclical: Food Processing, Member of S&P 500 Trading Data

kraftfoodscompany.com

Consensus EPS Estimates

Price: $31.35 (as of 1/21/11) 52-week range: $27.09 - $32.67 Market value: $54.8 billion Enterprise value: $82.5 billion Shares out: 1,746.8 million Ownership Data

This quarter Next quarter FYE 12/31/10

Latest $0.47 0.53 2.03

Month Ago $0.47 0.53 2.03

Valuation # of Ests 18 9 18

P/E FYE 12/31/09 P/E FYE 12/31/10 P/E FYE 12/31/11 P/E FYE 12/30/12 EV/ LTM revenue

15x 15x 14x 12x 1.8x

FYE 12/31/11

2.32

EV/ LTM EBIT

14x

Insider ownership: <1%

FYE 12/30/12

2.60

P / tangible book

n/m

Insider buys (last six months): 4

LT growth

8.4%

8.6%

Insider sales (last six months): 7 Institutional ownership: 74%

EPS Surprise 11/4/10

Actual $0.47

Estimate $0.46

Greenblatt Criteria LTM EBIT yield LTM pre-tax ROC

7% 46%

2003 30,498 11,967 6,042 3,476 1.96 1,727 4,119 1,085 3,034 514 8,124 36,879 59,285 1,328 7,861 11,591 30,755 0 28,530 54%

2004 32,168 11,887 4,612 2,665 1.56 1,709 4,008 1,006 3,002 282 9,722 35,811 59,928 2,568 9,078 9,723 30,017 0 29,911 38%

Fiscal Years Ended December 31, 2005 2006 2007 34,113 33,256 35,858 12,268 11,912 12,202 4,752 4,154 4,176 2,632 3,060 2,721 1.72 1.71 1.56 1,684 1,643 1,591 3,464 3,720 3,571 1,171 1,169 1,241 2,293 2,551 2,330 316 239 567 8,153 8,254 10,737 35,164 35,730 43,393 57,628 55,574 67,993 2,073 3,133 8,107 8,724 10,473 17,086 8,475 7,081 12,902 28,035 27,019 40,698 0 0 0 29,593 28,555 27,295 40% 39% 37%

2008 41,932 13,844 3,843 2,884 1.21 1,505 4,141 1,367 2,774 1,244 11,461 40,507 63,173 1,662 11,044 18,589 40,878 0 22,295 34%

2009 40,386 14,600 5,524 3,021 2.03 1,478 5,084 1,330 3,754 2,101 12,454 42,193 66,714 966 11,491 18,024 40,838 0 25,876 52%

LTME 9/30/10 46,459 17,233 5,732 4,284 1.59 1,546 3,039 1,601 1,438 2,288 15,824 62,240 93,620 464 13,626 29,571 58,740 0 34,880 46%

FQE 9/30/09 9,397 3,378 1,339 824 0.52 1,479 1,549 275 1,274 2,996 13,018 41,936 66,669 2,617 12,056 18,108 41,544 0 25,125 n/m

FQE 9/30/10 11,863 4,321 1,519 754 0.43 1,748 445 412 33 2,288 15,824 62,240 93,620 464 13,626 29,571 58,740 0 34,880 n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

$50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

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January 31, 2011 – Page 82 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA1

Branded foods giant Kraft acquired confectionary producer Cadbury for $18.5 billion (60% cash) in February 2010, while selling its frozen pizza business to Nestle for $4 billion.

INVESTMENT HIGHLIGHTS •

•

World’s #2 food producer following the purchase of U.K.-based Cadbury in 1H10.* The deal expands snacks revenue to 50+% of the total. Kraft now has #1 share in biscuits ($68 billion global market) and chocolate ($90bn) and is #2 in candy/gum ($74bn). Owns 11 brands with $1+ billion annual revenue each: Oreo, Nabisco, LU (biscuits); Milka, Cadbury (chocolate); Trident (gum); Jacobs, Maxwell House (coffee); Philadelphia (cream cheese); Kraft (cheese, dinners and dressings); and Oscar Mayer (meat). Targets annual organic revenue growth of 5+%, EBIT margins in the mid-to high-teens and EPS growth of 9-11%. This includes $1 billion of planned revenue and $750 million of cost synergies by 2013. Cash-flow from U.S. “heritage” brands enables expansion into high-growth developing markets. This may accelerate as Kraft capitalizes on Cadbury’s distribution capabilities. Berkshire, Pershing Square and Fairfax own shares (the latter two have been sellers recently).

INVESTMENT RISKS & CONCERNS •

•

Valuation may already reflect Cadbury benefits as Kraft trades at an implied EV-to-EBIT of ~15x, based on 3Q10 annualized EBIT (13% margin). Even if “normalized” margin is 500bps higher, this would still imply an EV-to-EBIT of more than10x. Execution. While Kraft has shown it can integrate a big European business (LU biscuits in 2007), a deal of Cadbury’s size may still prove challenging. Kraft expects $1.5 billion of pre-tax restructuring costs by ‘12 (~$285 million incurred through September ’10). Perennial restructuring, since chairman and CEO Rosenfeld (56) took over in 2006, has not increased margins. This reflects competition from branded and private label (Wal-Mart: ~15% of revenue) and input cost challenges, none of which are going away. $28 billion of net debt (3.7x 3Q10 annualized EBITDA) and significant post-retirement liabilities.

* We estimate Cadbury contributed $2.4 billion of revenue and $290 million of EBIT in 3Q10 (~20% of total revenue; ~18% of total EBIT, excl. charges).

YTD 7/1/10 – FYE December 31 2007 2008 2009 9/30/10 9/30/10 Revenue ($bn) 35.9 41.9 40.4 35.4 11.9 ∆ revenue 9% 17% -4% 26%2 26%2 % of revenue by segment: U.S. beverages 8% 7% 8% 7% 6% U.S. cheese 10% 10% 9% 7% 7% U.S. convenient meals 11% 10% 11% 7% 7% U.S. grocery 9% 8% 9% 7% 7% U.S. snacks 14% 12% 12% 12% 13% Canada & N.A. foodservice 1% 10% 10% 10% 10% North America 64% 57% 59% 50% 50% Europe 20% 23% 22% 23% 23% Developing markets 17% 20% 20% 27% 28% Revenue growth by major segment: North America 4% 5% -1% 8% 9% Europe 5% 39% -10% 34% 29% Developing markets 32% 38% -4% 70% 70% EBIT margin by segment (segment margins are pre-corporate costs): U.S. beverages 12% 13% 17% 20% 17% U.S. cheese 13% 14% 19% 18% 20% U.S. convenient meals 8% 8% 11% 11% 10% U.S. grocery 31% 30% 33% 35% 31% U.S. snacks 15% 13% 15% 15% 14% Canada & N.A. foodservice 11% 10% 13% 13% 14% North America 15% 14% 17% 18% 17% Europe 6% 2% 9% 12% 12% Developing markets 10% 10% 12% 12% 11% Total EBIT margin 12% 9% 14% 12% 13% Selected items as % of revenue: Gross profit 34% 33% 36% 37% 36% EBIT 12% 9% 14% 12% 13% Net income 8% 7% 7% 5% 6% D&A 2% 2% 2% 3% 3% Capex 3% 3% 3% 3% 3% ∆ shares out (avg) -4% -5% -2% 15% 18%

YTD reflects Cadbury purchase and divestiture of the frozen pizza business in 1H10. As a result, 3Q10 figures are most reflective of the business going forward. Reflects Cadbury acquisition. 3Q10 organic revenue (excl. currency effects, Cadbury and divestitures) grew 2.5% y-y. Cadbury organic growth was +0.1%.

COMPARABLE PUBLIC COMPANY ANALYSIS

HNZ HSY SJM KFT

MV ($mn) 15,780 11,230 7,540 54,760

RATINGS

EV ($mn) 19,570 12,510 8,300 82,510

EV / Rev. 1.9x 2.2x 1.8x 1.8x

P/ Tang. Book n/m 62.1x n/m n/m

This FY P/E 16x 19x 14x 15x

Next FY P/E 15x 18x 13x 14x

      

THE BOTTOM LINE Kraft’s purchase of Cadbury has turned it into a major global producer of confectionary and biscuits – high-growth, highmargin categories representing 50+% of combined revenue. High market shares, margin improvement potential via synergies, and global growth prospects are key investment considerations. While management is likely to execute on deal synergies, this appears to be already reflected in recent valuation as shares trade at an implied EV-to-EBIT of ~15x (3Q10 run-rate EBIT).

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Value-oriented Equity Investment Ideas for Sophisticated Investors

KRAFT – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE ($ in billions)

Valuation methodology

Normalized revenue1 Normalized EBIT margin2 Normalized EBIT Fair value multiple Estimated enterprise value Minus: Net debt Minus: Net post-retirement liability Minus: Cadbury-related restructuring cost3 Minus: Non-controlling interest Estimated fair value of the equity of Kraft Foods4 Implied earnings yield based on 2010 non-GAAP EPS guidance5 Implied earnings yield based on 3Q10 annualized non-GAAP EPS Implied dividend yield6 Implied EV-to-3Q10 annualized revenue Implied EV-to-3Q10 annualized EBITDA Implied EV-to-3Q10 annualized EBIT

Conservative

Base Case

Aggressive

12x estimated normalized EBIT of ~$6.0 billion (approximates 3Q10 annualized EBIT)

13x estimated normalized EBIT of ~$7.0 billion (~20% above 3Q10 annualized EBIT)

14x estimated normalized EBIT of ~$8.5 billion (~40% above 3Q10 annualized EBIT)

$47.5 12.5% $5.9 12.0x $71.2 (27.7) (5.3) (2.0) (0.1) $36 billion $20.60 per share 10% 9% 6% 1.5x 9.6x 11.7x

$47.5 15.0% $7.1 13.0x $92.5 (27.7) (5.3) (1.5) (0.1) $58 billion $33.10 per share 6% 6% 4% 2.0x 12.4x 15.2x

$47.5 17.5% $8.3 14.0x $116.3 (27.7) (5.3) (1.2) (0.1) $82 billion $46.90 per share 4% 4% 2% 2.5x 15.6x 19.1x

Represents 3Q10 annualized revenue (~20% of revenue is from Cadbury; snacks represent ~50% of revenue; non-U.S. revenue is 50+%). 3Q10 reported EBIT margin was 12.8% (13.6% excluding acquisition-related and integration program costs). Company 3Q10 non-GAAP EBIT margin splits into a 13.9% margin at the Kraft "base business" (excluding Cadbury) and 12.4% at Cadbury. We estimate Cadbury contributed ~$2.4 billion of revenue and $290 million of EBIT in 3Q10, which represents ~20% of total revenue and ~18% of total EBIT, excluding restructuring charges. Based on Kraft's strategy update presented in September 2010, management's targets include annual organic revenue growth of 5+%, EBIT margins in the mid-to high-teens and annual EPS growth of 9-11%. This includes management's expectation of delivering $1 billion in incremental revenue synergies and $750 million in cost synergies by 2013 (stated revenue and cost synergies would represent incremental EBIT of ~2.0% of 3Q10 annualized revenue). 3 Kraft expects cumulative integration charges of $1.5 billion pre-tax through 2012 (incurred ~$285 million of charges through September 30, 2010). 4 Based on 1,747 million shares outstanding. 5 Kraft is guiding for "operating" EPS of "at least" $2.00 in 2010 (likely excludes 1-2 months of contribution from Cadbury). Operating EPS excludes costs related to: the restructuring program; acquisition-related costs, including transaction advisory fees, U.K. stamp taxes and the impact of the Cadbury inventory revaluation; acquisition-related financing fees, including hedging and foreign currency impacts associated with the Cadbury acquisition and other fees associated with the Cadbury bridge facility; and the impact of a deferred tax charge resulting from the recently enacted U.S. health care legislation. 6 Based on annualizing the 3Q10 dividend of $0.29 per share. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates. 2

OPERATING EPS GROWTH – KRAFT VERSUS SELECTED PEERS

Based on fiscal year data for companies shown in the above table. Source: Company presentation dated September 15, 2010; available at http://bit.ly/dqj4MD

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January 31, 2011 – Page 84 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

KRAFT – MARKET SHARE POSITION IN SELECTED MARKETS North America:

Source: Company presentation dated September 15, 2010; available at http://bit.ly/dqj4MD

KRAFT – MANAGEMENT GUIDANCE FOR ORGANIC REVENUE GROWTH

Source: Company presentation dated September 15, 2010; available at http://bit.ly/dqj4MD

KRAFT – CADBURY COST SYNERGIES AND PRETAX INTEGRATION COSTS

Source: Company presentation dated September 15, 2010; available at http://bit.ly/dqj4MD

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January 31, 2011 – Page 85 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Merck (MRK) – Appaloosa, Fairfax Whitehouse Station, NJ, 908-423-1000

Health Care: Major Drugs, Member of S&P 500 Trading Data

www.merck.com

Consensus EPS Estimates

Price: $33.90 (as of 1/21/11) 52-week range: $30.70 - $40.29 Market value: $104.4 billion Enterprise value: $112.0 billion Shares out: 3,080.9 million Ownership Data

Valuation

This quarter Next quarter FYE 12/31/10

Latest $0.83 0.92 3.37

Month Ago $0.84 0.90 3.37

# of Ests 20 7 21

P/E FYE 12/31/09 P/E FYE 12/31/10 P/E FYE 12/31/11 P/E FYE 12/30/12 EV/ LTM revenue

6x 10x 9x 8x 2.5x

FYE 12/31/11

3.82

3.81

EV/ LTM EBIT

13x

Insider ownership: <1%

FYE 12/30/12

4.01

4.03

P / tangible book

>99x

Insider buys (last six months): 6

LT growth

5.7%

5.8%

Insider sales (last six months): 6 Institutional ownership: 75%

EPS Surprise 10/29/10

Actual $0.85

Greenblatt Criteria

Estimate $0.82

LTM EBIT yield LTM pre-tax ROC

7% 50%

12/31/03 22,486 18,049 9,052 6,831 2.92 2,237 9,894 1,916 7,978 4,173 11,527 1,949 40,588 1,700 9,570 5,096 25,011 0 15,576 66%

12/31/04 22,973 18,007 8,003 5,830 2.62 2,219 8,799 1,726 7,073 7,090 13,475 1,765 42,573 2,181 11,744 4,692 25,285 0 17,288 64%

Fiscal Years Ended 12/31/05 12/31/06 12/31/07 22,012 22,636 24,198 16,862 16,635 18,057 7,364 6,221 3,492 4,631 4,434 3,267 2.10 2.03 1.49 2,197 2,178 2,171 7,609 6,765 6,999 1,403 980 1,011 6,206 5,785 5,988 15,638 8,713 8,231 21,049 15,230 15,045 1,604 2,376 2,168 44,846 44,570 48,351 2,972 1,285 1,824 13,242 12,723 12,258 5,126 5,551 3,916 26,868 27,010 30,166 0 0 0 17,978 17,560 18,185 70% 70% 41%

12/31/08 23,850 18,268 9,932 7,788 3.63 2,136 6,572 1,298 5,273 5,486 19,113 1,964 47,196 2,297 14,319 3,943 28,437 0 18,758 89%

12/31/09 27,428 18,409 15,292 12,853 5.65 2,268 3,392 1,461 1,931 9,605 28,429 59,579 112,090 1,586 15,751 16,075 53,032 0 59,058 84%

LTME 9/30/10 43,987 25,130 8,298 7,855 2.79 2,471 9,525 1,575 7,951 10,625 27,756 55,435 107,840 4,116 17,323 14,032 52,247 0 55,593 50%

FQE 9/30/09 6,050 4,619 5,077 3,413 1.61 2,109 (312) 303 (615) 22,256 29,669 1,995 48,739 867 8,026 8,205 25,832 0 22,907 n/m

FQE 9/30/10 11,125 6,934 498 340 0.11 3,078 2,592 338 2,254 10,625 27,756 55,435 107,840 4,116 17,323 14,032 52,247 0 55,593 n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

$90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Jan 02

Jan 03

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Jan 05

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January 31, 2011 – Page 86 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA1

Merck develops and markets branded medicines.

INVESTMENT HIGHLIGHTS •

•

One of the largest global pharma companies following the merger with Schering-Plough in ‘09. Key therapeutic areas are cardiology/diabetes (~20% of 3Q10 revenue), respiratory (~15%), infectious disease (~10%) and vaccines (~10%). Shares trade at a ~10% earnings yield and a 4% dividend yield, based on the midpoint of 2010 nonGAAP EPS guidance of $3.31-3.39 (up 2-4% y-y on a pro-forma basis). This appears attractive if Merck can deliver on its 2009-13 earnings growth targets. Targets a high single-digit EPS CAGR from 2009 to 2013 (non-GAAP), “regardless of the outcome of Remicade arbitration.” Patent-owner J&J/Centocor is contesting Merck’s selling rights for the arthritis drug (~6% of 3Q10 revenue) and a follow-on drug. “On track” to meet $3.5 billion of annual merger savings by end of 2012. As of 3Q10, roughly half of total savings are yet to be realized, representing ~4% of 3Q10 annualized revenue. The workforce is to be cut by ~15% since the merger to end of 2012. Deep pipeline may sustain longer term earnings growth. Among 19 compounds in phase III, the Hepatitis C antiviral boceprevir (under FDA priority review) is a likely blockbuster. Vorapaxar, which aims to prevent strokes, received a setback in January as Merck has to modify future clinical trials.

INVESTMENT RISKS & CONCERNS •

•

~20% of 3Q10 revenue is vulnerable by 2012. Patents for hypertension treatments Cozaar/Hyzaar (~4% of 3Q10 revenue) expired in 1H10, Remicade (~6%) faces a 2011 arbitration decision, while respiratory treatment Singulair (~11%) goes offpatent in August 2012. Products representing ~15% of additional 3Q10 revenue go off patent by 2016. Pricing pressure from U.S. healthcare reform and government austerity measures in Europe. U.S. reforms include increased Medicaid rebates (started in 2010) as well as a new Medicare Part D discount and annual “reform fees” starting in 2011. $8 billion of net debt and other liabilities including pension obligations ($13 billion gross liability at yearend 2009) and risks from product litigation.

FYE December 31 2007 ∆ revenue 7% ∆ employees 0% Revenue ($bn) 24.2 Revenue by segment: Pharmaceutical 92% Other3 8% Adjusted EBIT margin by segment:4, 5 Pharmaceutical (ex. corp.) 60% Other (ex. corp.) 8% Total adj. EBIT margin 33% % of revenue by major geography: U.S. 61% Europe/Mideast/Africa 21% Japan 6% Selected items as % of revenue: Gross profit 75% R&D 20% EBIT 13% Net income 14% Net cash from ops 29% D&A 8% Capex 4% Employees, period-end 59,800 ∆ shares out (avg) 0%

2008 -1% -8% 23.9

2009 15% 81% 27.4

YTD 9/30/10 96%2 76% 33.9

93% 7%

92% 8%

86% 14%

59% 7% 31%

57% 6% 26%

52% 5% 29%

56% 24% 8%

53% 26% 9%

n/a n/a n/a

77% 20% 40% 33% 28% 7% 5% 55,200 -2%

67% 21% 57% 47% 12% 9% 5% 100,000 6%

59% 19% 8% 4% 21% 16% 3% 93,000 47%

Financials reflect the merged operations of Merck and Schering-Plough from November 3, 2009 onward. Prior figures exclude Schering-Plough. 2 0% on a pro-forma basis (including Schering-Plough in the prior period). 3 Includes results of animal health, consumer healthcare (brands include Claritin, Dr. Scholl’s, and Coppertone), and other items. 4 YTD EBIT excludes $5.6 billion of Schering-Plough-related accounting adjustments, $950 million of legal reserve costs, $864 million of restructuring costs and a $443 million gain on the AstraZeneca option exercise (all excluded from Corporate). 2009 excludes $2.3 billion of Schering-Plough adjustments, a $7.5 billion gain related to the Merck/Schering-Plough cholesterol partnership (wholly-owned following the merger) and a $3.2 billion gain on the Merial divestiture. 2008 excludes a $2.2 billion gain on a AstraZeneca LP distribution. 2007 excludes a $4.9 billion charge related to the U.S. Vioxx settlement. 5 Corporate includes R&D, D&A, and other items. This results in corporate costs being high as a % of revenue (segment EBIT is high as it excludes such costs).

COMPARABLE PUBLIC COMPANY ANALYSIS

JNJ PFE NVS GSK SNY MRK

MV ($mn) 172,080 147,050 129,180 96,990 3,000 104,440

RATINGS

EV ($mn) 161,980 168,030 148,150 110,590 11,480 111,960

EV / Rev. 2.6x 2.5x 2.9x 2.4x .3x 2.5x

P/ Tang. Book 6.9x n/m >99x n/m .5x >99x

This FY P/E 13x 8x 11x 13x 7x 10x

Next FY P/E 13x 8x 10x 10x 8x 9x

      

THE BOTTOM LINE Merck has nearly doubled its workforce and revenue following the merger with Schering-Plough in 2009. The combined firm is one of the largest global branded pharmaceutical manufacturers. Merger-related cost savings and a deep pipeline including a potential blockbuster under priority review, may offset the impact of an estimated ~20% revenue loss from patent expiries by 2012 and a potential adverse arbitration ruling in 2011. If management can deliver on its earnings growth target of a high single-digit EPS CAGR from 2009 to 2013, shares are attractive trading at a ~10% earnings yield (incl. a 4% dividend yield). © 2008-2011 by BeyondProxy LLC. All rights reserved.

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Value-oriented Equity Investment Ideas for Sophisticated Investors

MERCK – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE Conservative

Base Case

Aggressive

8x est. normalized EBIT

10x est. normalized EBIT

12x est. normalized EBIT

$44.5 30% $13.4 8.0x $107.3 7.6 (7.5) (3.4) (2.5) (3.0) (1.0) $97 billion $32 per share 8% 5% 2.4x $1.2

$44.5 30% $13.4 10.0x $134.1 7.6 (7.5) (3.4) (2.5) (2.0) (0.5) $126 billion $41 per share 6% 4% 3.0x $1.4

$44.5 30% $13.4 12.0x $160.9 7.6 (7.5) (3.4) (2.5) (1.0) (0.0) $154 billion $50 per share 5% 3% 3.6x $1.7

($ in billions) Valuation methodology 3Q10 annualized revenue1 3Q10 adjusted EBIT margin2 Estimated normalized EBIT3 Fair value multiple3 Estimated enterprise value Plus: Value of JVs/affiliates4 Less: Net debt5 Less: Net post-retirement liability6 Less: Non-controlling interest5 Less: Estimate for Vioxx-related liabilities7 Less: Estimate for other liabilities8 Estimated fair value of the equity of Merck9 Implied trailing FCF yield10 Implied dividend yield11 Implied EV-to-3Q10 annualized revenue Implied EV per employee ($mn)12 1

We use Q3 annualized revenue due to the merger with Schering-Plough in Nov. 2009. The seasonality of product sales does not affect our analysis materially. Adjusted 3Q10 EBIT excludes a $1.5 billion charge related to purchase accounting adjustments, a $950 million legal reserve charge, $387 million of restructuring costs and $64 million of merger-related costs. In addition, it excludes equity income from affiliates. 3 Our estimate of normalized EBIT and use of different EBIT multiples attempts to account for the risks associated with patent expiries as well as opportunities offered by the company's drug pipeline and merger-related cost savings. A more detailed valuation may attempt to value the cash flows of the existing product portfolio and the new drug pipeline separately. Key considerations in valuing the existing revenue stream are: 1) respiratory treatment Singulair, which accounts for ~11% of 3Q10 revenue, loses U.S./Europe patent protection in August 2012; 2) rheumatoid arthritis treatment Remicade, which accounts for ~6% of 3Q10 revenue under a distribution agreement with J&J-owned Centocor, is the subject of a pending arbitration ruling which may lead to the company losing rights to distribute Remicade; 3) Hypertension treatment Cozaar/Hyzaar, which accounts for 4% of 3Q10 revenue, lost patent protection in 1H10 and is experiencing rapid revenue decline as a result; and 4) products representing ~15% of additional 3Q10 revenue go off patent by 2016, based on our analysis. 4 Reflects primarily interests in the AstraZeneca LP and Sanofi Pasteur MSD JVs. Estimated value is based on 8x 3Q10 annualized equity income from affiliates. 5 Based on September 30, 2010 balance sheet values. 6 Based on the net funded status of pension benefits (gross obligation: $13.2 billion) and other postretirement benefits as of year-end 2009. 7 Merck announced in October 2010 that it had established a $950 million reserve in connection with the anticipated resolution of the U.S. Department of Justice investigation related to Vioxx. Merck faces product liability lawsuits, shareholder and other lawsuits and investigations related to the withdrawal of arthritis treatment Vioxx from the market in 2004 due to safety concerns. 8 Includes product liability litigation related to Fosamax and NuvaRing as well as other litigation and investigations. 9 Based on 3,081 million shares outstanding. 10 Trailing FCF excludes approximately one month of contribution from Schering-Plough. It includes special items. 11 Based on annualizing the 3Q10 dividend of $0.38 per share. 12 Based on 93,000 employees as of September 30, 2010. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates. 2

MERCK – KEY PATENT EXPIRATIONS ($ in millions) Top 10 products by revenue Singulair (respiratory) Remicade (rheumatoid arthritis) Januvia (diabetes) Zetia (cholesterol) Vytorin (cholesterol) ProQuad/M-M-R II/Varivax (vaccines) Cozaar/Hyzaar (hypertension) Gardasil (HPV vaccine) Isentress (HIV) Nasonex (respiratory) Merck – revenue of top 10 products

3Q10 revenue $1,215 661 600 571 485 434 423 316 278 259 $5,243

% of 3Q10 revenue 11% 6% 5% 5% 4% 4% 4% 3% 2% 2% 47%

U.S. patent1 expiry 8/20122 n/m3 2022 2017 2017 n/a 20104 20265 2023 20146

Refers to compound patent unless otherwise noted. The patent for Singulair will also expire in a number of major European markets in August 2012. Remicade is marketed by the company outside of the U.S. (except in Japan and certain Asian markets) under a distribution agreement with Centocor, a unit of J&J. The distribution agreement is the subject of a pending arbitration ruling with a decision expected in 2011. 4 Expired in April 2010 (European patents expired in February/March 2010). 5 Patent for method of making/use/product by process. 6 Patent for use/formulation. Source: Company filings, The Manual of Ideas analysis. 2 3

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Value-oriented Equity Investment Ideas for Sophisticated Investors

MERCK – PHARMACEUTICAL PIPELINE 1 Number of drugs in Phase II clinical trials Number of drugs in Phase III clinical trials Number of drugs under review Drugs under review as of October 22, 2010: Compound 1) SCH 900121 2) MK-3009 1

12/2/2010 24 19 4

10/22/2010 18 192 2

Therapeutic area Contraception Staph Infection

Excludes combination products in development. Includes potential blockbusters boceprevir (Hepatitis C antiviral; received priority review by the FDA and European authorities in January 2011) and vorapaxar (aims to guard against heart attack; January 2011 drug study update leaves future filing process uncertain). Source: Company filings, The Manual of Ideas analysis.

MERCK – MARKET SHARE POSITION

Includes Asia Pacific, Latin America, Eastern Europe, Middle East & Africa.

MERCK – LATE-STAGE DRUG PIPELINE

Source for above charts: Company presentation dated January 11, 2011; available at http://bit.ly/h3Pcc9

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January 31, 2011 – Page 89 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Microsoft (MSFT) – Appaloosa, Bares, Blue Ridge, FPA, Greenlight, Markel, Weitz Redmond, WA, 425-882-8080

Technology: Software & Programming, Member of S&P 500 Trading Data

www.microsoft.com

Consensus EPS Estimates

Price: $28.02 (as of 1/21/11) 52-week range: $22.73 - $31.58 Market value: $239.7 billion Enterprise value: $206.2 billion Shares out: 8,555.5 million Ownership Data

This quarter Next quarter FYE 6/30/11

Latest $0.68 0.56 2.45

Month Ago $0.68 0.56 2.45

Valuation # of Ests 31 29 34

P/E FYE 6/30/10 P/E FYE 6/30/11 P/E FYE 6/29/12 P/E FYE 6/29/13 EV/ LTM revenue

FYE 6/29/12

2.68

2.69

EV/ LTM EBIT

Insider ownership: 11%

FYE 6/29/13

2.99

P / tangible book

Insider buys (last six months): 15

LT growth

11.3%

Insider sales (last six months): 13 Institutional ownership: 63%

EPS Surprise 10/28/10

Actual $0.62

Estimate $0.55

13x 11x 10x 9x 3.1x 8x 7.2x

Greenblatt Criteria LTM EBIT yield LTM pre-tax ROC

13% n/m

6/30/04 36,835 30,239 8,952 8,168 0.75 10,803 14,626 1,109 13,517 60,592 70,566 3,684 94,368 0 14,969 0 19,543 0 74,825 n/m

6/30/05 39,788 33,757 14,409 12,254 1.12 10,839 16,605 812 15,793 37,751 48,737 3,808 70,815 0 16,877 0 22,700 0 48,115 n/m

Fiscal Years Ended 6/30/06 6/30/07 6/30/08 44,282 51,122 60,420 36,632 40,429 48,822 16,064 18,438 22,271 12,599 14,065 17,681 1.20 1.42 1.87 10,438 9,742 9,328 14,404 17,796 21,612 1,578 2,264 3,182 12,826 15,532 18,430 34,161 23,411 23,662 49,010 40,168 43,242 4,405 5,638 14,081 69,597 63,171 72,793 0 0 0 22,442 23,754 29,886 0 0 0 29,493 32,074 36,507 0 0 0 40,104 31,097 36,286 n/m n/m n/m

6/30/09 58,437 46,282 21,225 14,569 1.62 8,945 19,037 3,119 15,918 31,447 49,280 14,262 77,888 2,000 27,034 3,746 38,330 0 39,558 n/m

6/30/10 62,484 50,089 24,167 18,760 2.10 8,813 24,073 1,977 22,096 36,788 55,676 13,552 86,113 1,000 26,147 4,939 39,938 0 46,175 >100%

LTME 9/30/10 65,759 53,067 26,714 20,596 2.33 8,763 26,160 2,106 24,054 44,173 59,581 13,548 91,540 1,000 25,857 9,665 44,598 0 46,942 n/m

FQE 9/30/09 12,920 10,078 4,482 3,574 0.40 8,914 6,107 435 5,672 36,728 52,231 14,235 81,612 2,250 28,761 3,746 40,400 0 41,212 n/m

FQE 9/30/10 16,195 13,056 7,116 5,410 0.62 8,614 8,194 564 7,630 44,173 59,581 13,548 91,540 1,000 25,857 9,665 44,598 0 46,942 n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

$40 $35 $30 $25 $20 $15 $10 $5 $0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

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Jan 08

Jan 09

Jan 10

Jan 11

January 31, 2011 – Page 90 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA

Microsoft, founded in 1975, is the world’s largest software company. It operates in five segments: Business (>90% of revenue from Office software), Windows and Windows Live (Windows operating systems), Server and Tools (Windows, SQL, Azure), Entertainment and Devices (~70% of revenue from Xbox products), and Online Services (Bing, MSN).

INVESTMENT HIGHLIGHTS •

•

• •

Parlayed ownership of PC operating systems into leadership in other areas such as enterprise software, Internet services, and gaming. Microsoft generates more operating income from business applications software than from Windows OS. ~10% trailing FCF yield appears attractive despite competitive concerns given 1) continued revenue growth and margin expansion; 2) a net cash balance sheet; and 3) return of free cash flow through ongoing share repurchases and dividends. Negative impact of rival operating systems and application software may be overblown. Strong demand for Windows 7 (240+ million licenses sold since ’09 launch), Office 2010 and server software drove 13% y-y adjusted revenue growth in F1Q11. $34 billion of net cash, including short-term investments as of September 30, 2010. Repurchased $4.0 billion of stock in Sep Q ($25/share). ~$20 billion authorization remains.

INVESTMENT RISKS & CONCERNS •

•

Technology change and short product cycles lower revenue and margin visibility. However, the recent valuation gives little credit to Microsoft’s moat as reflected in continued strong performance. Threats to license-based software model from “open source” products such as Linux, Apache, OpenOffice, and others. In addition, verticallyintegrated hardware/software models (e.g. Apple) as well as “cloud-based computing” are challenges. Ongoing Online losses despite Yahoo deal, in which Microsoft provides paid search to Yahoo from 2010-2019. Online lost $0.6 billion in F1Q11.

AAPL GOOG ORCL YHOO MSFT

EV ($mn) 274,020 164,140 156,440 18,130 206,220

EV / Rev. 3.6x 5.6x 4.9x 2.8x 3.1x

P/ Tang. Book 5.6x 5.0x 32.9x 2.6x 7.2x

2007 15% 16% 13% 11% 51.1

2008 18% 21% 21% 15% 60.4

2009 -3% -7% -9% 2% 58.4

2010 7% 4% 18% -4% 62.5

YTD1 9/30/10 25%2 -6% 59%2 n/a 16.2

32% 29% 22% 12% 5%

31% 27% 22% 14% 5%

32% 25% 24% 13% 5%

30% 28% 24% 13% 4%

31 29% 24% 11% 3%

14% 13% 15% 28% 6%

15% 11% 18% 34% 31%

0% -12% 8% -6% -3%

0% 23% 5% 5% -29%

13% 11%2 12% 25% 8%

65% 76% 32% -32% -25% -9% 36%

64% 76% 32% 4% -41% -9% 37%

63% 72% 36% 0% -77% -8% 35%

62% 68% 34% 7% -111% -4% 39%

65% 68% 40% 20% -110% -5% 44%

61% 39%

59% 41%

57% 43%

58% 42%

n/a n/a

79% 14% 28% 35% 3% 4% -7%

81% 14% 29% 36% 3% 5% -4%

79% 15% 25% 33% 4% 5% -4%

80% 14% 30% 39% 4% 3% -1%

81% 14% 33% 51% 4% 3% -3%

1 Revenue has generally been highest in the December quarter due to corporate calendar year-end spending and holiday season spending by consumers. 2 Adjusted for the deferral of Windows 7 revenue, revenue and EBIT growth are 13% and 20%. Windows segment revenue growth reflects this adjustment. 3 Represents y-y change in period-end deferred (unearned) revenue. Deferred revenue was $14 billion as of September 30, 2010 (~22% of FY10 revenue). 4 FY10 segment information reflects move of Windows Live, Mobile Services, and Razorfish from Online to Windows (prior Client segment), Entertainment, and to Corporate segments, respectively. Prior periods have not been revised.

RATINGS

COMPARABLE PUBLIC COMPANY ANALYSIS MV ($mn) 301,000 195,650 164,250 20,810 239,730

FYE June 30 2006 11% ∆ revenue 19% ∆ deferred revenue3 12% ∆ EBIT 16% ∆ employees Revenue ($bn) 44.3 % of revenue by segment:4 Business 33% Windows & Windows Live 29% Server & Tools 22% Entertainment & Devices 11% Online Services 5% Revenue growth by segment: 4 Business 9% Windows & Windows Live 10% Server & Tools 16% Entertainment & Devices 38% Online Services -2% EBIT margin by segment: 4 Business 67% Windows & Windows Live 79% Server & Tools 33% Entertainment & Devices -27% Online Services 5% Corporate -13% Total EBIT margin 37% % of revenue by customer location: U.S. 67% International 33% Selected items as % of revenue: Gross profit 83% R&D 15% Net income 28% Net cash from ops 33% D&A 2% Capex 4% ∆ shares out (avg) -4%

This FY P/E 14x 18x 16x 18x 11x

Next FY P/E 13x 16x 14x 20x 10x

      

THE BOTTOM LINE Microsoft continues to be viewed as unexciting by many technology investors, while value investors may find it hard to get “comfortable” with the business due to technology change. This lack of a natural investor base seems to contribute to an undemanding valuation: shares trade at a ~10% trailing FCF yield despite double-digit revenue and EBIT growth. The undervaluation is even more apparent given $34 billion of net cash and negative contribution from valuable online businesses. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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Value-oriented Equity Investment Ideas for Sophisticated Investors

MICROSOFT – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE Conservative

Base Case

Aggressive

Sum-of-the-parts valuation (see detailed assumptions below)

Value of excess marketable assets:1 Cash, cash equivalents, and short-term investments Less: Debt Less: Estimated cash needed to run business Estimated value of excess marketable assets

$44.2 (10.7) (2.0) $31.5

$44.2 (10.7) (1.0) $32.5

$44.2 (10.7) (0.0) $33.5

Value of Business segment: Trailing EBIT Fair value multiple2 Estimated enterprise value of Business

$12.2 8.0x $97.5

$12.2 10.0x $121.9

$12.2 12.0x $146.3

Value of Windows segment: Trailing EBIT Fair value multiple3 Estimated enterprise value of Windows

$12.5 8.0x $99.8

$12 10.0x $124.7

$12 12.0x $149.7

Value of Server & Tools segment: Trailing EBIT Fair value multiple4 Estimated enterprise value of Server & Tools

$5.4 8.0x $43.2

$5.4 10.0x $53.9

$5.4 12.0x $64.7

Value of Entertainment & Devices segment: Trailing EBIT Fair value multiple5 Estimated enterprise value of Entertainment & Devices implied EV-to-trailing revenue

$0.7 10.0x $7.0 0.8x

$0.7 12.0x $8.4 1.0x

$0.7 14.0x $9.9 1.2x

Value of Online Services segment: Trailing revenue Fair value multiple6 Estimated enterprise value of Online Services

$2.2 2.0x $4.5

$2.2 3.0x $6.7

$2.2 4.0x $9.0

($5.0) 8.0x ($40.0)

($4.5) 10.0x ($45.0)

($4.0) 12.0x ($48.0)

$244 billion $28 per share 8x 10% 8% 7% 2%

$303 billion $35 per share 10x 8% 7% 6% 2%

$365 billion $42 per share 12x 7% 6% 5% 2%

($ in billions) Valuation Methodology

Negative value of corporate overhead: Estimated corporate costs Fair value multiple Estimated value drag of corporate overhead Estimated fair value of the equity of Microsoft7 Implied EV-to-trailing EBIT Implied trailing FCF yield Implied trailing net earnings yield Implied FCF yield based on overage FY05-10 FCF Implied dividend yield - based on F1Q11 annualized dividend8 1

Based on balance sheet values as of September 30, 2010. We do not assign here any value to the $9.2 billion of "equity and other investments" as these are assumed to be accounted for in the operating results of the various segments.

Multiples reflect strong market position of Office software and high-single digit average revenue growth during FY05-10 (F1Q11 y-y revenue growth: 13%; reflects sales of the 2010 Microsoft Office products released during the fourth quarter of fiscal year 2010).

Multiples reflect strong market position of Windows operating systems and high-single digit average revenue growth during FY05-10 (F1Q11 y-y revenue growth: 11%, adjusted for the Windows 7 deferral in the prior year; reflects sales of Windows 7 and total worldwide PC shipments of 9-11%).

