BACK TO - Clarity · • Self-driving Cars: We believe Nvidia will dynamically evolve to lead the long term secular growth cycle as their customers redefine and reshape the future

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While our investment team has been saying for quite a few years, this could be one of the greatest bull markets in history (and we still believe that to be the case), it does not mean there will not be hiccups along the way, both in the markets and more importantly, the businesses we own.While we have maintained an extremely bullish stance on equities since the bottom of the crash in 2009, we continue to believe the economy is going to continue to improve and in general, stock prices are going to continue to move quite a bit higher. That said, it does not mean we will not see 5%-20% corrections along the way. However, we still believe investing in equities and more importantly, specific businesses; will remain strong for the foreseeable future while owning fixed income type investment assets will continue to be perform poorly.

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BACK TO

1ST QUARTER 2018 UPDATE

NEPSIS™, Inc.8674 Eagle Creek Circle, Minneapolis, MN 55378(952) 746-2003 • Fax: (952) 746-2006www.InvestWithClarity.com I Blog: www.InvestingWithClarity.com | Radio: InvestingSuccessForYou.com

© Copyright 2018. Advisory services offered through Nepsis™, Inc.: An SEC Registered Investment Advisor.

“THE STOCK MARKET IS A NO-CALLED STRIKE GAME. YOU DON’T HAVE TO SWING AT EVERYTHING – YOU CAN WAIT FOR YOUR PITCH. THE PROBLEM WHEN YOU’RE A MONEY MANAGER IS THAT YOUR FANS KEEP YELLING, “SWING, YOU BUM!” - WARREN BUFFETT

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This latest correction provided us a tremendous opportunity to adjust portfolios for the future. Remember, as part of the Nepsis investment process - Flexibility and Transparency are critical components to the long-term investment process.

While 2018 started with a very strong performance in portfolios, February quickly transitioned to the beginning of a nice sized correction. From the top to the bottom in this last correction, we saw the S&P 500 index pull back roughly 13%, which was a nice sized pullback.

Remember, at Nepsis, we don’t just look at pullbacks in the markets, more importantly; we look at pullbacks in the actual businesses we own or want to own.

Taking advantage of corrections in actual businesses is why we believe the process of Strategic Cost Averaging™ (SCA) is SO important. SCA is the process of investing unequal dollar amounts into specific positions that we want to own more of when they go on sale.

Update regarding ZEST (Ecoark Holdings)A great example of the SCA process is none other than ZEST. Because ZEST is our largest holding many clients follow this position very closely. For purposes of a great SCA example, Zest provided us a tremendous opportunity to take advantage of buying more of the company on sale and reducing cost basis for most of our clients.

Remember, as I always say, “Investing is a long-term process in great businesses.”

As long as long-term fundamentals have not changed, or improved, investors should look at volatility as an opportunity. I believe the long-term fundamentals of Zest continue to improve.

I cannot stress enough the importance of sticking to the investment process. Don’t allow yourself to get caught up in the emotions of short-term performance. Remember, it is NOT about each individual company you own in your portfolio. Every position is owned for a specific reason which is to accomplish the LONG-TERM objective of the entire portfolio.

I believe the recent pullback to all-time lows for Zest has provided a tremendous opportunity to reduce cost basis. As I write this, the stock has rebounded about 100% from its bottom and is now trading very close to where it started the year – while cost basis has been lowered significantly.

For those investors who do not know, I have been an advocate for this company for over 6 years. I have been involved with them since they were private and went public just over two years ago.

Frankly, there are several reasons for why the stock and company have not performed well. However, as part of our investment process, we continue to assess the long-term fundamentals of the companies we invest into. As I have shared recently, I believe the long-term fundamentals are not only very good, I believe they have improved as they stated about 5 months ago, “We are moving from the development phase to the deployment phase.”

If you would like to know more about the company, I would encourage you to check out the company at www.ecoarkusa.com.




We look directionally at long-term trends to avoid getting caught up in the short-term moves of the market.

