P R I V A T E C L I E N T I N S I G H Tbbtscottstringfellow.com/Media/Default/Publications/Insight.pdf · Established in 1893 ... Colgate-Palmolive CL Cons Sta $71.85 $72.45 ... Emerson

Market Commentary W. Moultrie Dotterer, CFA

Negatives Seem to be Outweighing the Positives Managing Director Equity Strategy (804) 780-3279 [email protected]

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P R I V A T E C L I E N T I N S I G H T VOL. 17, ISSUE 2/SUMMER 2016

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These companies in the S&P 500 have raised their dividends for 25 or more consecutive years.

2 | Private Client Insight

S & P D I V I D E N D A R I S T O C R A T S

Price 52-week Ind Payout P/E EPS Gro

Company Ticker (5/4/2016) High Low Divi Yield Ratio ('16) 2016 '16 vs '15

Genuine Parts GPC Cons Disc $96.39 $100.00 $76.50 $2.63 2.7% 55% 20.2 0.0%

Leggett & Platt LEG Cons Disc $49.66 $51.28 $36.64 $1.28 2.6% 51% 19.8 7.3%

Lowe's Cos LOW Cons Disc $75.71 $78.13 $62.62 $1.12 1.5% 28% 19.0 21.3%

McDonald's Corp MCD Cons Disc $128.40 $130.43 $87.50 $3.56 2.8% 64% 23.2 11.3%

Target Corp TGT Cons Disc $79.99 $85.81 $66.46 $2.24 2.8% 42% 15.1 12.6%

VF Corp VFC Cons Disc $64.91 $77.40 $52.21 $1.48 2.3% 46% 20.1 5.1%

Archer-Daniels-Midland ADM Cons Sta $39.10 $53.31 $29.86 $1.20 3.1% 49% 15.9 -3.8%

Brown-Forman'B' BF.B Cons Sta $95.93 $111.06 $90.02 $1.36 1.4% 38% 27.0 5.0%

Clorox Co CLX Cons Sta $129.43 $132.50 $103.77 $3.08 2.4% 62% 26.3 7.9%

Coca-Cola Co KO Cons Sta $44.84 $47.13 $36.56 $1.40 3.1% 72% 23.1 -2.8%

Colgate-Palmolive CL Cons Sta $71.85 $72.45 $50.84 $1.56 2.2% 56% 25.6 -0.1%

Hormel Foods HRL Cons Sta $38.53 $45.72 $27.38 $0.58 1.5% 37% 24.5 19.0%

Kimberly-Clark KMB Cons Sta $126.13 $138.76 $103.04 $3.68 2.9% 60% 20.7 5.8%

McCormick & Co MKC Cons Sta $93.60 $100.91 $75.19 $1.72 1.8% 46% 25.1 7.3%

PepsiCo Inc PEP Cons Sta $103.56 $105.77 $76.48 $2.81 2.7% 59% 21.9 3.5%

Procter & Gamble PG Cons Sta $81.10 $83.87 $65.02 $2.68 3.3% 74% 22.4 -9.9%

Sysco Corp SYY Cons Sta $48.51 $48.99 $35.45 $1.24 2.6% 62% 24.3 8.6%

Walgreens Boots Alliance WBA Cons Sta $81.46 $97.30 $71.50 $1.44 1.8% 32% 18.1 15.9%

Wal-Mart Stores WMT Cons Sta $67.00 $79.94 $56.30 $2.00 3.0% 48% 16.2 -9.9%

Chevron Corp CVX Energy $101.32 $109.93 $69.58 $4.28 4.2% 300% 71.0 -49.9%

Exxon Mobil XOM Energy $88.11 $90.09 $66.55 $3.00 3.4% 116% 34.1 -32.8%

AFLAC Inc AFL Financials $68.97 $69.60 $51.41 $1.64 2.4% 25% 10.4 7.4%

Chubb Corp CB Financials $118.26 $123.17 $96.00 $2.68 2.3% 27% 12.1 -0.1%

Cincinnati Financial CINF Financials $66.47 $66.98 $49.72 $1.92 2.9% 61% 21.1 -11.4%