Multiples reflect strong market position of Windows and SQL server offerings and low double-digit average revenue growth during FY05-10 (F1Q11 y-y revenue growth: 12%; reflects sales growth in Windows Server, SQL Server, Enterprise CAL Suites and Windows Embedded revenue).

Multiples reflect strong Xbox market position and ~20% revenue growth during FY05-10 (F1Q11 y-y revenue growth: 25%; reflects increased volumes of Xbox 360 consoles sold (2.8 million consoles shipped in F1Q11 compared with 2.1 million in F1Q10) and higher Xbox 360 video game revenue led by Halo Reach).

Multiples reflect the large online market opportunity and prospects for improved profitability for Bing and MSN offerings.

Based on 8.64 billion shares outstanding.

Based on annualizing the F1Q11 dividend of $0.16 per share. Including share repurchases, the total capital return during F1Q11 was $5.4 billion, representing on an annualized basis 9%, 7% and 6% of our estimated equity fair values in the conservative, base and aggressive valuation cases, respectively. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

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Value-oriented Equity Investment Ideas for Sophisticated Investors

MICROSOFT – DESCRIPTION OF BUSINESS SEGMENTS SEGMENT #1: BUSINESS (30% OF TRAILING REVENUE; 63% EBIT MARGIN) Products:

Microsoft Office (90+% of segment revenue), Microsoft Dynamics

Customers:

~80% of revenue from businesses, ~20% from consumers

Revenue drivers:

Business: # of workers using Office (volume-based licenses); Consumer: new PC shipments (consumers buy products through OEMs)

Competitors:

Office: Apple, Google (Apps), IBM, Novell, Oracle, Red Hat Dynamics (business management software): Oracle, SAP, Intuit, Sage

Operating developments:

Office 2010 release is driving momentum; Office 365 announced

SEGMENT #2: WINDOWS AND WINDOWS LIVE (28% OF TRAILING REVENUE; 68% EBIT MARGIN) Products:

Windows operating systems (vast majority of sales)

Customers:

~75% of revenue from OEMs, ~25% from commercial/retail sales

Revenue drivers:

Windows OS: Worldwide PC shipments (OEMs pre-install Windows OS) Windows Live: Online advertising

Competitors:

Apple, "open-source" operating systems including Linux

Operating developments:

Windows 7 demand driving recent growth (9-11% PC market growth in F1Q11)

SEGMENT #3: SERVER AND TOOLS (23% OF TRAILING REVENUE; 35% EBIT MARGIN) Products:

Windows Server, Microsoft SQL Server, Windows Azure and other "cloud" and server offerings, and Windows Embedded device platforms; enterprise services include product support and consulting

Customers:

Primarily businesses (50% of revenue is from volume licensing agreements)

Revenue drivers:

Enterprise data/datacenter growth

Competitors:

HP, IBM, Oracle, CA, Novell, Red Hat, VMware

Operating developments:

Windows Azure subscriptions are up 40% sequentially in F1Q11

SEGMENT #4: ENTERTAINMENT AND DEVICES (13% OF TRAILING REVENUE; 8% EBIT MARGIN) Products:

Xbox 360 products and services (~70% of segment revenue), Zune digital music and entertainment platform, PC/online game software and services, Mediaroom (IPTV software), Windows Phone

Revenue drivers:

Xbox: # of consoles sold; consumer adoption of new games

Competitors:

Xbox: Sony (PlayStation), Nintendo (Wii) Zune: Apple (iPod) Windows Phone: Apple (iPhone)

Operating developments:

Xbox Kinect launched in Nov 2010; Windows Phone 7 launched in Oct/Nov '10

SEGMENT #5: ONLINE SERVICES (3% OF TRAILING REVENUE; -113% EBIT MARGIN) Products:

Bing Internet search engine, MSN Internet portal, and advertiser/publisher tools

Customers:

Online advertisers and, to a lesser extent, users

Revenue drivers:

Online advertising growth and, to a lesser extent, user subscriptions/fees

Competitors:

Google, Yahoo! (also a partner through the 2009 paid search agreement), AOL

Operating developments:

Bing "continues to gain market share in the U.S."; Yahoo! search integration "milestones achieved" (per October 2010 company presentation)

Source: Company filings, The Manual of Ideas analysis.

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Value-oriented Equity Investment Ideas for Sophisticated Investors

Pfizer (PFE) – Blue Ridge, FPA, Greenlight, Kleinheinz, Maverick, Paulson, Pennant New York, NY, 212-733-2323

Health Care: Major Drugs, Member of S&P 500 Trading Data

www.pfizer.com

Consensus EPS Estimates

Price: $18.36 (as of 1/21/11) 52-week range: $14.00 - $19.92 Market value: $147.1 billion Enterprise value: $168.0 billion Shares out: 8,009.5 million Ownership Data

Valuation

This quarter Next quarter FYE 12/31/10

Latest $0.46 0.60 2.22

Month Ago $0.46 0.61 2.22

# of Ests 19 4 22

P/E FYE 12/31/09 P/E FYE 12/31/10 P/E FYE 12/31/11 P/E FYE 12/30/12 EV/ LTM revenue

15x 8x 8x 8x 2.5x

FYE 12/31/11

2.30

2.29

EV/ LTM EBIT

18x

Insider ownership: <1%

FYE 12/30/12

2.25

2.22

P / tangible book

n/m

Insider buys (last six months): 0

LT growth

2.8%

3.2%

Insider sales (last six months): 4 Institutional ownership: 71%

EPS Surprise 11/2/10

Actual $0.54

Greenblatt Criteria

Estimate $0.51

LTM EBIT yield LTM pre-tax ROC

6% 40%

12/31/03 44,736 35,147 3,246 3,906 0.22 7,213 11,727 3,417 8,310 12,343 30,677 57,856 116,775 8,818 23,909 5,755 51,398 219 65,158 15%

12/31/04 48,988 42,597 13,403 11,353 1.44 7,531 16,340 2,928 13,412 20,546 39,088 57,007 123,078 11,266 26,458 7,279 54,800 193 68,085 62%

Fiscal Years Ended 12/31/05 12/31/06 12/31/07 47,405 48,371 48,418 40,173 40,731 37,179 10,800 13,028 9,278 8,079 19,332 8,140 1.03 1.52 1.18 7,361 7,242 6,917 14,733 17,594 13,353 2,537 2,203 1,880 12,196 15,391 11,473 22,736 28,227 26,092 46,835 47,658 46,849 47,229 45,226 41,880 116,970 115,546 115,268 11,589 2,434 5,825 28,402 22,099 21,835 6,347 5,546 7,314 51,206 44,188 50,258 169 141 93 65,595 71,217 64,917 48% 65% 50%

12/31/08 48,296 40,184 9,694 8,101 1.19 6,727 18,238 1,701 16,537 24,555 43,076 39,185 111,148 9,320 27,009 7,963 53,592 73 57,483 56%

12/31/09 50,009 41,121 10,827 8,633 1.22 7,007 16,587 1,205 15,382 27,164 61,670 110,391 212,949 5,469 37,225 43,193 122,935 61 89,953 55%

LTME 10/3/10 66,785 50,853 9,481 6,132 0.76 7,262 10,021 1,388 8,633 23,238 54,089 102,414 191,415 5,158 24,172 39,010 103,780 54 87,581 40%

FQE 9/27/09 11,621 9,832 3,971 2,878 0.43 6,730 4,101 261 3,840 53,264 73,784 37,921 141,294 6,954 23,992 32,402 75,137 64 66,093 n/m

FQE 10/3/10 16,171 12,275 1,440 865 0.11 8,027 6,683 288 6,395 23,238 54,089 102,414 191,415 5,158 24,172 39,010 103,780 54 87,581 n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

$50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

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January 31, 2011 – Page 94 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA1

Pfizer develops and markets branded medicines.

INVESTMENT HIGHLIGHTS •

•

• •

Broadened revenue sources and added vaccines and biologics focus via Wyeth purchase in 2009. Pfizer has the #1 market position in cardiovascular, #2 in infectious disease and central nervous system treatments, and is #4 in vaccines globally. It is the market leader in the U.S. (12% share), Europe (10%), Asia (7%), Japan (6%) and Latin America (6%). Guiding for non-GAAP net income to be up 5% from 2010 to ‘12, despite key patent expirations in 2011. With shares trading at a ~12% earnings yield (4% dividend yield) based on the midpoint of 2010 non-GAAP EPS guidance of $2.17-2.22, the market seems too pessimistic on Pfizer’s prospects. New products and cost reductions may offset negative revenue pressure from patent expirations and regulatory reforms. Pfizer targets $4-5 billion of costs saves by the end of 2012 relative to 2008 proforma costs. It expects to “exceed” its 15% staff reduction target. Revenue is expected to decline 2% from 2010 to $65.2-67.7 billion in 2012. “Remain on track” to achieve 15 to 20 regulatory submissions in 2010-12. Pfizer has 12 pending U.S. new drug applications and supplemental filings. One of the largest holdings of Appaloosa, Greenlight and other “superinvestors.”

INVESTMENT RISKS & CONCERNS •

• • • •

~40% of 3Q10 revenue is vulnerable by 2016 due to already expired or yet to expire patents (most by 2012). Pfizer expects it “will lose the substantial portion” of U.S. revenue from Lipitor (16% of 3Q10 revenue, of which ~50% from the U.S.) shortly after November 2011 when it loses exclusivity in the U.S. M&A strategy carries integration risks. The postWyeth Pfizer is pursuing yet more M&A including a recent $3.6 billion bid for drug maker King (KG). Chairman and CEO Kindler (54) “retired” in December 2010. Ian Read (57), ex-head of Pfizer’s global biopharmaceutical operations, became CEO. Expects an adverse revenue impact of ~$900 million in 2011 from U.S. health care reforms. $22 billion of net debt and pension obligations.

FYE December 31 ∆ revenue ∆ employees Revenue ($bn) Revenue by segment: Biopharmaceutical3 Diversified/Other4 Adjusted EBIT margin by segment:5 Biopharmaceutical Diversified / other Corporate Total adj. EBIT margin % of revenue by geography: U.S. Developed Europe6 Other Selected items as % of revenue: Gross profit R&D EBIT Net income7 Net cash from ops7 D&A Capex Employees, period-end ∆ shares out (avg)

2007 0% -12% 48.4

2008 0% - % 48.3

2009 4% 42% 50.0

YTD 10/3/10 50%2 51% 50.2

92% 8%

91% 9%

87% 13%

47% 0% -7% 38%

49% 24% -7% 40%

48% 20% -8% 38%

5 % 24% -7% 41%

48% 28% 24%

42% 31% 27%

43% 29% 27%

43% 25% 32%

77% 17% 17% 17% 28% 11% 4% 86,600 -4%

83% 16% 18% 17% 38% 11% 4% 81,800 -3%

82% 16% 23% 17% 33% 10% 2% 116,500 4%

76% 13% 19% 11% 10% 13% 2% 111,500 20%

Financials reflect the acquisition of Wyeth for $68 billion in cash and stock on October 15, 2009. Prior figures exclude any contribution from Wyeth. Revenue declined 1% y-y excluding Wyeth and currency movements. 3 Focus on cardiovascular/metabolic, central nervous system, arthritis/pain, infectious/respiratory, cancer, eye diseases and endocrine/urogenital disorders. 4 Focus on animal health, consumer healthcare, and nutrition products. 5 Net interest is excluded from the Corporate segment. YTD EBIT excludes 1) a $6.6 billion purchase accounting charge; 2) $2.7 billion of acquisition-related and restructuring costs; 3) $1.7 billion of intangible asset impairments; and 4) $212 million of inventory write-offs (all mainly related to Wyeth). 2007-09 adj. EBIT also excludes similar and other special items. 6 2007-09 figures include all of Europe. 7 YTD non-GAAP net income margin is 28% (YTD net cash from ops reflects cash outflows related to special items, which are excluded from non-GAAP). 2

COMPARABLE PUBLIC COMPANY ANALYSIS

JNJ NVS MRK GSK SNY PFE

MV ($mn) 172,080 129,180 104,440 96,990 3,000 147,050

EV ($mn) 161,980 148,150 111,960 110,590 11,480 168,030

EV / Rev. 2.6x 2.9x 2.5x 2.4x .3x 2.5x

P/ Tang. Book 6.9x >99x >99x n/m .5x n/m

This FY P/E 13x 11x 10x 13x 7x 8x

Next FY P/E 13x 10x 9x 10x 8x 8x

RATINGS

      

THE BOTTOM LINE Pfizer’s purchase of Wyeth in 2009 diversified revenue and improved the drug pipeline. An estimated 40% of 3Q10 revenue, however, remains vulnerable over the next five years due to expired or yet to expire patents (most by 2012, incl. blockbuster Lipitor). Nonetheless, the market’s valuation may be too pessimistic regarding Pfizer’s ability to stabilize and grow earnings over time. In fact, management expects net income to be up 5% from 2010 to 2012, helped by $4-5 billion of cost reductions and contribution from new products. The stock is one of the largest holdings of “superinvestors” Appaloosa and Greenlight. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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Value-oriented Equity Investment Ideas for Sophisticated Investors

PFIZER – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE Conservative

Base Case

Aggressive

8x estimated normalized EBIT

10x estimated normalized EBIT

12x estimated normalized EBIT

3Q10 annualized revenue1

$64.7

3Q10 adjusted EBIT margin2

36%

$23.5

($ in billions) Valuation methodology

Estimated normalized EBIT

Fair value multiple

8.0x

10.0x

12.0x

Estimated enterprise value

$188.0

$235.0

$282.0

Less: Net debt4

(21.7)

Less: Net post-retirement liability4

(8.5)

(0.4)

(5.3)

(2.0)

(1.0)

(0.0)

Less: Non-controlling interest

Less: Estimate for remaining restructuring liabilities

Less: Estimate for other liabilities6

$150 billion

$198 billion

$246 billion

$19 per share

$25 per share

$31 per share

Implied 2010 non-GAAP earnings yield (based on mgmt guidance)

12%

Implied 2012 GAAP earnings yield (based on mgmt guidance)8

Implied 2012 non-GAAP earnings yield (based on mgmt guidance)

12%

Implied dividend yield9

Estimated fair value of the equity of Pfizer7 Implied 2010 GAAP earnings yield (based on mgmt guidance)8 8

Implied trailing FCF yield

Implied EV-to-3Q10 annualized revenue

2.9x

3.6x

4.4x

Implied EV per employee ($mn)11

$1.7

$2.1

$2.5

We use 3Q10 annualized revenue as a starting base that can be readily identified by actual sales. 3Q10 revenue is also a better proxy for run-rate revenue than trailing revenue given the expiration of the Lipitor basic patent in March 2010 in the U.S. as well as the acquisition of Wyeth on October 15, 2009.

Adjusted 3Q10 EBIT excludes a $1.6 billion charge related to purchase accounting, $1.5 billion of intangibles impairments, $794 million of restructuring and M&Arelated costs, and $212 million of inventory write-offs (all charges relate primarily to the Wyeth acquisition). Adjusted EBIT includes equity income from affiliates.

Our estimate of normalized EBIT and use of different EBIT multiples attempts to account for the risks associated with patent expirations as well as opportunities offered by the drug pipeline and Wyeth-related cost savings. A more detailed valuation may attempt to value the cash flows of the existing product portfolio and the new drug pipeline separately. Key considerations in valuing the existing revenue stream are: 1) cholesterol treatment Lipitor, which accounts for ~16% of 3Q10 revenue, experienced a revenue decline of 11% y-y and 10% q-q in 3Q10, mainly as a result of the expiration of the basic patent in the U.S. in March 2010 (Pfizer expects it “will lose the substantial portion of our U.S. revenues from Lipitor shortly thereafter” referring to the date it will lose exclusivity for Lipitor in the U.S. in November 2011. The U.S. accounted for roughly 50% of Lipitor's total revenue in 3Q10. While the loss of exclusivity for Lipitor will occur at various times in developed markets outside the U.S., Pfizer expects “to maintain a significant portion of the Lipitor revenues in those markets through 2011” and does not expect that Lipitor revenue in emerging markets will be “materially impacted by loss of exclusivity over the next several years.”); and 2) products representing more than 25% of additional 3Q10 revenue have patents that have either expired or will expire before 2016, based on our analysis, with the vast majority of these patents expiring by the end of 2012. Pfizer's hypertension treatment Norvasc contributed 2% to Pfizer's 3Q10 revenue despite its patent having expired in 2007.

Based on October 3, 2010 balance sheet values.

Pfizer estimates costs related to cost-reduction activities to total $11.5-13.5 billion through 2012, of which it has incurred ~$8.2 billion through October 3, 2010. In our valuation, we assume the remainder is an immediate and 100% cash outflow (at the high end of cost guidance). In addition, Pfizer is involved in various patent, product liability, consumer, commercial, securities, environmental and tax litigations and claims; government investigations and other legal proceedings. According to Pfizer's 10Q filed on November 12, 2010, Pfizer does not believe "any of them will have a material adverse effect on our financial position."

Includes an estimate for potential liability from product liability and other litigation/investigations.

Based on 8,057 million shares outstanding.

Based on midpoint of GAAP net income guidance of $6.8-7.6 billion for 2010 (on revenue of $67.0-68.0 billion) and $12.9-14.1 billion for 2012 (on revenue of $65.2-67.7 billion). The non-GAAP earnings yields are based on the midpoint of non-GAAP net income guidance of $17.6-18.0 billion for 2010 and $18.3-19.1 billion for 2012. Non-GAAP net income excludes certain items as specified by Pfizer.

Based on annualizing the 3Q10 dividend of $0.18 per share.

Trailing FCF includes special items and excludes approximately two weeks of contribution from Wyeth (acquired in October 2009).

Based on 111,500 employees as of October 3, 2010.

Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

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January 31, 2011 – Page 96 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

PFIZER – KEY PATENT EXPIRATIONS ($ in millions) Top 10 biopharmaceuticals Primary indication Lipitor Reduction of LDL cholesterol Enbrel (outside U.S./Canada) Arthritis, psoriasis, spondylitis Lyrica Epilepsy, neuralgia/neuropathy, fibromyalgia Prevnar/Prevenar 13 Pneumococcal vaccine Celebrex Arthritis pain and inflammation, acute pain Viagra Erectile dysfunction Xalatan/Xalacom Glaucoma and ocular hypertension Norvasc Hypertension Zyvox Bacterial infections Geodon/Zeldox Schizophrenia, bipolar disorder/mania Pfizer - revenue of top 10 biopharmaceutical products 1

3Q10 revenue $2,534 799 757 735 578 459 416 330 285 262 $7,155

% of 3Q10 revenue 16% 5% 5% 5% 4% 3% 3% 2% 2% 2% 44%

U.S. patent1 expiry expired (2010)2 n/m3 2018 n/m 2014 2012 2011 expired (2007) 2015 2012

Refers to the year in which the U.S. basic product patent expires (including, where applicable, the additional six-month pediatric exclusivity period).

The U.S. basic product patent for Lipitor, including the pediatric exclusivity period, expired in March 2010. Pfizer has a patent covering specifically the enantiomeric form of the drug, which (including the pediatric exclusivity period) expires in June 2011. While Lipitor's 3Q10 revenue declined "only" 11% y-y and 10% q-q, Pfizer expects it "will lose the substantial portion of our U.S. revenues from Lipitor shortly thereafter" (referring to the date it will lose exclusivity for Lipitor in the U.S. in November 2011). The U.S. accounted for roughly 50% of Lipitor's total revenue in 3Q10. While the loss of exclusivity for Lipitor will occur at various times in developed markets outside the U.S., Pfizer expects "to maintain a significant portion of the Lipitor revenues in those markets through 2011" and does not expect that Lipitor revenue in emerging markets will be "materially impacted by loss of exclusivity over the next several years."

Pfizer has exclusive rights to the biologic Enbrel outside the U.S. and Canada and co-promotes Enbrel with Amgen in the U.S. and Canada. Revenue figure reflects sales outside U.S./Canada only, with U.S./Canada sales included in "Alliance" revenue (not listed in our table; "Alliance" revenue was $1.0 billion in 3Q10 including sales of Enbrel in the U.S. and Canada, Aricept, Exforge, Rebif and Spiriva). The Enbrel patent, which is owned by Amgen, expires in October 2012 in the U.S. Pfizer's U.S./Canada co-promotion agreement with Amgen expires in October 2013 (Pfizer is entitled to a royalty stream for 36 months thereafter, which is significantly less than its current share of Enbrel profits from U.S. and Canadian sales). Pfizer's rights to Enbrel outside the U.S. and Canada will not be affected by the expiration of the co-promotion agreement. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

PFIZER – ESTIMATED IMPACT OF U.S. HEALTHCARE REFORMS 1 Reform description

Date effective

Impact on Pfizer

Reforms with negative impact: An increase, from 15.1% to 23.1%, in the minimum rebate on branded prescription drugs sold to Medicaid beneficiaries.

January 1, 2010

Extension of Medicaid prescription drug rebates to drugs dispensed to enrollees in certain Medicaid managed care organizations.

March 23, 2010

Expansion of the types of institutions eligible for the “Section 340B discounts” for outpatient drugs provided to hospitals.

January 1, 2010

Discounts on branded prescription drug sales to Medicare Part D participants who are in the Medicare “coverage gap”.

January 1, 2011

Annual "reform fee" payable to the federal government.2

January 1, 2011

Provisions that affect the cost of certain postretirement benefit plans.

January 1, 2013

adverse revenue impact of ~$900 million in 2011 and ~$800 million in 20123

Reforms with positive impact: Expansion of health insurance coverage.

2014

uncertain (likely positive)4

Based on the principal provisions affecting Pfizer as a result of the U.S. healthcare legislation enacted in March 2010 (as stated in 10Q, November 12, 2010). The fee is based on prior-calendar-year share relative to other companies of branded prescription drug sales to specified government programs, with the total fee to be paid each year by the pharmaceutical industry increasing annually through 2018. The fee is not deductible for U.S. income tax purposes. 3 Pfizer's revenue was adversely impacted by $64 million in the third quarter of 2010 and $182 million in the first nine months of 2010, compared to the same periods last year, as a result of the reforms that became effective in the first half of 2010. Pfizer expects that full-year 2010 revenue will be adversely impacted by ~$300 million as a result of the U.S. healthcare legislation. Including the impact of reforms taking effect in 2011, it expects revenue will be adversely impacted by $900 million in 2011 and $800 million in 2012. While Pfizer refers to the impact in terms of revenue, the impact on EBIT is likely to be similar. 4 It is expected that there will be a substantial increase in the number of Americans with health insurance beginning in 2014, a significant portion of whom will be eligible for Medicaid. Pfizer anticipates that "this will increase demand for pharmaceutical products overall." Source: Company filings, The Manual of Ideas analysis, assumptions and estimates. 2

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January 31, 2011 – Page 97 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Travelers (TRV) – FPA, Greenlight, Southeastern Saint Paul, MN, 651-310-7911

Financial: Insurance (Property & Casualty), Member of S&P 500 Trading Data

www.travelers.com

Consensus EPS Estimates

Price: $55.00 (as of 1/21/11) 52-week range: $47.69 - $57.55 Market value: $25.2 billion Enterprise value: $31.3 billion Shares out: 459.0 million Ownership Data

Valuation

This quarter Next quarter FYE 12/31/10

Latest $1.68 1.59 6.07

Month Ago $1.71 1.59 6.09

# of Ests 21 13 22

P/E FYE 12/31/09 P/E FYE 12/31/10 P/E FYE 12/31/11 P/E FYE 12/30/12 EV/ LTM revenue

FYE 12/31/11

5.98

5.99

EV/ LTM EBIT

Insider ownership: <1%

FYE 12/30/12

5.83

P / tangible book

Insider buys (last six months): 13

LT growth

8.3%

Insider sales (last six months): 13 Institutional ownership: 85%

EPS Surprise 10/21/10

Actual $1.81

9x 9x 9x 9x 1.2x 3x 1.1x

Greenblatt Criteria

Estimate $1.51

LTM EBIT yield LTM pre-tax ROC

n/m n/m

Operating Performance and Financial Position ($ millions, except per share data)

Fiscal Years Ended December 31, 2005 2006 2007

2008

2009

LTME 9/30/10

FQE 9/30/09

FQE 9/30/10

26,017

24,477

24,680

25,236

6,327

6,482

9,914

7,604

8,459

8,662

2,237

2,303

4,711

9,084

1,250

1,371

3,593

3,577

928

996

6.33

7.08

1.65

2.11

563

539

558

466

4,231

3,419

1,415

1,341

2003

2004

15,139

22,544

24,365

25,090

4,037

4,127

6,186

9,507

Operating income

2,229

946

2,671

5,725

6,216

3,716

Net income

1,696

949

1,616

4,203

4,564

2,901

Diluted EPS

3.80

1.38

2.95

5.91

6.85

4.81

Shares out (avg)

434

608

676

687

652

596

3,833

5,229

3,605

4,774

5,286

3,138

Revenue Gross profit

Cash from operations Cash & investments Intangible assets Total assets

352

262

337

459

271

350

255

298

286

298

2,834

4,626

4,359

4,202

4,180

4,054

3,953

3,887

3,977

3,887

64,872

111,246

113,187

115,292

115,224

109,632

109,560

108,154

112,617

108,154

Long-term debt

2,675

6,313

5,850

5,760

6,242

6,181

6,527

6,252

6,528

6,252

Total liabilities

52,885

90,045

90,884

90,157

88,608

84,313

82,145

80,859

84,457

80,859

Preferred stock

188

153

129

112

Common equity

11,987

21,013

22,150

25,006

26,504

25,230

27,336

27,225

28,079

27,225

Ten-Year Stock Price Performance and Trading Volume Dynamics

$70 $60 $50 $40 $30 $20 $10 $0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

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January 31, 2011 – Page 98 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA

Travelers provides property and casualty insurance. Business segment (~50% of 2010 net earned premiums): provides property and casualty insurance mainly to commercial clients in the U.S. It also manages the company’s asbestos and environmental liabilities, assumed reinsurance and certain non-U.S. and other runoff operations. Personal (~35%): writes virtually all types of property and casualty insurance covering personal risks. Main coverages are auto and homeowners insurance sold to individuals. Financial, professional and international (~15%): includes surety/management liability, as well as property and casualty products in the U.K., Ireland Canada, and through Lloyd’s.

INVESTMENT HIGHLIGHTS •

•

• • •

One of the oldest U.S. insurance companies, dating back to 1853. Jay Fishman (57) has served as CEO since the 2004 merger of St. Paul with Travelers Property Casualty, which led to today’s structure. Fishman also became chairman in 2005. Superior capital stewardship, yet only a modest market valuation. Under Fishman’s leadership, the company has compounded tangible common book value per share in the high-teens since yearend ’05; yet shares trade at 1.2x yearend 2010 tangible book. “Committed to continuing to return excess capital to shareholders.” Management, who own 2+% (~$500 million), returned $5.7 billion through buybacks/dividends in ‘10 (~25% of market value). Booked a 12% ROE in 2010 despite catastrophe losses, which increased the combined ratio by five percentage points.* ROE was ~18% in 2006 and ‘07. Commercial lines are key profit driver, accounting for 75+% of 2010 operating income of $3.0 billion (net income excl. realized investment gains/losses). 4Q10 pricing environment “modestly better than in the third quarter” with an overall flat renewal rate.

INVESTMENT RISKS & CONCERNS •

• •

“Expect a modest increase in the consolidated loss ratio in 2011,” excluding catastrophes and prior year reserve development. Management also expects a “modest” fall in net investment income due to reinvesting maturing securities at lower rates. Reserving. As with any insurance business, lack of adequate reserving is a key source of potential risk. Asbestos and environmental reserves are ~$3 billion. Exposed to catastrophe risks.

Net favorable prior year reserve development of $818 million offset catastrophe losses of $729 million, both on an after-tax basis.

FYE December 31 2006 Tangible book value/share1 $28 ∆ tangible BVPS 21% ∆ net earned premiums 2% ∆ diluted EPS 101% Assets ($bn) 115.3 Selected items as % of total assets: Investments 63% Loss reserves2 51% Debt 5% Shareholders’ equity 22% Tangible shareholders’ equity1 17% Return on equity 18% Investment yield, after-tax3 3.8% Net earned premiums ($bn) 20.8 % of net earned premiums by segment: Business 52% Personal 32% Fin’l, professional & int’l 16% GAAP combined ratio by segment: Business 90.9% Personal 83.1% Fin’l, professional & int’l 89.0% Total GAAP combined ratio 88.1% Loss component 57.5% Expense component 30.6% Net income to common ($bn) 4.2 Common dividends ($bn) 0.7 Common repurchases ($bn) 1.1 Total capital return ($bn) 1.8 ∆ shares out (avg) 2%

2007 $33 16% 3% 16% 115.2

2008 $33 1% 1% -30% 109.6

2009 $42 25% -1% 32% 109.6

2010 $45 9% 0% 5% 105.2

65% 50% 5% 23% 18% 18% 3.9% 21.5

6 % 5 % 6% 23% 18% 11% 3.1% 21.6

68% 48% 6% 25% 20% 14% 3.1% 21.4

69% 49% 6% 24% 19% 12% 3.4% 21.4

53% 32% 16%

52% 32% 16%

51% 33% 16%

50% 34% 15%

87.8% 86.8% 87.6% 87.4% 56.6% 30.8% 4.6 0.7 2.9 3.7 -5%

90.2% 97.0% 87.2% 91.9% 59.4% 32.5% 2.9 0.7 2.2 2.9 -9%

86.1% 94.6% 88.1% 89.2% 57.3% 31.9% 3.6 0.7 3.3 4.0 -5%

91.3% 98.3% 87.7% 93.2% 61.0% 32.2% 3.2 0.7 5.0 5.7 -15%

Based on tangible common shareholders’ equity at period-end. Shareholders’ and common shareholders’ equity is similar as the value of preferred stock is minimal. Deferred acquisition costs are subtracted to arrive at tangible equity. 2 Includes claims and claim adjustment expense reserves. 3 Excludes realized gains and losses.

COMPARABLE PUBLIC COMPANY ANALYSIS

AIG HIG WRB

43.00 27.90 27.70

Market Value ($mn) 28,900 12,390 4,020

TRV

55.00

25,247

Price ($)

Price to Tangible Book 3.9x .6x 1.1x

This FY P/E 19x 10x 10x

Next FY P/E 41x 7x 11x

1.1x

FY End Date Dec-31 Dec-31 Dec-31 Dec-31

MAJOR HOLDERS CEO Fishman 1% | Other insiders 1% | Southeastern 2%

RATINGS

      

THE BOTTOM LINE Property and casualty insurer Travelers has compounded book value per share in the high teens, on average, since 2005. While this strikes us as a superior achievement, especially with modest use of debt, the market is not impressed: it values the shares in-line with year-end 2010 equity value and only a modest premium to tangible book. Given the company’s exposure to catastrophe as well as some long-tail risk, downside may not be as well protected as the valuation implies. Nonetheless, the risk-reward is favorable. Share repurchases, which have cut share count by a third since year-end 2007, are set to continue. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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Value-oriented Equity Investment Ideas for Sophisticated Investors

TRAVELERS – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE ($ in billions)

Valuation methodology

Conservative case metrics: Tangible common equity as of 12/31/20102 Fair value multiple Estimated equity value Base case metrics: "Normalized" net income to common Fair value multiple Estimated equity value Aggressive case metrics: "Normalized" net income to common Fair value multiple Estimated equity value

Conservative

Base Case

Aggressive

1.0x tangible common shareholders' equity

8x "normalized" net income to common (based on implied net income assuming a 15% return on equity)1

10x "normalized" net income to common (based on implied net income assuming a 15% return on equity)1

$19.8 1.0x $19.8 $3.8 8.0x $30.6

Estimated fair value of the equity of Travelers3 Implied equity fair value to tangible book Implied earnings yield based on 2010 net income to common Implied earnings yield based on "trough" earnings (2008) Implied earnings yield based on prior "peak" earnings (2007) Implied recent dividend yield4

$20 billion $45 per share 1.0x 16% 15% 23% 3%

$31 billion $69 per share 1.5x 10% 9% 15% 2%

$3.8 10.0x $38.3 $38 billion $87 per share 1.9x 8% 8% 12% 2%

Return on equity averaged ~15% during 2006-2010 with a "trough" of ~11% in 2008 and peak of ~18% in 2006 and 2007. 2010 ROE was 12%. The company's management targets a "mid-teens ROE over time." Our return on equity calculations are based on year-end 2010 shareholders' equity. In addition to goodwill and other intangibles, deferred acquisition costs of $1.8 billion are subtracted to arrive at tangible equity. 3 4 Based on 441 million diluted shares outstanding. Based on dividends of $670 million declared in 2010. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates. 2

TRAVELERS – RECENT FINANCIAL PERFORMANCE ($ in millions, except per share amounts)

Expenses related to the company’s purchase and retirement of $885 million of its $1.0 billion 6.25% fixed-to-floating rate junior subordinated debentures. Re-estimation of the current year loss ratios for the first three quarters of the respective year. 3 A benefit to the reported GAAP combined ratio is indicated as a positive item, and a charge is indicated as a negative item. 2

Source: Company presentation dated January 25, 2011; available at http://bit.ly/f6MpYo

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TRAVELERS – FINANCIAL POSITION ($ and shares in millions, except per share amounts)

Source: Company presentation dated January 25, 2011; available at http://bit.ly/f6MpYo

TRAVELERS – COMPONENTS OF OPERATING RETURN ON EQUITY

Source: Company presentation dated January 25, 2011; available at http://bit.ly/f6MpYo

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Value-oriented Equity Investment Ideas for Sophisticated Investors

Wal-Mart (WMT) – BRK, Eagle, Fairfax, FPA, Kleinheinz, Markel, Weitz Bentonville, AR, 479-273-4000

Services: Retail (Department & Discount), Member of S&P 500 Trading Data

walmartstores.com

Consensus EPS Estimates

Price: $55.73 (as of 1/21/11) 52-week range: $47.77 - $56.27 Market value: $198.5 billion Enterprise value: $244.7 billion Shares out: 3,562.0 million Ownership Data

This quarter Next quarter FYE 1/31/11

Latest $1.32 0.96 4.05

Month Ago $1.32 0.97 4.05

Valuation # of Ests 26 13 27

P/E FYE 1/31/10 P/E FYE 1/31/11 P/E FYE 1/31/12 P/E FYE 1/30/13 EV/ LTM revenue

15x 14x 13x 11x 0.6x

FYE 1/31/12

4.45

EV/ LTM EBIT

10x

Insider ownership: <1%

FYE 1/30/13

4.87

4.88

P / tangible book

4.1x

Insider buys (last six months): 9

LT growth

10.7%

Insider sales (last six months): 11 Institutional ownership: 33%

EPS Surprise 11/16/10

Actual $0.90

Estimate $0.90

Greenblatt Criteria LTM EBIT yield LTM pre-tax ROC

10% 25%

1/31/04 258,681 59,934 15,025 9,054 2.03 4,363 15,996 10,308 5,688 5,199 34,421 9,882 105,405 6,367 37,840 20,099 61,782 0 43,623 26%

1/31/05 284,310 67,478 17,300 10,267 2.46 4,259 15,044 12,803 2,241 5,488 38,854 10,803 120,154 7,794 43,182 23,258 70,758 0 49,396 28%

Fiscal Years Ended 1/31/06 1/31/07 1/31/08 312,101 348,368 377,023 74,452 84,389 92,886 18,713 20,497 21,952 11,231 11,284 12,731 2.72 2.92 3.16 4,183 4,164 4,066 18,241 20,235 20,642 14,530 15,666 14,937 3,711 4,569 5,705 6,193 7,767 5,492 43,825 46,982 48,020 12,097 13,759 15,879 138,187 151,587 163,514 8,633 8,283 11,269 48,825 52,148 58,478 30,096 30,735 33,402 85,016 90,014 98,906 0 0 0 53,171 61,573 64,608 26% 26% 25%

1/31/09 404,374 100,318 22,798 13,400 3.35 3,939 23,147 11,499 11,648 7,275 48,949 15,260 163,429 7,669 55,390 34,549 98,144 0 65,285 25%

1/31/10 408,214 103,557 23,950 14,335 3.72 3,866 26,249 12,184 14,065 7,907 48,331 16,126 170,706 4,919 55,561 36,401 99,957 0 70,749 26%

LTME 10/31/10 419,140 105,700 24,796 14,965 4.02 3,804 26,074 12,618 13,456 10,616 59,568 16,586 186,890 12,895 68,407 43,899 121,365 0 65,525 25%

FQE 10/31/09 99,373 25,458 5,442 3,144 0.82 3,851 2,545 3,141 (596) 6,003 51,516 16,162 172,502 9,752 59,155 37,601 105,222 0 67,280 n/m

FQE 10/31/10 101,952 26,046 5,611 3,436 0.95 3,617 2,246 3,765 (1,519) 10,616 59,568 16,586 186,890 12,895 68,407 43,899 121,365 0 65,525 n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

$70 $60 $50 $40 $30 $20 $10 $0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

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January 31, 2011 – Page 102 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA

Retail giant Wal-Mart operates through three segments: Walmart U.S. (75% of EBIT*): 3,800 stores, walmart.com. Wal-Mart owns 85+% of stores and 80% of 150 distribution sites. 75% of stores are supercenters (avg 185,000 sq ft), with the rest smaller discount and neighbor-hood stores. Groceries are 50% of revenue; the rest splits roughly evenly into entertainment, hardlines, apparel, health, home goods. International (20% of EBIT): 4,300 stores (35% owned), 35% in Mexico, 10% each in Brazil, U.K., Japan, Canada. Store size is 65,000 sq ft (50% supermarkets/discount stores). Sam’s Club (~5% of EBIT) runs 600 U.S. warehouse clubs (80% owned, 135K sq ft. average store size); samsclub.com.

FYE January 31 2006 Δ sss - Walmart U.S.1 3% Δ sss - U.S.2 3% Δ stores - Walmart U.S. 4% Δ stores - Walmart Int’l 46% Δ stores 16% Δ retail square footage 14% ∆ revenue 10% ∆ EBIT 8% ∆ employees 13% Revenue ($bn) 312 % of revenue by segment: Walmart U.S. 67% Walmart International 13% Sam's Club 20% Revenue growth by segment: Walmart U.S. 9% Walmart International 7% Sam's Club 13% EBIT margin by segment: Walmart U.S. 7% Walmart International 9% Sam's Club 2% Corporate 0% Total EBIT margin 6% Selected items as % of revenue: Gross profit 24% Net income 4% Net cash from ops 6% D&A 1% Capex 5% Stores (000s) 6.0 Retail sq ft (mn) 740 Sales / sq ft ($)3 438 Δ sales / sq ft3 0% Pre-tax ROI4 n/a Return on tang. equity 28% Tangible equity/assets 34% ∆ shares out (avg) -2%

INVESTMENT HIGHLIGHTS •

•

• •

World’s largest retailer and one of the largest private employers in the U.S., Mexico and Canada, with 2.1 million employees, including part-time staff. Price leadership through scale and supply-chain expertise results in a sustainable moat. “Everyday low prices” marketing (versus changing promotions) reinforces the pricing strategy in customers’ minds. A repeatable model? If Wal-Mart can replicate its U.S. mass merchant model abroad (evidence to date appears favorable), the recent valuation may not adequately reflect the value of growth opportunities. Owns ~85% of U.S. and ~35% of non-U.S. stores. High real estate ownership and FCF generation lower risks associated with ~$46 billion of net debt. Founder’s son Rob Walton (65) is chairman since 1992. The Walton family owns a ~45% stake.