We encourage investors to balance their portfolio investment strategies to gain business exposure to emerging growth opportunities, which can be a large driver of value creation over the long term. Looking to new future growth drivers also entails looking at the interactions and trends within and across industries. The semiconductor industry is in the crossroads of emerging technologies impacting multiple industries and reshaping the global marketplace.

In our view, Nvidia, together with their interrelated automobile, gaming industry partners and other long-term growth sectors, is leading the “creative destruction” 1 of major industries.

We believe Nvidia is an attractive company with high growth businesses, such as self-driving cars, big data, gaming and virtual reality, on the cutting edge of long-term secular growth. In our view, Nvidia, is poised for long-term secular growth as consumer and enterprise demand for emerging and evolving technology applications redefine and reshape value creation.

New designs and applications continue to emerge in the automotive industry, fueling new growth opportunities for companies building to redefine the future. In our view, the amount of semiconductor content used in cars may continue to increase over the long term. If we, as consumers, simply compare emerging cars to earlier car models, common sense points to the growth of semiconductor and electronic content in cars. For example, the number of semiconductors and the electronic content may be higher in the Tesla, Prius and concept cars as compared to the once red-hot Camaro.

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SPOTLIGHT - Nvidia Corporation (NVDA)

At Nepsis, We Constantly Look to the Future for Growth Opportunities…




Know What You Own and Why You Own It – Investing With Clarity™

1 In the mid-twentieth century, there was a concept by Joseph Schumpeter, an Austrian economist, called “creative destruction” which referred to industry transformations from radical innovations.

While mass market production of self-driving cars may be about 5 - 10 years away, we see self-driving test cars in Silicon Valley daily. The self-driving car market is in the early stages of development, integrating high end computing, artificial intelligence, cloud, and big data requirements for deep neural networks to train and compute functions in the car.

Nvidia’s underlying graphics processor units (GPU) platform and products are modified and applied in multiple industries, including automobile, data center, gaming and virtual reality.

• Self-driving Cars: We believe Nvidia will dynamically evolve to lead the long term secular growth cycle as their customers redefine and reshape the future of cars. In our view, the semiconductor and automobile industries are continuously iterating and innovating. Nvidia’s presence in the evolving self-driving car market has largely evolved around the graphics for infotainment systems. At this point, there are five development levels for the phase-in of self-driving cars. The five development levels include: Level 1 Driver Assistance, Level 2 Partial Automation, Level 3 Conditional Automation, Level 4 High Automation and Level 5 Complete Automation. At Level 5 there is absolutely no human attention for driving, while noting there won’t be a steering wheel or pedals. We note that California began issuing permits to test driverless cars on April 2, 2018.

• Data Centers: In the data center market, Nvidia is the semiconductor market leader for supercomputing and the emergence of deep learning for artificial intelligence. This requires a significant amount of data to produce key algorithms (i.e., complex mathematical equations). Nvidia works with data centers and cloud virtualization providers where their GPUs are positioned in the cloud and are being used by hyperscale companies for high end accelerated computing and performance (i.e., power efficiency and programmability). Like their presence in the emerging virtual reality market, Nvidia’s data center customer base is also poised for an increasing breadth and depth of customers.

• Gaming: Nvidia’s gaming business competes with products in the high end gaming segment, where there is a higher production value level of games, such as multiplayer and social platforms. We view this area as positive, given our belief that higher margins and pricing power are more likely to be sustained longer at the high end of the market.

• Virtual Reality: While virtual reality is in the very early stages of growth, Nvidia’s competitive strength in high end pc gaming, provides synergistic and competitive leadership advantages in the quickly emerging virtual reality market. The potential application for virtual reality is at the very early stages of creating and radically shifting transformative business growth opportunities. Nvidia has been shipping new cards for use in virtual reality, which is significant for the gaming market, with mind blowing consumer experiences ahead.

From a portfolio management perspective, owning businesses that have high growth opportunities is important for long-term value creation. As we look to the future and under the hood of Nvidia’s business areas, we believe that Nvidia’s semiconductors are fueling a range of emerging growth business investment opportunities spanning multiple industries.