Franklin Resources BEN Financials $36.80 $52.65 $31.00 $0.72 2.0% 27% 13.6 -17.5%

HCP Inc HCP Financials $34.84 $40.95 $25.11 $2.30 6.6% 145% 22.0 nmf

McGraw Hill Financial MHFI Financials $104.50 $109.27 $78.55 $1.44 1.4% 28% 20.4 13.2%

T.Rowe Price Group TROW Financials $74.93 $82.50 $63.57 $2.16 2.9% 47% 16.3 -0.5%

Abbott Laboratories ABT Health Care $38.55 $51.74 $36.00 $1.04 2.7% 47% 17.5 2.5%

AbbVie Inc ABBV Health Care $61.77 $71.60 $45.45 $2.28 3.7% 47% 12.8 12.3%

Bard (C.R.) BCR Health Care $213.99 $217.49 $166.29 $0.96 0.4% 9% 21.1 11.6%

Becton, Dickinson BDX Health Care $160.43 $162.98 $128.87 $2.64 1.6% 31% 19.0 18.1%

Cardinal Health CAH Health Care $79.24 $91.22 $74.73 $1.55 2.0% 30% 15.1 19.7%

Johnson & Johnson JNJ Health Care $112.69 $114.19 $81.79 $3.20 2.8% 49% 17.1 6.3%

Medtronic Plc MDT Health Care $79.44 $80.74 $55.54 $1.52 1.9% 32% 16.9 7.4%

3M Co MMM Industrials $167.97 $170.77 $134.00 $4.44 2.6% 54% 20.4 8.8%

Cintas Corp CTAS Industrials $89.61 $94.35 $78.00 $1.05 1.2% 24% 20.7 7.3%

Dover Corp DOV Industrials $64.77 $78.21 $50.91 $1.68 2.6% 48% 18.5 -3.8%

Emerson Electric EMR Industrials $54.67 $62.75 $41.25 $1.90 3.5% 62% 17.8 -2.8%

Grainger (W.W.) GWW Industrials $232.82 $251.90 $176.85 $4.88 2.1% 40% 19.3 0.9%

Illinois Tool Works ITW Industrials $104.47 $106.19 $78.79 $2.20 2.1% 40% 18.9 7.7%

Pentair plc PNR Industrials $57.99 $69.65 $41.57 $1.32 2.3% 32% 14.1 4.3%

Stanley Black & Decker SWK Industrials $110.58 $113.69 $88.72 $2.20 2.0% 35% 17.4 9.5%

Automatic Data Proc ADP Info Tech $88.81 $91.00 $64.29 $2.12 2.4% 65% 27.4 12.3%

Air Products & Chemicals APD Materials $143.14 $152.16 $114.64 $3.44 2.4% 46% 19.2 13.4%

Ecolab Inc ECL Materials $113.59 $122.48 $98.62 $1.40 1.2% 31% 25.5 1.8%

Nucor Corp NUE Materials $48.73 $51.10 $33.90 $1.50 3.1% 76% 24.8 11.2%

PPG Indus PPG Materials $109.50 $118.69 $82.93 $1.60 1.5% 25% 17.4 10.7%

Sherwin-Williams SHW Materials $289.00 $309.00 $218.27 $3.36 1.2% 26% 22.8 13.8%

AT&T T Telecom $38.91 $39.72 $30.97 $1.92 4.9% 67% 13.6 5.3%

Consolidated Edison ED Utilities $75.22 $77.23 $56.86 $2.68 3.6% 67% 18.8 -1.9%

Data compiled from Equity Strategy, Standard & Poor’s, and FactSet.

