The Lato Letter: Volume 2, Issue 3.

The Lato Letter: Volume 2, Issue 3.

Late last year, Padlock was hired to manage the US Equity portfolio of an area foundation. I have recently received a request from the foundation to provide a description of the holdings that were purchased on their behalf in that portfolio. The information below is the material that was sent to them earlier today and so I thought I would share it with you.

Air Methods (AIRM-NASDAQ)

Air Methods Corporation is a provider of air medical emergency transport services and systems throughout the United States of America. The company is the leader in the air ambulance business and is a major beneficiary of enhanced healthcare coverage in the US. Price/Earnings (P/E) multiple reflects projected earnings growth in the high teens.

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Amtrust Financial (AFSI-NASDAQ)

Amtrust Financial Services, Inc. is a multinational specialty property and casualty insurer company, focused on generating consistent underwriting profits. Very well managed company has grown both organically and through acquisitions. Very reasonable valuation at less than 11 times P/E of 2013 earnings.

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Apple Inc. (AAPL-NASDAQ)

Apple Inc. designs, manufactures and markets mobile communication and media devices, personal computers, and portable digital music players, and sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. With $145 per share in cash, the company is trading at just over six times this year’s earnings while still maintaining its dominant position in the growing smartphone and tablet industry. This combination of growth and value warrants the heaviest weighting in the portfolio.

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Calgon Carbon (CCC-NYSE)

Calgon Carbon Corporation is a provider of products, services, and solutions for purifying water and air. The company is well positioned within the water purification industry, a growing industry on a global basis. The company has recently announced a $50 million buy back of its shares.

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Carbo Ceramics (CRR-NYSE)

Carbo Ceramics Inc., is a supplier of ceramic proppant. The Company sells its products and services to operators of oil and natural gas wells and to oilfield service companies and is a major beneficiary of increased usage of horizontal drilling in North American oil and gas exploration.

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Caterpillar Inc. (CAT-NYSE)

Caterpillar Inc. is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. Although earnings growth has slowed slightly, Caterpillar is well positioned for the resumption of growth in the US housing market and in Asia. The stock is trading at just over 11 times this year’s earnings.

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Cirrus Logic (CRUS-NASDAQ)

Cirrus Logic, Inc. is a United States-based company, which supplies high-precision analog and digital signal processing components for audio and energy markets. The company is the only audio supplier to a variety of Apple products. Concerns of having one dominant customer have weighed on the stock and have created tremendous value in its shares as evidenced in its P/E multiple of just over seven times March 2014 earnings.

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EI Dupont (DD-NYSE)

  1. I. du Pont de Nemours and Company incorporated in 1915 is involved in manufacturing and distribution of a number of products in the following segments; Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Coatings, Performance Materials, Safety & Protection and Pharmaceuticals. Fastest growing segment is agriculture where research and development efforts have resulted in a great number of new product releases over the past few years. Attractive dividend yield of 3.6%

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Goldman Sachs (GS-NYSE)

The Goldman Sachs Group, Inc. is a global investment banking, securities and investment management firm that provides a range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. With the demise of several competitors during the financial crisis, Goldman has resumed its market leadership position. Trading at a slight premium to book value, well below its average of twice book value before the financial crisis.

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Google (GOOG-NASDAQ)

Google Inc. is a global technology company focused on improving the ways people connect with information. The Company generates revenue primarily by delivering online advertising. Valuation remains reasonable in spite of the company recently trading at an all-time high. Search advertising is the dominant source of revenues but the company is also expanding its revenue sources through display ads and YouTube.

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Hi-Crush Partners LP (HCLP-NASDAQ)

Hi-Crush Partners LP is a domestic producer of monocrystalline sand, a specialized mineral that is used as a proppant to enhance the recovery rates of hydrocarbons from oil and natural gas wells. Similar to Carbo Ceramics, Hi-Crush is well positioned to capitalize on the growth of horizontal drilling. As a limited partnership, it pays out the majority of its earnings and thus has a current yield of over 10% with potential for further dividend increases in the future. Overreaction to the loss of a major customer created an excellent entry point in mid-November.

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InterDigital Inc. (IDCC-NASDAQ)

InterDigital, Inc. designs and develops advanced technologies, which enable wireless communications and monetizes such technologies through licensing and other revenue opportunities. One of the largest developers and owners of technology patents in the world, the company is very well positioned to capitalize on the continued growth of smartphones and tablets.

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Kohlberg Kravis Roberts & Co. LP (KKR-NYSE)

KKR & Co. L.P. (KKR) is a global investment company. The Company’s business offers a range of investment management services to its investors and provides capital markets services to its firm, its portfolio companies and its third-party clients. KKR continues to fund new vehicles while it harvests the returns from its existing stable of private equity partnerships. Attractive yield of 5.4% could potentially see increases as the underlying asset base grows and is subsequently harvested.

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Layne Christensen (LAYN-NASDAQ)

Layne Christensen Company is a global water management, construction and drilling company. It provides solutions for water, mineral and energy challenges. Another play on the growing water infrastructure business, Layne also is a factor in the increased oil and gas exploration industry in the US.

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LHC Group (LHCG-NASDAQ)

LHC Group, Inc. provides post-acute health care services to patients through its home nursing agencies, hospices and long-term acute care hospitals. LHC Group has also grown both organically and by acquisition and as a provider of lower cost medical services, is well positioned to benefit as the cost/benefit of services comes under increased scrutiny.

