O I Strategy Flashcard Ouj SEqpiriOn co 0 Strategy Flashcard S&P 500 to reach 2150 by 2015 end on a long expansionary cycle of moderate growth 2015 end target: 2150 2016 end target: 2300 Div Yld: 2% 2014A 2015E 2016E Quarterly EPS EPS $118.0 $118 $128 1Q14A $28.00 1Q15E $28.00 PE on yearend S&P targets 17.4 18.2 18.0 2Q14A $29.75 2Q15E $29.00 DPS $39 $42 $46 3Q14A $30.00 3Q15E $30.00 EPS/DPS growth 6%/8% 0%/8% 896/10% 4Q14A $30.25 4Q15E $31.00 Market strategy and tactics: lower S&P returns than history likely, but still decent and few alternatives - stay involved, buy on dips Consider lesson of 2014: Interest rates stayed very low despite better growth and tighter labor market Next 5%+ move is likely: Down Risk of near-term correction: Elevated "S&P PE stands on the shoulders of bonds." Thematic and sector strategy: Tilt toward: 1) Secular Growth Sectors - industries with strong sales growth in the middle of economic cycles 2) Sales Growth near 5%- industries not dependent on margin expansion to drive 5%+ EPS growth 3) High ROE or long competitive advantage - ability to defend ROE/margins amidst low interest rates 4) Dividend Growth - stocks with ability to significantly raise dividend payout ratios 5) Debt Capacity - companies that can issue cheap debt for acquisitions and share buybacks Tilt away from: 1) Consumer companies whi red brands or facing tough competition (seek unique products/experiences) 2) Smaller cap cyclical plays which are still expensive, prefer big-cap banks and select retailers 3) Commodity and industrial capital goods producers, prefer Transports Reasons to still buy stocks: 1) -3% US GDP likely in 2015 2) S&P EPS will rise despite $/oil 3) PEs justifiable and been higher 4) Bond yields are nil after inflation Dare to ask: Why not 2500+ S&P cycle-high? 2500+ = 17x 2018E EPS of $150 S&P SOO avg. trailing 4qtr PE: 1960-2014 16.0 19852014 17.6 1995-2014 18.6 2005-2014 15.9 Sectors/Industries: Health Care, Tech Health Care, Tech, Consumer Disc. Tech, Health Care, some Consumer Big Banks, Mega-cap Tech Tech, Health Care, some Consumer Staples Be selective and valuation mindful Energy, Industrial Capital Goods Risks - US tax on foreign profits, whether repatriated or not, threatens large multinationals and would cause margin contraction - EM economy weakness that causes a steep decline in commodity prices, especially oil, and threatens US exports and investment spending - A surge in long-term interest rates or any global economic shock would threaten our constructive view on the S&P for 2015 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0059418 SDNY_GM_00205602 EFTA01367805