Negatives Seem to be Outweighing the Positives

Volume 17, Issue 2 | 3

M A R K E T C O M M E N T A R Y

Since mid-February, the S&P 500 is up

more than 15%, and investors are left to

ponder why stocks are reflecting such

optimism. There are positive and

negatives to weigh. Commodity markets

have rebounded faster and earlier than

most investors expected. The

unemployment rate has steadily improved

since peaking in 2009 at almost 10%. It is

now around 5%. In normal times, full

employment would create inflation

pressures. However, with weak economic

growth and labor force participation at

40-year lows, there is no pressure to push

wages higher. Q1 real GDP growth was

an anemic 0.5%, which was below

expectations. Revisions to the downside

could mean a GDP decline. There is

instability in emerging economies—

Argentina with 35% inflation and Brazil

with impeachment proceedings for its

president and interest rates at 14%. In

Europe there is considerable debate as to

whether England will leave the EU.

China seems to be stabilizing—strong Q1

GDP of 6.7% with strong industrial

production and fixed investment

spending. However, that is the slowest

GDP growth in China in 25 years. The

US Dollar index has fallen 6% since the

end of January. On the positive side,

consumer spending and housing markets

are bright spots in the US economy. We

are in the midst of Q1 corporate earnings,

and earnings are projected to be down

almost 8%. This is the fourth consecutive

quarter of yr/yr earnings declines. The

S&P 500 is basically flat over the past

four quarters and can’t seem to break

through the 2,100 level. In that time

period, we have had two pullbacks of

10% or more. Weighing all of the factors

outlined above and given the market run

up since February, we would not be

surprised to see a pullback in the near

term. Oh yeah, it’s also an election year,

which leads to more uncertainty,

especially with the slate of candidates that

we have this go ‘round!

Why was first-quarter GDP so weak?

For one, the stronger dollar and weaker

foreign economies led to a drop in

exports. Therefore, the recent weakness

in the dollar would be a positive for

exports and would also help earnings for

US-based companies with foreign sales.

Also fixed business investment fell almost

11%, based in part on the drop in

spending in the oil and gas sector.

Declines were also in spending for high-

tech, industrial, and transportation.

However, business inventories also

remain high. Consumer spending growth

moderated but was still up 1.9%. The

bright spot in the report was residential

investment (aka housing) which was up

almost 15%.

What are Q1 earnings telling us? We

have a strong team of transportation

stock analysts at BB&TCM, and their

takeaways from analyzing earnings and

talking to company managements have

not been positive for the most part.

Companies are missing consensus esti-

mates and many are guiding down the

forward earnings outlook. Things turned

down quickly. As one of our private

freight broker contacts commented a few

weeks ago, “since business reached its Q1

peak, which was during the second week

in March, volumes are off nearly 5%.”

Of the ten sectors of the S&P 500, seven

of those sectors are showing earnings

declines for the first quarter, according to

data from FactSet. Those sectors are the

Real GDP, select components

Source: BEA

S&P 500 operating earnings

Source: S&P, J.P. Morgan


M A R K E T C O M M E N T A R Y

cyclically sensitive ones such as energy,

materials, financials, and technology.

Again, this is another confirmation that

the economy is slowing. The traditionally

non-cyclically sensitive sectors are hold-

ing up well in terms of earnings. Telecom,

healthcare, and consumer staples are all

showing positive growth.

What are investors doing with their

money? Our correspondents at J.P. Mor-

gan track fund flows and fund perfor-

mance. According to them, 60% of equity

mutual fund managers are underperform-

ing benchmarks year to date and 58% of

hedge fund managers are in negative terri-

tory. Our take on why is that nobody

believed that the market would accelerate

as it has since February. Equity mutual

fund managers are playing it safe or are

underinvested. Hedge fund managers

were assuming stocks would go down

and held short positions. The percentage

of shares held short in the S&P 500 has

been increasing since fall 2015. However,

it dipped at the end of March, likely be-

cause short investors were spooked out

of their positions by the gap up in the

S&P 500, in our view.

Fund flows in mutual funds and ETFs

show that there have been average net

outflows in US equities and positive flows

in international equities and all bonds

over the past 13 weeks. Corporate stock

buy backs are down significantly over last

year—down 69% versus the same period

last year. That takes away another tail-

wind for US equities.