INVESTMENT RISKS & CONCERNS •

• • *

Declining same-store sales at Walmart U.S. (~75% of trailing, pre-corporate EBIT). Six consecutive quarters of y-y declines of 1-2% each reflect primarily less customer traffic. Directly exposed to U.S. consumer spending. Structural issues such as record consumer debt and high unemployment may be headwinds for years. Non-U.S. expansion may lead to volatility/low ROI.

Based on EBIT before corporate costs for the year ended October 2010.

COMPARABLE PUBLIC COMPANY ANALYSIS

AMZN TGT COST WMT

MV ($mn) 79,630 39,460 31,770 198,510

EV ($mn) 73,910 55,050 28,650 244,690

EV / Rev. 2.4x .8x .4x .6x

P/ Tang. Book 15.6x 2.7x 2.8x 4.1x

This FY P/E 71x 14x 22x 14x

Next FY P/E 51x 13x 19x 13x

2007 2% 2% 5% 27% 12% 9% 12% 10% 6% 348

2008 1% 2% 3% 13% 7% 8% 8% 7% 17% 377

2009 3% 4% 3% 16% 9% 6% 7% 4% 0% 404

2010 -1% -1% 1% 14% 7% 4% 1% 5% 0% 408

YTD 10/31/10 -1% -1% 1% 12% 6% 3% 4 6% 0% 305

65% 22% 13%

63% 24% 13%

63% 24% 12%

63% 25% 12%

62% 25% 13%

8% 93% -27%

6% 18% 5%

7% 9% 6%

1% 1% -1%

0% 14% 3%

7% 6% 3% -1% 6%

7% 5% 3% 0% 6%

7% 5% 3% -1% 6%

8% 5% 3% -1% 6%

7% 5% 3% 0% 6%

24% 3% 6% 2% 4% 6.8 805 436 -1% 20% 25% 34% 0%

25% 3% 5% 2% 4% 7.2 867 432 -1% 20% 6% 34% -2%

25% 3% 6% 2% 3% 7.9 918 442 2% 19% 27% 33% -3%

25% 4% 6% 2% 3% 8.4 952 433 -2% 19% 27% 35% -2%

25% 3% 4% 2% 3% 8.7 971 414 -1% 19% 28% 31% -5%

1 Same-store sales (SSS) refer to sales from stores open for the prior 12 months, including remodels, relocations and expansions. Format changes are excluded when accompanied by square footage changes of more than 5%. 2 Includes Walmart U.S. and Sam’s Club. 3 Includes Walmart U.S. only. 4 Per company. YTD return on investment is for the trailing 12-month period.

RATINGS

   1   

High proportion of real estate ownership offsets the net debt.

THE BOTTOM LINE We like Wal-Mart’s U.S. market position, real estate holdings, as well as the prospect for globally replicating its high-return operating model. While recent same-store sales declines in the U.S. are a concern, this may be tied more to a weak economy (cyclical) than structural issues. It is not surprising that Wal-Mart remains among Berkshire Hathaway’s largest holdings; other “superinvestors” including Markel Gayner and Boykin Curry’s Eagle have recently added to their stakes. Trading at an ~8% trailing earnings yield, shares are likely to continue delivering attractive risk-adjusted returns for long-term investors. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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WAL-MART – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE ($ in billions) Valuation methodology Trailing EBIT (year ended October 2010)1 Fair value multiple Estimated enterprise value Minus: Net debt Minus: Non-controlling interest Estimated fair value of the equity of Wal-Mart Stores2 Implied trailing FCF yield Implied trailing earnings yield Implied FY11 dividend yield3 Implied EV-to-trailing revenue Implied EV per store ($mn)4 Capex per store ($mn)5

Conservative 10x trailing EBIT $24.9 10.0x $249.4 (46.2) (2.9) $200 billion $56 per share 6.7% 7.5% 2.2% 0.6x 28.7 39.7

Base Case 11x trailing EBIT $24.9 11.0x $274.4 (46.2) (2.9) $225 billion $63 per share 6.0% 6.7% 1.9% 0.7x 31.6 39.7

Aggressive 12x trailing EBIT $24.9 12.0x $299.3 (46.2) (2.9) $250 billion $70 per share 5.4% 6.0% 1.7% 0.7x 34.4 39.7

U.S.-based segments Walmart U.S. and Sam's Club represent ~75% and ~5% of trailing segment EBIT, respectively. Walmart International represents the remaining ~20% of trailing segment EBIT. Wal-Mart's rental expense is less than 1% of revenue as the company owns 80+% of its U.S. store base and distribution centers as well as 35% of international stores. 2 Based on 3,576 million shares outstanding. 3 Based on the fiscal 2011 dividend of $1.21 per share (up 11%). 4 Based on 8,692 stores as of October 30, 2010 (Walmart U.S. represents ~45% of stores and ~65% of retail square footage). 5 Based on guidance for 185-205 new stores and related capital expenditure of $7.5-8.0 billion at Walmart U.S. in FY12. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

WAL-MART – RETURN ON INVESTMENT AND RETURN ON ASSETS

The average is based on the addition of the account balance at the end of the current period to the account balance at the end of the prior period, divided by 2. Based on continuing operations only. Total assets as of October 31, 2010, 2009 and 2008 in the table above exclude assets of discontinued operations that are reflected in the condensed consolidated balance sheets of $137 million, $145 million and $262 million, respectively. 3 Effective May 1, 2010, the company implemented a new enterprise resource planning (ERP) system for its operations in the U.S., Canada and Puerto Rico. Concurrent with this implementation and the increased system capabilities in applying the lower of cost or market principle, the company changed the level at which it applies the retail method of accounting for inventory in these operations from 13 divisions to 49 departments. The company believes the change is preferable because applying the retail method of accounting for inventory at the departmental level better segregates merchandise with similar cost-to-retail ratios and turnover as well as providing a more accurate ending inventory value and cost of goods sold for each reporting period. The retroactive application of this accounting change impacted both segment and consolidated operating income, as well as consolidated net income. Source: Company filings, The Manual of Ideas analysis. 2

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Value-oriented Equity Investment Ideas for Sophisticated Investors

WAL-MART – COMPARABLE STORE / CLUB SALES 1

Source: Company information.

WAL-MART – INTERNATIONAL GROWTH THROUGH ORGANIC EXPANSION AND ACQUISITIONS

WAL-MART – Q3 PERFORMANCE HIGHLIGHTS Sales ($ in billions):

Operating Income ($ in billions):

Source: Company presentation dated December 6, 2010; available at http://bit.ly/gjQ20i

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Walt Disney (DIS) – Children’s, Southeastern Burbank, CA, 818-560-1000

Services: Broadcasting & Cable TV, Member of S&P 500 Trading Data

disney.go.com

Consensus EPS Estimates

Price: $39.74 (as of 1/21/11) 52-week range: $28.71 - $40.00 Market value: $75.3 billion Enterprise value: $85.0 billion Shares out: 1,893.6 million Ownership Data

This quarter Next quarter FYE 9/30/11

Latest $0.55 0.56 2.45

Month Ago $0.55 0.55 2.43

Valuation # of Ests 24 23 30

P/E FYE 10/2/10 P/E FYE 9/30/11 P/E FYE 9/29/12 P/E FYE 9/29/13 EV/ LTM revenue

20x 16x 14x 12x 2.2x

FYE 9/29/12

2.82

2.79

EV/ LTM EBIT

13x

Insider ownership: <1%

FYE 9/29/13

3.18

3.15

P / tangible book

21x

Insider buys (last six months): 18

LT growth

11.4%

Insider sales (last six months): 7 Institutional ownership: 67%

EPS Surprise 11/11/10

Actual $0.45

Estimate $0.46

Greenblatt Criteria LTM EBIT yield LTM pre-tax ROC

8% 36%

9/30/04 30,752 4,048 3,739 2,345 1.11 2,049 4,370 1,427 2,943 2,042 9,369 25,719 53,902 4,093 11,059 9,734 27,821 0 26,081 22%

10/1/05 31,374 3,931 3,811 2,533 1.19 2,028 4,269 1,823 2,446 1,723 8,845 25,132 53,158 2,310 9,168 10,531 26,948 0 26,210 22%

Fiscal Years Ended 9/30/06 9/29/07 9/27/08 33,747 35,510 37,843 5,355 6,855 7,443 5,324 7,725 7,402 3,374 4,687 4,427 1.60 2.24 2.28 2,005 2,004 1,890 6,058 5,421 5,701 1,292 1,566 1,578 4,766 3,855 4,123 2,411 3,670 3,001 9,562 11,314 11,666 30,647 29,702 29,287 59,998 60,928 62,497 2,682 3,280 3,529 10,210 11,391 11,591 11,135 12,166 11,351 28,178 30,175 30,174 0 0 0 31,820 30,753 32,323 31% 46% 42%

10/3/09 36,149 5,697 5,658 3,307 1.76 1,856 5,319 1,753 3,566 3,417 11,889 29,055 63,117 1,206 8,934 11,721 29,383 0 33,734 31%

10/2/10 38,063 6,726 6,627 3,963 2.03 1,915 6,578 2,110 4,468 2,722 12,225 33,954 69,206 2,350 11,000 10,354 31,687 0 37,519 36%

LTME 10/2/10 38,063 6,726 6,596 3,963 2.03 1,915 6,578 2,110 4,468 2,722 12,225 33,954 69,206 2,350 11,000 10,130 31,687 0 37,519 36%

FQE 10/3/09 9,867 1,595 1,661 895 0.47 1,859 1,738 626 1,112 3,417 11,889 29,055 63,117 1,206 8,934 11,495 29,383 0 33,734 n/m

FQE 10/2/10 9,742 1,521 1,434 835 0.43 1,909 2,206 797 1,409 2,722 12,225 33,954 69,206 2,350 11,000 10,130 31,687 0 37,519 n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

$45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

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January 31, 2011 – Page 106 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

BUSINESS OVERVIEW

SELECTED OPERATING DATA1

Entertainment giant Disney operates in five segments: Media Networks: Cable, broadcasting and radio, including ABC, 80% of ESPN, and 42% of A&E/Lifetime. Parks and Resorts: Owns Disney-themed venues in Florida, California, Paris (51% stake), and Hong Kong (47%); and licenses a venue in Tokyo. Disney also owns a cruise line. Studio Entertainment: Comprises motion picture, music and theatrical production and distribution. Owned banners include Walt Disney Pictures, Pixar, and Touchstone. Consumer Products is the largest worldwide licensor of character-based merchandise measured by retail sales. Interactive Media: Produces games and owns websites.

INVESTMENT HIGHLIGHTS •

•

• •

•

Owns unique content and media production/ distribution assets with universal and timeless appeal. ABC is one of the four major U.S. TV networks, while ESPN and other cable channels are leading global providers of sports and children’s programming. The vast film library and intellectual property portfolio* are difficult to replicate. Ability to invest incremental capital at high rates of return should benefit long-term investors, despite a “fair” 5-6% trailing FCF yield. Disney may also offer inflation protection due to its proven pricing power and low-capital intensity model. Increasing capex and capital return (FY10 capex is up ~20% and dividends/buybacks up >3x y-y). Net debt of $10 billion is still only ~1.0x EBITDA. Steady theme park attendance suggests enduring brand relevance. Despite a recent decline, annual attendance growth at U.S. parks averaged 3% since 2005 (with average spending per guest up 2% p.a.). Emerging markets (<10% of revenue) may be a growth opportunity, assuming Disney’s largely children-oriented content holds universal appeal.

INVESTMENT RISKS & CONCERNS •

•

Cable networks represent 60+% of total EBIT. Despite diversified assets, profitability is vulnerable to programming cost rises (e.g. ESPN sports rights). So far, these have been more than offset by higher affiliate fees and advertising rates. Will online distribution yield the same ROIC as traditional channels such as broadcast/cable TV, DVD, and theaters? Despite technological changes, Disney is in a strong position as a “content-owner.” Relying on acquisitions for growth. Even after spending a total $12+ billion on Pixar (‘06), Marvel (‘09) and Playdom (’10), growth remains a challenge.

FYE September 30 2006 8% ∆ revenue 0% ∆ employees 5% ∆ attendance - U.S. parks 3% ∆ spend/guest - U.S. parks Revenue ($bn) 33.7 % of revenue by segment: Media networks 42% Parks and resorts 29% Studio entertainment 22% Consumer products 6% Interactive media n/a Revenue growth by selected segment: Media networks 12% Parks and resorts 10% Studio entertainment -1% EBIT margin by selected segment:2 Media networks 25% Parks and resorts 15% Studio entertainment 10% Total EBIT margin 17% % of revenue by major geography: U.S./Canada 77% Europe 16% Selected items as % of revenue: Net income 10% Net cash from ops 18% D&A 4% Capex 4% ∆ shares out (avg) -1%

2007 5% 3% 3% 3% 35.5

2008 7% 9% 2% 3% 37.8

2009 -4% -4% 2% -6% 36.1

2010 5% 3% -1% 3% 38.1

42% 30% 21% 6% 1%

42% 30% 19% 6% 2%

45% 30% 17% 7% 2%

45% 28% 18% 7% 2%

6% 7% -1%

6% 8% -2%

2% -7% -16%

6% 1% 9%

30% 16% 16% 21%

31% 16% 15% 21%

29% 13% 3% 17%

30% 12% 10% 19%

77% 17%

75% 18%

76% 17%

74% 17%

13% 15% 4% 4% 0%

12% 14% 4% 4% -6%

9% 14% 5% 5% -2%

10% 16% 5% 6% 3%

Major acquisitions in the period include Marvel in 12/09 and Pixar in 5/06. Includes share of profits of investees (mainly of cable businesses in Media Networks). Excludes restructuring/impairment charges as well as other income.

Excludes holdings of director Jobs (director since Disney acquired Pixar).

COMPARABLE PUBLIC COMPANY ANALYSIS

NWSA TWX VIA.B CBS DIS

MV ($mn) 40,220 36,370 25,560 14,090 75,250

RATINGS

EV ($mn) 44,720 48,920 31,480 19,560 85,010

EV / Rev. 1.4x 1.9x 2.3x 1.4x 2.2x

P/ Tang. Book 9.4x n/m n/m n/m 21.1x

This FY P/E 14x 14x 13x 19x 16x

Next FY P/E 12x 12x 11x 15x 14x

      

* Owned properties include Mickey Mouse, Disney Princess, Winnie the Pooh, Spider-Man, Iron Man, Lion King, Toy Story, Cars and many others.

THE BOTTOM LINE Disney owns “one-of-a-kind” content, as well as media production and distribution assets with universal and timeless appeal. While shares appear fairly valued at a 5-6% trailing FCF yield, long-term investors stand to benefit from Disney’s ability to invest incremental capital at high rates of return. Pricing power and low capital intensity are positives if inflation accelerates. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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Value-oriented Equity Investment Ideas for Sophisticated Investors

WALT DISNEY – OUR ESTIMATE OF THE EQUITY FAIR VALUE RANGE ($ in billions) Valuation Methodology1 Value of cable networks business: Trailing EBIT (excludes share of income of investees)2 Fair value multiple Estimated enterprise value of Cable Networks implied EV-to-trailing revenue Value of broadcasting business: Trailing EBIT Fair value multiple Estimated enterprise value of Broadcasting implied EV-to-trailing revenue Value of parks and resorts segment: Trailing EBIT Fair value multiple Estimated enterprise value of Parks and Resorts implied EV-to-trailing revenue3 Value of studio entertainment segment: Trailing EBIT Fair value multiple Estimated enterprise value of Studio Entertainment implied EV-to-trailing revenue4 implied EV-to-average revenue during FY06-10 Value of consumer products segment: Trailing EBIT Fair value multiple Estimated enterprise value of Consumer Products implied EV-to-trailing revenue5 Value of interactive media segment:6 Trailing revenue Fair value multiple Estimated enterprise value of Interactive Media Negative value of corporate overhead: Estimated normalized corporate costs7 Multiple Estimated value drag of corporate overhead Value of other items: Plus: Value of equity-accounted investments2 Plus: Value of excess land8 Minus: Net debt9, 10 Minus: Non-controlling interests11 Minus: Net post-retirement liabilities9 Estimated fair value of the equity of Disney12 Implied trailing earnings yield Implied FCF yield based on overage FY06-10 FCF Implied dividend yield13

Conservative

Base Case

Aggressive

Sum-of-the-parts

$4.0 10.0x $40.3 3.5x

$4.0 12.0x $48.4 4.2x

$4.0 14.0x $56.5 4.9x

$0.7 10.0x $6.6 1.2x

$0.7 12.0x $7.9 1.4x

$0.7 14.0x $9.2 1.6x

$1.3 10.0x $13.2 1.2x

$1.3 12.0x $15.8 1.5x

$1.3 14.0x $18.5 1.7x

$0.7 10.0x $6.9 1.0x 1.0x

$0.7 12.0x $8.3 1.2x 1.2x

$0.7 14.0x $9.7 1.4x 1.4x

$0.7 10.0x $6.8 2.5x

$0.7 12.0x $8.1 3.0x

$0.7 14.0x $9.5 3.5x

$0.8 1.0x $0.8

$0.8 2.0x $1.5

$0.8 3.0x $2.3

($0.4) 10.0x ($4.0)

($0.4) 12.0x ($4.8)

($0.4) 14.0x ($5.6)

$3.5 0.0 (9.8) (4.7) (3.4) $56 billion $29 per share 7.0% 7.1% 1.4%

$4.4 0.0 (9.8) (5.6) (3.4) $71 billion $37 per share 5.6% 5.6% 1.1%

$5.3 0.0 (9.8) (6.6) (3.4) $86 billion $44 per share 4.6% 4.7% 0.9%

All EBIT figures exclude restructuring and impairment charges as well as "other" income and expenses. "Trailing" refers to the year ended October 2, 2010. Disney's share of income of investees was $440 million in FYE October 2, 2010 (down from $577 million in FY09). We assume all of this income is attributable to the cable networks business and deduct it from reported cable networks EBIT (which includes it). Our separate valuation of equity-accounted investments is based on a range of multiples of 8-12x of Disney's share of income from investees of $440 million in FY10. Cash distributions received from equity investees have averaged ~$465 million during FY06-10. These are largely attributable to Disney's 42% equity stake in A&E/Lifetime cable channels. Disney reported $2.5 billion of long-term investments on its balance sheet as of October 2, 2010 (modestly below our conservative valuation of equity-accounted investments). 3 ~78% of trailing Parks and Resorts segment revenue is from the U.S., which is mainly attributable to the wholly-owned resorts in Florida and California. The remainder of segment revenue is mainly attributable to Disney-themed parks in Paris and Hong Kong, which are consolidated on Disney's balance sheet (although Disney only owns 51% of Euro Disney and 47% of Hong Kong Disneyland). 4 Trailing segment revenue breakdown for Studio Entertainment: ~40% home entertainment, ~30% theatrical distribution, ~30% TV distribution. Trailing revenue includes contribution from most of former Marvel since the acquisition on December 31, 2009 (rest of Marvel is accounted for within Consumer Products segment). 5 ~65% of trailing segment revenue is from licensing and publishing, with ~35% from retail and other. 6 ~75% of trailing segment revenue is from game sales and subscriptions and ~25% from advertising and other. The segment EBIT loss was $234 million in FY10. The segment includes Playdom, a company that develops and publishes online games for social networking websites, since its acquisition in August 2010. 7 Corporate costs were $420 million in FY10. 8 Disney owns land in the U.S. and Europe, mainly at and around theme parks. We do not put a specific value on these holdings as a large part is not “excess” land. Despite the large holdings, their value is likely not material relative to Disney's market value of ~$75 billion. 9 Based on balance sheet values as of October 2, 2010. 10 Our net debt figure includes all of the company's consolidated cash and debt. While some portion of the debt and cash resides in companies that are not wholly-owned, we do not break this out separately for purposes of simplicity. 11 A corollary to footnote 10 is the fact that our estimates for non-controlling interest are not based on a detailed analysis of specific companies (partly due to the fact that related information is not disclosed). Our "rough" estimates attempt to account for the value of the 20% equity stake in ESPN not owned by Disney. While this is likely the biggest component of the value residing in non-controlling interests, others include non-Disney ownership in theme park properties. For reference, Disney carried a value of $1.8 billion for non-controlling interest on its balance sheet as of October 2, 2010. 12 Based on 1,927 million shares outstanding. 13 Based on the $0.40 per share annual dividend announced in December 2010 (up 14% y-y). Including share buybacks, the total capital return in FY10 was approximately $3.3 billion (~4-5% of recent market value). Source: Company filings, The Manual of Ideas analysis, assumptions and estimates. 2

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WALT DISNEY – MEDIA NETWORKS SEGMENT Fiscal Years Ended September 30, 2005 2006 2007 2008 2009 ($ in millions) Media networks revenue by media property: Cable networks1 7,399 8,159 9,167 10,041 10,555 Broadcasting2 5,238 5,941 5,746 5,816 5,654 Media networks revenue 12,637 14,100 14,913 15,857 16,209 Media networks EBIT by media property (includes share of profits at investees3): Cable networks 2,762 3,005 3,603 4,139 4,260 Broadcasting 278 475 931 842 505 Media networks EBIT 3,040 3,480 4,534 4,981 4,765 Disney share of profits at investees3 483 473 485 581 577

2010 11,475 5,687 17,162 4,473 659 5,132 440

Disney's two primary cable networks are ESPN (80%-owned) and Disney Channels. ESPN- and Disney- branded radio operations are also managed within the cable operations. Programming at the cable networks is both internally produced and acquired from third parties. Cable networks derive a majority of their revenue from fees charged to cable, satellite and telecommunications service providers (Multi-channel Video Service Providers or MVSPs) and, for certain networks (primarily ESPN and ABC Family), the sale to advertisers of time in network programs for commercial announcements. 2 Disney's main broadcast platform is the ABC Television Network, which as of October 2, 2010, had affiliation agreements with 234 local stations reaching 99% of all U.S. television households. The ABC Television Network produces its own programs or acquires broadcast rights from third parties, as well as entities that are owned by or affiliated with the company and pays varying amounts of compensation to certain of the affiliated stations for broadcasting the programs and commercial announcements included therein. In certain cases the ABC Television Network receives fees for its broadcast feed. The ABC Television Network derives the majority of its revenue from the sale to advertisers of time in network programs for commercial announcements. Disney owns ten television stations, six of which are located in the top-ten U.S. markets. All of its television stations are affiliated with the ABC Television Network and collectively reach 23% of U.S. television households. 3 Relates mainly to cable network businesses. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

WALT DISNEY – PARKS AND RESORTS SEGMENTS Business Unit Walt Disney World Resort (Florida) The Magic Kingdom Epcot Disney's Hollywood Studios Disney’s Typhoon Lagoon Disney’s Blizzard Beach Disney’s Wide World of Sports5 Disney’s Animal Kingdom

Opened

Resort Size (Acres)1 25,0003

# of Hotels / Venues2 174

# of Hotel Rooms 22,353

5106

2,398

4,8008

5,760

1971 1982 1989 1989 1995 1997 1998

Disneyland Resort (California) Disneyland Park Disney’s California Adventure

1955 2001

Disneyland Resort Paris (51% owned; consolidated)7 Disneyland Park Walt Disney Studios Park

1992 2002

Hong Kong Disneyland (47% owned; consolidated)9

2005

311

1,000

Tokyo Disney Resort (no ownership; only royalty income)10 Tokyo Disneyland Park 1983 Tokyo DisneySea 2001

494

1,711

Disney Vacation Club

1991

n/a

1011

3,060

Disney Cruise Line Disney Magic Disney Wonder

1998 1999

964 ft. 964 ft.

n/a n/a

877 877

Adventures by Disney

2005

n/a

2212

n/a

Total hotels: 42 Total hotel rooms: 36,000+ *

Does not reflect recent developments including an agreement to build and operate a Disney theme park in the Pudong district of Shanghai announced in November 2010 (Disney is awaiting final approval from the central government on the incorporation of the related joint venture companies and the completion of the necessary regulatory processes) and an expansion of its cruise business by adding two new ships, the Disney Dream in January 2011 and the Disney Fantasy in April 2012. The new ships will each be approximately 130,000 tons with 1,250 staterooms. 1 Includes theme parks, hotels, dining and entertainment areas and surrounding land. 2 Includes only hotels and Disney Vacation Club properties owned and operated by The Walt Disney Company and affiliates. 3 Total acreage, including undeveloped land. 4 Includes Fort Wilderness Resort & Campground, but does not include Disney Vacation Club properties. 5 Rebranded ESPN’s Wide World of Sports in 2010. 6 Total acreage including 461 company-owned acres and 49 acres under long-term lease in Anaheim, CA. 7 The Walt Disney Company has an indirect investment in Euro Disney S.C.A., a publicly held French entity that owns Disneyland Paris. A subsidiary of The Walt Disney Company manages the resort and another subsidiary earns royalties on Disneyland Paris revenues. 8 Total acreage, including undeveloped land. 9 The Walt Disney Company owns a 47% interest in the Hong Kong Disneyland Resort through Hongkong International Theme Parks Limited. A separate Hong Kong subsidiary of the Company is responsible for managing Hong Kong Disneyland Resort. 10 A subsidiary of Walt Disney earns royalties on the Tokyo Disney Resort, which is owned and operated by Oriental Land, a Japanese corporation. 11 Includes the seven Disney Vacation Club properties at the Walt Disney World Resort, one property at Disneyland Resort, and two beach resorts. 12 Adventures by Disney provided 22 specialized excursion packages during 2009. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

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Exclusive Insights from VALUEx Participants In this section, we present exclusive mini-interviews with selected participants of the VALUEx investing event, held in Zurich and Klosters, Switzerland, on February 2-4, 2011. VALUEx has been modeled after the popular TEDx events, with attendees invited to present “ideas worth sharing.” The goal is mutual learning and the development of lasting friendships with like-minded individuals in the value investing community. Here are the questions we asked of selected VALUEx participants: 1.

Professional evolution. Please provide some background on your path as an investor. How did you get started and who has influenced your learning process most significantly over time?

Investment philosophy. Value investing comes in many different stripes, ranging loosely from the Ben Graham-style “deep value” approach to the Joel Greenblatt-style focus on “good” companies at “cheap” prices, to event-driven and activist investing. How would you describe the evolution of your investment approach? In what aspects does your style depart from what you may have observed among your peers?

Investment opportunity or case study. Please share an investment idea you consider particularly compelling today. (Alternatively, discuss a past investment, your rationale, the outcome, and the lessons learned.)

Favorite readings. What recent book(s) have impressed you or influenced your way of thinking, either about investing or the world at large?

We also encouraged respondents to share some biographical highlights about themselves and their firms. (For reasons of space and clarity, we have truncated or otherwise edited some of the responses while trying to preserve their meaning.)

“In the building practices of ancient Rome, when scaffolding was removed from a completed Roman arch, the Roman engineer stood beneath. If the arch came crashing down, he was the first to know.”

Ethan Berg, G4 I have a small, but committed set of clients who are philosophically aligned and financially committed for the long term. I eat my own cooking and I think of my two sons (who are five and eight) when I invest. In Klarman’s book he refers to economist Paul Rosenstein-Rodan who has pointed to the “tremble factor” in understanding human motivation. “In the building practices of ancient Rome, when scaffolding was removed from a completed Roman arch, the Roman engineer stood beneath. If the arch came crashing down, he was the first to know. Thus his concern for the quality of the arch was intensely personal, and it is not surprising that so many Roman arches have survived.” 1

Professional Evolution

I was intrigued by the stock market since I was a kid, but I didn’t really begin to treat it seriously until 1998. I had been working for six years as a management © 2008-2011 by BeyondProxy LLC. All rights reserved.

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consultant at Monitor Company, a consulting firm. Previously, I had mostly been investing in index and mutual funds, but after receiving my bonus one year, I decided I better learn how to more intelligently invest it. Not surprisingly, I began with the analysis that we were taught to do every day at Monitor. I had worked for two years directly for Michael Porter who was one of the founders and had provided much of the underlying intellectual capital. In the beginning, most of my time was devoted to projects designed to enhance competitiveness of regions or countries. We would study trade data and look for statistical evidence of industries with competitive advantage and then we would drill down into the companies. That then led to consulting directly to Fortune 500 corporations on business unit strategy. Naturally, I continued to rely heavily on Professor Porter’s frameworks. Probably the most useful tool was something we adapted in the field from the activity-system maps he wrote about in his 1996 Harvard Business Review article, What is Strategy? With this, we would work with clients to create what we called “advantage webs.” This involved identifying, from a customer’s point of view, a company’s core advantages. We would then work side by side with senior executives to map the company’s assets to those specific advantages. I quickly realized that while some of our clients had significant advantages, many not only didn’t have them but weren’t likely to ever develop them.

“Seth Klarman… gave her a copy of Margin of Safety. The logic in the book was incontrovertible and immediately resonated. It was exciting to think about hunting for stocks that could provide above-average returns while taking belowaverage risk and that the stock market would periodically and systematically misprice stocks…”

This was very sobering especially when I realized how well regarded these companies were in the popular and business press and how over time, competitors or new entrants would erode profits. The most dependable source of long-term, elevated profitability is an advantaged set of assets. As I began to reflect on the companies owned by the mutual funds that I was investing in, I had a sinking realization that very few of the companies were truly advantaged and therefore had no long-term reason not to have their profits whittled away over time. Since all my time was essentially consumed by my consulting work, I didn’t initially plan to manage my own investments. I did know that to the extent I did, I would focus on companies that had an advantaged set of assets. Margin of Safety then landed in my lap. At the time, I was living with my girlfriend (now wife) in Harvard Square in Cambridge, and one of her personal training clients was Seth Klarman. She must have told him that I was beginning to think about investing because he gave her a copy of Margin of Safety for me to read. Reading it was invigorating and inspiring. I had observed in major items I purchased in my consumer life that with a little digging there regularly were anomalies on how things were priced, or more accurately, mispriced. My Red Sox season tickets were $20 a seat but with the same view as seats two rows away at $65 a seat and across an eight-foot aisle which were $45 a seat. I purchased my car used, at one-fourth of its original cost, even though it still had what I estimated to be approximately 85% of its useful life remaining. Until I read Klarman’s book, though, I didn’t consider that those same kinds of opportunities were systematically available in the financial markets. The logic in the book was incontrovertible and immediately resonated. It was exciting to think about hunting for stocks that could provide above-average returns while taking below-average risk and that the stock market would periodically and systematically misprice stocks that could be found with a patient and disciplined pursuit. The book was a phenomenal blueprint for thinking about investing.

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Seth gave my wife a number of additional books that effectively created the beginning of a wonderful, investment-oriented learning library for me. Besides a lesson in kindness, the gift of these books showed me how relevant a broad range of books could be to creating an investment mindset. The books and several comments he made over the years were immensely useful. While I certainly was grateful when I first got his book, he was so humble that I didn’t realize until much later what an accomplished investor he was. In summary, my experience with Monitor and Professor Porter taught me to focus on advantage and the book from Seth Klarman taught me to focus on the downside and to be patient and to wait for the best opportunities. 2

Investment Philosophy

When I was a newspaper boy, there was a weekly circular from a Boston retailer that advertised “Good stuff, cheap.” I’ve essentially adopted that slogan for much of my own investing. When I feel like sounding more academic, I refer to the approach as “mispriced, advantaged companies.” To evaluate investments, I’d create a simple 2x2 matrix. The vertical axis would be a measure of value and the horizontal axis a measure of advantage. Over time, I’ve not so much changed the approach as refined it. I’ve supplanted earnings measures with cash flow measures. When assessing presence of advantage, I used to rely mostly on pattern recognition. Now, I’ll utilize some more quantitative data such as return on equity, when appropriate. The best quadrant of course is advantaged, inexpensive companies. The other evolution is that while I used to focus more on income statement measures, I will now sometimes invest in companies primarily based on Graham’s net current asset value strategy as well as some funky, special situation stocks where it seems there is little downside. Where my style may depart is that I often find myself being even more conservative than well-known value investors. I’ll look at the 13Ds and say to myself, “I’d like it, but I think it is still too expensive.” It is for both better and for worse, as I have missed out on some terrific opportunities. 3

Investment Opportunity

My best idea now would be to buy cheap insurance via long-dated, out of the money index puts. I was concerned before the 2008 crisis and entered with more than 50% in cash and equivalents. Today I am nearly fully invested but incredibly conflicted about it. Since January 2009, I have eagerly purchased numerous dominant, high ROI, high free cash flow yielding companies — MMM, MSFT, WMT, VOD, CCE, BRK, GOOG, among others, as well as companies with downside balance sheet protection. And more ideas are flowing. Each month of The Manual of Ideas yields at least one really compelling idea. While I am still comfortable with the underlying holdings I worry about the broader economic environment where the prevailing sentiment is that the solution to debt is to incur additional debt, where the most “sophisticated” investor clients of the most sophisticated bank oversubscribe to a $50 billion valuation where they haven’t even received financial disclosure, and where a SPAC announces that their best idea is to buy a cupcake bakery at more than 30 times net income. I haven’t really looked at the last one, but it just doesn’t sound good. Reinhart and Rogoff’s article on financial folly was a wake-up call, and it seems the best way to engage in this “willful suspension of disbelief” about the macro prospects long enough to eagerly invest in specific opportunities is to © 2008-2011 by BeyondProxy LLC. All rights reserved.

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have some insurance. Fortunately, given that everyone expects that “this time is different,” it is very reasonable to buy insurance. It is the one investment that I hope expires worthless. I will gladly give up a few percentage points of the upside to protect against the downside. 4

Recent Readings

Steve Johnson’s Where Good Ideas Come From

Philip Best, Argos Investment Managers Philip Best has 27 years of experience investing in European stock markets. British by nationality, he left England in 1988 and has subsequently lived in France and Switzerland. In 2003 he launched The Argonaut Fund. The Fund is a specialist value-driven European micro-cap stock picking fund investing in 4060 undervalued stock opportunities, typically with a market capitalization below €100 million. Keeping away from “glamour stocks,” Argonaut aims to invest in companies that are substantially undervalued, either because they are “uninteresting” at first sight, or because their limited liquidity has meant that they have not attracted interest from professional investors and are therefore “below the radar screen.” Stocks selected by the fund usually fall into one of four categories: recovery, sum of-the-parts, undiscovered value or cash backing. 1

“…too much fund management these days is done from behind the Bloomberg screen…”

Professional Evolution

I started out investing in Europe in the early 1980s with Warburg Investment Management (now Blackrock). Investing in Europe then was a bit like investing in emerging markets now – European markets were considered to be “frontier markets” and there were substantial inefficiencies in the information flow and opportunities to find mis-valued stocks. The portfolio I was given to manage in 1986 was income-biased, so immediately it meant I was approaching the market from a different angle and was not focused on finding “growth” stocks. I spent my time looking at stocks that had a higher-than-average yield, and in many cases these were not mainstream stocks. In fact, without knowing it, I became a value investor before I ever heard of Graham and Dodd. Subsequently, I spent a number of years broking European stocks, and my investment ideas appealed mostly to the “value” managers: I was able to learn a great deal from participating in company meetings and from the questions and approaches taken by these managers. I had the opportunity of meeting and traveling with some of Europe’s best-known “value” managers (Anthony Bolton at Fidelity, Stephen Peake at Henderson, William von Mueffling at Lazard). It was undoubtedly helpful to learn from the great experience of these managers, and it has also been a great advantage to have been a broker and fund manager. 2

Investment Philosophy

We are definitely closer to the “deep value” end of the scale, and we apply the philosophy to a specific part of the European markets: small and micro-cap. The reason for this is that out of a total of over 8,000 quoted companies in Europe, there are more than 5,000 that have a market capitalization of less than €100 million. These companies are often “orphan stocks,” too small to attract the interest of analysts and institutional investors. As a result we are able to find stocks that are substantially mis-valued. Our typical target companies will have © 2008-2011 by BeyondProxy LLC. All rights reserved.

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rock-solid balance sheets (often with large sums of net cash), substantial asset backing, discounts to book value, and low overall valuation. We think that too much fund management these days is done from behind the Bloomberg screen: fund managers tend to get their ideas from brokers or from meeting companies that come to their offices on road-shows. We believe strongly in going out and finding our own ideas among stocks that are being overlooked by other professional investors. As a result we spend a lot of time out on the road visiting companies and their managements. 3

Investment Case Study

Dialog Semiconductor (XETRA: DLG) – German designer of niche chips; applications in automobiles and handheld devices; core competence is power management chipsets; fabless business model We invested in the company in February 2009. At a price of €0.70 per share the market cap was €32 million, barely above the net cash of €29 million that was on the balance sheet. The company announced that sales for 2008 had nearly doubled, gross margins had risen to 38% and they had turned around from being perennially loss-making to making a substantial net profit. But it seemed we were just about the only investors listening on their conference call… Sales are continuing to grow as demand is growing for any products that can help reduce power consumption for smartphones. We started selling at €5 and sold our last shares in January 2010 at €10. 4

Recent Readings

An excellent book is Richard Oldfield’s Simple But Not Easy, published two years ago. Richard, who was one of my contemporaries at Warburg Investment Management, has a very down-to-earth approach to investment and believes in stripping away a lot of the complex overlays that have confused our business. At the end of the day he believes that good investment returns come out of good stock picking and getting the right entry point. I also thoroughly enjoyed Barton Bigg’s Wealth, War and Wisdom, which is fascinating background on how wealth has been preserved (or lost) over the course of many business cycles and in the face of war and political instability.

James Bradford, Private Investor We sold our firm in 2000. I am starting an auto retailing business next month. It sells cars and finances them at 20% interest. It is a very good business when credit conditions are tight. We sell a $3,000 car for $6,000 so credit losses are covered. We are not there to sell cars but to lend money. Almost one-half of the U.S. is a subprime credit now. 1

Professional Evolution

My family owned a brokerage firm so I grew up talking stocks. I bought my first shares when I was in third grade. I began to study valuation in college but, having worked on trading desks, knew more about securities than my professors.

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The first book I read was One Up on Wall Street. Lynch’s advice worked. I started in corporate finance after college — heard a lot of nonsense and did not really know what to believe, but I knew the bankers did not really understand what they were talking about. Then I read a Berkshire annual report and realized this guy was really telling me something and calling nonsense what it was. I read all of the annual reports… I like Ian Cummings’ letters more now. 2

Investment Philosophy

I like good companies. They create value over time and surprise on the upside. Increasing return on assets is what I want. 3

“I like good companies. They create value over time and surprise on the upside. Increasing return on assets is what I want.”

