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Investing in a Sluggish Economy January 8, 2011 Friedberg Investment Management.

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Presentation on theme: "Investing in a Sluggish Economy January 8, 2011 Friedberg Investment Management."— Presentation transcript:

1 Investing in a Sluggish Economy January 8, 2011 Friedberg Investment Management

2 2 Agenda JeffThe Evolution of FIM MonicaInvesting for Income AlanIndustrials JonathanHealthcare & Technology Break JeffQuiet Revolutions & Energy JeffEconomy Q&A

3 3 The Evolution of FIM 1964 Jeff buys first stock. 20 shares of Varian Associates. 1965 Jeff often stops by Merrill Lynch office before attending graduate school classes. 1968 Jeff is first employed as a geophysicist and manages his own portfolio. 1975 Brokerage industry is deregulated. Fixed commissions disappear. Discount brokers arise.

4 4 1978 Jeff meets with the SEC. 1979 Jeff gets registered and licensed. First client gives Jeff $7,431.50 to manage 1985 Jeff hires part time assistant. Still working from home. AUM $4 million. 1990 Jeff moves into an office with full time assistant. AUM $8 million. 1994 Jeff hires Mona. AUM $8 million. 2001 Jeff hires Monica for clerical work.

5 5 2002 Jeff hires first research analyst. Terry. AUM $48 million. 2006 Jeff hires Jonathan as 2 nd research analyst. Monica begins research work. AUM $120 million. 2007 Jeff hires Jenny. AUM $160 million. 2009 Terry departs. Alan joins FIM under consulting contract and investment committee is formed. 2011 Year begins with AUM of $171 million.

6 6 FIM Today President –Jeff Vice President of Research –Jonathan Front office –Jenny, Mona Investment Committee –Jeff, Jonathan, Monica, Alan Portfolio Management –Jeff, Jonathan AUM –$171 million

7 7 Succession Plan Jonathan will acquire majority ownership of FIM over time and gradually assume additional responsibilities. Others at FIM may also acquire ownership. Jeff will remain intimately involved indefinitely.

8 8 Investment Committee Maintains a list of securities that may be purchased and a “buy” price for each. Any member can nominate a security for addition to the approved list. Approval requires 3 votes. We meet twice a week.

9 9

10 10 FIM – The Human Touch We interface directly with the companies in which we invest. Conference calls approximately 660 in the past year Meetings with corporate executives ~ 125 Live presentations at investment conferences ~ 90 Presentations archived on the internet ~ 230

11 11 Monica’s Stock Recommendations ITC Holdings

12 12 Mid American Apartment Communities

13 13 Northwestern

14 14 Alan’s Stock Recommendations Dorman Products

15 15 Clean Harbors

16 16 Carlisle

17 17 Jonathan’s Stock Recommendations ROVI

18 18 MWI Veterinary Supply

19 19 American Tower

20 Monica Carmody Investing for Income

21 21 Xcel Energy (XEL)

22 22 Positioned for the Future Over 11B of capital investments planned 2011-2015 – all in rate base. –5.3B in generation (mostly renewables, environmental upgrades, repowering older assets); 3.9B in transmission (several large projects); 2.2B in distribution (customer growth & infrastructure enhancement) 7.5% CAGR in rate base – continued 5-7% EPS growth and 2-4% dividend growth. Current yield 4.3%, 61.5% payout. Environmental leader – no. 1 wind power provider in U.S. and no. 5 solar power provider; on track to meet state renewable portfolio standards and reduce emissions.

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26 26 Future Growth Significant future growth opportunities in both businesses: FPL – 10-12B of capital deployment expected through 2014, all in rate base. After a severe economic downturn, there are now signs of a turnaround in Florida, as well as signs of a improving regulatory environment. NextEra – 15-18B of capital deployment expected through 2014, in the areas of wind, solar, transmission, gas infrastructure, commodities and retail leading to balanced growth. Expect on-going 5-7% EPS Growth thru 2014. Current yield of 3.9%, 46% payout.

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28 28 Plains All American Pipeline (PAA) MLP involved in 3 primary business activities: –Transportation (pipeline) –Facilities (storage) –Supply & Logistics (merchant activities) Diversified portfolio of strategically located assets; handle over 3 million barrels/day. Current yield – just over 6%. Stable assets with consistent income & dividend growth.