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“… Nvidia, is poised for long-term secular growth as consumer and enterprise demand for emerging and evolving technology applications redefine and reshape value creation.”

– From the desk of Connie Song our Vice President of Investments

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Investors are bombarded with prognostications, postulations and speculations regarding how their investment portfolio should perform (over short periods of time) by many so-called “experts”. However, as I mention in the “Bottom Line” (on page 6), the fact of the matter is, investment success is a process over time by following a proven investment Philosophy & Strategy.Many investors believe they are diversified. More than likely, they probably are. In fact, most portfolios we assess are actually OVER-diversified. It’s been my experience that many investors confuse or don’t understand the difference between diversification and asset allocation.

What’s the difference? In its simplest form… • Diversification is a function of owning multiple investments in the SAME asset class.

• Asset Allocation includes diversification of similar assets in one asset class, but, asset allocation takes it a step further by owning investments in different asset classes as well (i.e. bonds, stocks, cash, international stocks, emerging market stocks, gold, real estate, etc.).

In today’s investment climate, investors are bombarded with the idea of investing in low cost index funds. While that has proven in the short-term to be a good strategy, it does NOT mean you should adhere to owning 100% of your invest-ments in U.S. stocks and indexes. The only “index” investors should use is the long-term investment and planning goals.

As discussed, our portfolios are structured in a SMA format. There are two types of SMA portfolios: • The “Single Style” portfolio (a distinct equity, fixed income or balanced investment style), which of course should give you diversification.

• The second is the “Multiple-Style” SMA. This strategy uses several different investment styles in a single portfolio. The Multiple-Style portfolio is how Nepsis manages our clients’ portfolios.

Nepsis uses the “Multiple Style” process because it not only provides the diversification, but it also provides the asset allocation (portfolios do not own all of the same types of assets in the portfolio, whether it’s stocks, bonds or others).

This is why we DO NOT subscribe to using indexes as our portfolios don’t have an adequate comparable index due to the fact we are using an asset allocation strategy as well as a diversification strategy.

We believe this process provides greater flexibility in helping investors accomplish their LONG-TERM investment goals as opposed to short-term goals.

BOTTOM LINE:Nepsis utilizes a “Multiple Style” SMA approach for managing client portfolios. This process creates a greater asset allocation format so that investors have greater flexibility in taking advantage of opportunities to accomplish their long-term investment goals.

DIVERSIFICATION & ASSET ALLOCATION

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Are we going to see the elusive 20% Market Correction?Many of our clients have seen the chart below as we add this chart every quarter to our Updates. I believe this chart is a great reminder to our clients of the historical frequency of stock market corrections. Of course, as we have reminded our clients over and over again, we have yet to see a 20% correction since the financial crisis almost 8 years ago.

When will we see a correction of the 20% magnitude? Who knows? But, I believe it is important for us to remember they happen and will continue to happen in the future. Always be prepared for a big correction!

That said, one of the reasons we require our advisors to go through a thorough process of understanding our investors’ risk tolerance AND tolerance for volatility utilizing our Investment Policy And Objective Setting Questionnaire (IPOSQ) is to put our clients’ portfolio ALLOCATION in a format that enables them to worry less about short-term corrections and volatility and focus more on their long-term goals.

If the volatility associated with your portfolio bothers you, please consult with your advisor on what may be the appropriate allocation for your particular situation and portfolio.

Magnitude of Frequency of Market Decline Occurrence

>5% Every Year >10% Every 2 Years >20% Every 5 Years >30% Every 10 Years >40% Every 25 Years >50% Every 50 Years

Source: Morningstar

The Headline vs The Bottom LineEach day, investors are bombarded with financial news and predictions. It is human nature to be caught up in the prognostications, postulations and speculations the financial services industry is keen on providing.