What happens to stock markets in

election years? Ned Davis Research

provides interesting insight on this, and

unfortunately the news is not good. Ned

Davis looked at S&P 500 returns for two-

term presidencies going back to 1953.

Obama is the fifth president to serve two

terms and the median return for year 8 is

down 6.6%. The worst was George W.

Bush’s last year, when the market was

down 38% in 2008; the best was Ronald

Reagan’s last year, when the market was

up 12% in 1988. Perhaps the negative

returns are explained by lame-duck nature

of the last year, where little is expected to

be accomplished.

How best to position portfolios in this

environment? Value stocks are starting

to outperform growth stocks. The diver-

gence began in March and occurred again

in April. Since the first week in April,

S&P 500 value stocks are up 3%, while

S&P 500 growth stocks are down 1%.

The shift seems to make sense to us given

the weak trends in GDP growth and

earnings. We tend to favor value given

the long-term outperformance. Since

1970, value stocks have dramatically out-

performed growth stocks: according to

Morningstar, $1 invested in small-cap

value starting in 1970 would have grown

to $480.75 by year-end 2015. Also in a

low-growth environment, we favor divi-

dend-paying stocks. Dividends (and their

reinvestment) can be a significant portion

of returns over time. We do not encour-

age investors to try to time the market

and get out ahead of a potential pullback.

You may get lucky and miss the down-

turn, but you may miss the upturn as well.

Since 1926, $1 invested in the S&P 500

would be worth $5,390. However, if you

missed the best 45 months during that

time period, your $1 would be worth only

$20.33!

Shares short as percentage of shares outstanding for S&P 500 stocks

Source: Bloomberg, J.P. Morgan

Value stocks versus growth stocks, 1970–2015

Source: Morningstar/Ibbotson

What Others are Saying


F E A T U R E

The risk-asset cycle is empirically defined

by the US expansion and ends just before

the following recession. June this year will

become the 7th anniversary of the

expansion and pushes us into overtime,

as postwar expansions have averaged only

just over six years. There is no time limit

on economic overtimes, though. We

simply look at early signals of an

impending turn. Short-term indicators

have turned more benign here. However,

the medium-term ones, and in particular

falling profits, combine with wariness

about what policy makers can/will do to

prevent a downdraft to still see a 29%

risk of recession within 12 months.

Jan Loeys, JP Morgan, 4/22/16

We recently highlighted our downbeat

forecast for corporate profits in 4Q2015.

We now look for a 5% oya decline in

profits (excluding special factors) in

Friday’s GDP report, which would be the

worst profit outcome of the recovery so

far. And we have pointed out since last

July that declining profit margins predict

elevated risk of recession on the horizon.

But we are often asked if the decline in

profits and margins is "just energy,"

implying that a decline in energy industry

profits would be less worrisome than

declines in other industries. It is true that

profit declines have been largest in the

energy sector, and slowdowns in

measures of profits excluding the sector

are less extreme. But the slowdown is

indeed appearing in other industries as

well, and we look for some of the forces

driving it to continue. And we also

caution against entirely dismissing the

energy profit declines—after all, the

profit decline that began in 2000 was

"just high-tech" and the decline in 2007

was "just financials." Nonetheless, in our

earlier note, we already discounted the

negative signal coming from the profits

data to some extent. Our regression

models observe that past margin declines

this large have ended in recession within

three years on 9 out of 11 occasions, and

put the risk of recession quite high

accordingly. We, however, recognize

there are some reasons to think this time

could be different, and we continue to

put the risk of recession beginning within

one year at about 1/3, within two years at

1/2, and three years at 2/3.