Investment Opportunities

Union Pacific (UNP) — ROA is going up and there are real reasons for this: traffic congestion and increased gas prices. The interstate highway system is like a competing train line that did not have to pay for the tracks. Now those “tracks” are getting costly. Gas prices and congestion are going to move Union Pacific’s return on invested capital from 9% to 16% over the next few years, up from 6% a few years back — so you have a business going from bad to good. Increased pricing and volumes is a good combination. No one is ever going to build an east-west rail line again so you have something really special with those tracks. Sprint Nextel (S) — Sprint merged with Nextel and it was a total disaster. For a while two groups of people were fighting each other. I wanted Nextel to win but Sprint did. They were stuck with two networks and are running two times as many towers as Verizon, with about the same footprint and CDMA technology. Theoretically, they should be able to have the same margins. The reality is that you cannot provide the same call quality with two networks that you can with one. Also, having good people in the service department is hard. Also, Sprint sells more types of phones than you need. Nextel’s push-to-talk lost its value when calls got so cheap (they are getting rid of the push-to-talk feature). Call quality is going up. They have gone from being last to second in most markets, according to JD Power. If you add subscribers and start putting Verizon margins and multiples on it, you make three to five times your money at $4.25 a share. 4

Recent Readings

I mainly read newspapers, magazines, financials, and other industry reports. My favorite book is Who Moved My Cheese.

David Coyne, Setanta Asset Management I am thirty-five years old, born and bred in Dublin, Ireland. I studied economics and math at Trinity College Dublin, but I always say that my education started when I joined Setanta. Setanta Asset Management was set up in 1998. It is part of Canadian insurance company Great West Lifeco. Setanta has around €5 billion under management, split roughly equally between equities and bonds. The investment team comprises twelve people, nine of whom work on equities, two on bonds and one in trading. All funds are managed with a “value” philosophy. Our flagship fund is the Global Equity Fund, which holds around 120 stocks and has outperformed (pre-management fees) the MSCI World by 2.5% annually over © 2008-2011 by BeyondProxy LLC. All rights reserved.

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ten years. Other equity strategies include a concentrated global equity fund, global high-yield funds and some regional funds (Europe, EAFE, Ireland). 1

Professional Evolution

Like the conversion of Saint Paul in the Bible, I went down the wrong path for quite a few years before radically reforming my approach. Between 1998 and 2005 I worked for Allied Irish Bank Investment Managers on a European equity fund. However, unlike many of the value investor greats, I had no one to guide me in the right direction. I diligently applied myself to a labor of lost causes. In mid-2005 I moved to Setanta. I started off managing global financials (mid-2005-to-date), part of the firm’s global equity fund. Since then I have also managed the Irish equity fund (end-2006 to end-2010) and co-managed a concentrated global equity fund (mid-2007-to-date). Since May 2010 I have also co-managed a multi-asset value fund with an inflation-plus benchmark.

“We screen for value, scan the holdings of wellrespected value managers, keep an eye on activist shareholders and spin-offs, subscribe to publications like The Manual of Ideas and generally scour around overlooked or despised companies.”

Setanta’s investment approach had much going for it, unshackled by the benchmark and having a long-term approach, although the focus on valuation just wasn’t keen enough. However, this was a team of intelligent and independent thinkers who slowly drew a stronger value approach out of each other by a relentless questioning of conventional wisdom. We began to read the writings of well-known value investors, including Graham, Schloss, Buffett, Chou, Klarman and Tweedy Browne, to name just a few. Our level of stock analysis also became significantly better. A collective light went on when we all read Tweedy Browne’s What Has Worked In Investing. The evidence in favor of “statistical value” was so compelling, and we knew we weren’t searching hard enough in the right places. While there’s certainly no consensus over the Graham versus Buffett value approach, all of Setanta’s managers have firmly bought into a value approach. We screen for value, scan the holdings of well-respected value managers, keep an eye on activist shareholders and spin-offs, subscribe to publications like The Manual of Ideas and generally scour around overlooked or despised companies. Another important moment for me was the 2007 collapse of Northern Rock, which I had purchased shortly before. We all know how that ended, though thankfully I sold out of the stock still with a stump of an arm left. While Setanta had already developed an aversion to highly-indebted companies, I somehow didn’t make the connection to the most leveraged of all sectors, banks. Fail! Northern Rock’s demise drove this mistake home hard. It radically changed my analyzing, understanding and valuation of banks. My investment path was certainly paved through bad experiences. 2

Investment Philosophy

I don’t like to pigeon-hole myself into any particular value style, as I believe each stock must be taken on its own merits. For example, Greenlight’s recent purchase of Apple stands side-by-side Graham-like MI Developments (MIM). Above all else I am wary of companies with debt or debt-like obligations such as leases. Leverage just multiplies up or down the underlying performance of an equity-funded investment (although there is a tax benefit to debt). In a highly-indebted company, the valuation may be low but the financial leverage means that a small change in the firm’s prospects could lead it into a deathspiral. This puts me off looking at many stocks that may otherwise be interesting © 2008-2011 by BeyondProxy LLC. All rights reserved.

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investments. We are intrigued that many value investors are now talking about the great value on offer in European equities, because we’re just not finding that many – probably because so many of the “interesting” stocks are too leveraged for us, their outcomes too uncertain as a result.

“For misdiagnosed ‘good’ companies, sales, margins, returns and valuation multiples can all come under severe pressure, culminating in a sharply lower share price.”

“Good” companies bring their own set of risks. While I recognize the benefits of brands and moats and compounding and other Buffettesque terms, I am wary of my ability to spot the genuine moats from Maginot lines. For misdiagnosed “good” companies, sales, margins, returns and valuation multiples can all come under severe pressure, culminating in a sharply lower share price. Ironically, for someone who runs a global financials fund, I am extremely nervous about banks’ business model. Banks exist at the mercy of governments and central banks. Moreover, they are highly complex companies that are valued off a stub of equity. I would love the likes of Bruce Berkowitz, or Warren Buffett for that matter, to show me what I’m missing. Yes, it is vital that banks survive in order to protect the very societies in which we live, but why do equity (or bond-) holders need to be saved? Setanta’s global equity fund, as it is currently set up, aims for broad sector neutrality (versus the benchmark), so still has around 9% exposure to banks. However, purer forms of our value process have a weight of zero or just one or two percent in banks. Berkowitz has 75% of his fund’s equity exposure in financials. Please, Bruce, write and tell me. 3

Investment Case Study

In July 2010 I researched and purchased MI Developments (NYSE: MIM), a U.S. real estate company that in 2002 was spun out of Magna International (NYSE: MGA), the auto-parts company. Greenlight Capital had a holding in MIM, held since the spin-off. The stock was not covered by any sell-side analysts as far as I could tell — always a good rock to look under. It was trading on a stated price-to-tangible book of 0.4x and the company didn’t have much debt, so I took a closer look. I discovered that MIM’s shareholder base was a “who’s who” list of value investors, collectively owning two-thirds of the company. Because of the super-voting class B-shares, company founder Frank Stronach controlled MIM. Let’s just say he’s a man who didn’t always have subordinate shareholders’ best interests at heart. His control of the company made it ugly and unwanted by the mainstream. Around that time shareholders in Magna were negotiating with Frank to buy out his B-shares. However, unlike MIM, Magna shareholders were more like a “who’s who” list of closet index funds, with no strong voice leading the negotiations against Frank. On the other hand, MIM shareholders were wellorganized, led by Greenlight, and had been aggressively snapping at Frank’s heels for years. I believed that investing alongside these guys would greatly increase the chances of a ‘least cost’ solution to ridding Frank of his B-shares. I also noticed that MIM’s real estate was carried at cost. While unable to get precise details from their filings, it was fairly clear that the majority of their real estate assets were transferred over from Magna in 1998 and 1999. Since 2003 the number of properties had been stable (as far as I could tell, additional space was built on existing land), so MIM did not get involved in the ensuing global real estate madness. Underpinning the $1.4 billion net book value of their real estate was $1.2 billion in future minimum rental payments to be received from tenant Magna (weighted-average time to lease expiry of just 6.7 years), along © 2008-2011 by BeyondProxy LLC. All rights reserved.

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with a whopping 14.5% rental yield on the net value of the real estate assets. MIM’s properties were mostly in the Greater Toronto area, Austria and Southern Germany, which were largely unaffected by the global financial crisis. Based on some conservative back-of-the-envelope calculations I estimated that the real estate could be undervalued by some 50% and that MIM could be trading on a true price-to-tangible book of perhaps 0.25x. I then assumed a $500 million cost of paying off Frank, based on his top-of-the-market proposal back in 2007/08. The main black spot on MIM was the pretty dismal foray into horse racing via MIM’s majority ownership of MEC, an owner and operator of horse racing courses. Over the last few years MIM had extended loans to MEC but in 2009 MEC filed for bankruptcy. MIM took control of bankruptcy proceedings and negotiated with junior creditors. While this process was not complete by July 2010, there were enough details to work out roughly how MIM would look post the MEC bankruptcy.

“Based on some conservative back-of-the-envelope calculations I estimated that the real estate could be undervalued by some 50% and that MIM [MI Developments] could be trading on a true price-totangible book of perhaps 0.25x.”

So we liked the story. We added the stock to one of our funds in early August at a price of $12.70. We understood that this stock could take a very long time to work out, if at all, but that the odds were strongly in our favor. In early October 2010, with the stock trading at around $11, Frank (recently enriched by his payoff from Magna investors) indicated he would buy shares from shareholders at $13. The stock shot to above $14, where we doubled our position on an upside versus downside risk view. We also bought MIM across three other funds. In a surprising turn of events, by the end of December 2010 it was announced that Frank had agreed with eight of the top ten shareholders in MIM (over 50% of class-A shareholders) to swap his B-shares in exchange for MIM-owned horse racing assets. At 3Q10 these were valued at around $350 million (versus the $500 million payoff I had assumed). The stock price jumped to $28 per share. We were extremely fortunate with the timing of events, and we also know that Frank could have destroyed more shareholder value by further indulging his personal hobbies. In that way, it’s never right to judge a process by its outcome, good or bad. But I believe that if I can find similar risk-reward propositions over the rest of my career I will be the proud owner of a very satisfactory performance track record. I don’t think the MIM story is fully over yet. While at the current price the stock is trading at around book value, I don’t believe many investors have looked closely at the “at cost” book value of MIM’s real estate. A new board of directors will be appointed shortly and will undoubtedly highlight the “hidden” real estate value, if indeed any exists. If not, I believe the downside is low. 4

Recent Readings

Many of the books I’ve read are from the “usual” value investment shelf, so there’s no need to mention those. For anyone looking for an Austrian view of our “fraudulent” and incredibly risky banking system, I would recommend Money, Bank Credit, and Economic Cycles by Jesus Huerta de Soto.

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Shai Dardashti, Dardashti Capital Management While managing DCM is my primary passion (and restricted to accredited investors), it’s a joy to openly return the intellectual kindness I’ve received from others via Reflections on Value Investing, valueinvestingresource.blogspot.com 1

Professional Evolution

I have been lucky — born at the right place at the right time. I turned 13 in 1996, the precise moment at which Warren Buffett titles were New York Times bestsellers, and therefore impossible to miss at the local library.

“How can a single share price be the right share price, for many people, at the same time?”

By 1996, the Internet (i.e., dial-up modems and AOL message boards) had evolved to the point where anyone, regardless of nationality, income, or religion, could easily “connect” — digitally/socially/remotely — to a vast network of ideas and talent. By 2000, Mohnish Pabrai was a prolific writer, and Mosaic added invaluable perspective. Dr. Michael Burry was a prolific member of Value Investors Club. Whitney Tilson was a contributing writer to Fool.com, and Guy Spier was (and still is!) remarkably warm and welcoming. With ample spare time as a student, I had more than a fair share of writings to read and insights to absorb. To this day, I remain extraordinarily grateful for the intellectual generosity of many people who both knowingly and unknowingly helped me learn (and practice) the art of intelligent investing. 2

Investment Philosophy

Graham vs. Fisher, or Buffett vs. Munger — all paths lead to one road: the horse, the jockey, the runway, and the price. The holy grail is to buy a tremendously high-quality company with an exceptional management team at a remarkably cheap price and with an endless runway. The catch, of course, is that there’s often a trade-off among these four variables. To each his own. How can a single share price be the right share price, for many people, at the same time? Perhaps the following adaptation from a joke shared by Asa Berger captures the secret sauce to the efficient market hypothesis: Putting all rationality aside, it provides comfort to those who seek a simple answer to the unanswerable. And with surprising effect. A man comes to a Rabbi’s house and asks the Rabbi’s wife, “Can I see the Rabbi? It’s important.” The Rabbi’s wife walks the man to the Rabbi’s office, at which point the man recites a series of complaints about the man’s wife. As the man speaks, the Rabbi nods his head in agreement, “Yes, yes... you’re absolutely right.” This gives the man great comfort and the man leaves. A short while later, the man’s wife comes in and demands to see the Rabbi. She is in a state of great excitement. She’s welcomed to the Rabbi’s office by the Rabbi’s wife, and the woman begins, “I’m here about my husband” and then recites a series of complaints about her husband. As she talks, the Rabbi nods his head, “Yes, yes...you’re right.” The woman calms down, thanks the Rabbi, and leaves. Then, the Rabbi’s wife comes in and says to her husband, I don’t understand you. When he man came, you agreed with everything he said. Then his wife

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came and contradicted everything the man said, and you agreed with her. You’re on both sides of the same argument.” The Rabbi nodded his head and said “Yes, yes...you’re right.”

Investment Case Study

There are a few cash-flow positive net-nets today that are interesting. But absolutely nothing that is “20-punch card” caliber. Going back to the idea of “horse, jockey, runway, price” for a moment: Telular Corporation (Nasdaq: WRLS) had 18 million shares outstanding, $18 million of balance sheet cash, no debt and a $2-per-share price in July 2009, which implied an $18 million valuation for the enterprise.

“There are a few cash-flow positive net-nets today that are interesting. But absolutely nothing that is ‘20-punch card’ caliber.”

The company had (and has) an $8 million earnings engine that supports an annual $6 million dividend stream today. What’s an appropriate valuation for this earnings engine today? Perhaps a 6% yield on the $6 million of dividends, which implies a $100 million valuation. What about the $18 million raw cash from 2009? $15 million was returned to shareholders in 2010 via a special dividend, meaning the “true” cost basis of shares purchased in 2009 is close to the company’s enterprise value at the time. In other words, $20 million grows to $100 million in a few years. Telular enjoys high-margin revenues with low capex requirements, which makes for delightful ROA, ROE and ROIC. And, even more interestingly, revenue is recurring with very low churn. The runway? See slide #7 of Telular’s recent investor presentation. The management? They understand Henry Singleton. 4

Recent Readings

The Birth of Plenty, by William Bernstein (watch a great talk by the author).

Simon Denison-Smith, Metropolis Capital Metropolis Capital is a London-based investment management firm run by entrepreneurs Simon Denison-Smith and Jonathan Mills. The firm was established to take the disciplines developed from executing over twenty private company buyouts into a focused long-only equity investment strategy. The founders have been running a private fund for the last three years, but after jumping through the many hoops of the UK’s FSA authorization process, they are soon launching an open-ended fund, the SF Metropolis Valuefund. 1

Professional Evolution

I started “investing” in equities when I was eighteen years old when I worked briefly as a clerk in the back office of a futures and options trading business in London. The tools I have developed for investing have been built up through an initial stint as a strategy consultant with Bain & Co., followed by sixteen years of experience as an entrepreneur starting and building two software companies and a media business. In the media business, we have acquired over twenty other private companies and through this process have developed an approach to due diligence and valuation, which we started applying to the equities markets in © 2008-2011 by BeyondProxy LLC. All rights reserved.

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early 2008. Moving full-time into investment management in 2008 taught me that everything I had done in the previous twenty years in equity investment had been little more than gambling. In building the media business through acquisitions and now creating an investment management business, we have been hugely inspired by Warren Buffett. We have been attending the Berkshire shareholder meetings for seven years. 2

Investment Philosophy

We are in the “good companies at cheap prices / great companies at fair prices” camp. We spend a lot of time thinking about the strength of the franchise and constantly come back to this analysis throughout the life of any investment. We believe it is very important to be focused, preferring to invest in our 10-20 best ideas, on which we can spend significant time before and during the investment.

“We have a holding in Microsoft. This is a wonderful business with incredible margins and with a strong network-effect franchise in the MS Office suite and Windows.”

Sell discipline is extremely important to us and it is this area of our strategy that has evolved the most. We don’t believe in holding a position beyond what we determine is the intrinsic value — because then, of course, we become speculators — so our holding periods average around three years. With respect to activism, we look to build relationships with the management teams of the companies we invest in — where we can, i.e. in small caps — and will use this to influence strategy and capital allocation decisions. If we have to get activist, then we have made an error because a key buy criterion is smart managers with a disciplined approach to investing shareholder funds. 3

Investment Case Studies and Investment Opportunity

Our first investment in May 2008 was in Lloyds Banking (London: LLOY). We placed a big bet there – 20% of our fund. Within the media business [mentioned above], we service some of the UK high street banks and could see how strong their franchise was. Lloyds was the boring, conservatively financed one of the UK banks, and our view was that even if we assumed significant profit decline from the recession that was building, and no recovery, the stock had a huge margin of safety. We could not foresee that management would throw out their painstakingly crafted “boring” reputation and decide to gamble the company on one of the worst acquisition decisions in UK banking history. As soon as they announced the HBOS decision, we sold for a loss of about 18%, i.e., our first investment broke Buffett’s first and second rules and caused a 4.5% of loss for the fund in just four months of the fund being up and running. However, we sold at a price of £2.80; within months, they were worth 10% of our sell price. There were lots of lessons for us: First, avoid stocks with a potential feedback loop between the price of the share and the fundamentals. Second, look for stocks with conservative balance sheets (we now have a rigid debt-toEBITDA rule). Finally, the most important lesson: It does not matter what you purchased the stocks for, when the fundamentals change negatively accept that you cannot get everything right and sell. We were able to redeploy this money into an unloved kitchen manufacturer, Omega International, with net tangibles assets of £28 million and net cash of £4 million. The company had made profits of £9 million that year and had a market cap of just £17 million. They were, of course, seeing a significant downturn but after talking to management, we got comfortable that they could sustain a 50% hit in revenues and still be cash flow break even without cutting out any cost. Sadly for us, management could also see that the business was ludicrously cheap © 2008-2011 by BeyondProxy LLC. All rights reserved.

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and executed an MBO. We doubled our money in two months but would have preferred to have stayed invested in this high-quality business. We have a holding in Microsoft (Nasdaq: MSFT). This is a wonderful business with incredible margins and with a strong network-effect franchise in the MS Office suite and Windows. To be able to buy the business at enterprise value to net income of 11x and EV to projected net income of less than 10x was a great opportunity (the price is up only a little from where we purchased). 4

Recent Readings

I loved Vitaliy Katsenelson’s book, Active Value Investing. We read this early on in the development of the fund and it helped shape some of our thinking with respect to our sell discipline.

Dr. Christopher Detweiler, Private Investor Christopher Detweiler completed his Ph.D. in Chinese Studies at the University of Freiburg, Germany in 2010. In a recent interview with the Swiss newspaper NZZ, he made a bearish call on Chinese real estate, which he estimates is more overvalued than Tokyo real estate in 1991, U.S. real estate in 2006, and Spanish and Irish real estate in 2007. He resides in Zurich with his Swiss wife and is looking to combine his China background with his passion for value investing. 1

“I am interested in searching for the companies that Graham described as offering the ‘ideal, though infrequent, combination of safety and profit opportunity.’”

Professional Evolution

While finishing up my Ph.D. in Chinese Studies, I spent time studying original economic texts, including several from the Austrian School, and I taught a series of lectures on Ludwig von Mises and his Theory of Money and Credit for the Liberales Institut in Zurich. I also had the opportunity to intern with Wellershoff & Partners, a macroeconomic consultancy founded by Klaus Wellershoff. Joachim Klement, CIO and partner, introduced me to value investing by having me first read Graham’s Intelligent Investor before assisting him with equity analysis. He then directed me towards Security Analysis, Klarman’s Margin of Safety, and other related works. I was immediately hooked and took it upon myself to try to distill, organize, and apply the more than 200 value investing principles and methods I learned throughout the process. I found Graham’s common-sense approach to investing appealing and noticed several similarities between his view of markets and the economic theories of Ludwig von Mises. 2

Investment Philosophy

I am interested in searching for the companies that Graham described as offering the “ideal, though infrequent, combination of safety and profit opportunity.” These are companies with no debt and with demonstrated earning power, which would be able to cover bond yield-like dividends even with a low payout ratio. 3

Investment Opportunity

National Presto Industries (NYSE: NPK), coincidentally a company Graham liked in 1972, produces home appliances, ordnance, and absorbent pads. As in 1972, the company has a solid financial position (no debt, a current ratio over five) and strong enough earning power to cover bond-like dividends twice over (though no longer four times, as was the case in 1972 and for a time in 2010).

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Recent Readings

I am currently reading Exchange, Prices, and Production in Hyper-Inflation: Germany, 1920-1923 by Frank Graham. One surprising piece of information appears to be that Germans who owned listed shares of German companies did better in real terms than those who held gold (provided they didn’t sell until the hyperinflation ended in 1924). However, it was quite a ride from the beginning of 1920 to the end of 1923! From the beginning of 1920 to the end of 1921, during which time the government was increasing the money supply by 50% per year (as it had been doing since 1916), share prices doubled in real terms. But from the beginning of 1922 until the beginning of 1923, during which time the government increased the money supply by 20% per month, shares lost around 50% of their value in real terms. Then, during 1923, when the money supply was going up by 50% per week, share prices doubled again to end up at twice the real level of the beginning of 1920.

Tim du Toit, Eurosharelab Tim du Toit is editor and founder of Eurosharelab. On the website he reveals what more than twenty years of investment have taught him, sometimes at considerable cost. He publishes a free newsletter, “Investing that makes sense.” 1

“My approach initially was mainly deep value. Buying low price-to-earnings and high dividend-yield companies. Over time this has changed to buying higher-quality companies cheaply.”

Professional Evolution

I got into investing in a roundabout way, making all the mistakes you can possibly make as an investor. After finishing school in South Africa I had no idea of what I wanted to do with my life. My dad had a friend that was making a lot of money with an electrical contracting company. It sounded interesting to me and I went off to study as an electrician. At around the same time I enrolled in a stock market correspondence course that I really enjoyed. A few months before starting my practical training as an electrician I enrolled at Indiana University and studied finance and accounting, ending up with an MBA in 1995. In the meantime, I learned investing through the school of hard knocks. I lost money I pooled with my father investing using technical analysis. I listened to brokers and lost more money chasing the hottest stocks while trading a lot. Luckily I discovered a book Winning on the JSE by the mathematician Karl Posel that gave me a framework for finding, evaluating, buying and selling undervalued companies. During my studies in the U.S. a friend explained the idea of contrarian investing. It fit well with my existing investment framework. During this time I was also greatly influenced by Ben Graham’s The Intelligent Investor. The book brought it all together for me: Investing is the buying of a part of a business. The market is there to serve you. Buy when your downside is limited through a margin of safety, i.e., calculated value is substantially more than the current price. From there I went on to read Warren Buffett, David Dreman, Joel Greenblatt and many more. My way of approaching investing thus moved from a process with no proven evidence of success to one that has substantial proven success, all with the help of other successful investors.

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Investment Philosophy

My approach initially was mainly deep value. Buying low price-to-earnings and high dividend-yield companies. Over time this has changed to buying higherquality companies cheaply. Mainly due to reading The Little Book That Beats The Market by Joel Greenblatt. The book has also changed me to more of a mechanical type of investor. I look for quantitative strategies that have successful long-term records and have combined them into my own system. 3

Investment Opportunity

An investment I like at the moment is William Hill (London: WMH), the UKbased bookmaker. William Hill is based in London, and is one of the largest bookmakers in the United Kingdom. The company’s history dates back to 1937 when William Hill started his bookmaking business. The company has quite a history of owners, first acquired by Sears Holdings plc (a UK conglomerate, not the U.S. retailer) in 1971. In 1988 William Hill was acquired by Grand Metropolitan, who then sold it to Brent Walker in 1989. In 1997 the Japanese investment bank Nomura completed a leveraged buyout of the company after Brent Walker collapsed under too much debt. After a failed stock market listing in 1999, Nomura sold the company to two private equity firms, Cinven and CVC Capital. The private equity owners listed William Hill on the LSE in 2002. William Hill’s business is divided into three divisions, based on the way it does business with its customers: retail, online, and telephone.

“William Hill is based in London, and is one of the largest bookmakers in the United Kingdom.”

Retail. The retail division is by far the largest of William Hill’s businesses, accounting for 76% of sales and 73% of operating profit in 2009. This division is further divided into over-the-counter (OTC) betting on horse racing, football, dog racing, and gaming machines. The retail segment is William Hill’s breadand-butter business with over 2,300 licensed betting offices (LBOs) or shops in the UK, and more than 8,000 gaming machines. William Hill controls 25% of the UK’s LBO market. This segment’s growth is mainly driven from opening new LBOs and acquisitions of other betting offices. In the past five years, the company has opened more than 200 new shops. In addition, in 2005 it purchased 624 LBOs from Stanley Leisure for £504 million. However, this transaction marked the end of acquisitions as a means of growth, as The Office of Fair Trading in the UK made William Hill sell 78 of the 624 shops it acquired due to concerns about anti-competitive practices. In terms of product mix, winnings from horse racing have historically contributed more than 50% of the total gross winnings. This contribution has mainly come from older, long-term customers. Because the earnings from horse racing have not been growing, William Hill has over the last few years aggressively installed gaming machines in its shops. This has not only changed the revenue mix of the shops, but it has also attracted younger customers. A factor that has helped William Hill’s success is the decision to lease machines. This puts William Hill ahead of the competition, which owns an ageing fleet of machines that does not reflect customer tastes. Online. This division is the fastest-growing segment of William Hill’s business and the one that has received the most management focus. William Hill started accepting online bets in 1998. The segment grew with the introduction of Sportsbook (a live sports betting platform), online casino and online poker sites. Because of their early presence they were able to capture significant market share. However, the nature of the Internet, low barriers to entry, and low capital

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requirements resulted in declining share as new players entered the market. In order to strengthen the business, in 2008 the company combined William Hill Interactive, their online operation, with certain purchased assets from UK-listed Playtech, one of the world's leading gambling software companies. The combined entity, of which William Hill holds 71%, was named William Hill Online and is one of Europe’s leading online gaming and sports betting firms. William Hill Online operates two main platforms: Playtech-based download casino and poker and an Internet-browser flash-based “Vegas” platform. In terms of online products, sales are generated as follows: sportsbook (21% of segment sales), casino (62% of segment sales), poker (10% of segment sales), and bingo (7% of segment sales). The online division’s core strength is SportsBook, a live sports betting platform. The main advantage of SportsBook is that it can attract and retain customers at very low cost. This is advantageous as it can be used to cross-sell customers into the other gaming platforms of the company. At the end of 2009 William Hill Online was one of the top three online betting and gaming companies in Europe. More than 40% of the online division’s revenue is derived from outside the UK, mostly in Europe. Telephone. This is the oldest division of William Hill, as in the past the only way to place a bet, if you weren’t at the race course, was through the telephone or by post. For a lot of older customers the telephone remains the preferred channel for placing bets and for efficient personal service. For the company, however, this is the most expensive channel for taking bets. William Hill has one of the largest telephone customer bases, with 113,700 active customers in 2009. It has call centers in Sheffield and Leeds and can take up to 600 calls simultaneously.

“My research has revealed that William Hill is undervalued for three main reasons: the UK recession, unfavorable results in its bookmaking activities, and the large debt load and concentrated maturity of its debt.”

The UK telephone division has continued to be impacted by an uneven playing field, benefiting offshore competitors and betting exchanges. The UK tax system places UK companies at a competitive disadvantage due to a 15% tax on gross profits and customer wins, as well as a 10% levy on UK horse racing bets. William Hill’s offshore competitors pay none of the above, and UK betting exchanges (like competitor Betfair) only pay a tax of 15% on the net amount they take from customers. In 2009 the telephone business posted a loss of £36 million due to higher taxes and levies, as well as a £35 million goodwill writeoff. This is the reason why, in 2010, William Hill moved its telephone betting call centers to Gibraltar. From my description of the business you most likely have the impression that William Hill is a good business. The question you may be asking is, why did the share price decline so much that it has become so undervalued? My research has revealed that William Hill is undervalued for three main reasons: the UK recession, unfavorable results in its bookmaking activities, and the large debt load and concentrated maturity of its debt. First, it is understandable that the severe recession, along with falling property prices in the UK, impacted the company’s sales. This led to the share price decline because analysts apparently thought betting and gambling would be more recession-resistant than they turned out to be. For example, in 2009 sales from betting offices dropped by 8%. This was caused by a 3% fall in the number of bets placed and a 5% fall in the average bet size.

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The second factor which also led to a decline in sales and profitability was that William Hill was affected by quite a few “out-of-the-ordinary” sporting events results in 2009. In 2009 there was a severe absence of draws in the UK soccer Premier League matches which led to double-digit declines in the net sales of bookmakers in the UK. This was made worse by winning streaks among the most heavily bet on Premier League UK soccer clubs, which increased bookmaker payouts. Bookmaking, by its very nature, is a probability-driven activity, where over long periods the odds will favor the bookmaker. This does not mean that there may not be periods during which the bookmaker’s profits will be larger or smaller. In 2009 William Hill had such a period of lower profitability. This provides the perfect opportunity to invest in the company. The last factor why the company is undervalued is because it had too much debt; especially when the financial crisis hit. At the end of 2008 William Hill had bank debt of £1.1 billion, equal to 285% of equity. This was very high, and was a result of the company’s previous private equity ownership. Of this amount £820 million was to be refinanced in 2010. When the financial crisis hit the UK at the end of 2007 and 2008, it was nearly unthinkable that the company would be able to refinance it. William Hill went to work and in February 2009 raised £350 million by way of a share issue at a price of 105 pence per ordinary share. In November 2009 the company sold seven-year bonds with a value of £300 million and a coupon of 7.125%. These two actions took a lot of pressure off the company by decreasing net debt to 74% of equity, and they stretched the maturing debt to 2012 and 2016. I generally don’t like to invest in companies with debt of more than 35% of equity. But William Hill’s strong cash flow generation makes it acceptable. William Hill's debt equals 4.4 times 2009 free cash flow. Also, with UK companies, one has to be careful of pension liabilities. In William Hill’s case the pension liability is a manageable £57 million. One negative factor about William Hill is that management has a very small stake in the company: only 0.05%. I normally look for a management shareholding of at least 10%, or a substantial amount of shares in the company not in the form of options. In this case I am willing to make an exception because the company is so undervalued. (I have a position in William Hill.) 4

Recent Readings

Whole Earth Discipline: An Eco-Pragmatist Manifesto, by Stewart Brand. It makes the dangers of climate change clear but also offers concrete ideas how it can be countered. The Little Book of Sideways Markets, by Vitaliy N. Katsenelson. As I think the probability of a sideways market is quite high over the next few years, I found the book a good guide on how to profit from it.

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Christian Eck, UBS Education – undergraduate: European Business Programme, FH Münster and University of Portsmouth. Graduate: Masters in Finance, London Business School. Profession: Executive Director, Multi-Asset Institutional Structured Product Sales, UBS London. Interests: value investing, carpe diem, guitar. 1

Professional Evolution

My interest in value investing began just a few years ago. Having worked in the global markets area of investment banks for the last ten years, structuring and selling financial products to institutional and retail investors, I recognized at some stage that my own investment skills had to be improved. It seemed to be much easier to advise clients about their investment needs than to manage my personal account. I began reading books about value investing and followed some lectures and discussed approaches and investment ideas with like-minded people. Value investing has become a fascinating and rewarding hobby and approach, something I could envisage working on full-time in the future. 2

Investment Philosophy

Ben Graham’s deep value approach, and Joel Greenblatt’s focus on good companies at cheap prices. 3

Investment Case Study

Callinan Mines (Toronto: CAA) is a small metals exploration company in Canada. The investment case at the end of 2009 was that the company benefited from a “net profit interest” in an operating metals company. The NPI generated considerable cash flow, which at the time was not priced in. The company also had projects of its own, some of which have now come closer to development. The stock price more than doubled from C$1.40 to C$3 by December 2010. 4

Recent Readings

Democracy: The God That Failed, by Hans-Hermann Hoppe, a book that influenced my thinking about modern state forms, their disadvantages and consequences for societies, published in 2001.

Ori Eyal, Emerging Value Capital Management “At one point, Guy [Spier] and I traveled to Israel together and we went to visit and research about 15 undiscovered companies in Israel. In some cases I think we were the first international investors that had ever visited them.”

Ori Eyal is the founder and portfolio manager of Emerging Value Capital Management (EVCM), a focused global value fund. The goal is to generate the highest possible long-term returns without risking permanent loss of capital. Employing a disciplined value investing approach, Ori searches the world for exceptional investment opportunities based on long term business fundamentals. Ori then constructs a long-biased, concentrated portfolio consisting of 20-30 large positions, mostly stocks, trading at deep discounts to their intrinsic business values. Ori’s in-depth research explores the merits of each potential investment in the context of a global market. Many of EVCM’s investments benefit from multiple economic tailwinds as they operate in emerging markets that are experiencing rapid economic growth and development. EVCM uses little or no leverage and demands a wide margin of safety for each investment. Ori has invested significant portions of his personal wealth in EVCM fund.

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Ori has spent more than ten years studying and practicing global value investing and has developed a disciplined global value investing framework. He worked at Deutsche Bank Asset Management, Deephaven Capital Management LLC and Aquamarine Fund LLC. Ori won first place in the LCG investment challenge (National Value Investing Competition) and third place in the VCIC (National Venture Capital Investing Competition). Ori holds an MBA from the University of Chicago Booth School of Business, an MS from the Open University of Israel and a BS from the University of Maryland (MSc. & BSc. in Computer Science with multiple honors). Born in Israel and raised both in Israel and the U.S., Ori has a strong understanding of how to invest in both developed and emerging markets. In addition to investing, economics and emerging markets, his interests include logic games and puzzles, artificial intelligence, strategy/game theory, science/physics/astronomy and futurology. 1

Professional Evolution

While I started out as a computer scientist, I was always interested in finance and economics. Around the year 2000 I read The Essays of Warren Buffett and became a value investing addict. The basic tenets of value investing make intuitive sense to me: buying something for less than it’s worth, investing within your circle of competence, demanding a large margin of safety, and the power of compounding over time. Ever since, I have been on a journey to learn from the masters of value investing and to develop my global value investing framework. I earned my MBA at the University of Chicago’s Booth School of Business in 2006. I worked for Deutsche Bank as an analyst at one of their global investing funds. I also interned for several hedge funds, including Deephaven and Aquamarine.

“Closely studying the fantastic investing framework that Zeke [Ashton] has developed as well as many of his specific investments, has been a tremendous learning experience for me. Particularly helpful has been studying Zeke’s excellent risk management framework and his covered call methodology.”

In 2008, after a decade of developing and practicing my global value investing framework, I finally felt ready to launch my own fund, Emerging Value Capital Management. EVCM is a long-biased global value fund. At EVCM, I strive to integrate my global value investing framework with the best practices and ideas from the value investors I have studied. My life savings are invested in EVCM fund so I “eat my own cooking.” I was very fortunate to work for Guy Spier at Aquamarine Fund while studying for my MBA. Guy Spier is an extremely talented and thoughtful investor who looks at the world as one global integrated market. Using his deep insights into how the world operates, and his latticework of mental models, Guy has been able to successfully identify and invest in some of the world’s greatest businesses. At one point, Guy and I traveled to Israel together and we went to visit and research about 15 undiscovered companies in Israel. In some cases I think we were the first international investors that had ever visited them. Watching Guy interact with the management teams of these companies was a key learning event for me. He has the ability to quickly develop rapport with everyone in the room and get to the main business issues that each company faces. By the time the meeting is over, Guy has a better understanding of the business than the company management team does. Furthermore, Guy intuitively understands the people running the company, their motives, and their likely future behavior. Working for Guy helped me develop my global value investing framework. He taught me how to analyze great businesses and how to approach and interact with company management teams. He has been a great SUBSCRIBE TODAY! www.manualofideas.com

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mentor, role model, and friend over the years. When I launched EVCM fund, Guy Spier was my biggest supporter and my first investor. Zeke Ashton of Centaur Capital has also been a great mentor, teacher and friend. After I launched Emerging Value Capital, Zeke was kind enough to invite me to his office and has helped me further develop and refine my investment approach. Closely studying the fantastic investing framework that Zeke has developed as well as many of his specific investments, has been a tremendous learning experience for me. Particularly helpful has been studying Zeke’s excellent risk management framework and his covered call methodology. I have also learned a lot (and continue to learn) from my interactions with great investors including Monish Pabrai, Whitney Tilson, Glenn Tongue, Mathew Richey, and Rick Reiss. 2

Investment Philosophy

Even today, most value investing takes place in the U.S. and is applied to U.S. stocks. Having an international background, I became convinced that value investing can and should be applied to global markets. Therefore, one of the main tenets of my investment strategy at Emerging Value Fund is global value investing. I invest in various countries based on where I find the best investment opportunities. When I invest outside the U.S., I look for investment opportunities that are so attractive that they more than compensate me for bearing additional geo-political and macroeconomic risks. Portfolio construction is a bottom-up process driven by where I find the best investment opportunities at any given time. I don’t have a target allocation for any specific country. Rather, I keep my “idea radar” open for opportunities around the world in both developed and emerging countries. I search the world for the best investment opportunities and use them to construct the portfolio.

“My favorite international investing theme is the growth in the number and in the wealth of emerging market consumers… As the emerging markets population urbanizes, it rapidly embraces capitalism, creates wealth for itself, and increases its purchasing power.”