However, at the end of the day, what matters most is the Road Map you have plotted out to help you accomplish your long-term goals and investment objectives. Don’t let the news of the day, the speculations or propensity to appeal to your emotions and take you off track. “Stick to the knitting”.

BOTTOM LINE:What folks are not talking about on Wall Street and in the media, is that at the end of the day investors have different investment needs, objectives and goals. Although many try to fit all investors into a box or into categories, the reality is no one client is the same. Invest and plan like a business owner – build, monitor and adjust your plan based on your goals and needs. When it comes to your investments,

“Invest with Clarity™”!




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Every fan of late 1970s and early 1980s remembers this classic hit from the music group, “The Clash”. The song revolves around a man asking his girl whether he should stay in this relationship with her or should he bail? The second stanza goes like this;

We reference this great tune as we believe that investors who do not have clarity are contemplating this same question as it pertains to their ownership of companies in the form of stocks. Should I stay invested in stocks or should I sell and go to cash? Although we believe the foundational principals of this question to be faulty on its face, we will nonetheless directly address in this missive by asking the question posed in this classic Clash song.

The deeper questions that investors should be asking really relate around the two main questions that the so-called “markets” are dealing with and they are:

1. How much is Global Growth slowing? 2. How hot is Inflation getting?

If there are two things that Bulls (the “Should I Stay in Stocks?” faction) and Bears (the “Should I Go to Cash?” faction) agree on they are:

1. GDP Growth in the US and Europe is rising but the rate of change has slowed. 2. Inflation has increased in the US and is basically at the Fed’s target rate.

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SHOULD I STAY OR SHOULD I GO?

“It’s always tease, tease, teaseYou’re happy when I’m on my kneesOne day it’s fine and next it’s black

So if you want me off your backWell, come on and let me knowShould I stay or should I go?”

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What Bulls & Bears do not agree on is how significant both changes will affect corporate earnings in 2019. In our analysis we will use several indicators but rely primarily on GDP, CPI and PMI numbers. Admittedly, we are entrenched in the Bull Camp, however we will try earnestly to look at both sides but, in the Clash narrative we will emphatically make the case that investors should “stay in stocks” and not “go to cash.”

Yes, GDP was down in Q1 vs. the previous three quarters and yes consumer spending rose slightly at 1.1% but that was following a 4% spending spree in Q4 which was the highest in three years. Consumers took a breather from the best holiday spending since 2010 to pay off their bills and rebuild savings. NY Fed Nowcast and Atlanta Fed GDP now have Q2 estimated to be at 2.97% and 4.0% respectively.

BULLS WIN!




BEAR CASE (Go to Cash)• Consumer Spending rose a scant 1.1% in Q1.• Investment in new housing was flat.• GDP at 2.3% still down from 3% average.

BULL CASE (Stay in Stocks) • Q1 2.3% higher than expected 2.0%.• Business spending up significantly.• Inventories were rapidly replenished.• Export growth increased greater than Imports.• 2018 Q1 GDP twice that of Q1 2017 and Q1 2016 has seasonality effects that lower the number.

Fundamental Statistic — US GDP

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Yes, much like in the US, Eurozone GDP was down in Q1 vs. the previous three quarters. However, just like in the US, GDP was in line with expectations and followed on the heels of an upward revised Q4 2017 at 0.7%. The PMI (Purchasing Manager’s Index) is a great gauge for European Growth as it relies so heavily on its Manufacturing base for growth. The current 56.20 reading was lower in April but still well above the 50-demarcation line signaling growth or expansion. As important was the 58.20 and 53.80 readings in Germany and France showing the two big leaders are still robustly growing.

BULLS WIN!

BEAR CASE (Go to Cash)• 56.20 is off of the December 2017 high of 60.60.• PMI has declined four consecutive months.• GDP at 0.4% lowest since Q3 2017.

BULL CASE (Stay in Stocks) • April reading of 56.20 shows continued expansion.• Readings above 50 show growing Manufacturing.• 56.20 was a slight drop from 56.60 in March.• Services PMI was higher in April than March.• Economy grew at 0.4% in Q1 2018.