Jesse Edgerton, JP Morgan 3/21/16

Risky asset prices have staged a

remarkable about-face this year, slumping

and then rallying strongly. This V-shaped

move largely has been divorced from

economic performance, i.e., global

growth has been consistently soft over

the past six months. The recent

experience follows a somewhat familiar

pattern over the past few years in which

financial markets have undergone

significant swings against a backdrop of

relatively stable global GDP growth. To

be sure, global growth turned soft the

past two quarters, running below its trend

and our forecast. However, we think

there is good reason to look for a pickup

beginning this quarter, led by the US and

China. In part, swings in risk markets

appear related to the ebb and flow of

uncertainty about macroeconomic tail

risks, including the European sovereign

debt crisis, the oil price collapse, and the

downshift in Chinese growth. Risk is

always present but a number of factors

have amplified it in the current

expansion.

Bruce Kasman, JP Morgan 4/22/16

Warranted or not, American consumers

have developed a reputation for

impatience and impulsiveness, seeking

quick gratification today at the potential

cost of burdensome debt loads and

inadequate accumulated savings later. For

decades, household debt and personal

savings rate trends have appeared to

support these generalizations. But since

the 2007-09 financial crisis, debt has

fallen and the personal savings rate has

risen. Some investors interpret a rising

savings rate as a sign of risk aversion and

fragile consumer spending. In the current

circumstances, we see it as the

opposite….Our work reveals that the

improvement in household balance sheets

is real. Lower income households are

more able to increase their cash balances

because of labor income, low energy

prices, and rising credit availability.

Wealthier households are seeing increases

in their net worth due to capital gains.

However, we do not see this “balance

sheet repair” as a sign of risk aversion.

Strong consumption growth in the past

few years has coincided with improving

balance sheets and rising savings,

suggesting a foundation for spending that

is both strong and sustainable, for the

first time in many years.

James Sweeney, Credit Suisse, 4/15/16

We expect choppy conditions in US

equities to persist for the duration of

2016, as none of our six DRIVERs are

positive. (We now consider deals and

cash usage, the one positive in our

framework in 2015, to be a neutral.) In

the short term, we are concerned that

investors have become too bearish and

that the weaker dollar could provide a lift

to earnings revisions and the broader

stock market, enabling the run off the

February 2016 lows to persist for longer.

However, valuations remain a significant

overhang, which we believe will keep

equities vulnerable to bad news. Although

recession concerns have eased, the

prolonged period of sluggish global

industrial production that our economists

believe we are in is not likely to do stocks

any favors. We are essentially market

weight on the broader market, and on

this point, there is no change to our basic

view.

Lori Calvasina, Credit Suisse, 4/19/16

Chart Watch


F E A T U R E

Forecasts for GDP growth in the first

quarter have been coming down. For

example, our correspondents at Credit

Suisse recently cut their Q1 GDP

expectation almost in half, from 1.1% to

0.6%. The latest cut was based on

weaker consumer spending and

inventories.

Source: Credit Suisse, Federal Reserve

After the financial crisis of 2008/2009,

Americans increased their savings rate for

the first time since the 1970s. Is it

because we have become more fiscally

responsible or we are worried about the

future earnings potential in the US

economy? Hard to say, but we think it is

a combination of both.

Source: Bureau of Economic Analysis, US

Treasury Office of Economic Policy, Credit

Suisse

Here is the updated chart from

Morningstar/Ibbotson, which shows us

once again why we invest! This is the

value of $1 invested in the various asset

classes since 1926.

Source: Morningstar/Ibbotson

Q1 GDP will likely again prove to be an outlier to the downside

Personal Savings rate picks up after trending lower for decades

Current Buy List


F E A T U R E

The goal of the Current Buy List is to

utilize the multiple sources of research to

which we have access, including our in-

house BB&T Capital Markets research,

JPMorgan, Credit Suisse, Morningstar,

Inc., industry conferences, the extensive

information in business publications, and

the information available on the Internet.