My favorite international investing theme is the growth in the number and in the wealth of emerging market consumers. It is one of the most powerful secular investment themes of which I am aware. As the emerging markets population urbanizes, it rapidly embraces capitalism, creates wealth for itself, and increases its purchasing power. To profit from this trend I seek to invest in businesses that sell to emerging market consumers. Willi-Food is an example of a company that is well positioned to benefit from this long term trend. A second way in which EVCM fund seeks to differentiate itself is in my approach to risk management and capital preservation. Risk management and capital preservation are my number one job. Making money is only my night job. Capital preservation does not mean that everything I buy always goes up right away (I wish that it did). Rather, it means that I make a great effort to avoid permanent losses of capital. It also means that I construct EVCM fund’s investment portfolio in such a way that minimizes the risk that multiple investment positions will all experience a permanent loss of capital due to one event, misfortune, or mistake. At the individual position level I limit risk and avoid permanent losses of capital by conducting in-depth research on each investment; sizing each position based on its risk/reward profile; demanding a large margin of safety for each investment; investing only within my circle of competence; seeking to invest in good businesses with durable competitive advantages; preferring experienced

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and shareholder friendly management teams; and periodically reviewing and reassessing the investment thesis for each of my investments. At the portfolio level I limit risk and avoid permanent loss of capital by holding cash or other placeholders when there are few good investment ideas; occasionally selling short stocks or stock indexes (or using put options); using little or no leverage; seeking to reasonably diversify our investments across four dimensions: investment types (cheap growth, special situation, great business, global macro), industry exposure, country/currency exposure, and market caps; and limiting the possible damage from any single event or mistake. The key to long-term wealth creation is not earning high returns. Rather, it is earning good returns while avoiding (or minimizing) the blow-ups. The biggest mistake that investors make is not investing in a conservative enough manner. The world is a dangerous place for capital. Inflation, expropriation, revolution, currency devaluation, industry declines, wars, natural disasters, depressions, market meltdowns, black swans, theft, fraud, and taxes all pose a constant and lurking threat to growing (or even just maintaining) wealth over time. In any given year, the probability of disaster is small. But over many years and decades anything that can go wrong eventually will.

“A 10% annual return will multiply our money over 117 times in 50 years. But having even one single year with catastrophic losses will undo years of great performance.”

As long as we can stay in the game, the long-term power of compounding will work in our favor. A 10% annual return will multiply our money over 117 times in 50 years. But having even one single year with catastrophic losses will undo years of great performance. Simply put, the key to amassing wealth over time is avoiding catastrophic losses and never having to start over from scratch. When things go wrong, we can avoid catastrophic losses only by investing conservatively and without leverage. Conservative investing is like insurance— it seems like a waste of money until something bad happens and then you are glad to have it. I see funds that use leverage (either at the portfolio level or by investing in highly levered companies), and I see funds that are too concentrated. Over the long run, leverage and excessive concentration usually end badly. 3

Investment Opportunity

G. Willi-Food International (Nasdaq: WILC) is one of Israel’s largest food importers with a focus on the Kosher and Health-Food segments. WILC designs, imports, manufactures, markets and distributes more than 1,000 food products. Products are sourced from 200+ suppliers throughout the world to more than 2,000 customers in Israel including all the major Israeli food retailers, wholesalers, and the Israeli defense forces. Imported products include: canned vegetables, fruits, pickles, canned fish, bakery products, lemon juice, highquality oils, dried fruit, nuts, pasta, halva, coffee creamer, snacks, dairy products, noodles, and more. The Company adds 40-60 new products to its offerings each year. In many cases, Willi-Food works with global food manufacturers to reengineer both the food contents and the production lines into a kosher endproduct. This end product is then imported and distributed in Israel under the Willi-Food brand. All Willi-Food products are certified Kosher according to strict rabbinical authorities, which positions Willi-Food as a strong competitor in the lucrative kosher products market. Although most of the Company’s products are sold under its own brand, Willi-Food distributes a variety of items from © 2008-2011 by BeyondProxy LLC. All rights reserved.

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world-leading manufacturers, such as Completa coffee whitener (Netherlands), Zanetti cheese (Italy), Breda butter (Netherlands), Nobleza Gaucha Yerba Mate tea (Argentina), Lurpak “spreadable” butter (Denmark) and Arla Foods dairy products (Denmark). In addition, Will-Food provides some products on a private label basis. While 80% of revenue is from Israel, the company's activities extend beyond importing into the Israeli market. Willi-Food distributes its products in both the USA and Europe and is actively working on expanding its sales in these and other international markets. The kosher food market is estimated to be over $14 billion per year in the U.S. alone. It is growing at 15% per year and is underserved with few branded kosher products. Among others, kosher products appeal to Jews, Muslims, and Health conscious consumers. Willi-Food is actively targeting this huge international market and any success here could dramatically increase the company’s revenues and profits.

“Net of cash, WILC [G. Willi-Food International] trades at five times 2010 earnings, a cheap price for a profitable, growing, recession resistant business with strong competitive advantages…”

WILC is owned and managed by the Williger brothers who co-founded the company. They are conservative managers that have done a good job at slowly and steadily growing shareholder value. Under their management, revenue has grown from $30 million in 1999 to $120 million in 2010 while net income has grown from $1.8 million in 1999 to $8 million in 2010. I visited the company in Israel and I was favorably impressed by what I saw. WILC’s recent market cap was $88 million. The company has about half its market cap in net cash and is looking to deploy this cash to acquire a U.S. distributor. Net of cash, WILC trades at five times 2010 earnings, a cheap price for a profitable, growing, recession resistant business with strong competitive advantages (brand, distribution, kosher know-how, global supplier network), a team of experienced and proven owner-managers, and with an attractive growth runway (global kosher food market). 4

Favorite Readings

Reading voraciously is a characteristic that all great investors share in common. There is simply no better way to gain wisdom and learn about the world than to read great books. For international investing, Jim Rogers’s earlier books, Investment Biker, Adventure Capitalist, and Hot Commodities are good. The Economist is a great weekly magazine to read and learn about the world. I also think Mohnish Pabrai’s The Dhandho Investor and Joel Greenblatt’s You Can Be a Stock Market Genius are great investing books. Economics is a key investing skill so I think everyone should read Milton Friedman, especially his books Capitalism and Freedom and Free to Choose. Trying to forecast what the future will look like is an important investing skill. To this end I recommend books by Ray Kurzweil, Fantastic Voyage and The Singularity Is Near. Bill Gates has called Ray Kurzweil “the best person I know at predicting the future of artificial intelligence.” Kurzweil’s vision of the future will literally “change everything.” To broaden your latticework of mental models, I highly recommend books by Richard Dawkins, Jared Diamond, Richard Feynman, Michael Pollan and John Brockman. I also think Buzzmarketing by Mark Hughes and Influence by Robert Cialdini are must-read books. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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Don Fitzgerald, Tocqueville Finance Don has worked as an investment and finance professional in Europe for the past fifteen years and spent the last eight years identifying, analyzing and managing portfolios of undervalued securities in European equity and distressed debt markets. Prior to that he spent seven years in corporate and investment banking. He has worked in Dublin, London, Frankfurt and Paris. He completed the CFA program in 2006 and graduated from Trinity College Dublin with a first class honours degree in Business Studies and German in 1996. Don co-manages the Tocqueville Value Europe fund. The fund’s multicapitalization investment strategy is contrarian and value-oriented and stock selection is bottom-up, based upon intensive proprietary research and a disciplined investment process. Don is rated A by Citywire for risk-adjusted returns and the fund ranks among the top-performing European equity mutual funds over the past decade with five out of five ratings from Lipper in all categories and a five-star Morningstar rating. Tocqueville Finance is a Paris-based value house with €1.8 billion in assets under management. The company has followed a value investing philosophy since its foundation in 1991. 1

“Although investing in distressed debt is a fascinating business, I liked equities too and was more interested to work in an environment with more liberty than a large bank.”

Professional Evolution

I first started off dabbling in the stock-market with a modest sum of money as a student. Results were initially mixed, largely because there was no guiding philosophy. Then I picked up a copy of John Train’s The Money Masters to get a better understanding of how the great investing minds think. The book outlines the investment approach of several great investors from macro gurus to stockpickers, each with their own individual style. I identified much more with the value investing style, worked hard to deepen my knowledge and began to build a portfolio around this approach helping me achieve better results. My step into managing money professionally is a little unusual. I had spent six years with a large U.S. bank in different banking and structured finance roles in Dublin, London, Frankfurt and Paris. Then I spent three great years with the Paris branch of a large German bank as part of one of the most experienced teams investing in European distressed debt. Although investing in distressed debt is a fascinating business, I liked equities too and was more interested to work in an environment with more liberty than a large bank. So I interviewed with several of the successful Paris-based value-type boutiques. The fit with Marc Tournier’s team at Tocqueville, whose oldest fund has compounded annual returns of 15% since 1993, was good as they instantly saw common elements between credit, distressed debt and value investing. I did not hesitate to sign up, first as an analyst and a year later I was co-managing Tocqueville Value Europe with Sebastien Lemonnier. From time to time, I pick up little nuggets of wisdom here and there by reading through the investment letters of proven value investors who are clear thinkers, write well and who have been around the block a few times. By this, I mean people like Marty Whitman and Eveillard, the folks at Tweedy Browne, Seth Klarman and Warren Buffett, of course. Don’t forget that one of the great things about investing is that learning is cumulative — the more businesses you analyze and the more experience you

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have under your belt — the more it will help you improve as an investor. We cannot always master short-term returns but we can work hard to continuously upgrade our skill-set and improve the investment process in order to ensure that we continue to outperform over a full business cycle. 2

Investment Philosophy

I am closer to the approach of investing at modest prices in half-decent companies that are temporarily out of favor or overlooked rather than running a portfolio of basket cases or stocks that appear cheap on quantitative measures. We certainly run screens to find stocks that are cheap on Graham-type screens but only to serve as tools for idea generation not to build portfolios.

“…compare the two French cement-makers Vicat and Lafarge. Family-controlled Vicat’s shrewd capital allocation has created wealth for shareholders whereas Lafarge is a classic case of professional management with limited skin in the game making large bets with shareholder capital in order to enlarge their empire.”

The financial crisis reinforced a few of my convictions: To begin with, not all companies are created equal: capital allocation, competitive strengths, pricing power and recurrent business models can result in large differences in operational performance between ostensibly similar businesses. For example, compare the two French cement-makers Vicat and Lafarge. Family-controlled Vicat’s shrewd capital allocation has created wealth for shareholders whereas Lafarge is a classic case of professional management with limited skin in the game making large bets with shareholder capital in order to enlarge their empire. Also, the market does indeed throw out the baby with the bathwater from time to time. Small caps, companies with short stock market history — take for example Lanxess or Arkema — two orphan chemicals companies spun off from their parents in 2006 and holding companies all come to mind as parts of the market that were punished far too harshly. These areas might prove productive hunting grounds post the next big crash. At Tocqueville, we are not activist per se but take our responsibilities seriously and will actively defend our position if we own a substantial slice of the company and believe that management is not behaving responsibly. 3

Investment Case Study

Gategroup (Swiss: GATE) has been a strong performer for us over the past two years. The company is the 2nd-largest airline catering group in the world, behind Lufthansa’s Chefs Group (LSG). It was listed on the Zurich exchange in 2009. Although the stock had already risen from the price it listed at when we bought it in late summer 2009, it has risen nearly two-and-half fold from our initial purchase. Looking back at this investment there are many elements here that are common themes to uncovering undervalued securities: To start with, you had some motivated sellers in the form of a syndicate of private equity owners who were regularly selling down shares for the first few months of its listing. Second, the stock was slightly overlooked as there are no listed peers with which less diligent investors could compare it. Also, it was perhaps a little contrarian too in the sense that in the eyes of many investors this business was most likely judged guilty by association with the airline industry. Third, the business was of much better quality than one might think at first sight. It benefits from reasonable barriers to entry as airline catering requires scale in a particular hub like Zurich, Chicago or Heathrow. This need for local scale sometimes leads to local oligopolies. This, combined with a global © 2008-2011 by BeyondProxy LLC. All rights reserved.

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network, innovative service offering and a lower cost base, results in a strong competitive position. Furthermore, the company has long-term contracts with clients, generates strong cash flow, decent return on capital, and management owns a large chunk of the company. Finally, we bought the business on fairly depressed earnings due to the cyclical downturn and specific events that affected the company in 2009, so our estimate of normalized earnings was well above the reported numbers on which the market was focused. 4

Favorite Readings

These are a handful of books that have influenced my approach to investing: For market psychology and value basics: Graham’s timeless Intelligent Investor; For helping you look in the right corners of the market for mispriced securities: Greenblatt’s Uncover the Secret Hiding Places of Stock Market Profits; For evaluating the quality of a business: Greenwald’s Competition Demystified, and my friend Dorsey’s Little Book That Builds Wealth; For appreciating market history: my compatriot Napier’s Anatomy of the Bear

Massimo Fuggetta, Horatius 1

“My basic idea is that people are prone to make major mistakes in assessing probabilities. So I look for situations where I think prices reflect some sort of probability misjudgment…”

Professional Evolution

I got interested in the academic debate on market efficiency while doing a Ph.D. at Oxford. I thought the efficient market hypothesis was wrong, and I wanted to prove it in practice. So I got a job as analyst and portfolio manager at JP Morgan Investment Management in London. I was there for ten years. After that I was CIO and CEO of Sanpaolo IMI Asset Management in Milan for two and a half years. Then in 2004 I created Horatius. I wanted to invest for clients in the same way I invested my personal wealth — which was very different from the institutional, benchmark-driven approach at JPMIM. For many years I had owned a portfolio of about twenty stocks, selected worldwide on a value basis. Benjamin Graham was, of course, a great influence. But at the time I found David Dreman’s Contrarian Investment Strategies very inspiring, plus the whole behavioral finance literature that I had researched for my Ph.D. 2

Investment Philosophy

My basic idea is that people are prone to make major mistakes in assessing probabilities. So I look for situations where I think prices reflect some sort of probability misjudgment, which creates an opportunity as the market eventually corrects the misperception. I actually see this as the root of all value investing, underlying many different “strategies.” The market can attach high probabilities to events or scenarios that in fact have low probabilities; or, vice versa, give low probabilities to outcomes that have really high probabilities. The typical example is extrapolation of past performance. Of course, the problem is that low-probability events do occur sometimes, the post-Lehman crisis being the perfect example: a highly improbable outcome (in my opinion!) that rapidly became inevitable thanks to egregious mishandling by the U.S. Treasury.

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“One of my favorites today is Barratt Developments (London: BDEV), a UK house builder priced below one pound and 25% of tangible book value…”

Investment Case Study and Investment Opportunity

One investment that has worked very well is XL Group (NYSE: XL), a U.S. insurance company which, post-Lehman, was reputed to be the next AIG — except that, if you looked at the balance sheet, it was pretty clear that it wasn’t. I bought the stock at $3 per share, and it is now at $23 per share. One of my favorites today is Barratt Developments (London: BDEV), a UK house builder priced below one pound and 25% of tangible book value, while until 2007 it was valued between one and two times book. They run into trouble with a wrongly-timed and -priced acquisition and are still suffering under a weak construction environment. But as the market eventually normalizes, I think they should be valued at many times the current price. 4

Recent Readings

Two books I enjoyed reading recently are Leonard Mlodinow’s The Drunkard’s Walk: How Randomness Rules Our Lives, and Chris Frith’s Making Up The Mind: How The Brain Creates Our Mental World. They both deal, from a physicist and a psychologist’s perspective, with mental traps and other mistakes we tend to make. On the same theme I am now reading Joseph Mazur’s What’s Luck Got To Do With It? The History, Mathematics and Psychology of the Gambler’s Illusion. On the 2008 crash the best book I have read is William Isaac’s Senseless Panic: How Washington Failed America. Isaac was the head of the FDIC in the ‘80s and demonstrates very well how a perfectly manageable crisis — in many respect less severe than the ones he had to deal with — turned into such a disaster. On a different (but not entirely unrelated) subject, I loved Alison Gopnik’s The Philosophical Baby: What Children’s Mind Tell Us About Truth, Love and the Meaning Of Life.

Benedikt Germanier, Private Investor Following a career as researcher in banking I joined zai AG as CEO in 2009. zai stands for “tough” and “resistant” in Raetoromanic. zai is a niche player in the ski industry. We produce 1,000 skis per year in the top technology segment. We also run a small sunglass business and last year founded zai Golf AG. I drive my investment, which is risky and sometimes I am even afraid of myself. However, it is great fun being successful, and the zai team learns so much about life! 1

Professional Evolution

Teaching economics at the University of Applied Sciences, Zurich, 1996-1999. Global Strategist, Credit Suisse, 1999-2002. Forex Strategist, UBS Investment Bank, 2002-2006. Head Forex Strategy, UBS Americas, 2006-2009. First investment: Following the Asian crisis in 1998, I thought, without knowing much, that Swiss banks were cheap. I invested my family savings into stocks. What I learned over time: Most of the time, don’t do what most others do. Flow analysis can be helpful at extremes. Professionally I focused on sentiment analysis, creating and marketing the UBS FX Risk Index. Over time I benefited

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a lot from economic modelers such as Ray Barrell from NIESR in the UK who helped me think in scenarios in a consistent way. 2

Investment Philosophy

I have a non-compromising style. With my move out of the banking industry into the world of business as CEO from zai AG, I willingly put most of my eggs into one basket. Importantly, I am able to influence the destiny of my investment, which I could not do before… 3

Private Investment

zai is my major investment today. I believe that focusing on quality and technology will create a unique combination, helping to clearly differentiate ourselves in the market. This will also lead to above-average returns over time. 4

Favorite Readings

Thinking about things: All Life Is Problem Solving, by Karl Popper

“I willingly put most of my eggs into one basket. Importantly, am able to influence the destiny of my investment …”

Investing: All of the books by Andre Kostolany Psychology: The Inner Game of Tennis, by Tim Gallwey

Pablo Gonzalez, Abaco Capital We are a small family office that manages around $50 million in equity and fixed income. We are regulated as an investment advisor by CNMV. 1

Professional Evolution

I worked as a proprietary trader for more than 17 years for Nomura America, Banco Santander, and Calyon. In 1997, when I lived in New York, a friend recommended I learn about Berkshire Hathaway. A few months later I bought my first Berkshire shares. I have been reading books and articles about Buffett since then. I tried applying some of this learning to my prop trading activities. 2

Investment Philosophy

I used to trade event-driven and relative value situations and capital arbitrage, so those are the first places for me to look for ideas. In general, I like good companies at cheap prices. Those are the ones I hold for the long term. 3

Investment Opportunities

My latest investment is Markel (NYSE: MKL). It is an excellent company selling at a very reasonable price. I have also bought some shares in Lloyds Banking Group (London: LLOY). 4

Recent Readings

The last edition of Security Analysis is great. I was very impressed by Outliers, and I have been studying the concept of deliberate practice, which is explained in the book. Also, Talent Is Overrated, by Geoffrey Colvin.

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Dr. Olaf Hein, Sparta AG Founded in 1995, Sparta is a publicly traded investment company with a longterm investment horizon that invests primarily in German and Swiss securities. The basic objectives are wealth creation and wealth preservation even in difficult market phases. Contrary to popular wisdom, the degree of portfolio diversification is rather limited, with the goal to benefit disproportionally from a limited choice of attractive investment opportunities. 1

“I was highly skeptical about [the deal]. Finally, the winning argument for me was, ‘Why do you think Goldman Sachs is a coinvestor?’ As it turned out, the platform never drew enough participants and the money was completely lost.”

Professional Evolution

I am a latecomer to the field of investing. While I had my first exposure to the German stock market at Deutsche Bank Capital Markets from 1986 to 1990, I did not re-enter the stock market again before 1996. That year I became CEO of a newly founded investment boutique called Sparta AG. The investment focus was mainly German small caps. In 1998 the company had a tremendously successful IPO and within 18 months reached a mind-boggling market cap. This was, however, not due to our small-cap expertise, but because Sparta used the IPO proceeds to invest opportunistically in all sorts of Internet startups. For a while investors perceived the Sparta portfolio as a potential goldmine. When the Internet bubble burst, Sparta went from boom to (almost) bust. This rather unnerving experience led to the realization of what I call the “Little Red Riding Hood” — advice: “Don’t go astray while you are on your way!” Within the last ten years I have bought some 70 books on the financial markets and read about 40 of them from cover to cover. All in all the books have put my view of the financial world into a far better perspective. A lasting impression made, among many others, Jack Schwager’s Interviews with Americas Top Traders, Reminiscences of a Stock Operator by Edwin Lefevre, Fooled by Randomness by Nassim N. Taleb, and especially Poor Charlie’s Almanack, the wonderful book about the wisdom of Charlie Munger. I have also read various books about Warren Buffett. Several years ago I even put a $20 bill in an envelope and in return received Berkshire Hathaway’s collection, “Letters to Shareholders, 1977-2002.” 2

Investment Philosophy

Unfortunately, early on I did not have the luck to be introduced to some sort of mentor who would have provided me with the “ten secrets of successful investing.” So, I did not start on a very sound footing but rather with an egregious misconception regarding solid portfolio management. I was also relatively easy to sway by the verdict of apparently experienced investors. I remember a private equity deal suggested many years ago for a new Pan European trading platform. I was highly skeptical about it. Finally, the winning argument for me was, “Why do you think Goldman Sachs is a coinvestor?” As it turned out, the platform never drew enough participants and the money was completely lost. In light of these costly experiences I have become comparatively risk adverse. I think in terms of absolute return and as a general concept don’t want to lose money. So I am pretty much concerned with the downside risk of a stock before worrying about the upside. Over time I have written down a set of “a danger foreseen is a danger avoided” constellations. Many are pretty obvious, such as, “don’t buy an IPO from the portfolio of a private equity firm, if none of © 2008-2011 by BeyondProxy LLC. All rights reserved.

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the proceeds go to the company itself;” or “don’t invest in companies with a questionable record of the main shareholders.” Others are a little more subtle: “don’t buy a stock with a large listed peer group in the same market segment;” or “don’t invest in companies that claim to be the next Apple or Google. What distinguishes my investment style from others is understandably hard to tell. I believe you should not try to seek consent or support for a certain investment idea as long as you are convinced the stock is the right thing to buy and you stick to your own knitting. Once you become the defender of an idea, it is hard to change your mind about it. 3

“…you should not try to seek consent or support for a certain investment idea as long as you are convinced the stock is the right thing to buy and you stick to your own knitting. Once you become the defender of an idea, it is hard to change your mind about it.”

Investment Opportunity

Given the limited shelf life of many new investment ideas, I prefer to stick to a company I picked in late 2009 and we still own. The company is Eckert & Ziegler Strahlen- und Medizintechnik (XETRA: EUZ). It is a German small cap with an enterprise value of about €145 million and sales of about €105 million in 2010. EUZ could earn €11 million in 2011. EUZ produces and markets a range of medical equipment, especially for cancer therapy, featuring radioactive isotopes including prostate seed implants as well as products for medical nuclear imaging, and industrial metrology. For many years, I had the company on my short list but did not invest in it, given a somewhat unstable business development at that time. In 2009 the company was forced by the Belgian financial regulator CBFA, and subsequently by the Court of Appeal in Brussels, to make a mandatory takeover bid for its Belgian minority holding IBt Bebig. Given the global financial crises, the takeover bid strained the liquidity of EUZ at a difficult time. Two rights issues, which burdened the share price, provided the necessary funds in 2009. With hindsight, participating in the second rights offering was well timed, as the acquisition turn out to be very profitable. The rationale for the EUZ investment is as follows: (1) Trust in the management capabilities of the CEO and major shareholder Dr. Eckert Ziegler. This is very important given that very few investors can claim to sufficiently understand the business mechanics of radioactive isotopes. (2) The company operates in a niche market, difficult to enter by a large med-tech company. In the long run EUZ might also be an attractive acquisition target. (3) EUZ business has compelling demographics, servicing the needs of a steadily increasing number of prostate cancer patients. (4) EUZ is attractively positioned as one of the few consolidators in a mature, regulated radioactive isotope market. 4

Favorite Readings

I can’t pinpoint a single book that has made the big difference to me. Books that educated my somewhat naïve view of the financial world were Smartest Guys in the Room, about the scandalous rise and fall of Enron; and more recently, The Big Short by Michael Lewis. Being German I was embarrassed by the part, “It’s zero-sum. Who is on the other side? Who is the idiot? Düsseldorf. Stupid Germans. They take rating agencies seriously. They believe in the rules.” I follow the bi-weekly column of Alfons Cortes in the Swiss periodical Finanz und Wirtschaft. Mr. Cortes is an excellent technical analyst, extremely well-read and an expert in the field of behavioral finance. I believe a sound understanding of behavioral finance is a key element of successful portfolio © 2008-2011 by BeyondProxy LLC. All rights reserved.

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management. Recently, Mr. Cortes recommended the book Behavioral Finance: Investors, Corporations and Markets by H. Kent Baker. Comprising chapters contributed by experts from influential firms and universities, the book provides a comprehensive cross-section of essential elements of behavioral finance.

Markus Henz, Wüthrich, Henz & Co. I am Swiss and graduated from the University of Applied Sciences in Basel, specializing in banking and finance. Subsequently, I received an Executive MBA from INSEAD. I am a CFA and CAIA charterholder. My passions outside of work are traveling, studying Russian, playing chess and squash. I participate in an angel investing group and enjoy learning about business ventures. 1

Professional Evolution

My colleague Peter Wüthrich and I founded Wüthrich, Henz & Co. in 2009 following many years in private banking. We launched our firm with a single fundamental objective: to provide our clients with state-of-the art investment advice, either by leveraging our internal expertise or through access to leading industry and academic experts. Our aim is to create value for clients by using a multi-disciplinary approach to the investment decision process, incorporating findings from psychology, neurology, economic history, and other fields. I got started as an investor in the 1990s through manager research. My primary interest was always to identify the most capable investors rather than to pick securities myself. My learning process was therefore influenced by a handful of great investors versus any single individual or philosophy. 2

Recent Readings

Guns, Germs and Steel: The Fates of Human Societies by Jared Diamond

Robert Karas, Schoellerbank (UniCredit Group) Robert Karas, CFA, started his career at Bankhaus Schoeller & Co in Vienna in 1990. From 1996 to 2007 he worked in Liechtenstein and Switzerland. In 2007 he joined Schoellerbank AG in Salzburg to head the equities team. Founded in 1833, Schoellerbank is a private bank with an Austria-wide presence. 26,000 private and institutional investors rely on Schoellerbank for investment advice and management. Schoellerbank functions as an independent private bank within the international alliance of UniCredit Group. 1

Professional Evolution

I began my investment career in 1990 as a market maker in equity options on the Austrian futures and options exchange. We were trained by Tony Saliba, a Chicago options trader who was featured in the book Market Wizards along with investing legends Michael Steinhardt, Jim Rogers and Paul Tudor Jones. That started my interest in hedge funds and trading. In the mid-90s, I took a position in Switzerland as a fund allocator. Interviewing hundreds of hedge fund managers in person greatly influenced my thinking. One thing I learned is that very few things work over long time periods in the markets and nothing works continuously. Looking for investment strategies that offer “smooth line” returns © 2008-2011 by BeyondProxy LLC. All rights reserved.

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always spells big trouble eventually. Over time I also came to believe that buying part of a great company at a reasonable price has to make sense. I think it was in 2002 when I met Guy Spier, and I decided to go to the Berkshire Hathaway annual meeting the following year. Guy introduced me to a lot of people and argued that I should focus on value investing. Nevertheless, I stuck with my own global macro hedge fund for a few years. Then I turned to value investing, and took over the asset management equity department at Schoellerbank in August 2007. Another example of the fallacy of market timing! 2

“I find that my temperament starts to trigger the wrong decisions if the possibility of a permanent loss of capital starts showing up on the horizon. I am open to any ideas but the case has to be easy to understand.”

Investment Philosophy

Like most investors, I have been educated by pain. I find myself more and more looking for companies Marty Whitman would describe as “safe and cheap.” Balance sheet strength just lets you sleep well. Even if you might pay too much by being early sometimes, a great company bails you out as the underlying business progresses. Thus, high-quality businesses are a focus. Looking for the dirt cheap, lower-quality companies hasn’t really worked for me in the past. I find that my temperament starts to trigger the wrong decisions if the possibility of a permanent loss of capital starts showing up on the horizon. I am open to any ideas but the case has to be easy to understand. I admire the complex analysis that some investors are capable of doing, e.g. in the area of distressed investing. But I prefer something easier to understand, e.g. when short-term participants overweight quarterly earnings vis-à-vis the long-term outlook. I also like outsourcing the capital allocation/reinvestment problem to smart people. Holding companies like Loews or Leucadia and insurance companies like Markel or Fairfax are examples. Market developments in recent years provided an opportunity to buy into these companies at attractive prices. Ideally, you can hold on to them forever. 3

Investment Opportunities

The entire segment of high-quality companies is particularly compelling today. Household names like Johnson & Johnson (NYSE: JNJ), Wal-Mart (NYSE: WMT), Pfizer (NYSE: PFE), Exxon (NYSE: XOM), Total (NYSE: TOT), Microsoft (Nasdaq: MSFT), Cisco Systems (Nasdaq: CSCO), Heineken (OTC: HINKY), Nestle (OTC: NSRGY), Novartis (NYSE: NVS), Roche (OTC: RHHBY), Medtronic (NYSE: MDT), etc. It’s hard to see how a portfolio of such names will not fare better than other segments and asset classes. There are also a number of companies in Japan that have a strong market position, trade cheaply and have net cash. Importantly, they are not as indifferent to shareholder interests as are most Japanese firms. A recent investment was Walgreen (NYSE: WAG) in June/July 2010. We had been investors in Walgreen before, but sold out in August/September 2009. Back then the outlook was unclear and the valuation no longer compelling. When the stock traded down, we reentered in 2010. Enterprise value to EBIT was less than eight times, and the new store concept made a lot of sense. Management took the right long-term decisions and focused on cost reduction and their “rewiring for growth” effort. Market participants overweighted the short-term earnings misses and seemed to forget the long-term strength of the company. Walgreen slowed the rate of store growth and invested back in their core stores. It all made great sense. Although the stock is up by nearly 40%, we are still invested and the valuation is still reasonable. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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Recent Readings

I loved The Big Short by Michael Lewis. It showed how one person’s decision can make an enormous difference; how some people were able to see things coming that had not happened before and how others got stuck in a past view of the world. I am currently reading King of Oil, about Marc Rich. The book gives a lot to think about with regard to law, morale, and politics.

Andreas Lechner, Private Investor 1

Professional Evolution

I started early on, while in school. SAP struck me as a company that seemed to have captive customers and good prospects. I visited a local tradeshow to learn more about SAP and took a position. It did quite well, so I decided to learn more about investing. I came across books by Peter Lynch and about Warren Buffett. I continued to read Buffett’s letters to shareholders and everything else I could find. He certainly has had the biggest influence on my investing. 2

“I buy what is cheap and I can understand. Quality is an important aspect of valuation…”

Investment Philosophy

I buy what is cheap and I can understand. Quality is an important aspect of valuation, which is often underappreciated by the market. That’s why I usually, but not always, end up with “good” companies at moderate multiples rather than so-so companies at extremely low multiples. A catalyst is clearly a positive, but not required. I am not entering an investment as an activist, but might turn into one if I find out about things that I don’t like. Since most public companies are small, I find more investments in small caps than large caps. However, I am fine with any size. I don’t have a geographic focus. 3

Investment Opportunity

Microsoft (Nasdaq: MSFT) seems like a decent idea: good company, misunderstood by the market, reasonable valuation. The market views them as a consumer company being eaten alive by Apple, whereas the bulk of Microsoft’s business is in the corporate sector, and the switching costs are prohibitive. The valuation is still reasonable at eight to nine times fiscal year 2011 EBITA. 4

Recent Readings

The Loyalty Effect, by Frederick Reichheld

Sébastien Lemonnier, Tocqueville Finance Sebastien graduated with a Master degree in economy and finance at Sorbonne University in Paris. He started his career in 2003 at Tocqueville Finance, a French boutique specializing in value investing. He began as a financial analyst focused on European equities. By 2006 he was promoted to fund manager responsible for the Tocqueville Value Europe fund. He has been co-managing the fund with Don Fitzgerald since the beginning of 2008. Sebastien is rated A by Citywire, and the fund ranks among the top-performing European equity mutual funds over the past decade, with five out of five ratings from Lipper in all categories and four stars from Morningstar. Tocqueville Value Europe’s

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multi-cap strategy is contrarian and value-oriented; stock selection is bottom-up, based on proprietary research and a disciplined investment process. 1

Professional Evolution

I was on track to become a professional tennis player, playing in a national competition in the famous Roland Garros stadium, but due to injury I went back to school and graduated with a Master’s degree in economics and finance from the Sorbonne University in Paris. More relevant than my studies to becoming a value investor were the books I read about Warren Buffett and by Peter Lynch and others. I was lucky to learn from colleagues, including the most successful French investor over the last decade, Marc Tournier. Being a value investor was a logical and best possible move because I had never put much emphasis on complex mathematical models or theories. Meanwhile, I was interested in concrete explanations, company strategies, long-term management vision, corporate culture, common sense — key differentiations of a value investor. 2

Investment Philosophy

I view value investing as rational, common-sense investment. I tend to prefer companies that create value over the long term as opposed to focusing on shortterm earnings growth. The numbers are just a consequence of tangible facts, so I focus on solid and sustainable company fundamentals. It is key to understand structural business aspects as opposed to being distracted by temporary events.

“I do not trust in a secret formula to perform but I tend to be pragmatic, trying to pick up key investment principles from the great value investors like Buffett and Graham…”

In addition, being a rational investor means not to be spontaneous like shopping with your girlfriend, but to behave more like Scrooge McDuck. That’s probably why I am used to being contrarian and happy buying boring quality stocks. Value investors need humility, as we aren’t the ones investing in sexy stocks. Thus, another way to think about value investing is to track, analyze and invest differently than the masses. In terms of qualitative work, we don’ t focus like others on a “story” but analyze a company’s entire value chain to identify sustainable competitive advantages. In terms of valuation work, we mainly look at enterprise value compared to normalized earnings in order to determine what a reasonable investor would pay for the entire business. Margin of safety is key to risk/reward optimization. At present, the investor’s main challenge is not to find information but to ask yourself and the company you meet the questions people don’t ask. Consequently, I do not trust in a secret formula to perform but I tend to be pragmatic, trying to pick up key investment principles from the great value investors like Buffett and Graham in order to improve my investment process. 3

Investment Opportunity

At Tocqueville, our conservatism leads us to manage diversified funds of 50-70 stocks. Why? Because we know we will make mistakes. At the same time it provides us the flexibility to invest in large quality companies like Nestlé and in undiscovered small caps that historically generate good returns. Thus, I won’t take one of the largest holdings, but a small holding that amounts to less than 1% of the fund: Baron de Ley (Madrid: BDL). Before I detail the investment rationale, it is worth pointing out that liquidity risk management is important. This company is not far from having everything investors currently don’t want: Spanish exposure, low stock liquidity, no emerging markets exposure, limited operating leverage, no acquisition strategy, limited investor relations. In © 2008-2011 by BeyondProxy LLC. All rights reserved.

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reality, this Rioja wine producer’s fundamentals are strong. The company has two strong brands (El Coto and Baron de Ley). It is a differentiated player with no young wine production, contributing to a robust margin track record. It has scale and a good organization; it is signing exclusive distribution agreements with leading local distributors. It has a strong balance sheet, with solid tangible assets and no debt; solid and stable free cash flow, and quality management. The fundamental picture is much stronger than the top-down market perception. Finally, the valuation provides enough margin of safety for an investor like me who does not like to pay up — it trades at 1x book value despite 13% ROCE and 7x EBIT 2011, which is a roughly 40% discount to its historical level. 4

Favorite Readings

Good to Great by Jim Collins, Security Analysis, and The Intelligent Investor

Kaushal Majmudar, The Ridgewood Group I am now the founder and chief investment officer of Ridgewood Investments. I graduated with honors from Harvard Law School after being an honors graduate of Columbia University with a bachelor’s degree in Computer Science. Prior to founding The Ridgewood Group in late 2002, I worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers. I am a CFA charterholder, member of Value Investors Club and SumZero, and am also admitted to the bar in New York and New Jersey. The Ridgewood Group is an SEC-registered investment firm located in Short Hills, a suburban community in New Jersey, just 20 miles west of Manhattan. Since our founding, we have run value-oriented portfolios and funds with market beating long-term track records. 1

“I call our approach ‘eclectic value investing’ and it really draws from most of the major tribes within value investing. However, I am always looking for compounding machines run by able people and available at a fair price.”

Professional Evolution

I’ve been largely self-taught in investing and finance, starting in high school. I came of age in the mid- to late-1980s during the first mergers and acquisitions wave (just before the era of “Wall Street” the movie). Reading the papers, the world of high finance (and investing) seemed fascinating. At that time, I started watching programs like Nightly Business Report and Wall Street Week (both on PBS) out of personal interest and to try to make sense of things I was reading about. Later, I discovered Warren Buffett’s letters, and reading them was like an epiphany. After that I read and learned in an iterative process, trying to learn as much as I could but also by having real-world experiences and connecting those experiences back to what I was reading. Of course, my later education and training as a lawyer and then my work as an investment banker were also important in my seasoning and understanding of how Wall Street, various businesses, financial intermediation, capital allocation, and valuation work. 2

Investment Philosophy

Jean Marie-Eveillard once said, “Value investing is a big tent.” Though the main principles are identical, these principles can be interpreted and implemented in multiple ways and so there are various schools of thought. I call our approach “eclectic value investing” and it really draws from most of the major tribes within value investing. However, I am always looking for compounding machines run by able people and available at a fair price. That is more similar to the Fisher approach and the later-Buffett style. So if we have a choice relative to the cigar-butt school of investing, we look for companies that are of higher © 2008-2011 by BeyondProxy LLC. All rights reserved.

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quality and that can internally compound over time. However, we do take advantage of opportunities when they present themselves in order to buy assets cheaply. We have always found the logic in staying flexible but always looking for quality and reasonable price has been profitable for us over time. 3

Investment Opportunity

Value and the opposite of value are two sides of the same coin. Right now, it seems to me that long dated bonds/treasuries as well as municipal bonds are and have become irrationally popular and represent anti-value. Asymmetric ways to short long-term bonds seem to be a good place to look for attractive risk-reward opportunities. Of course there are always individual stock ideas and indirect ways to play the overvaluation of bonds. We do think something ugly may be in store for long-bond investors (and indeed a bit of this theme which we have been talking about for several years has already transpired with the relatively large move up in interest rates in the waning weeks of 2010). Follow this train of thought and it leads to multiple opportunities on both the long and short side. 4

“A good recent read was a book called Startup Nation. It tells the amazing story of how the entire country of Israel has become wealthy and productive under seemingly harsh circumstances…”

Favorite Readings

There are quite a few books worth reading. I like books on non-investing topics that nevertheless have relevance to living a thoughtful and productive life and/or adding to my mental models. A good recent read was a book called Startup Nation. It tells the amazing story of how the entire country of Israel has become wealthy and productive under seemingly harsh circumstances due mainly to the determination and moxy of its entrepreneurs, many of whom are ex-military. Besides being a great read, the book conveys a lot of lessons about success, culture, and how committed people find a way to win. I’m in awe of what Israel has accomplished in a relatively short time and its relevance to many, many aspects of business and investing.