Fundamental Statistic — Euro Area Manufacturing PMI

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The Japanese economy expanded at the strongest rate for six months at the start of the second quarter, according to survey data, allaying concerns of slowing business activity. April PMI data also suggest that the overall pace of growth will likely remain robust in the months ahead. The Nikkei Japan Composite PMI™ Output Index rose from 51.3 in March to 53.1 in April, marking the strongest rate of improvement in the health of the economy since October of last year. The latest reading was indicative of quarterly GDP rising at a solid 0.8% rate at the beginning of the second quarter.

BULLS WIN!

BEAR CASE (Go to Cash)• Previous PMI has shown signs of leveling off.• Growth at 0.8% is still muted.• Stronger Yen could hurt future sales.

BULL CASE (Stay in Stocks) • At 53.1 in April hits the highest since October 2017.• Domestic demand drives upturn in Sales.• Rising costs allow companies to raise Prices.

Fundamental Statistic — Japan Composite PMI

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The story in China continues to be whether or not the powers that be can orchestrate a transition from a manufacturing-based economy to a services-based economy. As we speak, the Services Sector as a percentage of GDP has eclipsed the 50% mark when compared to Manufacturing and thus is a bigger component of the Economy. With China’s GDP steady just under 7%, and both Manufacturing and Services contributing, we have to suggest like with the US, Eurozone, and Japan that once again…

BULLS WIN!

BEAR CASE (Go to Cash)• Confidence shown signs of leveling off.• Manufacturing comprises less than Consumption.• Trade with US could be stunted.

BULL CASE (Stay in Stocks) • Business Confidence remains steady.• Non-Manufacturing PMI rose again in April.• Fastest growth in Services sector since January.• Manufacturing PMI also rose in April.

Fundamental Statistic — China Composite PMI

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Source: https://tradingeconomics.com/china/indicators

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Global synchronized growth albeit not as robust as it was in the beginning of the year, still in our estimation is moving at a measured pace. The Conference Board’s LEI’s of select global regions suggest that based on its review of patterns of economic growth the world remains open for business. https://www.conference-board.org/data/bci.cfm

The chart below from Trading Economics at https://tradingeconomics.com/ suggests the same.

Outside of the idiosyncratic issues faced in the United Kingdom and their struggles with Brexit, the top countries listed by GDP all have the following qualities:

• Consistent sustainable growth. • Low interest rates and accommodative Central Bank policies. • Low jobless rates with persistent employment growth. • Low rates of Inflation with modest increases.

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Fundamental Statistic — Global Synchronized Growth

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We were begging for this to happen nine months ago and now that it is before us we are curling up in the fetal position waiting for the mighty axe to fall. There is simply nothing in the data other than wild speculation that Global Growth has rolled over or that Inflation has reached out of control levels. Let’s allow the Fed to normalize rates in a measured pace as they have purported to do and allow corporations to conduct business in a worthy manner that rewards their shareholders and stop the subjective manipulation of our emotions.

Should I stay or should I go… the answer emphatically is STAY!!– From the desk of Chuck Etzweiler our Vice President of Research

So, let’s break this down to see whether or not this is good or bad news. According to the following article written by Jeffry Bartash at MarketWatch.com (this can be read in its entirety at https://www.market-watch.com/story/inflation-hits-feds-2-target-possible-prelude-to-faster-rise-in-us-inter-est-rates-2018-04-30) the following points can be made:

• The PCE index, the Fed’s preferred inflation barometer, rose to 2% year over year from a 1.7% pace in February.

• The 12-month increase in the more closely followed core rate of inflation was close behind, rising to 1.9% in March from 1.6% in the prior month. That’s the biggest yearly gain in the core rate since April 2012.

• Consumer outlays rose 0.4% last month to mark the first advance since the end of 2017. Incomes climbed 0.3% in March.

• Consumer spending, meanwhile, rose for the first time in three months.