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MasterCard Inc. (MA-NYSE)

MasterCard Incorporated is a global payments and technology company that connects consumers, financial institutions, merchants, Governments and businesses worldwide, enabling them to use electronic forms of payment instead of cash and cheques. Recently announcing a doubling of its dividend, MasterCard will continue to be a beneficiary to the global electronic payments trend. Not a “cheap” stock at 20 times this year’s earnings, MasterCard enjoys a superior growth profile that justifies the multiple.

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Multi-Fineline Electronix (MFLX-NASDAQ)

Multi-Fineline Electronix, Inc. is a provider of advanced, flexible printed circuits and value-added component assembly solutions to the electronics industry. Multi-Fineline disappointed recently with the pre-announcement of lower than expected earnings as a result of margin pressures. The company retains a strong and deep customer list and remains well positioned to resume its earnings growth next year. Trading at just under eight times 2014’s consensus earnings, the opportunity for renewed share price appreciation is possible.

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NCR Corp (NCR-NYSE)

NCR Corporation is a technology company, which provides products and services, which enable businesses to connect, interact and transact with their customers. With its roots over 100 years ago as the National Cash Register Company, NCR is the leader in the retail payments industry. The recent announcement of a contract to install 10,000 self-service check out systems at Walmart is an example of the growth possibilities available to NCR. With low teens earnings growth and P/E multiple of 11 times this year’s earnings, the company represents great value.

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Paccar Inc. (PCAR-NASDAQ)

PACCAR Inc is a global company whose truck segment includes the design, manufacture and distribution of light-, medium- and heavy-duty commercial trucks and related aftermarket parts. Paccar is the world leader in commercial truck manufacturing operating in North American under it leading Peterbilt brand and in Europe under the DAF brand. The company recently completed its 74th consecutive year of profits. At 14.5 times this year’s earnings, the stability and growth of this company are very well priced.

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PepsiCo Inc. (PEP-NYSE)

PepsiCo Inc. is a global food and beverage company whose brands include Frito-Lay and Quaker Foods. PepsiCo broadens the diversification of the portfolio into the consumer staples area. Fairly priced at just over 16 times 2013 earnings and with a dividend yield of just under 3.0%, make PepsiCo a solid contributor to portfolio.

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Qualcomm Inc. (QCOM-NASDAQ)

Qualcomm Incorporated designs, manufactures and markets digital wireless telecommunications products and services based on its code division multiple access (CDMA) technology and other technologies. Similar to InterDigital, Qualcomm collects license fees for the technology that it has developed. Well positioned with the key participants in the smartphone industry and trading at less than 14 times September 2014 consensus estimates.

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Regal-Beloit Corp. (RBC-NYSE)

Regal Beloit Corporation is a global manufacturer of electric motors and controls, electric generators and controls, and mechanical motion control products. This company produces some of the world’s most efficient motors and therefore has seen continued growing demand for its products. Very attractively priced at just 13 times 2014 earnings.

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Sears Holdings (SHLD-NASDAQ)

Sears Holdings Corporation is a retailer operating through Kmart Holding Corporation (Kmart) and Sears, Roebuck and Co. The company’s brands include Kenmore, Craftsman and Diehard. The company realized value last year from the spin out of its holdings in Sears Hometown and Sears Canada. Sears continues to struggle as a retailer but the attractiveness of the holding is the further realization of value from its real estate holdings, its low cost leases and its well-known consumer brands.

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Toll Brothers (TOL-NYSE)

Toll Brothers, Inc. designs, builds, markets and arranges financing for single-family detached and attached homes in luxury residential communities. Due to its large land holdings and conservative balance sheet, the company weathered the severe downtown in the US housing industry in very good shape. As the housing market continues its recovery, Toll will continue to be an industry leader.

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United Technologies (UTX-NYSE)

United Technologies Corporation provides high technology products and services to the building systems and aerospace industries worldwide. This company is a well-diversified industrial manufacturer operating through a number of subsidiaries including Carrier Air Conditioning, Otis Elevators, Sikorsky Helicopters and Pratt & Whitney Aircraft. The focus this year will be on the integration of their latest acquisition, Goodrich.

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Walgreen Co. (WAG-NYSE)

Walgreen Co. together with its subsidiaries operates the largest drugstore chain in the United States. A steady double digit growth company for many years, Walgreen is currently trading at 11 times next year’s earnings which should benefit from the upcoming closing and subsequent integration of their acquisition of Boots PLC.

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Web.Com Group (WWWW.NASDAQ)

Web.Com Group Inc. is a provider of a line of Internet services for small- to medium-sized businesses (SMBs). Web.Com is a global domain name registrar, which seeks to meet the Internet needs of SMBs. In addition to the domain registry business, Web.Com provides services in the areas of web design and maintenance. At just over eight times this year’s earnings, Web.Com is very attractively priced for its double digit growth potential.

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WEX Inc. (WXS-NYSE)

WEX Inc., formerly Wright Express Corporation, provides business payment processing and information management solutions. It operates in two segments: Fleet Payment Solutions and Other Payment Solutions. WEX provides many unique services to the fleet and hospitality industries both in North Amnerica and beyond. It should continue to grow with the growth in the electronics payments industry.

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This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change without notice.

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