Paul McNulty, Setanta Asset Management I was born in the North of Ireland and decided at fifteen that fund management was the career I wished to follow, despite little real knowledge of what was involved. Having spent five years studying finance to Masters level in Queens University Belfast (including one year at Barry University in Miami, Florida), my investment education truly began at Setanta. 10+ years later my employer remains the same, but I believe our focus on value investing is much more developed. I have two main work-related focuses: to deliver the best long term results for my investors, and to continue developing my learning. Last year I took a course at Columbia University with this aim. (For background on Setanta, see our mini-interview with David Coyne above.) 1

Professional Evolution

After studying finance at Queens University Belfast, I took up a position as trainee fund manager in my current firm, Setanta Asset Management in 2000. Fund management at the best of times is difficult to rationalize, but in 2000 it was like learning to drive in a thick fog. I would regard my first five years at Setanta as pure education. I passed the CFA, but more than that, the experienced people I worked with were really generous with their time and knowledge.

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I have always been a stock picker focused on company fundamentals and taking a long-term approach, but I didn’t really put enough focus on valuation. Right now we have a young and energetic team. We have lots of contrarian thinkers and a great ongoing investment conversation around stocks and value. Access to the thoughts of the great value investors is a benefit of the Internet. Investors like Seth Klarman, Francis Chou and Marty Whitman might not know it, but they are all my professors. For the past five years I have been managing a suite of global high dividend yield funds, currently with my colleague Richard Doyle, all using a dedicated value investment process. I also manage our consumer staples sector, which feeds into the Setanta Asset Management Global Equity Fund. 2

“My core belief is that you should never compromise on the balance sheet irrespective of where the ‘story’ lies on the investment spectrum.”

Investment Philosophy

I think everyone has a natural investment orientation (Greenwald terminology), whether it is searching for a deep discount to asset value at an ugly company, or looking for companies trading below earning power value. Finally, it could be looking for a discount to growth for a company with strong barriers to entry. I believe my genetic makeup is oriented towards the latter two approaches. They say you should never mess with genetics, but I try to keep an open mind for Graham-like stocks, and we have made several deep value investments over the past few years. My core belief is that you should never compromise on the balance sheet irrespective of where the “story” lies on the investment spectrum. 3

Investment Opportunity

Home Retail (London: HOME) operates home and general merchandise retail stores under the formats Argos (72% of sales in 2010) and Homebase in the UK and Ireland. The Homebase DIY business is suffering in the weak consumer market but, more importantly, it is significantly underperforming market leader B&Q. Management has identified a number of stores that are no longer feasible (circa 10% of Homebase), and they would like to close those stores, subject to lease terminations. The impaired value of leases must be factored into valuation. Argos is a unique business model, providing low-end, convenient, no-frills shopping, with a distribution of 40 million catalogs featuring items across categories from electrical to DIY. The company operates in a very competitive marketplace. Argos’s advantages are the “share of shopping mind” derived from the catalog, convenience, and value for money. The real question is whether these are sufficient to fight off the incessant competition in retailing from onstreet competition and the Internet. On a more positive note, with the stock trading at less than 0.6 times book value, and even after writing off 20% of the lease book, the company remains at a significant discount to book value. The value of goodwill is certainly an item for discussion, with the sustainable operating margin a key consideration. If the company can sustain a margin of at least 4.5% (average for the past five years is north of 5.5%), then the stock may be worth north of 2.60 assuming no growth from current levels. Free cash flow to enterprise value (adjusted by adding back rent to free cash and capitalizing leases at eight times annual rent) is 10%, and the dividend yield is 8%. The company aims to keep dividend coverage at 2x in the medium term; in 2010 it was 1.6x.

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Risks include: (1) The company operates in a competitive retail market. (2) Management insists on growing and investing capital despite weak end markets. (3) Buybacks may not sensible given the unknowns. (4) Homebase stores have increased by 18% in the past five years whereas sales have merely grown by 1%. How much of this invested capital is obsolete? (5) The average remaining lease term for Homebase is 11 to 20 years, while for Argus it is eight years. 4

Favorite Readings

Investing: Margin of Safety, by Seth Klarman. I would also recommend the website of the Value Investment Institute (www.valueinstitute.org). This notfor-profit organization has a raison d’être to discuss value investing issues. World at large: The Consolations of Philosophy, by Alan de Botton. I enjoyed the chapter that focused on Socrates around the time 450 to 400 BC. As value investors we need to think clearly and with structure despite potential hysteria and unpopularity. We can learn a lot from people like Socrates!

William O’Chee, Himalaya Consulting I am a partner in a trade and investment advisory firm specializing in resources and real estate in Australia and Asia-Pacific. We look at projects rather than equity investments, and look for the quality not quantity of deals we do.

“I think value comes from understanding an investment deeply and knowing more about it than anyone else.”

Apart from that, I am finalizing a book on human rights theory, which is based on what I learned during my time in [the Australian] Parliament. One of my friends from the other side of politics persuaded me I should do it, and after eight years I have finally found a top-rate publisher who wants to print it. I just have to find the time to complete the work! I have had a varied career. I started out reading law but loathed it. I did corporate restructuring and investment banking before finding myself elected to the Australian Senate, which used up the better part of a decade of my life. After leaving Parliament, I returned to the financial world but also indulged myself by taking a commission as a part-time Army officer in Australia. My rationale was that I had voted to send people to the first Gulf War, but had not gone myself, so I wanted to prove to myself I was willing to do what I asked others to do. I enjoyed my service, but was also glad I was part-time and not a regular officer. 1

Professional Evolution

I worked my way through university winding up and restructuring companies, so I have always been very risk averse. After that I traded LDC debt. Our bank was the second-biggest in the market, and we made money by simply knowing more about the debts we traded than our counterparties. That taught me the importance of good information in mitigating risk and maximizing returns. I always look for value and try to ignore a lot of the clutter other people are saying about the general market or a particular project. 2

Investment Philosophy

I think value comes from understanding an investment deeply and knowing more about it than anyone else. Also, I don’t really like equity markets, as I think a lot of the upside I look for is gone by the time an investment is listed.

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The fundamental determinants of profitability for a given industry are the same no matter where it is in the world. The location and government regulatory environment merely determine the level of profitability. 3

“The greatest investment was the one I missed… It would have cost $10 million. The company had… profit on premium income of $4 million.”

Investment Case Study

The greatest investment was the one I missed. Some sixteen years ago I was offered the Saigon provincial business of Bao Viet, the Vietnamese insurance company. The government wanted to sell it outright. It would have cost $10 million. The company had premium income of $8 million and profit on premium income of $4 million. It also came with its own five-story office building in the middle of Saigon. I could raise the financing for the acquisition, but I needed an insurance company with a trading record to front the deal, and I only knew two guys who ran insurance companies. One didn’t like the deal. The other loved it, but didn’t have enough staff to take on the project. In the end the business was sold to Mitsui, and I still rue the missed opportunity. 4

Favorite Readings

I’m a philosopher at heart. I love Aquinas and Augustine of Hippo, and Aristotle’s Politics. From a business point of view, I was profoundly affected by Shiller’s New Financial Order. I liked the principles behind the book, if not the specific ideas themselves. I read it as part of Allearn, a continuing education program run some years ago by Oxford, Yale and Stanford.

Bernard Peperstraete, NGN Capital Bernard is a partner at NGN, a firm investing in mid- to late-stage healthcare ventures. Prior to NGN, Bernard served as a principal at Masa Life Science Ventures where he focused on early stage life science opportunities. His previous operating roles include hospital manager, medical entrepreneur, sales and marketing executive, and physician. In 2004, Bernard worked at Novartis where he evaluated the commercial market potential for emerging indications. Before completing his MBA at Harvard, Bernard was a deputy director at the Tan Tock Seng Hospital (TTSH) in Singapore and was responsible for medical manpower coordination during the SARS crisis. Prior to TTSH, he successfully co-founded and ran a contract research business, the Infectious Disease Research Center, also in Singapore. In 1999, after serving as a physician, Bernard managed the HIV business unit at Bristol Myers & Squibb, Singapore. Bernard holds observer seats on the boards of ACT Biotech and Exosome Diagnostics. At NGN, Bernard is further involved with the Noxxon and Artisan Pharma transactions. He was previously a director at Potentia Pharma (Alcon). 1

Professional Evolution

Initially, my medical training and practice allowed me to understand how medical therapies and technologies applied to various medical environments. In addition, my commercial operating roles as a hospital manager, contract research entrepreneur, and sales and marketing executive allowed me to evaluate technologies and their applications from a variety of angles, a skill I have found useful both in the venture capital environment and as an investor in general.

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Over the years, some of my friends and mentors have included William Gedale, co-founder of NGN Capital and ex-CEO and chairman of General American Investments; Professor Michael Chu of Harvard Business School, managing director of IGNIA Fund and former executive and limited partner at KKR; Anthony Mattessich, CEO of NAPP Pharma in the UK; and Dr. Gerald Edelman, Nobel Laureate in Medicine in 1972 and co-founder of Promosome. I have also enjoyed profound support and learning from the Society Of Kaufman Fellows, its leadership, mentor network and its Advisory Board members, who have made invaluable contributions to my honing of investment skills. 2

“When it comes to making private equity venture investments in the life sciences area, the investment philosophy I prefer is based on the experience that, in addition to the standard evaluation criteria, a number of select criteria for investments form a good basis for consistent success.”

Investment Philosophy

When it comes to making private equity venture investments in the life sciences area, the investment philosophy I prefer is based on the experience that, in addition to the standard evaluation criteria, a number of select criteria for investments form a good basis for consistent success. In the life sciences private venture industry, there is a prevalent assumption that the later the development stage of the investment, the more secure the returns are and the sooner the “exit” occurs. However, while late-stage investments often have a shorter path to the market, this does not necessarily preclude them from being highly capitalintensive and from encountering plenty of technical, execution and market risks. My personal approach is stage-agnostic, but with special attention given to criteria such as the amount [of capital] required for further de-risking, proximity of important value inflection points, corporate interest, etc. What triggered my thinking about this set of specific criteria and patterns was Alcon’s staged buyout of Potentia Pharmaceuticals, an early investment I had identified, evaluated and then supported through an investment as first institutional investor. Later and quite recently, I recognized patterns of similar criteria in other investments, such as Exosome Diagnostics and Promosome. Exosome originated from Harvard. Exosome’s lead scientists discovered a novel, abundant and high-quality source of genetic material in the blood, a combination of benefits that is not present in sources such as circulating tumor cells or cell-free DNA. Exosome’s technology allows for highly accurate monitoring of cancer, cancer treatment effectiveness, and characterization of certain metabolic diseases through the draw of a blood or urine sample. Promosome originated from the Scripps Institute in Lahoya, California. The company’s co-founder, Dr. Gerald Edelman (Nobel Laureate, 1972), developed a technology that boosts yields of cell-derived protein products to unprecedented levels. The technology has applications ranging from antibodies and biosimilars to industrial enzymes and biofuels. The technology also allows for the rescue of protein compounds that were abandoned due to expression difficulties. Both investments were made only recently, and hence the jury on their success is still out. However, we have already received encouraging signs of corporate interest. 3

Investment Opportunity

One investment I can recommend is Micromet (Nasdaq: MITI), a venturebacked biotech company with offices in Maryland and Munich, Germany. The company has developed a platform of T cell-based therapies to treat cancer. MITI’s lead compound, Blinatumomab (MT103), is the first of a new class of agents called BiTE antibodies, designed to harness the body’s T cells to kill © 2008-2011 by BeyondProxy LLC. All rights reserved.

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cancer cells. It has demonstrated notable — and in my opinion unprecedented — single-agent activity in adult and pediatric patients with acute lymphoblastic leukemia (ALL). In the multi-center Phase 2b study, of the twenty evaluable patients, 80% achieved a complete molecular response, within the first cycle of treatment. Nine of the patients received an allogeneic stemcell transplant, a toxic procedure that typically carries a high short-term risk of mortality. All nine transplanted patients were alive one hundred days following the transplant. In December 2010, the company reported that long-term efficacy data of the study demonstrated that blinatumomab produced prolonged remissions in the ALL patients. As of November 2010, the hematologic disease free survival was 60%, with a follow-up of up to 27.5 months. With so many cancer programs in development, it is hard to distinguish one program from another for many investors. However, there is no doubt that in a difficult-to-treat indication such as ALL, these results are nothing short of spectacular. The company’s second BiTE antibody, MT110, is currently in development in patients with advanced solid tumors. Needless to say that encouraging results in solid tumors would significantly expand the application of BiTE antibodies and further add to the already large market opportunity in blood-based oncology. MITI is further advancing a pipeline of promising preclinical candidates and has robust research capabilities, fueling long-term growth. In addition, the company has impressive management. I believe it is bar none in the cancer biologics development field. MITI’s market cap recently fluctuated around $650 million. For the nine months ended September 30, 2010, Micromet’s revenue increased 19% to $19.5 million. Net loss decreased 13% to $29.8 million. Revenue reflects an increase in income from collaboration agreements. Net loss was partially offset by an increase in R&D expenses, a rise in G&A, and increased in interest expenses. With the MT103 data, the company has provided a strong signal of what its platform of specifically designed BiTE antibodies is capable of. MITI has a rich pipeline, and has the opportunity to create a tremendous amount of value, repeating this success many times over, reflected in good upside potential, on a going-concern basis or through an acquisition. 4

Recent Readings

I can’t really comment on a huge range of books, as time for reading is limited. I find historically inspired books about the world’s greatest strategists fascinating, as well as books that are a product of oral history, books that point to potential blind spots or pitfalls of human nature. Such books reflect the accumulated narratives, lessons and philosophies from centuries of humanity. One book I am currently reading is Shake Hands With The Devil by Lt. Gen. Romeo Dallaire, a realistic and factual narrative about the genocide in Rwanda. The book reminds us of the real consequences when values such as civility are absent. In the matter of the Rwandan genocide such values were not only absent in Rwanda, but also collectively among some of the world’s most powerful governments and institutions. On several occasions, these displayed lack of judgment and leadership, and indifference and ineffectiveness. Another book I found quite engaging was China Safari: On the Trail Of Beijing’s Expansion in Africa by Serge Michel. The book is a journalistic field account of China’s vigorous exploitation of Africa’s resources. The book illustrates China’s pragmatic approach of mining Africa’s natural and human © 2008-2011 by BeyondProxy LLC. All rights reserved.

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resources in return for advancing Africa’s infrastructure. It also highlights the Western hands-off, perhaps complacent approach to the African continent. The book adds to the discussion of the morality of both approaches, and adds to the debate about China’s growing control of some of the world’s essential resources.

Matthias Riechert, Private Investor I am preparing to start a fund in the medium term. Meanwhile, I manage my portfolio and study at London Business School and Columbia Business School. 1

Professional Evolution

I have worked in derivatives and structured products and recognized over time that most participants in that market don’t have the slightest clue about how to evaluate the underlying asset — which might explain the poor performance of their portfolios. Three years ago I took part in Professor Greenwald’s value investing seminar at Columbia Business School. Soon after, I decided to enroll as an Executive MBA student and to specialize in investment management. This gives me access to many adjunct Professors who teach in Columbia’s value investing program. Of course, I have read great books, studied other investors and analyzed businesses and special situations. 2

“I am not agnostic on the macro environment. I believe the Austrian School provides a perfect analysis and outlook of our economic development and our monetary system.”

Investment Philosophy

Bottom-up stock picking based on fundamental analysis is at the core of what I do. Two-thirds of my portfolio is in long-term compounding stock investments. One third is in special situations like spin-offs, restructurings and liquidations. However, I am not agnostic on the macro environment. I believe the Austrian School of Economics provides a perfect analysis and outlook of our economic development and our monetary system. Therefore, I expect further money printing down the road, and I try to protect my portfolio against this outcome. I search for undervalued stocks in areas that offer inflation protection and I hold a significant portion of my portfolio in precious metals and gold miners. 3

Investment Opportunity

Hochtief (Germany: HOT). The stock recently traded around €63 per share. A sum-of-the-parts analysis results in an implied value of €90 per share. Hochtief has traded at a conglomerate discount for several years because management has not been capable of closing this gap by implementing strategic changes. With ACS [Spain’s largest builder], we now have a catalyst in place, which can put significant pressure on Hochtief’s management. There are several ways how this battle can play out. The bottom line is that ACS will purchase more stock in the open market to get above 50%. I get additional confidence from the fact that Mason Hawkins’ Southeastern is a significant shareholder of ACS and Hochtief. 4

Recent Readings

Meltdown by Thomas Woods. If you are looking for a root cause analysis of the credit crisis, this is the book. Geldreform by Thorsten Polleit (English version coming soon). The book provides an inside view of our monetary system.

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Stephen Roseman, Thesis Fund Management Mr. Roseman founded Thesis Capital Management, a long/short equity hedge fund, in 2005. While at Thesis, Mr. Roseman was often successful in identifying undervalued companies and frequently took an activist role in companies he believed would benefit from a change in strategy. In 2007, Institutional Investor Magazine named Mr. Roseman one of the “Rising Stars” in hedge funds. Before Thesis he was a senior vice president and portfolio fund manager at Kern Capital Management and vice president and senior analyst at Oppenheimer Funds. Mr. Roseman sits on the board of several companies and is dedicated to improving financial literacy with respect to alternative investment strategies. He received an MBA from Fordham Graduate School of Business Administration, a BA from Arizona State University, and has over 15 years of industry experience. Thesis Fund Management is committed to bringing alternative investment strategies to the masses via 1940 Act registered products such as mutual funds. 1

“My approach was ultimately shaped into the mold of a dyed-in-the-wool value investor for one very simple reason — I hate losing money. One of the best ways to mitigate losses is to buy things that are unlikely to get much cheaper.”

Professional Evolution

I grew up in my family’s businesses in Canada and then worked for our jewelry company in Hong Kong and the U.S. Much of what I did pre and post the jewelry company was preparation for what I viewed was an inevitable career as an investor. I have studied and started businesses from the time I was very young, and my operational background is probably one of my most significant advantages. Having run businesses, I care about really understanding how a business works, and my comfort level in understanding is a key determinant in my ability to withstand investments (long and short) that move against me. As I learned about “investing,” I read everything I could get my hands on related to the subject. The books covered value investing, private equity, venture and growth investing, commodity trading and everything in between. Because of the far-reaching influences on the topic I wouldn’t say there is a single person that has influenced my learning process. I incorporate many different perspectives into my view of value investing. My approach was ultimately shaped into the mold of a dyed-in-the-wool value investor for one very simple reason — I hate losing money. One of the best ways to mitigate losses is to buy things that are unlikely to get much cheaper. 2

Investment Philosophy

One of the non-negotiable requirements I have with respect to committing capital — on the long side — is a tangible catalyst I can point to within the ensuing six to twelve months. Capital has a cost, and this discipline helps to improve returns in two distinct ways: it helps to avoid value traps, a common foible of value investing; and it helps to improve IRR as capital is deployed closer to events that might help realize value. The short portfolio has the same requirements, but I am looking for catalysts within three to six months (at most). 3

Investment Opportunity

An interesting, off-the-run idea is West Marine (Nasdaq: WMAR). They are the last national boating supply retailer in the U.S. Most of their competition — the few national chains as well as many mom-and-pop stores — went bankrupt in the downturn. One would be hard-pressed to get the financing to start a new company in the industry. They now have the industry almost to themselves. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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“An interesting, off-the-run idea is West Marine. They are the last national boating supply retailer in the U.S.”

There are not many opportunities to own a company that has a nearmonopoly in a national, evergreen business. What follows are a few talking points: (1) strong balance sheet (net cash ~15% of market value); (2) trades at a high FCF yield and has consistently generated FCF; (3) rationalizing real estate portfolio by closing the poorly-conceived, unproductive, small-store formats they opened years ago; (4) haven’t begun to squeeze their suppliers yet for better terms; (5) near-monopoly; and (6) economic cycle still a pending tailwind. 4

Recent Readings

Two recent books that were good, for different reasons, were Invisible Hands by Steven Drobny and When Markets Collide by Mohamed El Erian. The first part of Invisible Hands opens with an unvarnished view of how big institutions allocated, and in some instances mis-allocated, capital, and the rest is a look at different managers and their strategies. When Markets Collide is an interesting read on El Erian’s take on the world and its transformation over his career.

Marc Saint John Webb, Argos Investment Managers We launched a fund investing in smaller European companies in 2007. The object was to invest in healthy growing companies at a discount to our estimate of intrinsic value. We devised a scoring system based on our undervalued sustainable profitable growth (USPG) criteria. In the depths of the recession in early 2009, we looked at the common factors of the shares that had not collapsed. We found that the 40% of the fund which was invested in familyowned companies tended to have survived better thanks to more conservative strategies and solid balance sheets. We then decided to adopt this filter for all our investments and changed the name of the fund to Argos Family Enterprise. The Family Enterprise fund invests in small and midcap European businesses that are quoted but still partly owned by family shareholders. Even more importantly than the qualities of family management, we are particularly attracted to the guarantee of good corporate governance that family ownership represents. Indeed, family shareholders that have board representation tend to share the same short- and long-term interests as we do, and they assure oversight of company management. Added to our core USPG investment philosophy and rigorous process, this corporate governance filter assures us of investing in a risk-averse strategy that generates recurring dividends. 1

Professional Evolution

I started my career as a stockbroker at the Paris branch of Warburg Securities in 1987. After graduating with the French financial analyst’s diploma in 1989, I moved into equity research on a number of sectors. I progressively became more focused on smaller companies, simply because I found it more inspiring to have one-on-one meetings with the CEO there, rather than meeting the investor relations officer at larger companies. I moved on to head the smaller companies research and sales at another bank in Paris before finally moving to Geneva in 2006 to work with Philip Best on the Argonaut Micro-cap fund.

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“Most investors seek liquid opportunities, so we believe we have a competitive advantage simply by looking at the smaller companies others ignore.”

Investment Philosophy

We run both a deep-value micro-cap fund and a more mainstream value small cap fund focused on European equities. Statistical evidence suggests that buying undervalued assets is a recipe for success. But many investors already have a value bias ingrained in their character. Buying second-hand cars, waiting for sales, researching the lesser-known brands, looking for three-for-the-price-oftwo deals, hunting for value-for-money restaurants and cheap deals at hotels are all tell-tale signs that you might not end up as a biotech investor. We are long-term investors in undervalued assets, with a three-year average holding period. Most investors seek liquid opportunities, so we believe we have a competitive advantage simply by looking at the smaller companies others ignore. We avoid fashion and are at ease being contrarian. We focus on net asset values on the balance sheet and current earning power values. 3

Investment Opportunity

Touax (Paris: TOUP) is one of our mature investments and a core holding for the Family Enterprise fund. The company was founded in France in 1853 by the Walewski family, operating barges on the rivers and canals north of Paris. The company now has a worldwide network that rents out ocean-going containers, canal barges, modular block buildings and railway wagons. It has just paid out its 113th dividend without discontinuity since 1897. The share was floated on the Paris Stock Exchange in 1906 and is still 30%-owned and managed by the Walewski family whom we meet regularly. This continuity and track record reassured us during the crisis, despite structurally high levels of debt in this capital intensive industry. The stock trades at seven times our estimate of next year’s earnings and 1.2 times book value. 4

Recent Readings

As I spend a lot of my time researching the real world, visiting companies and factories, meeting executives, and reading annual reports, I quite like textbooks that help me put my ideas straight. In this category I liked Chris Browne’s The Little Book of Value Investing and Bruce Greenwald’s Value Investing.

Yusuf Samad, Belfield Capital I invest for my own account and am an investment consultant to UK pension funds working with Aon Hewitt. 1

Professional Evolution

While I started taking interest in stocks as a teenager in Pakistan, my interest in investments was ignited by my advisor, Stephen Hawk at the University of Wisconsin-Madison in 1976. Professor Hawk, whose students rank among the leading investors — such as Jeff Diermeier, ex-CEO of UBS Brinson and the CFA Institute — taught me security analysis. He introduced me to Graham and Dodd and told us then that the newly enacted ERISA, incorporating the “prudent man” rule, would lead to index hugging on a large scale. I became a believer in fundamental analysis, and this was only strengthened in my career as a banker with Citibank. The importance of judging character and

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capacity can never be underestimated. Those are two of the four C’s of credit, the other two being capital and conditions. I have been investing for my own account starting with stocks in Pakistan and then in large-cap U.S. stocks and options. At present, I invest mostly in managed funds and also make direct investments in equities and bonds. After leaving Citibank I became a trustee and investment advisor to pension funds in the UK, where the role has more to do with asset allocation and manager selection. In this role I have observed a variety of approaches and styles. My learning process has been influenced most by reading the leading value investors. I share thoughts with a friend and a fellow Citibank credit officer who believes passionately in Warren Buffett, and together we follow the newsletters and individual picks of leading value investors. We are regular readers of the Outstanding Investors Digest, The Manual of Ideas and Value Investor Insight. 2

“I look for business models that incorporate one or more of the following characteristics: repeat use of the product; a product that is well plugged into a customer’s value chain; high switching costs for customers; annuity income streams vs. lumpy revenues; and provider of the backbone or infrastructure to an industry.”

Investment Philosophy

I focus on buying good companies at cheap prices. I believe in taking a thorough fundamental approach to understanding a business and buying it at a cheap price. Over time, I have refined my approach to focus on companies with an understandable business and financials. The starting point is that the business lines and sources of revenue should be clear, and it should be possible to relate these easily to the financials. Good companies should have strong cash flow, well protected by high barriers to entry. To identify these companies, I look for business models that incorporate one or more of the following characteristics: repeat use of the product; a product that is well plugged into a customer’s value chain; high switching costs for customers; annuity income streams vs. lumpy revenues; and provider of the backbone or infrastructure to an industry. Opportunities to buy with a “margin of safety” arise when markets overreact. I tend to apply the same principles to selecting managed funds. In this case, I prefer managers that take a fundamental and common-sense approach to understanding businesses. Their information advantage is typically based on knowledge and experience of a region, sector or industry. I tend to avoid complex quantitative approaches that may look very smart but harder to comprehend. I prefer organizations led by wise people who passionately build a strong investment and risk management culture. 3

Investment Opportunity

RPC Group (London: RPC) is the largest dedicated producer of rigid-plastic packaging in Europe. While this is a fragmented market with intense price competition, RPC has strong positions in niche packaging markets and is among few that can deliver the required quality to multi-national clients, including Unilever and Procter & Gamble. RPC protects its position via joint product development and partner coverage of less stable Eastern European countries. Mainland Europe accounts for 73% of sales, with Germany the largest market. The company is defensively positioned, with 57% of sales to the food sector. Packaging is forecast to grow in line with GDP, with rigid plastic growing faster due to substitution effects from other packaging materials. RPC is nearing completion of optimizing its plants and cutting cost, giving it a high degree of operational gearing. With favorable economic conditions, operating margins could rise above peak levels. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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The shares trade at just over seven times fiscal year 2012 (March) estimated earnings (down from nine times earnings in 2010), and a dividend yield of 5.2%. 4

Recent Readings

Three books I have read recently have influenced my way of thinking: Obliquity, by John Kay, gives valuable insight into decision making and solving problems under uncertainty, a characteristic of markets. Good decisions are the outcome of good judgment. Michael Maboussin’s two books, More Than You Know and Think Twice, are full of lessons for long-term investors. Some of the key lessons are that good outcomes do not imply a good process. A thoughtful process carefully considers where the consensus, as revealed by the market price, may be wrong. Unfortunately, institutions have focused too much on process and measurement and less on building wisdom and a risk management culture. Babel: The Breaking of the Banks, a compilation of Jonathan Ruffer’s investment letters, gives an excellent illustration of how to think about managing risk. His book is a chronicle of the events leading up to the credit crisis and thereafter.

Rahul Saraogi, Atyant Capital

“…the efficient market hypothesis and CAPM appeared stupid to me from day one (having made and lost so much money in the market).”

Rahul is a managing director and manages the Atyant Capital India Fund. In the last ten years he has managed money exclusively in the Indian markets. His mission is to consistently identify the best 10-15 investment ideas from among the thousands of publicly-traded Indian corporations. Rahul’s value philosophy stands apart due to his belief in the importance of corporate governance, specifically how management operates with minority shareholders in mind. Prior to Atyant, Rahul spent four years leading Meridian Investments, generating a 430% absolute return for the firm’s high net worth clients. Rahul graduated from the Wharton School with a degree in economics. Outside of Atyant, he practices Vipassana, a 2,500 year-old meditation technique that helps people see things as they really are. Rahul lives and works in Chennai, India. You can read Rahul’s latest thinking in the Atyant newsletter and blog (www.atyantcapital.com), and connect with him on LinkedIn. 1

Professional Evolution

I started out investing for my personal account in 1997-98. I bought every kind of toxic waste and made a lot of money in the 1998-2000 period and then lost a lot of money in 2000-02. My biggest year of learning was 2001, when I started reading all the investing greats and basically put myself through a two-year value investing course. My mentor in India, Govind Parikh, a 25-year value investing veteran in the Indian markets, helped formulate my thinking as well. Wharton helped teach me the tools of finance. However, the efficient market hypothesis and CAPM appeared stupid to me from day one (having made and lost so much money in the market). I started a money management firm in 2002 and did well for my clients. We launched Atyant Capital in 2005.

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“I don’t think I would like to specifically use a Graham or Greenblatt hammer and look for nails.”

Investment Philosophy

All investing styles have merit. It really depends on what opportunities are available at what point in time. I don’t think I would like to specifically use a Graham or Greenblatt hammer and look for nails. Sometimes there are net-nets available that also have good businesses, while at other times they are value traps. Sometimes there are no-brainer corporate action plays that leave free money on the table, and at other times they tie up your capital for low returns and create huge opportunity costs. For example, it would have been stupid to do 20% annualized risk-arbitrage trades in early 2009 with four to five month horizons, when there were potential multi-baggers going cheap. 3

Investment Opportunity

Our fund is invested in a fertilizer company that has a market cap of $650 million. It is a debt-free company with net working capital and cash of $230 million. The company has marketable securities of $150 million and earnings of $126 million. The stock effectively trades at a P/E of 5.2 and price to book value of 1.35, with a return on equity of 26%. To top it all, agricultural inputs is a growth business in India, and the company is growing at about 40% a year. 4

Recent Readings

I recently re-read Poor Charlie’s Almanack and Damn Right (Janet Lowe). Charlie Munger is absolutely fascinating. He is also very “real.”

Benjamin Schmitt, Varus Fund The Varus Fund is a long-short equity fund focusing on German mid- and largecaps and their European competitors. The fund invests in pair trades and catalyst driven longs and shorts. Investments are based on quantitative and qualitative analysis and strong competence in German stocks. Thanks to strict risk/reward thinking, trading discipline and tight risk management, Varus Fund aims for absolute returns with low correlation and volatility. 1

Professional Evolution

I gained my first insights while at high school in Germany where I interned at M&G Investments. The internship confirmed my interest in working in this industry. During my studies of business administration at European Business School in Germany, I interned at Absolute Capital Management, a long-short equity hedge fund, as an equity analyst, and at Deutsche Bank as an FX options trader. I finally chose to work on the buy side in the equities universe. Two of my former colleges, who were my supervisors during my internship at Absolute Capital, and who had the most influence on my learning process, chose to open their own hedge fund in Zurich, which I joined after my studies. 2

Investment Philosophy

My research includes a diverse approach to information sourcing, ranging from newspapers to management meetings. In a 360-degree analysis, covering the company, suppliers, customers and competitors, the research moves along the value chain to gain cross-reads and to identify strong companies. This helps to identify changes in business momentum and emerging sectors at an early stage.

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Investment Opportunity

I have a positive view on Centrotherm Photovoltaics (Germany: CTN), with a market cap of €550 million. The company is well positioned for a geographic shift of the solar sector from Germany to outside Europe, with a focus on China. The company trades at a discount even though it is positioned better than many of its peers. There is upside potential coming from the thin-film business, which they started recently. The current fear coming from analysts is contrary to the view of the solar companies themselves, since analysts focus mostly on the developments in Germany. Meanwhile, the companies already see potential in many markets outside of Europe, with demand coming from locals. 4

Recent Readings

I tend to prefer books that are somewhat older. Books that have influenced my way of thinking about investing more than others were Wall Street Meat by Andy Kessler and Manias, Panics and Crashes by Charles Kindleberger.

Alan Schram, Wellcap Partners

“I focus on high-quality businesses. Rather than just look for cheap valuations, I try to judge the risk-reward in each situation. I have no problem with volatility, but I do not like illiquidity…”

Alan has been managing investment portfolios for private and institutional investors since 1997. He founded Wellcap Partners in 2000 and serves as managing partner and portfolio manager, responsible for all investment decisions. From 1997 to 2000, Alan served as an analyst and portfolio manager at InterGroup, a Los Angeles-based long-short fund. In 1996 he co-founded Sitestar, a technology investment company that acquired several Internet service providers in secondary U.S. markets and became a public company in 1999. Alan served as an officer in the Israeli Air Force and received an honorable discharge as a veteran of the Gulf War, at the rank of Captain. He graduated from UCLA’s Anderson School Executive Management Program. Wellcap Partners is a long-short investment partnership with a researchintensive, disciplined, long term-oriented analytical process. The portfolio is focused and limited to the best, most thoroughly researched ideas. The fund has a long bias in U.S. equities. The objective is superior risk-adjusted long-term capital growth, with capital preservation a guiding principle. Wellcap has a tenyear track record of 16% net annualized return, with one down year (the S&P 500 Index generated a 1.5% annualized return during same period). 1

Professional Evolution

I was interested in financial markets as a child, so my learning path started early. I got a job as an analyst at a hedge fund in Los Angeles and worked there for four years, until I felt ready to launch my own fund in 2001. I learned the most from Buffett and Munger and first attended Berkshire’s annual meeting in 1995. I recognized early on that nobody could emulate Buffett and Munger, so I worked at developing my own style, which fits my own skills and temperament. I also learned what not to do by watching and analyzing failed investors. 2

Investment Philosophy

I focus on high-quality businesses. Rather than just look for cheap valuations, I try to judge the risk-reward in each situation. I have no problem with volatility, but I do not like illiquidity and I am not comfortable with debt so generally do not get involved with leveraged companies or micro-caps. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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Investment Opportunity

Safeway (NYSE: SWY) is one of the largest food and drug retailers in North America, operating 1,725 stores, principally in the Western U.S. The company also sells third-party gift and prepaid cards through wholly-owned subsidiary Blackhawk, and owns a 49% stake in Casa Ley, which operates 146 food and merchandise stores in Mexico. With $40+ billion in sales, Safeway has 7.3% share of the supermarket category and 4.0% of total grocery sales. What we like: Strong cash flow, solid balance sheet: Net debt is $4.8 billion, while FCF is $1.4 billion. While returning cash through buybacks and a 2% dividend yield, Safeway has cut debt to equity from 85% in 2006 to an expected 29% in 2011. Strong brands: Safeway has proven adept at developing its own brands. Steady, predictable business. Inflation hedge: With major real estate holdings and an ability to pass on most food costs to consumers, an inflationary cycle should be a growth builder. Competent, experienced, shareholder friendly management: CEO Burd owns 3% of Safeway, so his incentives are aligned with those of shareholders. Dominant real estate position, which is often impossible to replicate and provides a solid moat. Safeway owns 710 stores (41% of the total), and we believe the real estate is worth $7 per share (albeit difficult to realize).

“With market value of $8 billion, enterprise value of $13 billion, and FCF of $1.4 billion per year, the valuation [of Safeway] is appealing. The real estate and the card business provide a floor and ways to unlock value.”

Card business: Blackhawk Network sells 300+ brands of prepaid and gift cards and distributes them to retailers in 70,000+ locations, reaching 165 million customers every week. Despite the economic softening, the gift card business has continued growing rapidly. It dominates the niche and if sold, could be worth $5 per share (GDOT, a close comparable, trades at 44x earnings). Attractive valuation: With market value of $8 billion, enterprise value of $13 billion, and FCF of $1.4 billion per year, the valuation is appealing. The real estate and the card business provide a floor and ways to unlock value. Catalysts: Low valuation at 4.5x EV to EBITDA. We believe food price inflation will soon start generating earnings momentum for Safeway. With its capex cycle peaking by 2011, SWY is setting the stage to boost FCF. The company is at the tail end of a major capex initiative and now has 80% of its store base in the new format. We believe this capital spending strategy has given SWY one of the most attractive portfolios of stores in the industry. Blackhawk could go public next year. Ancillary value is provided by the real estate and card businesses, both of which obfuscate the value of the grocery business. Variant view: (1) Deflationary pressure continues to be the deciding factor for grocery store valuations. Deflationary pressures are hurting margins, but they are transient and overstated. (2) Safeway’s move up the quality ladder has hurt the brand in this economic environment. Identical-store sales turned negative in 2009 after averaging 3% growth over the past five years. Consumer perceptions take time to change, and with consumer flight to discounters such as Wal-Mart, Safeway operates in a competitive industry. (3) Misunderstood capex cycle: most of the “Lifestyle” project capex has been completed.

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Recent Readings

There are too many to mention, but among recent books I liked Matt Ridley’s The Rational Optimist and Joshua Cooper Ramo Age of the Unthinkable.

Andreas Schweitzer, Private Investor Private: I get balance from meditation and yoga, try to kite surf and find the Old Persian Empire full of inspiration. If the opportunity arose, we would settle in Asia for some years — a good way to reinvent oneself at this stage in life. We spend our time mainly in the UK, Switzerland and Iran, where we have family.

“My main experience is in identifying, packaging and developing private equity opportunities.”

Business: We help startup and SME companies in the life science/diagnostic and wind energy industries identify hidden value from within — mainly with a focus on sourcing funding or on a consulting basis, providing hands-on experience. We look for roll-ups in the large market of energy efficiency components. As a personal investment we develop a thermal spa in Ticino, Switzerland. 1

Professional Evolution

I started my business career in the treasury of a Swiss multinational and had the opportunity of working in the Americas and various European countries. I was exposed to private equity investments early on. 2

Investment Philosophy

I am not a stock market investor per se. My main experience is in identifying, packaging and developing private equity opportunities. I am generally also the first CEO during the ramp-up period. I have shifted focus to more mature opportunities where value can be unlocked through market development rather than restructuring. We concentrate on renewable energy and life sciences only. 3

Investment Opportunities

I still like the renewable energy space, mainly wind energy. There is a large niche for decentralized energy production (off-grid) in second-tier countries. We stay away from the developed markets with large established players. On the life sciences side, the medical diagnostics sector has significant growth potential. We see a few roll-up opportunities within this space. 4

Recent Readings

I get my business brain tickle from the weekly Economist and my annual oneweek retreat to a business school in the world with other YPO peers.

Kevin Slemp, Private Investor 1

Professional Evolution

I sought a job on the buy side after graduating from college in 2007. I was offered an opportunity at Fidelity, covering regional banks and thrifts. The job provided limited formal training; much of my development came from reading. I was inspired by the writings of Seth Klarman, Joel Greenblatt, Bruce Greenwald, James Montier, Mohammad El-Erian and, of course, Buffett. With © 2008-2011 by BeyondProxy LLC. All rights reserved.