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31 31 Healthcare REIT (HCN)

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33 33 Balanced Growth Strong fundamental trends in healthcare – aging population, healthcare reform, limited new construction, etc. 5.5B current investment pipeline - most of it off-market, as a result of existing relationships, - both development and acquisitions, across all healthcare facility types. Strong track record – expect growth to continue if not accelerate. Current yield – just over 6%, 95% AFFO payout. Slow and steady growth.

34 34

35 35 Digital Realty (DLR) Specialty REIT that provides data center solutions – acquire, manage and operate data centers which allow customers to deliver critical business operations. Global platform - 96 properties, 28 markets in US & Europe and recently entered the Asia Pacific market by acquiring a property in Singapore. Portfolio is comprised of powered base building space (power in place, data center infrastructure ready to be built), turn key data center space (fully built out) and non-technical space which will be redeveloped or eventually sold. Current yield – approx. 4%, 77% AFFO payout.

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38 38 Strong Growth Prospects Strong market fundamentals - available data center demand is outpacing supply. Significant internal growth opportunities – strong leasing pipeline with embedded rent growth. High barriers to entry – new competitors require significant capital and specialized expertise. Attractive acquisition environment – strong balance sheet provides capacity required – 1.3B acquired YTD – 200-450M expected in 2011.

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40 40 Atlantic Power (AT) Independent power producer with a diversified fleet of power generation projects as well as one transmission project, all located in the U.S. All projects have long-term contracts which ensures stability of earnings. Shares originally listed only in Canada, now listed on the NYSE since July 2010. Stable dividends – yielding 7.5% now, with 100% payout ratio in 2010. They have a yield-oriented business model with the primary objective of maintaining the stability and sustainability of the dividend. With the current contracts in place, are able to maintain the current dividend through 2016 without any further additions to the portfolio. However, they have numerous growth initiatives in place, so over time expect dividend to grow.

41 41 Atlantic Power

42 42 Preferred Shares Over the past couple of years we have invested in preferred shares when we could buy them at a discount to their redemption value. Due to the credit crisis and economic downturn many REITS were seen as risky by the market. In reality most well-capitalized REITS were able to weather the market easily. We took advantage of this opportunity to buy REIT preferred shares at a discount. We invested only in the preferred shares of those REITS that we researched thoroughly and where we were comfortable with their financial metrics – Public Storage, PS Business Parks, Alexandria, Weingarten, Entertainment Properties, Vornado, Regency, Kimco, Health Care REIT, etc... We are still purchasing preferred shares today at levels close to par for the yield only.

43 43 PSA Preferred M

44 Industrials Alan Brochstein, CFA

45 45 2010: Many Opportunities Industrials had a great year –2 nd best sector in the S&P 500 –Big stocks in high demand –Smaller stocks did well too We went from 3 Industrials to 12 on our Approved List We are closely following another 25 names (20% of our Watchlist) These are exciting times for Industrials!

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47 47 Key Themes for Industrials Sales Growth –GDP Growth –Inventory Restocking –Many Secular Drivers: Aerospace: Boeing Dreamliner, Regional Jets in Emerging Markets Precision Agriculture Infrastructure Alternative Energy Applications Margin Recovery –Survival of the Fittest –Better Management Techniques Export Demand Mergers & Acquisitions

48 48

49 49 Danaher (DHR): The Model Business Process Improvement Pioneer (DBS) Very Diversified –Professional Instrumentation (Environmental, Test & Measurement) –Medical Technologies (Life Sciences & Diagnostics, Dental) –Industrial Technologies (Product ID, Motion Control) –Tools & Components (JV with Cooper) >50% of Sales outside U.S. Underleveraged Financially Still Reasonably Valued with Growth Potential

50 50 Danaher: No “Lost Decade”

51 51 Clean Harbors (CLH) Specialized waste company Really like CEO – 10% ownership, fair pay, cares about employees Great capital allocation – sold stock in 2008, promising acquisition in 2009 Eveready –Canadian Company –Industrial Services –Seasonal Differences –Lodging for Energy E&P Tar Sands, Bakken Shale Lots of pent-up demand Helped by BP Oil Spill in 2010, but future is bright

