Investor's Business Daily

Crawford: It’s a transformative company that single-handedly changes the way we consume content. We are concerned that their free-cash- flow and earnings potential resides in the out years (in the future). They’re able to get lever- age only as they’ve seeded the global market. We see additional international penetration; the ability to increase pricing from the current offering of $10 a month in the U.S., which we believe is greatly underpriced for the value; and their ability to monetize their user base using creative advertising methods. We believe they can double their user base and revenues in the next five years. IBD: Broadcom has accelerated EPS growth for four quarters in a row. Are you comfortable they can keep this up? Crawford: They’re one of the best examples of life-cycle change. They have a visionary CEO (Hock Tan), who via acquisitions and organic growth has driven earnings up ninefold over the last seven years. And we believe he’s not done. Broadcom should continue to see further earnings accretion and now capital return to shareholders because it’s generating $6.5 bil- lion to $7 billion in free cash flow, which is about 30% of its revenue in free cash flow. IBD: Morgan Stanley has pulled back from its March high on investors’ fears that corporate tax reform and lowering banks’ regulatory bur- den is not the slam dunk many thought they would be. What’s your thesis? Kelly: They’ve undergone significant change. Wealth management was only 5% of their busi- ness in 2006. Now it’s roughly 50%. We believe that shift to a higher margin, less-capital-inten- sive business can drive return-on-equity ex- pansion and multiple expansion. And financials in general should still benefit from regulatory relief and higher interest rates. IBD: Which of your strategic drivers does Adobe represent? Crawford: It’s both a lifecycle-change and a high-unit-volume-growth company. And it is dominant in its market, and should have sus- tainable midteens revenue growth for the next three to five years, with over 20% earnings growth in that period. Digital advertising is the high-unit-volume- growth part of their business. They provide a platform that enables customers to deploy digi- tal advertising. The life-cycle change is in the creative prod- ucts part of the company, which has undergone a fast transition and is continuing to grow their total available market, as their products are ad- opted more broadly. And Adobe is adding more solutions, such as Fotolio, which is competitive with Shutterstock. It’s a site where photographers can display their

Kelly: Amazon’s Alexa (a voice-capable interac- tive personal assistant) is an AI device. It will prove disruptive to the retail sector. Apple is a life-cycle change company with a growing services business and an upcoming product-cycle services that should be an anchor that mutes the cyclicality of any product cycle. IBD: Is there also a potential Trump Trade boost for, say, Apple? Kelly: If tax repatriation takes place, Apple has $100 billion sitting (outside the U.S.) that would make them a beneficiary. It would either allow them to do a pretty significant buyback or, for companies that are legacy companies, it would give them the ability to positively life-cycle change. They can buy assets that let them turn their big ship around. IBD: Let me ask about some individual com- panies as of your latest disclosure. Do you like Alibaba because of any one part or do you like it because of its many parts together? Kelly: Our thesis is that Alibaba is one of the most dominant companies in the world. It’s the dominant e-commerce platform in China. They also have leading positions in video, payments, logistics and cloud computing in China. We continue to believe platforms such as Alibaba and Amazon are extremely disruptive and un- derappreciated by the market. IBD: What has enabled earnings per share for Cavium (CAVM) to grow again after four quar- ters of declines? Crawford: For us, this is a classic unit-volume- growth story. They’re a semiconductor company that will benefit from the upcoming 5G infra- structure upgrade. There will be a need to build faster data centers and to move to ARM-based servers (which are a category of reduced instruc- tion set computing, or RISC, architectures for computer chips, which cut costs, heat and power use). Cavium has a complete portfolio of infra- structure IT to address the next generation of networks. These product cycles will drive con- tent growth and market-share gains, which we expect will drive significant revenue and earn- ings accretion over the next three years. IBD: Any concern about Facebook’s EPS growth slowing for two quarters in a row? Kelly: Internet advertising will experience rap- id growth. And we expect Facebook to continue to take market share. It’s also in the early stages of monetizing Instagram and its rapidly grow- ing 600-million user base. Facebook has other medium- to long-term monetization levers, in- cludingMessenger, WhatsApp and their Oculus Rift platform. IBD: Netflix ’s (NFLX) quarterly EPS growth has accelerated. Any clouds on the horizon?

images and content-creator customers can use their images. It’s a subscription type business, which allows for increased average selling price per customer. IBD: United Rentals (URI) has traded side- ways near its all-time high since its January earnings report. Do you still like it? Kelly: It’s one of the leading equipment rental companies in the U.S. Postelection, investors expected it to benefit from construction, from corporate tax reform and improving GDP growth. It (stalled) because there is uncertainty about the prospects for an infrastructure bill. If one passes, United would be a big beneficiary. Trump is also pro-energy, so a buildout of pipe- lines should benefit United. IBD: S&P Global (SPGI) has mostly gone side- ways since Congress failed to repeal or reform ObamaCare. Is that a problem for S&P? Crawford: It’s not a problem yet. S&P is anoth- er market dominant company. It is one of effec- tively two players in the ratings business, where they enjoy secular growth in debt issuance due to global economic growth and regulator con- straints on banks. Combined with their infor- mation services business and their index busi- ness, 70% of their business is recurring. Adding to that, they are pruning their port- folio and using the proceeds to buy back shares. IBD: The fund’s outperformance in the past 10 years got a boost from the fund’s 56.52% gain in 2009. What worked so well for the fund that year? Kelly: We follow our philosophy and process in all markets to deliver strong long-term results for our clients. Looking at one year is not the lens we use to view the performance of the fund... (On the other hand, we) have had consistently strong performance over any three-year rolling period over the past 10 years. I think that is the better metric to focus on than any one year. IBD: What’s your process for building positions in a stock? Kelly: Building positions depends on the stock and a variety of other factors. We continually assess risk-reward and look to rotate money into the names that we think have the most fa- vorable risk-reward. IBD: You are active managers. Some people say active management at least in mutual funds is doomed. What do you think? Kelly: We’re in a highly competitive market. You need to be able to drive good performance over a multiple-year period. We’ve been able to do that. That will continue to be our challenge going forward. We remain confident in our team and philosophy and process.

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