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these investors’ perspectives as a guidepost, I had trouble finding value in my coverage universe in the initial stages of the credit bubble. I have subsequently covered financials at two hedge funds in New York, where the inconsistencies between market valuation and intrinsic value can be exploited on both sides of the ledger. 2

Investment Philosophy

Any good investment needs to be viewed in the context of mid-cycle operating metrics. The delta between market value and “fair value” tends to intensify during peak or trough performance. I try to understand where current valuation is relative to my opinion of fair value, and I evaluate this in the context of the cycle. The key then becomes recognizing the cycle’s inflection point, and being positioned to benefit during the subsequent retracement to fair value. 3

“Any good investment needs to be viewed in the context of mid-cycle operating metrics. The delta between market value and ‘fair value’ tends to intensify during peak or trough performance.”

Investment Case Study

One of my biggest mistakes was investing in Safeway (NYSE: SWY) at the end of 2009. Safeway is a levered, cash flow-generative grocery chain. At the time, I held a macro view that food inflation was about to increase at the retail level. My view was driven by the discrepancy between the PPI [producer price index] and CPI [consumer PI] for food. With the PPI soaring higher and the CPI continuing to lag, it was only a matter of time before higher prices worked their way through the supply chain. I believed potential margin compression would be overcome by higher prices, ultimately creating SG&A leverage. This earnings leverage, combined with proactive debt repayment and potential multiple expansion, led me to conclude there was compelling upside for equity holders. I failed to adequately discount the competitive dynamics within the grocery sector. Grocers are fundamentally bad businesses. Extreme price competition results from multiple outlets selling similar, if not identical, products, with low consumer switching costs. Customers are price-elastic, and alternative vendors tend to be in close proximity. I assumed since grocery stores are the cheapest food source, the stressed consumer environment would absorb the price increases. Instead, grocers discounted heavily to drive traffic, and the thesis was disrupted by retail outlets using food as a loss leader. The lesson is that bad businesses are often value traps. The focus should be searching for above-average companies to invest in when they become cheap, rather than finding cheap companies to invest in for their own sake. 4

Recent Readings

I enjoyed More Money Than God. It impressed upon me that success can be defined in many ways in this business. It is not worth trying to be someone you are not. It is important to learn lessons from other great investors, but there is no magic formula for success. Instead, figure out what works for you, refine the craft through repetition, and always strive to get better.

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Guy Spier, Aquamarine Capital Management I run an investment partnership for a select group of high-quality investors who have a lot of patience and long time horizons, and who do not pay me a dime unless I make them money. I used to do this from New York, and I am now ecstatic to be doing it from Zurich. 1

Professional Evolution

I was working as an investment banker when I came across The Intelligent Investor, and the Lowenstein biography of Warren Buffett. It flowed from there.

“I now spend more time looking at low-return businesses that have the potential to revert to the mean.”

Who has influenced my learning the most? There is a Jewish saying, “Who is wise? He who learns from every man.” My teachers are a broad group of people, some of whom I have met, some not, some living, some not. Rather than mention some of the better known names, Warren, Charlie, Ben Graham, Pabrai, here are some of the teachers that your readers might find more surprising: Mahatma Gandhi — we are but ashes and dust, be the change you want to see in the world; Nelson Mandela — how to achieve a lot for yourself and the world even when stuck in prison for half your life; Tony Robbins — the power of enthusiasm, the systematic study of success; Dale Carnegie — winning friends and influencing people; Antonio Damasio — the decade of the brain; Atul Gawande — checklists; Ronald Reagan — how to achieve a lot by writing personal notes and taking lots of naps in the White House. 2

Investment Philosophy

I was initially heavily influenced by Tom Russo / Ruane Cunniff, and the desire to pay up for a better business. More recently, I have become convinced that this approach can result in failing to appreciate the need for downside protection or margin of safety, as I found out to my own cost in 2008. I now spend more time looking at low-return businesses that have the potential to revert to the mean. 3

Investment Opportunity

I still think that John Burbank’s “go long what China is short” is a phenomenal guiding principle today. 4

Recent Readings

I am currently reading the biography of Chuck Feeney entitled The Billionaire Who Wasn’t: How Chuck Feeney Made and Gave Away a Fortune Without Anyone Knowing. If I become just 1% more like Chuck Feeney as a result of reading the book, I will probably be more than 100% better off for it.

Christoph Stahl, Private Investor Christoph was born and resides in Munich. He holds a BA from Munich and an MBA from Lausanne. He is a partner at ARRI and Richter + Frenzel. 1

Professional Evolution

My father started my interest in finance and investing when we played Big Boss, a Parker game when I was seven years old. We made the rules more complicated to move the game closer to reality. He also involved me into decisions of our family business from that time on. At age 22, in the summer of 1987, he gave me some money to invest. The crash of 1987 was a meaningful lesson. The first © 2008-2011 by BeyondProxy LLC. All rights reserved.

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books I read were Manias, Panics and Crashes by Charles Kindleberger and The Crowd by Gustave Le Bon. I became a Berkshire shareholder in 1988, and Munger and Buffett were always an anchor of my reading. Behavioral psychology has a strong influence on my investment style, as I wasn’t convinced by the efficient market hypothesis. Besides the usual literature, my learning process was influenced by the experience I gathered at the stock exchange and with our family business. I always liked Michael Porter and his books on competitive strategy, and most of the books Charlie Munger recommended. 2

Investment Philosophy

I always had a concentrated portfolio of no more than ten stocks. I’m open to making contrarian bets against strong mass convictions, like the housing bubble or the BP oil spill in the Gulf of Mexico. Those contrarian investments were so far my most successful, although often the right idea gets destroyed by the wrong timing. I’m also willing to make macro bets, which usually don’t pay off. 3

“Today there are some interesting opportunities in Portugal, Italy, Ireland, and Greece.”

Investment Case Study and Opportunities

I started buying Wolseley (London: WOS) in November 2007 and continued to increase my position to almost 50% of my portfolio. As Wolseley was exposed to the U.S. and UK housing markets with a lot of leverage, their share price went down further than I had imagined. At one point in the spring of 2009 my position was at -70%, and I had to show a major loss at the end of 2009. Only during the last couple of weeks [of 2010] I recovered my losses and am now in positive territory by 10%. I had a strong opinion about their business and the valuation, as one of our family businesses would be a direct competitor if Wolseley operated in Germany. The lesson I learned was one I have learned repeatedly — that my timing is most of the time too early. Today there are some interesting opportunities in Portugal, Italy, Ireland, and Greece. I’m also buying Munich Re (Germany: MUV2), as the trade below book value and at a low single digit PE-ratio. I live within walking distance, know many of their employees, and the circumstance that Berkshire has so far bought 10% of their stock has probably also helped. 4

Recent Readings

This Time Is Different by Carmen Reinhart and Kenneth Rogoff Why the West Rules – for Now by Ian Morris The Contrarian’s Guide to Leadership by Steven B. Sample and Warren Bennis

Armin Stracke, Citigroup I have work in the equity derivatives and structured products department at Citigroup since 2005. Value investing is not part of my daily job but the understanding of financial products is also important in value investing. 1

Professional Evolution

I started as a value investor three years ago. As I work full time in a different area of finance (equity derivatives) I only invest my personal money. I was introduced to value investing by my former colleague and Columbia student Matthias Riechert. After having tried many other investment approaches © 2008-2011 by BeyondProxy LLC. All rights reserved.

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—technical analysis, statistical arbitrage — I am now of the opinion that value investing is the only reliable long-term investment style. I particularly like that you can sleep well at night as you rely less on assumptions and pure luck. 2

Investment Philosophy

As I only invest my own money, I can make use of tiny companies and special situations, as described in Joel’s book You Can Be a Stock Market Genius. Due to inefficiencies in these markets, you can invest without having to estimate the profits of a company for the next five years. For example, distressed converts have been a very profitable area over the past two years. I know my focus area will have to change as the amount invested increases. However, it is a good start into the business, as it allows me to make a decent profit without having the knowledge of Warren Buffett. 3

“The 7 Habits of Highly Effective People by Stephen Covey is one of the best selfmanagement books…”

Investment Case Study

I invested in a convertible issued by a small Indian company. The company had $50 million “cash on hand” but only $10 million of liabilities. The bond traded at a yield of 80%. Everyone was afraid of the next Satyam case. I flew to India, attended the annual meeting and talked with the CEO about redemption. He was trapped, as either the money was there to redeem or he had misused the funds. Frightened, the CEO only bought back my bonds, other investors still wait for their money. This is the reason why people avoid emerging markets. Some black sheep in these markets can easily destroy the reputation of a whole continent. 4

Favorite Reading

The 7 Habits of Highly Effective People by Stephen Covey is one of the best self-management books, as it not only focuses on business life but also on your private and family life. The habits you need are often the same. Acting with integrity and having a clear goal are important in business and private life.

Josh Tarasoff, Greenlea Lane Capital Management Josh is managing member of Greenlea Lane, which he founded in 2006. Josh graduated from Duke University in 2001 with a degree in philosophy. He has worked at Goldman, Sachs and holds an MBA from Columbia Business School. 1

Professional Evolution

When I graduated from college, I worked at a major investment bank in equity research. Although I enjoyed the job, much of what we did consisted of trying to predict or react to data points or investor sentiment, rather than analyzing businesses. My initial interest in investing came from a book called The Quest for Value, which showed me that businesses have fundamental economic value that can be analyzed and estimated. It was only a matter of time before I began to read about value investing. The simplicity and logic of the approach appealed to me, which was refreshing after my experience on Wall Street. It was natural that I wanted to attend Columbia Business School, which has a program devoted to value investing. I began to invest my own money while in school and set up Greenlea Lane Capital shortly after I graduated.

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January 31, 2011 – Page 163 of 182

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Investment Philosophy

My approach is to make concentrated investments in great businesses, at attractive prices, which is more in line with the Joel Greenblatt style than the Ben Graham style. I do not think there is anything wrong with cigar-butt investing, but my temperament is better suited to trying to find the rare occasions in which high-quality businesses are selling for significant discounts to what they are worth, and then making relatively large, long-term investments.

“One of the most powerful ideas I have ever encountered is the one-decision stock: a company you can simply hold for a decade or two and receive an outstanding outcome.”

One of the most powerful ideas I have ever encountered is the one-decision stock: a company you can simply hold for a decade or two and receive an outstanding outcome. My ideal investment would be to purchase a company like this at a significant discount to intrinsic value, and then hold it for a very long time. This approach is a combination of letting the economics of a great business play out, while also opportunistically taking advantage of market inefficiencies. The way in which my style differs from what I have seen among other value investors is that I tend to have a narrower focus in terms of the businesses I am comfortable owning. Most people I know are comfortable with a wider range of business quality, understandability, or valuation. As a result, they tend to have more positions in their portfolios at any given time, and they make more investments over time. I tend to invest in very high quality, easy-to-understand companies, and wait for cheap prices. The rest of the time I don’t do anything. Great investment opportunities are rare, because there are a lot of smart, motivated investors competing for returns. I consider this fact very important, and this is what motivates me to stay disciplined and pick my spots carefully. 3

Investment Opportunity

One of Greenlea Lane’s largest investments is Markel (NYSE: MKL). I believe Markel is a great example of the kind of one-decision stock I referred to earlier. Markel is a specialty property and casualty insurance company that has compounded book value per share at an annualized rate of over 20% since its IPO in 1986. The Markel family has the vast majority of its net worth concentrated in Markel stock, and it has been a fabulous investment for them. I think Markel has a long runway for continued great results, by simply continuing the underwriting and investment discipline that has been carefully cultivated for decades. Moreover, insurance stocks are widely out of favor at the moment because business conditions have been very difficult for many years. Markel trades at only 1.2x book value. I think the company will compound book value at a mid-teens rate over time, and that it will trade for a much higher multiple, likely when conditions in the insurance industry improve. Historically, Markel’s average multiple of stated book value has been 2x. 4

Favorite Reading

One of the most thought-provoking quotes I have encountered recently comes from David Sokol’s book Pleased But Not Satisfied. He says the following: “Multiple analyses of a company, such as EBITDA multiples, P/E multiples or some of the more exotic recent multiples… are of no use or, at best, limited use when assessing the genuine value of a business. Each business is so unique that such multiples tell only about 25% of the story.” That is a strong statement, and it resonated with me. I think it is typical for investors to anchor on statistical valuation measures, while giving short shrift to the fundamental differences that © 2008-2011 by BeyondProxy LLC. All rights reserved.

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exist among various companies, especially companies within the same industry. In my experience, this is true, ironically, even of people who are fundamental, bottom-up analysts, as opposed to quantitatively-based investors. Markel is a good example of this. It trades at one of the highest multiples of book value in the industry, but I think it is one of the best long-term investments, because of its unique characteristics.

Paolo Tramontana, Kraemer, Schwab I am a partner at Kraemer, Schwab, a Swiss investment management firm dedicated to capital preservation and growth for high net-worth individuals around the world (CHF 1.6 billion in AUM). We have focused on value investing since 1983. I also manage a small fund for ClaridenLeu (Global Value Fund). I am Italian born and raised, married to a German and have a small child. 1

Professional Evolution

I started my career in corporate finance in big banks, and I soon experienced the limitations of sell-side research, short-term benchmarking, and an exclusive focus on relative performance. The person that has influenced me the most is Warren Buffett. Reading his annual reports has opened my eyes and hooked me on value investing. Since I read his letters for the first time, I have never stopped trying to deepen and broaden my understanding of businesses and capital markets’ greed and fear cycles. I have also been influenced by mentors such as Jeremy Grantham and Prem Watsa, whose writings are precious materials. 2

“…it is important to be humble and flexible, and seek opportunities where they seem to be most appealing. Sometimes they will be in “deep value/cigar butts” and some other times more in wide moat global franchises.”

Investment Philosophy

I think it is important to be humble and flexible, and seek opportunities where they seem to be most appealing. Sometimes they will be in “deep value/cigar butts” and some other times more in wide moat global franchises. As a personal bias though, I am fascinated by business dynamics and tend to be much more focused on high-quality companies, the so-called wide-moat stocks. My approach has evolved in the direction of appreciating more the value of incentives of the management of businesses, in particular in financial companies operating with leverage. The long-term track records of banks and insurances are extremely different from one another, and normally the best companies are owned by the management and run for the long term. Relative to peers, I often observe that I tend to have more patience in investments, both in holding on to ideas and in waiting for fat pitches. This can be good, but it has the downside of risking to be slow in recognizing value traps. Finally, I am not shy to use ETFs to invest in an asset class I believe to be significantly undervalued but in which I lack the expertise to pick single ideas. 3

Investment Opportunity

Imperial Tobacco (London: IMT), Heineken Holding (OTC: HINKY) and Fairfax Financial (Toronto: FFH) are ideas I consider very attractive at the moment. In particular, Fairfax is a Canadian insurance company run by one of the best value investors in the world, Prem Watsa. Of the three key elements of any investment — business, management and price — management is the key here (and price is very affordable, basically it trades at book value).

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Fairfax’s business consists of two activities: selling insurance and investing the premia and the equity capital. Insurance is close to a commodity product, pricing power is almost non-existent and differentiation is hard to achieve, except based on capital rating. It is a very cyclical industry in which most players have not made much money over time. We all know from the master, Buffett, that the attraction is in the float that, if not expensive, provides a turbo boost to the returns achieved in the investment portfolio on the asset side. The best insurance company ever, Berkshire, combines the best capital allocation skills on the investment side with great skills and strong will to focus on long term underwriting profitability on the insurance side. Any insurance company of interest as an investment must have a good combination of these two elements, and here we come to the management part. As the keys in investing and insurance are skill and long-term focus, management and incentives are vital. In order to have low-cost float, management needs to be disciplined and long term-oriented, and able and willing to shrink sales when prices are not right, and to expand them only when they are. At Fairfax, the investment side of the business is centralized and run by Watsa, who has an exceptional long-term track record in bonds and stocks and is twenty years younger than Buffett. He founded the company in the 1980s and controls it via special voting shares. Most of his wealth is tied in the stock, while he gets a very low salary. His incentives are perfectly aligned with those of long-term shareholders. The investment side of the business ranks extremely highly among all insurance companies in the world.

“Fairfax trades at book value. We can buy an insurance company with one of the best track records in the world for the same price as if it was liquidated today.”

On the insurance side, Fairfax is decentralized, and every company is run by its own management team. Watsa makes sure that the culture and the incentives are set up the right way, i.e., with an eye on long-term underwriting profitability rather than on sales dollars or short-term results. The long-term track record on the insurance side is ok, but not fantastic. It seems to me that in the last few years Watsa has purchased insurance companies with great longterm underwriting results in order to improve this side of the business. Overall, Fairfax is a great company, basically a top hedge fund run by one of the best value managers, combined with decent (and improving) insurance operations. Watsa, originally Indian, is also present in India and in other emerging countries, where the growth potential is huge. While insurance does not have a competitive advantage, having an owner/manager like Watsa is a key advantage, and it is hard to replicate. Markel is one of few similar companies. Fairfax trades at book value. We can buy an insurance company with one of the best track records in the world for the same price as if it was liquidated today. Hopefully, Watsa will be in place for a very, very long time. Under the stewardship of Prem Watsa, Fairfax promises to be a great investment for the next two decades or, hopefully, longer. 4

Recent Reading

I recently read Learned Optimism from Martin Seligman. He describes his lifelong research in depression and optimism and describes how the explanations we give ourselves in the face of adversity have a huge impact on our thinking and of our children listening to us. Developing the conviction that difficulties are permanent, pervasive and always exclusively due to personal failures leads inevitably to a sense of impotence and depression, while the opposite leads to © 2008-2011 by BeyondProxy LLC. All rights reserved.

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optimism and, usually, a successful life. He also touches on the limits of optimism, and when some pessimism might be desirable. For example, in a company it is important to have “alpha males,” optimists driving the business, but also more balanced board members considering the risks and downside. The book emphasizes how deep and profound the consequences of our thinking are even on small matters, as they help to ingrain thought habits that might not be healthy. I think it is a useful and interesting book to look at the world and investments from a different angle.

Carter Venkat, Private Investor 1

Professional Evolution

I started investing as a sideline before attending business school while I worked as a leveraged finance banker. This was in the late 1990s during the tech and telecom boom. At the time, I was a story investor and, like the rest of the herd, bought a lot of tech and telecom stocks. I started business school in January 2000 and soon after, the value of my portfolio plummeted.

“I find the deep value style difficult to implement because I think technology has helped to make these situations much rarer.”

However, I was fortunate to attend Columbia Business School and had Bruce Greenwald for my core microeconomics class. On many occasions during this class the discussion turned to Internet darlings such as Cisco and Amazon.com and why he thought those stocks were overvalued. During my business school career, I went on to take two more classes with Greenwald as well as a few other investing classes. Through these classes I learned that there were methodical approaches to investing, and both the process and philosophy of value investing resonated with me. I did not take a job in investing after business school, returning to investment banking instead, but the idea of a career as an investor was always in the back of my head. About four years ago my wife and I moved from New York to London, and I used the opportunity to re-think my career and decided that investing was my passion. I switched career paths. My first investment job was with a fund that invested globally, and was focused on emerging markets. Thus, I tend to look globally but believe that most emerging markets are currently very expensive. I can’t pinpoint a single person who has had the most significant impact on my views as an investor. I read as much as possible on the subject. Buffett, Greenwald, Klarman, and Greenblatt have influenced me. I also learn by speaking to others in the industry, especially those I have become friends with. 2

Investment Philosophy

I started as a story investor and tended to follow the herd. I learned the futility of this approach the hard way. Since becoming a value investor I have tended to be the “Greenblatt type,” buying good companies at cheap prices. Some of the companies I have invested in include Starbucks, Nestle, M. Dias Branco, Godrej Consumer Products, and Apollo Tyres. However, I can see the merits of both the deep value and especially the event-driven and activist approach. But I find the deep value style difficult to implement because I think technology has helped to make these situations much rarer. I have a very systematic investing approach that includes different types of screens and detailed checklists to ensure that I don’t invest outside of my style or competence. © 2008-2011 by BeyondProxy LLC. All rights reserved.

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Investment Case Study

An example of my investment approach was my analysis of Starbucks (Nasdaq: SBUX) in the fall of 2008. At the time the company showed up in a number of my screens and, given their strong brand identity and my familiarity with the company, I decided to look at in greater detail. At the time the company was trading at $12 per share, and my analysis led me to conclude that they were conservatively worth $25 per share. Starbucks was a classic case of a company that had grown too quickly and along the way diluted the brand experience in order to sustain growth. Their phenomenal success led to justifications for more growth. However, they had strong brand awareness — they were the 85th most valuable brand in the world and number four in fast food retailing, according to Interbrand. Howard Schulz had recently returned as CEO and was focused on rebuilding brand integrity. The company had outlined measures to cut costs in the U.S., and I was certain that they would either grow into their expensive international infrastructure or cut costs there as well. However, the market was not giving them any credit for this. Also, while same-store-sales in the U.S. in fiscal 2008 declined by 5%, this decrease was led by reduced sales in just five states (California, Florida, Georgia, Nevada, and Arizona), with flat to increasing same-store-sales in the rest of the country. This last fact was lost on many sell-side analysts. Starbucks recently traded at $32 per share. The stock has gone above my assessment of fair value. I tend to be conservative in my valuations and usually sell too quickly and leave money on the table. What I have noticed is that when stocks rebound, they tend to go through their intrinsic value and trade above this level for a period of time. I continue to agonize over whether I should take advantage of this phenomenon but remain uncomfortable doing so. 4

“This book is a useful read, as it reveals that in certain industries in India it can be difficult for companies to be completely above-board and successful.”

Recent Readings

The Polyester Prince by Hamish McDonald is an account of how Dhirubhai Ambani built Reliance Industries. It’s a demonstration of the nexus between politicians, bureaucrats, journalists and big business in India in the 1980s and ‘90s. I think that in different forms, these relationships still exist today. While it’s not strictly a book about investing, it gave me a lot of insight on how India and probably a lot of other emerging markets work. This book is a useful read, as it reveals that in certain industries in India it can be difficult for companies to be completely above-board and successful. As an investor, it is important to be aware of these conditions, so you can either steer clear of industries that are deeply affected by government intervention or ensure that the companies you invest in will not be adversely affected (a difficult proposition).

Jacob Wolinsky, Value Advisory I love history and politics. I got into one of the top political science programs in the country at George Washington University, but I declined acceptance since I loved finance and thought it was more practicable career-wise. My favorite history is Mideast and WWII history; I have probably read dozens of books on both topics. My favorite author on WWII is Antony Beevor. In my free time, I enjoy spending time with my wife and my two daughters. I also truly enjoy helping people. I think it is important to remember that money © 2008-2011 by BeyondProxy LLC. All rights reserved.

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is not everything. No one writes on your tombstone this person was a billionaire. People are remembered for their good deeds. On that note, I commend Warren Buffett for raising so much money for charity in his recent initiative. 1

Professional Evolution

My experience as a speculator started about twelve years ago during the height of the tech bubble. I made my parents a fortune buying AOL and watching the stock quadruple. However, in hindsight it was all luck. For many years after that I thought I was the king of the world. However, my stock picks were based on hot tips and even stock alerts I got by email. Even while the market was rallying in 2003-04, my stocks were down. I no longer thought I could beat the system. One day I saw an advertisement for a free copy of a book Warren Buffett described as “the best book on investing ever written.” I had heard of Buffett and decided to search the Internet for the book. It turned out to be the Intelligent Investor. I went to the library, took out the book and almost immediately realized that all the mistakes Graham described were ones I made. I became a value investor that day. I devoted much time to learning about value investing, behavioral finance, and to reading company filings. I was previously an analyst for a value-based private equity firm that bought publicly traded micro-caps. I am currently an equity analyst at a small value research firm. I also write for several websites and enjoy it. My dream is to set up my own partnership with a colleague two to three years from now. I have a good audited track return over the past three years, and hope to make that five years in a short while! 2

“Calamos is the type of stock you would never find on a screener. You really have to dig deep down into the filings to figure out the capital structure of the company.”

Investment Philosophy

My investment philosophy leans toward a diversified “cigar butt” portfolio. My ideal investment is a stock trading below conservative liquidation value and is not burning through cash too rapidly. In early 2009 Movado traded at $5 per share, while on a liquidation basis it was probably worth twice as much, and it was not losing a material amount of cash. This was a successful investment. I now look for stocks that are cheap based on price to earnings or price to book value. I try to see if a low multiple is justified or not; usually the market overreacts. Since there is no such thing as a perfect stock, I tend to assume that a basket of cheap stocks will outperform since the winners will outstrip the losers. I was influenced in this regard mostly by David Dreman, John Neff, and Tweedy Browne (and their pamphlet What Has Worked in Investing). 3

Investment Case Study

Calamos Asset Management (Nasdaq: CLMS) is the type of stock you would never find on a screener. You really have to dig deep down into the filings to figure out the capital structure of the company. I estimate intrinsic value at $24 per share (versus $15 recent stock price). Calamos provides investment services, managing a dozen mutual funds, five closed-end funds, and separately managed accounts. CLMS (the public company) owns 21.7% of Calamos Holdings (the operating company); the rest of Calamos Holdings is owned by the Calamos family. The structure of the board is cause for some concern, as five of the six board members are linked to the Calamos family. John Calamos and Nick Calamos had compensation of $3.5 million and $2.3 million, respectively, in 2009. Calamos had $33 billion in © 2008-2011 by BeyondProxy LLC. All rights reserved.

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January 31, 2011 – Page 169 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

AUM at the end of Q310 across equity (54%), convertible (21%), fixed income (9%), total return (6%), and alternative investment (6%) of categories. I estimate that Calamos trades at a P/E of 7.4, net of cash, DTA and investments (as opposed to a P/E of 14.6 before adjusting for cash, DTA and investments). Calamos is cheap compared to competitors, such as Franklin Resources, Eaton Vance and T. Rowe Price, which trade at P/E multiples in the mid to high teens. (Disclosure: Long Calamos.) 4

Recent Reading

I read James Montier’s Little Book of Behavioral Investing a few months ago, and it is one of the best books around. It took only two to three hours to read the entire book, but I learned more than I have in a long time. The book made me realize how little I actually knew about behavioral finance and value investing.

Peter Wüthrich, Wüthrich, Henz & Co. I am Swiss and graduated from the University of St. Gallen with a Master’s degree in banking and finance. I am a CFA and FRM charterholder. My passions outside of work are activities with my family. My colleague Markus Henz and I founded Wüthrich, Henz & Co. in 2009 following many years in private banking. We launched our firm with a single fundamental objective: to provide our clients with state-of-the art investment advice, either by leveraging our internal expertise or through access to leading industry and academic experts. Our aim is to create value for clients via a multidisciplinary approach to the investment decision process, incorporating findings from psychology, neurology, economic history, and other fields. 1

Professional Evolution

I got started as an investor in the 1990s through bond market analysis and fund manager research. My primary interest was always to identify the most capable investors rather than to pick securities myself. My learning process was therefore influenced by a handful of great investors rather than a single person. 2

Recent Reading

James Montier’s Little Book of Behavioral Investing

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January 31, 2011 – Page 170 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Favorite Stock Screens For Value Investors “Magic Formula,” based on Trailing Operating Income Companies with high returns on capital employed, trading at high trailing EBIT-to-enterprise value yield Move To 52-Week Low High

MV ($mn)

EV ($mn)

▼

EV/ Sales

Trailing EBIT/ EV

EBIT/ Capital Employed

Tax Rate

Price/ Tangible Book

Insiders % Buys/ Own. Sells

Company

Ticker

Price ($)

1 2 3 4 5

EarthLink * PDL BioPharma Bridgepoint Edu. ITT Educational Unisys

ELNK PDLI BPI ESI UIS

8.63 4.87 17.23 71.73 27.10

-9% -1% -26% -30% -37%

8% 50% 60% 70% 49%

935 680 900 2,151 1,155

542 918 670 1,988 1,304

.9x 2.8x 1.0x 1.2x .3x

35% 32% 31% 31% 28%

11688% infinite infinite infinite 2230%

n/m 37% 42% 39% 17%

1.4x n/m 4.5x >9.9x n/m

0% 0% 1% 0% 0%

11 / 5 -/7/7 8/2 3/2

6 7 8 9 10

Career Education Metropolitan Health Impax Labs Medicis Pharma Apollo Group

CECO MDF IPXL MRX APOL

21.91 4.54 22.00 25.15 42.35

-25% -57% -67% -16% -20%

64% 8% 4% 23% 57%

1,780 184 1,413 1,525 6,062

1,340 143 1,055 1,044 5,203

.6x .4x 1.1x 1.5x 1.0x

24% 27% 43% 23% 27%

14847% 1422% 380% infinite 1053%

34% 38% 37% 41% 48%

5.0x 3.3x 3.1x 3.0x 6.3x

0% 3% 1% 0% 3%

6/5 4/4 7/4 -/2 / 12

11 12 13 14 15

ePlus Amerigroup InfoSpace Oshkosh Terra Nova Royalty

PLUS AGP INSP OSK TTT

24.31 47.19 8.16 36.09 7.26

-37% -49% -19% -32% -42%

7% 8% 45% 23% 29%

200 2,339 295 3,275 442

173 1,841 67 4,238 297

.2x .3x .3x .4x 1.0x

21% 21% 20% 33% 19%

infinite infinite infinite 267% infinite

38% 37% 7% 34% 61%

1.1x 2.8x 1.3x n/m 2.0x

9% 2% 2% 0% 0%

11 / 6 12 / 14 3/9 11 / 5 -/-

16 17 18 19 20

VirnetX H&R Block USA Mobility Amedisys Cardiome Pharma

VHC HRB USMO AMED CRME

12.69 13.78 17.04 31.38 6.55

-76% -26% -40% -27% -31%

58% 65% 13% 105% 43%

620 4,204 376 911 400

545 4,404 234 976 372

2.7x 1.1x 1.0x .6x 4.2x

19% 18% 25% 22% 16%

infinite infinite 265% 298% infinite

32% 38% 31% 39% n/m

8.9x n/m 2.2x >9.9x 7.2x

0% 0% 1% 1% 0%

2/3 14 / 2 5/4 4/2 -/-

21 22 23 24 25

Tessera Technologies ViroPharma AutoChina Global Cash Access Dell

TSRA VPHM AUTC GCA DELL

21.26 16.69 26.31 3.14 13.47

-30% -44% -22% -28% -16%

9% 12% 84% 195% 30%

1,073 1,302 517 204 26,001

599 997 399 385 18,614

2.2x 2.5x .6x .6x .3x

18% 19% 15% 15% 15%

358% 252% infinite infinite infinite

44% 43% 24% 40% 24%

2.1x 6.0x 2.4x n/m >9.9x

1% 0% 0% 1% 12%

4/4 5/6 -/-/4 13 / 6

26 27 28 29 30

United Online SuperGen InterDigital DeVry Providence Service

UNTD SUPG IDCC DV PRSC

6.98 2.95 46.98 47.08 16.01

-32% -42% -53% -23% -30%

25% 29% 9% 58% 16%

600 178 2,082 3,298 207

788 70 1,519 2,845 329

.8x 1.4x 4.0x 1.4x .4x

15% 15% 15% 16% 19%

infinite infinite infinite 392% 218%

40% n/m 29% 33% 44%

n/m 1.6x >9.9x 6.4x n/m

6% 0% 1% 10% 1%

3 / 10 -/12 / 13 16 / 2 -/2

31 32 33 34 35

* Rigel Pharmaceuticals Deluxe AmSurg Lihua International Corinthian Colleges

RIGL DLX AMSG LIWA COCO

7.07 23.59 20.34 9.85 5.04

-15% -34% -20% -26% -22%

33% 4% 15% 32% 283%

369 1,210 629 287 425

202 1,969 891 197 576

1.6x 1.4x 1.3x .7x .3x

15% 15% 25% 23% 42%

1068% 482% 131% 137% 115%

n/m 36% 16% 25% 39%

2.1x n/m n/m 2.1x 3.6x

0% 1% 1% 48% 1%

-/1 9/4 3/3 2/17 / 3

36 37 38 39 40

Nephros * Value Line IntegraMed America Power-One Argan

NEP VALU INMD PWER AGX

5.86 13.81 8.88 10.74 9.48

-52% -13% -21% -72% -22%

74% 101% 15% 21% 72%

174 138 104 1,146 129

126 96 68 1,010 53

1.2x 1.7x .3x 1.2x .3x

50% 14% 14% 20% 17%

114% infinite infinite 155% 219%

24% 27% 42% 42% 36%

1.8x >9.9x 4.3x 5.2x 1.7x

16% 0% 6% 2% 0%

-/2 -/17 / 6 9/2 -/-

41 42 43 44 45

Almost Family Lincoln Educational * Forest Labs Aeropostale * Teradyne

AFAM LINC FRX ARO TER

34.82 14.70 31.66 25.40 13.75

-33% -34% -24% -16% -36%

27% 92% 8% 27% 7%

322 326 9,043 2,234 2,494

283 349 5,599 1,995 1,946

.9x .6x 1.3x .8x 1.3x

18% 35% 18% 20% 20%

183% 110% 165% 128% 127%

41% 41% 27% 39% 7%

5.4x 3.0x 2.1x 4.5x 2.7x

0% 4% 1% 0% 0%

-/4/8 15 / 12 1/3/4

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January 31, 2011 – Page 171 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

“Magic Formula,” based on This Year’s EPS Estimates Companies with high returns on capital employed, trading at high earnings yields (based on this FY EPS estimates) Move To 52-Week Low High

MV ($mn)

EV ($mn)

▼

EV/ Sales

This FY EPS Yield

EBIT/ Capital Employed

Tax Rate

Price to Tangible Book

Insiders % Buys/ Own. Sells

Company

Ticker

Price ($)

1 2 3 4 5

ITT Educational GTx Ariad Pharma Metropolitan Health Impax Labs

ESI GTXI ARIA MDF IPXL

71.73 2.88 6.40 4.54 22.00

-30% -34% -68% -57% -67%

70% 55% 14% 8% 4%

2,151 146 812 184 1,413

1,988 126 763 143 1,055

1.2x 2.0x 4.2x .4x 1.1x

15% 13% 13% 13% 14%

infinite infinite infinite 1422% 380%

39% n/m n/m 38% 37%

>9.9x 9.1x >9.9x 3.3x 3.1x

0% 20% 1% 3% 1%

8/2 6/2/1 4/4 7/4

6 7 8 9 10

Career Education Bridgepoint Edu. VirnetX Amedisys Dell

CECO BPI VHC AMED DELL

21.91 17.23 12.69 31.38 13.47

-25% -26% -76% -27% -16%

64% 60% 58% 105% 30%

1,780 900 620 911 26,001

1,340 670 545 976 18,614

.6x 1.0x 2.7x .6x .3x

12% 12% 12% 14% 10%

14847% infinite infinite 298% infinite

34% 42% 32% 39% 24%

5.0x 4.5x 8.9x >9.9x >9.9x

0% 1% 0% 1% 12%

6/5 7/7 2/3 4/2 13 / 6

11 12 13 14 15

Apollo Group Amerigroup Nephros Forest Labs Lihua International

APOL AGP NEP FRX LIWA

42.35 47.19 5.86 31.66 9.85

-20% -49% -52% -24% -26%

57% 8% 74% 8% 32%

6,062 2,339 174 9,043 287

5,203 1,841 126 5,599 197

1.0x .3x 1.2x 1.3x .7x

11% 10% 24% 13% 14%

1053% infinite 114% 165% 137%

48% 37% 24% 27% 25%

6.3x 2.8x 1.8x 2.1x 2.1x

3% 2% 16% 1% 48%

2 / 12 12 / 14 -/2 15 / 12 2/-

16 17 18 19 20

Teradyne EarthLink Corinthian Colleges Cornerstone Lincoln Educational

TER ELNK COCO CRTX LINC

13.75 8.63 5.04 5.85 14.70

-36% -9% -22% -18% -34%

7% 8% 283% 29% 92%

2,494 935 425 150 326

1,946 542 576 102 349

1.3x .9x .3x .8x .6x

15% 10% 18% 11% 18%

127% 11688% 115% 255% 110%

7% n/m 39% 26% 41%

2.7x 1.4x 3.6x 3.6x 3.0x

0% 0% 1% 56% 4%

3/4 11 / 5 17 / 3 1/3 4/8

21 22 23 24 25

Rigel Pharmaceuticals GT Solar Endo Pharma DeVry ePlus

RIGL SOLR ENDP DV PLUS

7.07 11.68 33.68 47.08 24.31

-15% -58% -43% -23% -37%

33% 1% 13% 58% 7%

369 1,763 3,893 3,298 200

202 1,517 3,461 2,845 173

1.6x 2.1x 2.2x 1.4x .2x

10% 10% 10% 10% 9%

1068% infinite 293% 392% infinite

n/m 37% 25% 33% 38%

2.1x >9.9x 9.4x 6.4x 1.1x

0% 0% 0% 10% 9%

-/1 13 / 14 8/4 16 / 2 11 / 6

26 27 28 29 30

* Medicis Pharma Lam Research America's Car-Mart China Valves GameStop

MRX LRCX CRMT CVVT GME

25.15 49.98 26.53 7.20 20.90

-16% -36% -23% -8% -18%

23% 6% 13% 106% 23%

1,525 6,147 287 249 3,164

1,044 5,234 338 243 3,232

1.5x 2.0x .9x 1.6x .3x

9% 12% 10% 18% 13%

infinite 112% 209% 80% 97%

41% 16% 36% 19% 35%

3.0x 3.7x 1.6x 2.0x 6.3x

0% 0% 6% 0% 3%

-/6 / 10 3/2 -/3/5

31 32 33 34 35

Veeco Instruments Exceed Company SciClone Pharma Gilead Sciences * China Electric Motor

VECO EDS SCLN GILD CELM

44.51 8.15 3.92 38.19 4.75

-34% -25% -47% -17% -12%

22% 29% 15% 30% 108%

1,776 160 187 31,005 104

1,444 65 134 32,149 68

1.9x .1x 1.7x 4.0x .7x

10% 23% 12% 10% 19%

162% 78% 97% 192% 72%

4% 8% 4% 27% 27%

3.8x .7x 2.4x 7.5x 1.6x

0% 0% 0% 1% 2%

4/5 -/-/8/4 7/-

36 37 38 39 40

Microsoft Cephalon * Almost Family Aeropostale SanDisk

MSFT CEPH AFAM ARO SNDK

28.02 59.64 34.82 25.40 49.97

-19% -8% -33% -16% -50%

13% 22% 27% 27% 7%

239,726 4,487 322 2,234 11,718

206,218 4,307 283 1,995 10,502

3.1x 1.6x .9x .8x 2.2x

9% 13% 10% 10% 9%

infinite 87% 183% 128% 338%

25% 28% 41% 39% 22%

7.2x >9.9x 5.4x 4.5x 2.3x

11% 1% 0% 0% 0%

15 / 13 10 / 10 -/1/7/8

41 42 43 44 45

Actuate * Kulicke and Soffa LTX-Credence SkyPeople Juice PMC-Sierra

BIRT KLIC LTXC SPU PMCS

5.54 8.95 7.92 4.83 8.69

-29% -49% -37% -17% -21%

10% 11% 43% 68% 12%

249 635 391 124 2,011

215 553 275 88 1,834

1.7x .7x 1.1x 1.1x 3.0x

8% 11% 11% 19% 8%

infinite 97% 88% 66% infinite

28% n/m 1% 31% 22%

>9.9x 2.5x 2.7x 1.2x 4.1x

3% 2% 2% 0% 0%

3/4 12 / 12 -/5 -/6/9

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January 31, 2011 – Page 172 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