52 52 Clean Harbors: Transformational Acquisition

53 53 Haynes International (HAYN) Several Drivers –Aerospace –Alternative Energy –Natural Gas Strong Management –New CEO –Strong CFO Strong Balance Sheet and Financial Transparency Differentiation –Products/Capabilities –Customer Focus 12% Margin on $800mm  $8 EPS

54 54

55 55 Haynes International: Set to Fly

56 56 Preformed Line Products (PLPC) Makes specialized wire and enclosures Key Markets: Energy, Alternative Energy, Communication, Cable 60% sales outside US –Australia -16% –Brazil - 11% No Wall Street Coverage Strong Balance Sheet 58% Insider Ownership Very low Valuation: We expect EPS > $6 in 2012

57 57 Preformed Line Products: Hidden Gem

58 58 Why We Like Industrials for 2011 Headwinds Have Turned to Tailwinds Margin Expansion Opportunities Sources of Growth Beyond U.S. Economic Recovery Smaller Companies Look Attractive

59 Healthcare & Technology Jonathan Reichek, CPA, CFA

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64 64 Winners Companies with a unique product Companies that save the system money Healthcare IT Pet Healthcare

65 65 Intuitive Surgical (ISRG)

66 66

67 67 Worldwide Procedures

68 68 da Vinci® Prostatectomy

69 69 Target Procedures Urology –Prostatectomy –Nephrectomy –Cystectomy –Pyeloplasty Gynecology –Hysterectomy –Sacral Colpopexy –Myomectomy Cardiothoracic –Mitral Valve Repair –Revascularization General Surgery –Colorectal Procedures Head & Neck –Transoral Procedures

70 70 Intuitive Surgical

71 71 Express Scripts (ESRX) Makes money when clients save money Generics Mail –Lower cost to fill prescription –800 basis point adherence advantage Formulary 30M lives added in 2014 through healthcare reform

72 72 Best year of the decade for generics

73 73

74 74 Express Scripts

75 75 Other PBMs Catalyst Health Solutions (CHSI) SXC Health Solutions (SXCI)

76 76 Idexx Labs (IDXX) Dominant pet healthcare company –Everything but pharmaceuticals Innovation – Cardiopet proBNP Proprietary test, Heart disease –Catalyst DX Chemistry Analyzer, 27 tests Increases productivity Integrates with Vetlab International presence

77 77 Idexx Labs

78 78 Verisk Analytics (VRSK) Sells information to property and casualty insurers to develop and price products –Proprietary Databases Risk Analyzer Catastrophe Modeling All major insurers are customers No competition in some products Mortgage Fraud Healthcare Fraud

79 79 Risk Analyzer

80 80

81 81 Catastrophe Modeling

82 82 Catastrophe Modeling Scarcity of historical loss data makes statistical techniques of loss estimation inappropriate –Before catastrophe models companies relied on best guesstimates Usefulness of data that does exist is limited due to the constantly changing landscape of insured properties –New properties continue to be built in areas of high hazard –Building materials and designs change –New structures may be more or less vulnerable to catastrophe events than the old structures

83 83 Verisk Analytics

84 84 Rovi (ROVI)

85 85 Homepage of Home Entertainment Total Guide –Over the Top Content 50% of TVs will have an internet connection by 2014 –Mid 2011 Significant increase in pricing Advertising in guide

86 86 Rovi

87 87 Ansys (ANSS) Tester Prototype Service Bureau Design Engineer & Design Workstation CAD File Physical Prototype Design Problems Report

88 88 Simulation-Driven Product Development Tester Prototype Service Bureau CAD File Physical Prototype Design Problems Report Design Engineer & Design Workstation +

89 89 Examples of Faster Product Development An auto manufacturer used Ansys’ software to model the flow of air conditioning through a minivan, cutting a 30 day task down to 2 days. An auto manufacturer used Ansys’ software to design a gas tank meter, shortening a 1 year task down to 8 weeks. A jet engine manufacturer used Ansys’ software to optimize its turbine manufacturing process, cutting a 2 week project down to 2 hours.