Fundamental Statistic — US InflationI look at this chart below and I ask myself why we are even discussing this. I realize that some CEO’s in their quarterly reports discussed rising commodity prices but should that not be expected in periods of growth?

As many of our clients know, we are very active in the management of client portfolios. This active management includes the continual buying and selling of a small amount of shares in one’s portfolio – we call this “Strategic Cost Averaging™” (SCA).

Our process of SCA is something we believe is unique and important to our portfolio management strategy. It allows complete flexibility in the management of your portfolio. We believe this flexibility is extremely important in the long-term success of investing as it allows for the ability to be continually investing in great businesses over time while at the same time providing flexibility in selling a portion of a business under our “Sell Discipline” (listed below). In fact, we have written a blog piece called; “A Penny for Your Thoughts” to give investors a deeper look at the strategy in this process. Visit our blog at www.InvestingWithClarity.com to read this article.

There are several factors that contribute to decisions made in our client portfolios. It is, however, important to understand that you should NOT view any one position in the portfolio individually. It is the portfolio working as a whole that accomplishes the intended outcome. All positions working together for a specific reason lends to the power of “Asset Allocation”.

Think of your portfolio like a machine. There are a lot of moving parts working together for the machine to work. They all must work together for the intended outcome. As a “Multi-Style” SMA portfolio, it is our objective to have every position in client portfolios there for a specific reason – to have the machine work as efficiently and effectively as possible.

Factors that contribute to the machine working effectively and efficiently include volatility, which creates opportunity in portfolios to take advantage of continually fine-tuning the portfolio like you do a machine. This is a function of “Strategic Cost Averaging™” and our Sell Disciplines.

Remember, there should be no one position in the portfolio that should make or break the long-term performance of one’s portfolio. The portfolio’s overall allocation is far more important.

We have “Four Sell Disciplines” which we adhere to in our investment process.

1. Selling a company when the long-term fundamentals are in jeopardy or have changed.

2. Selling a part of a position to lock in profits to raise cash for other opportunities or cash needs.

3. Selling a weaker company in favor of a stronger, less expensive company. This happens most often during corrections of the market or the sector the company belongs to.

4. Selling positions to take a loss to offset future gains (Tax-Loss Harvesting).

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STRATEGY FOR BUYING & SELLING OF HOLDINGS

Respectfully,

Mark PearsonPresident, Founder & CIONepsis, Inc.

As Nepsis, Inc. continues to grow, we appreciate your continued confidence and support. We believe successful investing requires “Investing with Clarity™”. We look forward to continually providing you with the Clarity needed to be a successful investor long-term.

Investing in fixed income investments will not provide the types of returns they have historically. This has been our position since 2014. The Federal Reserve continues to move the Fed Funds rate higher as the economy continues to improve. Although we have tried to communicate with our clients over the years regarding the risks associated with owning fixed income, some clients still ask why we do not buy bonds for their portfolios.

Of course, like any type of investment, higher interest rates will not happen overnight. It will take time. However, like any good investment, we like to look at what we call, “Risk Adjusted Return”.

What is “Risk Adjusted Return”? It is the level of risk taken for the associated investment return on the investment.

Bonds do not warrant the associated risk for the potential associated return.

However, we continue to believe that the only way to own bonds is to have shorter duration bonds (1-5 years at most), and they should be viewed as investments to help reduce portfolio volatility and not provide much of any assistance in overall portfolio return. Remember, although bonds may provide some level of return, it is the “risk adjusted return” investors should focus on, in other words, the risk taken to achieve a particular rate of return.

As for our target allocations, particularly in the more “conservative” portfolios, we continue to be extremely selective and patient on what bonds we want to own for our clients.

Therefore, we continue to favor solid dividend producing companies with long standing businesses to continue to provide income opportunities for our clients and continue to hold cash as we look for opportunities that have appropriate risk versus the potential reward.

THE STATE OF FIXED INCOME


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BACK TO - Clarity · • Self-driving Cars: We believe Nvidia will dynamically evolve to lead the long term secular growth cycle as their customers redefine and reshape the future