“Magic Formula,” based on Next Year’s EPS Estimates Companies with high returns on capital employed, trading at high earnings yields (based on next FY EPS estimates) Move To 52-Week Low High

MV ($mn)

EV ($mn)

▼

EV/ Sales

Next FY EPS Yield

EBIT/ Capital Employed

Tax Rate

Price to Tangible Book

Insiders % Buys/ Own. Sells

Company

Ticker

Price ($)

1 2 3 4 5

Bridgepoint Edu. ITT Educational Career Education Metropolitan Health Endo Pharma

BPI ESI CECO MDF ENDP

17.23 71.73 21.91 4.54 33.68

-26% -30% -25% -57% -43%

60% 70% 64% 8% 13%

900 2,151 1,780 184 3,893

670 1,988 1,340 143 3,461

1.0x 1.2x .6x .4x 2.2x

15% 14% 13% 12% 13%

infinite infinite 14847% 1422% 293%

42% 39% 34% 38% 25%

4.5x >9.9x 5.0x 3.3x 9.4x

1% 0% 0% 3% 0%

7/7 8/2 6/5 4/4 8/4

6 7 8 9 10

Lihua International Dell Nephros GT Solar Forest Labs

LIWA DELL NEP SOLR FRX

9.85 13.47 5.86 11.68 31.66

-26% -16% -52% -58% -24%

32% 30% 74% 1% 8%

287 26,001 174 1,763 9,043

197 18,614 126 1,517 5,599

.7x .3x 1.2x 2.1x 1.3x

18% 11% 21% 11% 14%

137% infinite 114% infinite 165%

25% 24% 24% 37% 27%

2.1x >9.9x 1.8x >9.9x 2.1x

48% 12% 16% 0% 1%

2/13 / 6 -/2 13 / 14 15 / 12

11 12 13 14 15

ePlus America's Car-Mart Apollo Group Medicis Pharma Lincoln Educational

PLUS CRMT APOL MRX LINC

24.31 26.53 42.35 25.15 14.70

-37% -23% -20% -16% -34%

7% 13% 57% 23% 92%

200 287 6,062 1,525 326

173 338 5,203 1,044 349

.2x .9x 1.0x 1.5x .6x

11% 12% 11% 10% 15%

infinite 209% 1053% infinite 110%

38% 36% 48% 41% 41%

1.1x 1.6x 6.3x 3.0x 3.0x

9% 6% 3% 0% 4%

11 / 6 3/2 2 / 12 -/4/8

16 17 18 19 20

Power-One Kulicke and Soffa DeVry Veeco Instruments Amedisys

PWER KLIC DV VECO AMED

10.74 8.95 47.08 44.51 31.38

-72% -49% -23% -34% -27%

21% 11% 58% 22% 105%

1,146 635 3,298 1,776 911

1,010 553 2,845 1,444 976

1.2x .7x 1.4x 1.9x .6x

12% 15% 10% 11% 10%

155% 97% 392% 162% 298%

42% n/m 33% 4% 39%

5.2x 2.5x 6.4x 3.8x >9.9x

2% 2% 10% 0% 1%

9/2 12 / 12 16 / 2 4/5 4/2

21 22 23 24 25

China Valves Gilead Sciences GameStop Exceed Company LTX-Credence

CVVT GILD GME EDS LTXC

7.20 38.19 20.90 8.15 7.92

-8% -17% -18% -25% -37%

106% 30% 23% 29% 43%

249 31,005 3,164 160 391

243 32,149 3,232 65 275

1.6x 4.0x .3x .1x 1.1x

22% 11% 14% 23% 15%

80% 192% 97% 78% 88%

19% 27% 35% 8% 1%

2.0x 7.5x 6.3x .7x 2.7x

0% 1% 3% 0% 2%

-/8/4 3/5 -/-/5

26 27 28 29 30

* China Electric Motor Microsoft Cephalon Allied Healthcare SkyPeople Juice

CELM MSFT CEPH AHCI SPU

4.75 28.02 59.64 2.30 4.83

-12% -19% -8% -19% -17%

108% 13% 22% 35% 68%

104 239,726 4,487 100 124

68 206,218 4,307 62 88

.7x 3.1x 1.6x .2x 1.1x

24% 10% 14% 12% 22%

72% infinite 87% 90% 66%

27% 25% 28% 26% 31%

1.6x 7.2x >9.9x 2.1x 1.2x

2% 11% 1% 0% 0%

7/15 / 13 10 / 10 -/1 -/-

31 32 33 34 35

Gulf Resources Xyratex Integrated Silicon Aeropostale * Continucare

GFRE XRTX ISSI ARO CNU

9.73 13.33 9.30 25.40 4.49

-35% -21% -48% -16% -28%

35% 53% 50% 27% 17%

337 404 245 2,234 272

264 313 159 1,995 238

1.8x .2x .6x .8x .8x

17% 19% 14% 10% 10%

67% 61% 70% 128% 171%

27% n/m 3% 39% 38%

1.9x 1.1x 1.4x 4.5x 5.0x

0% 0% 0% 0% 0%

5/-/-/1 1/-/-

36 37 38 39 40

Teradyne * Lam Research PMC-Sierra Hawaiian Holdings * Intel

TER LRCX PMCS HA INTC

13.75 49.98 8.69 7.42 20.82

-36% -36% -21% -37% -15%

7% 6% 12% 17% 17%

2,494 6,147 2,011 370 116,134

1,946 5,234 1,834 268 96,364

1.3x 2.0x 3.0x .2x 2.2x

10% 10% 9% 13% 11%

127% 112% infinite 67% 90%

7% 16% 22% n/m 29%

2.7x 3.7x 4.1x >9.9x 2.6x

0% 0% 0% 0% 0%

3/4 6 / 10 6/9 -/3/3

41 42 43 44 45

* Primoris Services Cisco Systems Eli Lilly SciClone Pharma * Lexmark

PRIM CSCO LLY SCLN LXK

8.61 20.73 34.76 3.92 35.43

-35% -8% -8% -47% -29%

16% 34% 10% 15% 36%

411 114,874 40,083 187 2,784

401 91,227 41,080 134 2,313

.6x 2.2x 1.8x 1.7x .6x

10% 9% 13% 10% 12%

96% 3384% 65% 97% 62%

39% 18% 23% 4% 24%

4.6x 4.6x 4.9x 2.4x 2.9x

40% 0% 0% 0% 1%

6/2 21 / 12 12 / 2 -/4/6

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January 31, 2011 – Page 173 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Value with Catalyst: Cheap Repurchasers of Stock Companies that may be creating value by reducing their shares outstanding at relatively cheap prices ▼ MV ($mn)

EV ($mn)

Q-Q Change in Shares

Next FY P/E

Price to Tangible Book

Net Cash as % of MV

Insiders % Buys/ Own. Sells

Company

Ticker

Price ($)

1 2 3 4 5

Elron Electronic LaBranche Allied World Validus RenaissanceRe

ELRNF LAB AWH VR RNR

5.60 3.70 59.50 30.35 64.15

166 151 2,514 3,274 3,520

109 n/m n/m n/m n/m

-23.3% -10.0% -9.3% -8.6% -8.0%

46x 7x 8x

.9x .6x .8x .9x 1.1x

34% n/m n/m n/m n/m

0% 0% 0% 2% 0%

-/-/-/9/2 -/-

6 7 8 9 10

* Scorpio Tankers Endurance Specialty Platinum Underwriter Everest Re FPIC Insurance

STNG ENH PTP RE FPIC

9.87 44.99 44.71 83.27 37.24

236 2,194 1,756 4,578 342

316 n/m n/m n/m n/m

-7.0% -6.6% -6.3% -6.2% -6.1%

9x 9x 7x 14x

1.1x .8x .8x .7x 1.3x

-34% n/m n/m n/m n/m

0% 0% 2% 0% 3%

-/-/13 / 4 -/4/3

11 12 13 14 15

ITT Educational Clifton Savings Gilead Sciences Big Lots Banco Santander

ESI CSBK GILD BIG STD

71.73 11.03 38.19 32.52 12.39

2,151 288 31,005 2,454 101,955

1,988 n/m 32,149 2,532 n/m

-6.0% -5.6% -5.5% -5.0% -5.0%

7x 9x 11x 8x

16.8x 1.6x 7.5x 3.0x 2.3x

8% n/m -4% -3% n/m

0% 0% 1% 1% 0%

8/2 -/8/4 2/2 -/-

16 17 18 19 20

WellPoint Scholastic H&R Block Employers Holdings Eastern Insurance

WLP SCHL HRB EIG EIHI

61.45 30.93 13.78 16.62 13.00

24,187 954 4,204 662 120

n/m 1,186 4,404 n/m n/m

-4.7% -4.7% -4.0% -4.0% -4.0%

9x 12x 8x 14x 25x

8.0x 2.5x n/m 1.4x .9x

n/m -24% -5% n/m n/m

0% 1% 0% 1% 0%

7/9 10 / 6 14 / 2 7/-/-

21 22 23 24 25

Best Buy Lukoil Assurant Infinity Property LSI Corp.

BBY LUKOY AIZ IPCC LSI

35.11 64.11 38.74 61.30 5.76

13,840 50,093 4,128 767 3,551

14,737 57,431 n/m n/m 2,950

-4.0% -3.9% -3.6% -3.6% -3.4%

10x 6x 8x 13x 12x

4.3x .9x .9x 1.3x 6.2x

-6% -15% n/m n/m 17%

0% 0% 1% 1% 0%

8/3 -/6/8 4/3 6/1

26 27 28 29 30

Hewlett-Packard Bunge Forest Labs America's Car-Mart Qlogic

HPQ BG FRX CRMT QLGC

47.23 70.04 31.66 26.53 17.37

103,454 10,148 9,043 287 1,835

114,824 12,330 5,599 338 1,531

-3.1% -3.1% -2.9% -2.9% -2.9%

8x 13x 7x 9x 12x

n/m 1.1x 2.1x 1.6x 4.6x

-11% -22% 38% -18% 17%

0% 0% 1% 6% 0%

14 / 11 -/15 / 12 3/2 8/3

31 32 33 34 35

White Mountains PartnerRe * Abington Bancorp W.R. Berkley * Torchmark

WTM PRE ABBC WRB TMK

342.91 81.00 11.04 27.70 61.40

2,846 6,034 223 4,018 4,915

n/m n/m n/m n/m n/m

-2.8% -2.8% -2.7% -2.7% -2.6%

23x 9x 32x 11x 9x

.8x .9x 1.0x 1.1x 1.3x

n/m n/m n/m n/m n/m

0% 0% 1% 6% 1%

-/-/4/3 3/4 21 / 14

36 37 38 39 40

Stage Stores Blyth Zimmer Holdings Aetna Fox Chase Bancorp

SSI BTH ZMH AET FXCB

16.41 34.44 56.36 33.28 11.48

601 284 11,128 13,315 167

597 278 11,285 n/m n/m

-2.6% -2.5% -2.5% -2.4% -2.4%

15x 12x 12x 10x 38x

1.4x 1.3x 4.9x 3.1x .8x

1% 2% -1% n/m n/m

1% 0% 0% 0% 0%

4/1 -/1 2/2 5/6 -/-

41 42 43 44 45

Danvers Bancorp * ProAssurance * Northrop Grumman * Shengkai Innovations * Navigators Group

DNBK PRA NOC VALV NAVG

21.91 60.15 69.47 5.42 50.92

453 1,799 20,302 140 849

n/m n/m 21,983 123 n/m

-2.1% -2.1% -2.0% -2.0% -2.0%

23x 11x 10x 5x 15x

1.7x 1.1x n/m 7.5x 1.0x

n/m n/m -8% 12% n/m

1% 1% 0% 0% 0%

4/6/6 17 / 4 -/1/1



Company website

SEC

Proxy

* New additions are highlighted.

Criteria: ► MV < 2 * BV ► Next FY P/E < 12 ► Debt/equity < 0.4 ► MV > $100mn ► Q-Q ∆ shares < 0

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January 31, 2011 – Page 174 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Profitable Dividend Payors with Decent Balance Sheets Dividend-paying companies with no net debt and EPS estimates in excess of 75% of the indicated annual dividend ▼ Move To 52-Week Low High

EV ($mn)

Est. P/E This Next FY FY

Price to Tangible Book

Insiders % Buys/ Own. Sells

Company

Ticker

Price ($)

1 2 3 4 5

Two Harbors Invest. Fifth Street Finance * Himax Tech PennyMac Mortgage Life Partners

TWO FSC HIMX PMT LPHI

9.78 12.50 2.52 18.19 11.82

-18% -22% -21% -14% -1%

6% 9% 30% 2% 66%

255 682 446 306 220

n/m n/m 407 n/m n/m

14% 8% 44% 2% 8%

16% 10% 10% 9% 8%

8x 11x 16x 12x 7x

6x 10x 11x 8x 6x

1.1x 1.2x 1.2x .9x 3.2x

1% 3% 0% 0% 0%

6/1 4/-/1/2 3/-

6 7 8 9 10

TICC Capital NGP Capital Mesabi Trust BGC Partners Crexus Investment

TICC NGPC MSB BGCP CXS

11.62 9.18 35.89 8.10 13.14

-52% -27% -65% -54% -11%

5% 19% 61% 13% 7%

314 199 471 760 238

n/m n/m n/m n/m n/m

6% 7% 7% 5% 3%

8% 8% 7% 7% 7%

13x 17x 13x 12x 21x

11x 11x 12x 10x 10x

1.3x .8x >9.9x 3.5x .9x

1% 1% 0% 12% 0%

1/4/-/7/5 1/-

11 12 13 14 15

* Banco Santander Gladstone Investment AstraZeneca Lorillard Colony Financial

STD GAIN AZN LO CLNY

12.39 7.65 48.10 74.20 20.10

-30% -40% -16% -5% -18%

24% 5% 11% 21% 2%

101,955 169 68,015 11,101 294

n/m n/m 67,095 10,805 n/m

4% 3% 3% 6% 3%

6% 6% 6% 6% 6%

10x 15x 7x 11x 18x

8x 14x 7x 10x 12x

2.3x .9x n/m n/m 1.1x

0% 0% 0% 0% 0%

-/4/-/11 / 3 3/-

16 17 18 19 20

Nat'l Australia Bank BBVA Banco Frances Westpac Banking American Software CTC Media

NABZY BFR WBK AMSWA CTCM

24.15 11.66 112.10 6.31 23.42

-24% -54% -24% -28% -47%

11% 19% 19% 13% 7%

51,521 2,085 66,743 163 3,666

n/m n/m n/m 125 3,519

6% 6% 6% 6% 1%

6% 6% 6% 6% 5%

10x 8x 11x 23x 25x

9x 11x 11x 19x 19x

1.6x 2.6x 2.5x 3.2x >9.9x

0% 0% 0% 2% 0%

-/-/-/3/7/7

21 22 23 24 25

Telecom Argentina Bristol Myers Squibb Australia and NZ CNB Financial People's United

TEO BMY ANZBY CCNE PBCT

26.70 26.06 23.26 13.72 13.20

-45% -15% -30% -23% -8%

2% 7% 11% 38% 28%

5,257 44,607 59,539 168 4,740

5,026 42,970 n/m n/m n/m

8% 5% 5% 5% 5%

5% 5% 5% 5% 5%

12x 12x 11x 12x 24x

10x 12x 10x 11x 18x

4.2x 5.6x 2.3x 1.6x 1.5x

0% 0% 0% 4% 1%

-/4/8 -/14 / 1 6 / 10

26 27 28 29 30

THL Credit Nokia Baldwin & Lyons Renasant American Ecology

TCRD NOK BWINB RNST ECOL

12.80 10.78 22.45 15.81 16.94

-30% -26% -11% -19% -23%

5% 47% 19% 15% 7%

254 40,371 333 396 310

n/m 34,159 n/m n/m 280

1% 5% 6% 4% 4%

5% 5% 4% 4% 4%

43x 14x 22x 16x 31x

11x 12x 15x 12x 21x

1.0x 5.5x .9x 1.4x 3.4x

0% 0% 3% 0% 0%

7/-/-/5 2/1 7/1

31 32 33 34 35

* Santander Brasil GFI Group Safety Insurance Washington Trust United Bankshares

BSBR GFIG SAFT WASH UBSI

12.58 4.77 48.23 20.36 29.11

-22% -14% -30% -27% -26%

24% 47% 4% 13% 10%

47,810 579 725 329 1,269

n/m n/m n/m n/m n/m

2% 4% 4% 4% 4%

4% 4% 4% 4% 4%

13x 17x 13x 14x 18x

11x 11x 15x 12x 18x

2.0x 2.8x 1.1x 1.6x 2.7x

0% 42% 3% 1% 2%

-/4/7 3/5 5/7 3/8

36 37 38 39 40

Olin Corp. Electro Rent Healthcare Services Credit Suisse Turkcell

OLN ELRC HCSG CS TKC

19.68 14.90 15.65 45.35 15.98

-27% -27% -22% -20% -24%

14% 15% 9% 20% 25%

1,566 357 1,031 53,708 14,062

1,559 326 961 n/m 12,681

4% 3% 4% 5% 4%

4% 4% 4% 4% 4%

24x 16x 30x 11x 11x

15x 15x 25x 9x 11x

2.8x 1.5x 5.5x 2.1x 3.1x

0% 17% 5% 0% 0%

9/2 5/3 5/6 -/-/-

41 42 43 44 45

Paychex Pzena Investment Microchip Technology * Female Health * Comtech Telecomm.

PAYX PZN MCHP FHCO CMTL

32.60 7.12 36.47 5.35 26.78

-24% -19% -30% -19% -25%

1% 11% 3% 39% 38%

11,791 458 6,814 147 736

11,327 n/m 5,779 144 333

4% 1% 4% 3% 1%

4% 4% 4% 4% 4%

23x 22x 16x 15x 13x

22x 18x 15x 18x

>9.9x >9.9x 4.5x 9.1x 1.4x

11% 0% 0% 18% 2%

1/4 -/11 / 9 9/3 8/1



Company website

SEC

Proxy

* New additions are highlighted.

MV ($mn)

Dividend Yield Last 12 Annual Months Indicated

Price Charts

Criteria: ► Positive net cash ► Positive EPS estimates for this FY and next FY ► MV > $100 million

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January 31, 2011 – Page 175 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Deep Value: Lots of Revenue, Low Enterprise Value Companies that trade at low multiples of net revenue ▼ Move To 52-Week Low High

MV ($mn)

EV ($mn)

EV/ Sales

Est. P/E This Next FY FY

Price to Tangible Book

Insiders % Buys/ Own. Sells

Company

Ticker

Price ($)

1 2 3 4 5

Ingram Micro Tech Data World Fuel Services AmerisourceBergen Cardinal Health

IM TECD INT ABC CAH

19.40 46.27 35.68 36.10 41.30

-24% -25% -38% -28% -28%

1% 3% 6% 1% 1%

3,042 2,157 2,466 9,939 14,412

2,640 1,974 2,058 9,625 13,840

.08x .08x .12x .12x .14x

10x 11x 16x 15x 16x

9x 10x 15x 13x 14x

1.0x 1.1x 3.1x >9.9x 6.2x

0% 0% 2% 1% 0%

4/5 1/5 2/2 10 / 4 20 / 10

6 7 8 9 10

Kelly Services * Systemax Eastman Kodak McKesson Insight Enterprises

KELYA SYX EK MCK NSIT

17.80 13.70 5.15 73.21 14.75

-43% -17% -32% -22% -24%

14% 78% 76% 3% 15%

653 503 1,385 18,527 683

687 505 1,238 17,756 756

.14x .14x .16x .16x .16x

25x 10x 14x 15x 10x

16x 9x n/m 13x 9x

1.2x 1.5x n/m 7.1x 1.6x

2% 0% 0% 0% 1%

10 / 3 -/5/3 10 / 10 11 / 8

11 12 13 14 15

Office Depot SYNNEX Sunoco Kindred Healthcare Brightpoint

ODP SNX SUN KND CELL

5.60 33.62 40.94 19.01 8.99

-40% -33% -40% -40% -36%

64% 9% 2% 10% 6%

1,552 1,202 4,937 751 606

1,960 1,489 6,355 837 691

.17x .17x .18x .19x .20x

n/m 9x 24x 13x 11x

93x 8x 18x 12x 10x

2.0x 1.5x 1.7x .9x 6.9x

1% 1% 0% 0% 1%

7/1 6/6 6/2 1/4 2/7

16 17 18 19 20

Tesoro Barnes & Noble Celestica BJ's Wholesale Club SUPERVALU

TSO BKS CLS BJ SVU

18.03 16.79 9.29 44.98 7.33

-42% -29% -20% -27% -2%

9% 47% 22% 9% 144%

2,581 1,011 2,095 2,456 1,555

4,089 1,458 1,389 2,400 8,700

.21x .21x .22x .22x .23x

n/m n/m 18x 6x

11x n/m 16x 6x

.9x n/m 1.4x 2.2x n/m

0% 20% 0% 0% 0%

2/2 10 / 9 -/-/2/-

21 22 23 24 25

* Aegean Marine Petrol Valero Energy IDT Corp. Western Refining Owens & Minor

ANW VLO IDT WNR OMI

11.20 24.13 23.55 10.33 29.77

-22% -36% -83% -61% -14%

212% 6% 28% 14% 10%

523 13,663 533 912 1,886

1,005 19,347 340 1,928 1,949

.23x .23x .24x .24x .24x

12x 15x n/m 16x

10x 11x 15x 15x

1.2x .9x 3.0x 1.5x 3.3x

0% 0% 15% 40% 1%

-/6/7 7/1 6/2 5/6

26 27 28 29 30

Flextronics Kroger Sears Holdings * Sanofi-Aventis Centene

FLEX KR SHLD SNY CNC

8.01 21.56 74.57 34.53 25.48

-39% -12% -21% -19% -31%

6% 12% 68% 14% 16%

6,135 13,711 8,203 2,996 1,318

6,768 20,761 11,450 11,476 1,154

.24x .26x .26x .26x .26x

12x 58x 7x 14x

11x 74x 8x 12x

3.2x 3.3x 2.2x .5x 2.5x

0% 0% 0% 0% 6%

-/16 / 9 1/2 -/16 / 11

31 32 33 34 35

Tutor Perini Fred's Administaff Tyson Foods Rite Aid

TPC FRED ASF TSN RAD

22.70 13.30 27.97 17.25 1.00

-31% -32% -41% -21% -14%

12% 8% 9% 19% 77%

1,069 522 727 6,506 890

957 489 476 8,064 7,177

.27x .27x .28x .28x .28x

10x 17x 33x 9x n/m

9x 15x 23x 9x n/m

1.7x 1.3x 3.5x 2.1x n/m

29% 6% 3% 0% 1%

2/3 2/6 8/6 11 / 7 -/4

36 37 38 39 40

Sanmina-SCI EMCOR Group General Motors Best Buy Manpower

SANM EME GM BBY MAN

13.62 29.65 37.24 35.11 64.18

-35% -26% -11% -12% -38%

49% 2% 6% 39% 7%

1,091 1,970 55,860 13,840 5,235

1,803 1,480 37,948 14,737 5,343

.29x .29x .29x .29x .30x

8x 16x 13x 11x 39x

6x 14x 9x 10x 23x

1.6x 4.0x n/m 4.3x 5.2x

1% 2% 10% 0% 0%

8/2 12 / 7 22 / 11 8/3 10 / 4

41 42 43 44 45

Panasonic Sonic Automotive Safeway Avnet Arrow Electronics

PC SAH SWY AVT ARW

13.79 12.68 21.02 34.98 37.00

-12% -35% -11% -36% -41%

25% 9% 29% 5% 2%

28,549 668 7,836 5,316 4,285

30,363 1,986 12,495 6,412 5,419

.30x .30x .31x .31x .31x

25x 13x 14x 9x 9x

43x 10x 12x 9x 8x

2.1x n/m 1.8x 2.2x 2.3x

0% 1% 1% 0% 0%

-/3/3 10 / 10 17 / 15 3/3



Company website

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Proxy

* New additions are highlighted.

Price Charts

Criteria: ► EV to trailing revenue less than 0.5x ► MV does not exceed revenue ► MV > $500 million

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January 31, 2011 – Page 176 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Deep Value: Neglected Gross Profiteers Companies that trade at low multiples of gross profit ▼ Move To 52-Week Low High

MV ($mn)

EV ($mn)

Enterprise Value / Gross Sales Profit EBIT

Est. P/E This Next FY FY

Price/ Tang. Book

Insiders % Buys/ Own. Sells

Company

Ticker

Price ($)

1 2 3 4 5

Stewart Information Winn-Dixie Stores Five Star Quality WellCare Humana

STC WINN FVE WCG HUM

11.70 6.25 6.53 30.45 58.01

-33% -5% -58% -27% -26%

28% 122% 16% 13% 6%

215 347 233 1,295 9,764

149 245 233 204 1,611

.1x .0x .2x .0x .0x

.1x .1x .2x .2x .2x

.1x n/m 11.2x n/m .8x

n/m n/m 10x 12x 8x

18x n/m 9x 11x 10x

1.0x .5x 1.6x 1.9x 2.1x

0% 2% 2% 1% 1%

1/19 / 13 5/7/9 5/5

6 7 8 9 10

* Sanofi-Aventis Charming Shoppes Eastman Kodak Imation Blyth

SNY CHRS EK IMN BTH

34.53 3.23 5.15 9.95 34.44

-19% -12% -32% -15% -25%

14% 114% 76% 27% 74%

2,996 373 1,385 385 284

11,476 409 1,238 128 278

.3x .2x .2x .1x .3x

.4x .4x .5x .5x .5x

1.2x n/m 1.6x n/m 5.3x

7x n/m 14x >99x 12x

8x 81x n/m 59x 12x

.5x 1.6x n/m .7x 1.3x

0% 0% 0% 0% 0%

-/3/5/3 3/-/1

11 12 13 14 15

E.W. Scripps Office Depot Coldwater Creek American Equity Haverty Furniture

SSP ODP CWTR AEL HVT

9.28 5.60 2.73 12.83 12.75

-33% -40% -1% -48% -25%

27% 64% 221% 5% 42%

538 1,552 252 753 279

344 1,960 213 684 221

.4x .2x .2x .6x .4x

.5x .6x .6x .6x .7x

18.9x n/m n/m .6x 20.1x

14x n/m n/m 7x 46x

37x 93x n/m 7x 17x

1.0x 2.0x 1.1x .7x 1.1x

1% 1% 0% 4% 0%

4/9 7/1 -/7/6 -/1

16 17 18 19 20

Corinthian Colleges Molina Healthcare Retail Ventures RealNetworks Christopher & Banks

COCO MOH RVI RNWK CBK

5.04 28.43 14.90 3.89 5.95

-22% -30% -51% -33% -15%

283% 12% 17% 39% 95%

425 860 749 528 212

576 401 567 204 128

.3x .1x .3x .5x .3x

.7x .7x .7x .7x .8x

2.4x 5.9x 3.5x n/m n/m

6x 15x 88x n/m

11x 13x n/m n/m

3.6x 2.3x 3.8x 1.4x 1.2x

1% 3% 0% 0% 2%

17 / 3 4/8 -/6/3 5/5

21 22 23 24 25

* Hot Topic Barnes & Noble Brown Shoe Kenneth Cole Celadon Group

HOTT BKS BWS KCP CGI

5.63 16.79 13.38 12.78 14.39

-19% -29% -23% -23% -34%

77% 47% 49% 72% 17%

251 1,011 587 233 321

193 1,458 820 163 338

.3x .2x .3x .4x .6x

.8x .8x .8x .8x .8x

965.0x n/m 10.8x n/m 18.1x

n/m n/m 14x 23x 21x

35x n/m 10x 18x 15x

1.1x n/m 1.7x 1.6x 2.3x

0% 20% 1% 0% 6%

2/10 / 9 1/4 -/7/4

26 27 28 29 30

Investment Tech Skechers PC Connection Spartan Stores Lincoln Educational

ITG SKX PCCC SPTN LINC

17.67 21.29 8.58 14.95 14.70

-26% -11% -33% -19% -34%

22% 111% 15% 19% 92%

740 1,014 230 338 326

432 799 193 488 349

.7x .4x .1x .2x .6x

.9x .9x .9x .9x .9x

11.4x 3.4x 5.7x 8.4x 2.9x

18x 7x 10x 12x 6x

15x 9x 10x 10x 7x

2.1x 1.1x 1.2x 8.1x 3.0x

2% 2% 3% 0% 4%

5/6 4/6 2/4 2/2 4/8

31 32 33 34 35

* Sun Healthcare * Stein Mart Core-Mark Kelly Services * Liz Claiborne

SUNH SMRT CORE KELYA LIZ

12.39 8.24 34.05 17.80 4.76

-24% -28% -25% -43% -18%

13% 32% 9% 14% 104%

309 358 371 653 450

631 278 342 687 1,170

.3x .2x .0x .1x .4x

.9x .9x .9x .9x .9x

5.1x 6.4x 9.1x 83.8x n/m

5x 9x 17x 25x n/m

9x 12x 12x 16x -

1.0x 1.4x 1.1x 1.2x n/m

1% 2% 2% 2% 1%

-/14 / 5 8/8 10 / 3 8/-

36 37 38 39 40

Destination Maternity Career Education * Fred's * eHealth * Bob Evans Farms

DEST CECO FRED EHTH BOBE

39.10 21.91 13.30 12.24 32.36

-50% -25% -32% -24% -29%

6% 64% 8% 55% 8%

248 1,780 522 272 979

269 1,340 489 133 1,133

.5x .6x .3x .9x .7x

.9x .9x .9x .9x 1.0x

8.6x 4.2x 11.7x 5.7x 12.4x

10x 8x 17x 21x 15x

9x 8x 15x 21x 13x

3.5x 5.0x 1.3x 2.0x 1.6x

1% 0% 6% 0% 2%

2/2 6/5 2/6 1/2 11 / 6

41 42 43 44 45

Sears Holdings MedCath * AnnTaylor Stores * RadioShack * Gleacher & Co.

SHLD MDTH ANN RSH GLCH

74.57 13.45 21.94 17.61 2.28

-21% -51% -47% -4% -34%

68% 9% 29% 36% 108%

8,203 275 1,272 2,005 299

11,450 316 1,048 1,962 279

.3x .7x .5x .4x 1.0x

1.0x 1.0x 1.0x 1.0x 1.0x

20.4x n/m 9.5x 4.9x 14.4x

58x 56x 17x 10x 33x

74x 67x 13x 8x 10x

2.2x 1.0x 2.6x 2.3x 1.3x

0% 2% 2% 0% 12%

1/2 -/5 6/7 2/3 -/3



Company website

SEC

Proxy

* New additions are highlighted.

Price Charts

Criteria: ► EV not more than trailing gross profit ► MV not more than 2x gross profit ► MV > $200 million

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January 31, 2011 – Page 177 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

Activist Targets: Potential Sales, Liquidations or Recaps Companies that may unlock value through a corporate event ▼ Move To 52-Week Low High

MV ($mn)

EV ($mn)

Price to Tangible Book

Net Cash (% of MV)

NCAV (% of MV)

EV/ Sales

Next FY P/E

Insiders % Buys/ Own. Sells

Company

Ticker

Price ($)

1 2 3 4 5

Qiao Xing Mobile Qiao Xing Universal Audiovox * Myriad Pharma Maxygen

QXM XING VOXX MYRX MAXY

4.56 2.51 7.22 4.06 4.07

-55% -46% -15% -12% -24%

31% 56% 35% 29% 7%

242 231 166 103 122

(63) (180) 120 (22) (30)

.6x .5x .6x .7x .8x

126% 178% 28% 122% 125%

161% 140% 134% 118% 117%

n/m n/m .2x n/m n/m

n/m -

0% 0% 8% 1% 0%

-/-/10 / 10 5/1/-

6 7 8 9 10

Crexus Investment Imation Exceed Company PennyMac Mortgage Tuesday Morning

CXS IMN EDS PMT TUES

13.14 9.95 8.15 18.19 3.82

-11% -15% -25% -14% -8%

7% 27% 29% 2% 130%

238 385 160 306 164

(37) 128 65 (101) 164

.9x .7x .7x .9x .7x

115% 67% 59% 133% 0%

114% 108% 108% 107% 102%

n/m .1x .1x n/m .2x

10x 59x 4x 8x 8x

0% 0% 0% 0% 2%

1/3/-/1/2 5/2

11 12 13 14 15

Sprott Physical Gold Sycamore Networks Colony Financial Alvarion Ingram Micro

PHYS SCMR CLNY ALVR IM

11.55 21.92 20.10 2.17 19.40

-17% -26% -18% -18% -24%

11% 57% 2% 97% 1%

1,121 625 294 135 3,042

39 31 17 42 2,640

1.0x 1.0x 1.1x 1.0x 1.0x

96% 95% 94% 69% 13%

96% 94% 94% 87% 86%

n/m .5x .9x .2x .1x

>99x 12x 9x

0% 0% 0% 0% 0%

-/1/3/-/4/5

16 17 18 19 20

FormFactor Hardinge Opnext Movado Zoran

FORM HDNG OPXT MOV ZRAN

8.81 9.15 1.93 14.60 8.86

-22% -43% -33% -35% -33%

138% 10% 43% 17% 38%

445 106 174 361 434

74 92 131 298 63

1.0x .7x .8x 1.0x 1.0x

83% 13% 25% 17% 86%

86% 85% 83% 82% 81%

.4x .4x .4x .8x .2x

n/m n/m 38x n/m

0% 2% 0% 4% 1%

2/2 6/2 -/7/8 3/-

21 22 23 24 25

PC Connection Rimage Cynosure Nam Tai Electronics Tech Data

PCCC RIMG CYNO NTE TECD

8.58 14.47 10.65 6.42 46.27

-33% -4% -17% -37% -25%

15% 26% 32% 7% 3%

230 138 134 288 2,157

193 32 44 69 1,974

1.2x 1.1x 1.1x .9x 1.1x

16% 77% 67% 76% 9%

81% 79% 78% 78% 77%

.1x .4x .6x .2x .1x

10x 26x n/m 16x 10x

3% 0% 0% 0% 0%

2/4 4/1 -/-/1/5

26 27 28 29 30

Cutera Callaway Golf Benchmark Electron. * Xyratex ModusLink

CUTR ELY BHE XRTX MLNK

8.32 7.74 18.53 13.33 6.36

-17% -25% -25% -21% -10%

45% 32% 23% 53% 75%

113 498 1,129 404 278

22 388 794 313 132

1.2x .9x 1.1x 1.1x 1.0x

80% 22% 30% 22% 53%

77% 75% 75% 74% 73%

.4x .4x .3x .2x .1x

n/m 39x 13x 5x -

4% 0% 1% 0% 2%

1/3/1 2/4 -/12 / 5

31 32 33 34 35

Flexsteel Industries InfoSpace TomoTherapy West Marine QLT

FLXS INSP TOMO WMAR QLTI

17.50 8.16 3.40 11.67 7.24

-42% -19% -24% -31% -39%

13% 45% 31% 17% 20%

117 295 190 263 370

113 67 50 226 172

1.0x 1.3x 1.1x 1.1x .9x

4% 77% 74% 14% 54%

72% 71% 70% 69% 68%

.3x .3x .3x .4x 3.8x

51x n/m 13x -

16% 2% 7% 21% 1%

10 / 4 3/9 14 / 5 3/4 3/-

36 37 38 39 40

* RTI Biologics Force Protection * China Integrated BigBand Networks * Exar

RTIX FRPT CBEH BBND EXAR

2.44 5.44 5.95 2.60 6.55

-17% -29% -1% -2% -18%

88% 24% 107% 40% 19%

134 382 201 180 290

132 277 126 28 99

.9x 1.2x 1.1x 1.3x 1.2x

1% 28% 37% 85% 66%

67% 66% 66% 66% 66%

.8x .4x .3x .2x .7x

16x 14x 4x n/m 41x

0% 1% 0% 1% 1%

3/1 4/3 -/12 / 8 7/4

41 42 43 44 45

Universal Travel Cogo Group PCTEL * Comtech Telecomm. ORBCOMM

UTA COGO PCTI CMTL ORBC

6.85 8.65 6.61 26.78 2.86

-53% -32% -27% -25% -43%

59% 8% 8% 38% 9%

136 306 122 736 122

72 244 57 333 36

1.5x 1.5x 1.1x 1.4x .8x

47% 20% 53% 55% 70%

65% 65% 65% 64% 64%

.5x .7x .9x .4x 1.0x

10x 24x 18x 72x

0% 0% 3% 2% 0%

1/-/1/2 8/1 -/-



Company website

SEC

Proxy

* New additions are highlighted.

Price Charts

Criteria: ► Tang. book > 50% of MV ► ST assets - liabilities > 50% of MV ► Net cash ► MV > $100mn

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January 31, 2011 – Page 178 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

This Month’s Top 10 Web Links A Selection of Our Favorite Freely Accessible Internet Resources

Click on the link next to each title, or type the Web address into your Web browser:



David Einhorn’s Q4 2010 Letter

http://bit.ly/hXZ8Qq



Jeremy Grantham’s Q4 2010 Letter

http://bit.ly/gy5dRL



Warren Buffett and Bill Gates in China

http://bit.ly/eP1BF5



Bill Ackman on Retail Industry, JC Penney, Borders

http://bit.ly/g9rEa5



Phil Goldstein of Bulldog Investors on His Approach

http://bit.ly/gbLJkP



Jim Simons Looks Back at His Remarkable Career

http://bit.ly/ftluea



Marvin Schwartz on Investment Approach, Anadarko, IBM

http://bit.ly/eO7bOh



Videos from World Economic Forum in Davos

http://bit.ly/gDmqni



Chanticleer Holdings Q4 2010 Letter

http://scr.bi/fvk8Ko



David Brown’s Long Thesis on Pulse Data (Toronto: PSD)

http://bit.ly/gpdmoB

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January 31, 2011 – Page 179 of 182

Value-oriented Equity Investment Ideas for Sophisticated Investors

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No Investment Advice This newsletter is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. This newsletter is distributed for informational purposes only and should not © 2008-2011 by BeyondProxy LLC. All rights reserved.

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January 31, 2011 – Page 180 of 182

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