90 90 Some of the Benefits of Accelerating the Design Process Faster time to market Discover flaws prior to beginning production Consider more design alternatives  Higher revenues  Lower manufacturing costs  Create more innovative products

91 91 Ansys

92 92 American Tower (AMT)

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94 94 Drivers 65% leased Leveraged to emerging markets –India, South Africa, South America REIT conversion in 2012

95 95 American Tower

96 Break

97 97 Three Quiet Revolutions

98 Revolution #1 Oil and Gas Resource Plays

99 99

100 100 Are we running out of oil? No. What we are running out of is cheap oil. Finding and producing oil will get more expensive over time. Primary beneficiaries will be oil service companies. The future –Deep water for oil, resource plays for natural gas.

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102 102

103 Investing in Energy Jeff Friedberg

104 104 Helmrich & Payne (HP) HQ: Tulsa, OK Business: Manufacturer and operator of drilling rigs Market Cap: $5 billion

105 105 Attributes Developer of the FlexRig, the most advanced and efficient drilling rig for land operation. 200 FlexRigs in fleet of 250 rigs. FlexRigs are ideal for horizontal drilling and resource plays. HP rig count at record though industry 20% below previous peak. Premium rigs, premium day rates, long term contracts.

106 106 Helmrich & Payne

107 107 CARBO Ceramics (CRR) HQ: Houston,TX Worlds largest supplier of ceramic proppant for fracturing oil and gas wells. Proppants are injected into wells along with frac fluid to keep the fractures open. Market Cap: $2.3 billion

108 108 Attributes Sand is the most widely used proppant, but ceramics result in higher conductivity CARBO has a 70% share of ceramics, which are gaining market share vs. sand. Fracturing is necessary for resource plays. CARBO expanded capacity by 20% in 2010 with another 20% being added this year. Ancillary businesses are also doing well.

109 109 CARBO Ceramics

110 110 Petroleum Geo Services (PGSVY) Acquisition and processing of marine seismic data. HQ: Oslo, Norway Regional Centers –London, Houston, Singapore 16 seismic vessels, 23 data processing centers Market Cap: $3 billion

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113 113 Attributes Advances in data acquisition technology and resolution spur oil companies to resurvey many basins every 5 to 10 years. High density seismic data is now being used for reservoir monitoring Very limited competition at high end of market. 3DHD, 4D, Wide Azimuth, GeoStreamer.

114 114 Petroleum Geo Services

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117 117 Seadrill (SDRL) HQ: Bermuda Approximately 50 offshore drilling units, drillships, semi-submersibles, jack-ups, tenders. Age of fleet is 7 years vs. industry average of > 20 years. Dividend yield 7% Debt level: high Market cap : $7 billion

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122 122 Attributes New and modern fleet. Deep water focus. High spec focus. Making a big bet on ultra-deep water exploration.

123 123 Seadrill

124 Revolution #2 Lean Manufacturing

125 125 Lean Manufacturing Enlightened companies are leading a cultural change in employee thinking. Much more of a team approach with significant contributions made by employees. Managers undergo lengthy training in new methods.

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130 130 Revolution #3: DNA Sequencing Determining best treatment for cancer patients. Scanning patients with unexplained symptoms for rare diseases. Tracking movement of infections in hospitals and public places. Newborn sequencing. Mate selection in livestock industry.

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132 132

133 133 Warren Buffet

134 134 T. Boone Pickens

135 135 Carl Ichan

136 136 Jeff Friedberg

137 What do these 4 men have in common?

138 138 2010 Outlook The economic storm has passed The economy has stabilized and is slowly recovering The stock market is up significantly from the bottom, but is still well off it’s highs We expect new highs in less than 5 years The question is “when,” not “if.”

139 139 2011 Outlook The economic storm has passed The economy has stabilized and is slowly recovering The stock market is up significantly from the bottom, but is still well off it’s highs We expect new highs in less than 5 years The question is “when,” not “if.”

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152 152 Dow 15,000 by 2015

153 153 Bottom Line Banks have plenty of money to lend. Corporations have record amounts of cash. The pump is primed. We’re optimistic.

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