Just among our three primary research

sources (BB&TCM, JPMorgan, and

Credit Suisse), hundreds of stocks are

recommended for purchase. As in-

dependent, experienced analysts, we add

value by focusing investors on stocks that

look attractive on a near- to intermediate-

term basis. The impetus of our stock

recommendations is to give new ideas to

clients to potentially add to existing

portfolios. With so many names to

consider, part of the process is to

quantitatively screen the universe of

stocks for attributes such as value, yield,

capitalization, growth, etc. The next step

is basic fundamental analysis using a

bottom-up approach that considers

industry trends, company specifics such

as earnings, balance sheet, cash flow,

management, valuation, and near-term

catalysts. For inclusion on the list, a stock

must be covered by at least one of our

three primary resources (BB&TCM,

JPMorgan, and Credit Suisse). Should

there be a loss of coverage, the stock will

be removed from the Current Buy List

once a replacement is found. Stocks may

be removed and replaced at the

discretion of the Equity Strategy Group

for reasons such as capital appreciation,

weak fundamentals, or better perceived

upside in other stocks. The Large-

Cap/Blue Chip category will focus on

valuation opportunities in stocks that are

widely recognized by investors. The Yield

category will focus on high current yield

and/or the potential for rising dividends,

and the Small/Midcap/Aggressive

category will focus on valuation

opportunities within the higher-risk,

higher-return potential area. There will be

no more than five stocks in each

category.

ADDITIONS TO THE LIST

We took advantage of the market turmoil

back in February and added Zoetis

(ZTS) to The List. Zoetis (pronounced

zō-EH-tis) is the world’s biggest animal

health company that was spun out of

Pfizer in 2013. At the basic level, it is a

play on growing livestock headcount and

the growing preference for protein in

diets, particularly in emerging economies,

and the increase in pet ownership. ZTS

has the #1 position in cattle and swine,

#2 in pets, and #3 in poultry. Products

include anti-infectives, vaccines, parasiti-

cides, etc. Revenue is globally diversified

with 60% from the Americas, 23% Eu-

rope, 15% Asia, and 2% rest of world.

The strong dollar has had a negative im-

pact on revenue and earnings and that

headwind may be starting to abate with

current weakness in the dollar. There is a

good deal of M&A in the space, and ZTS

just closed on the PharmaQ acquisition.

PharmaQ is an interesting company and

is the leader in aquaculture, which pro-

vides medicines for fish farms, shrimp

farms, etc. We believe another positive is

that Bill Ackman/Pershing Square is in-

volved, and it owns around 10% of the

company. Pershing bought in around

November 2014, when the stock was

trading near the $4o level. He helped

bring about a headcount reduction of the

workforce by 25% and other measures to

improve profitability.

Key Investment Points: (1) Buying the

leader and trends support growth.

Animal health is a $24B industry, and

ZTS is the leader with almost $5B in rev-

enue (Merck is #2 at $3.5B). This indus-

try is expected to grow by 5.5% per year

going forward, according to industry re-

search. Macro trends supporting growth

include population growth—in ten years

the world’s population is expected to

grow by 27% with half of that coming

from Asia. In Q3’15 China revenue was

up 24%. In addition, we have growing

middle classes and urbanization which

lead to the increased consumption of

proteins. In the US, cattle herds are start-

ing to grow after declining for close to 20

years. In addition, pet ownership contin-

ues to grow and demand for care is in-

creasing in the high-single digits. Aqua-

culture growth is around 17% per year,

and farmed fish is now 50% of consump-

tion versus 15% in 1990. (2) Growth is

being driven by macro trends, restruc-

turing, M&A, and new products. ZTS

is in the midst of closing facilities, reduc-

ing headcount, and cutting costs. The

goal is to cut $300M out of the cost

structure by 2017. The net impact of all

restructuring is that operating profit mar-

gins are expected to grow from about

28% in 2015 to 37% by 2019. In terms of

new products, this business is unique

relative to human health. It takes on av-

erage just five years to bring a product to

market versus ten years in human health.

ZTS identifies 220 products with less

than four years to market. (3) Activist

investor pushing for success. Bill

Ackman got involved in this company in

fall 2014 because he realized there was

value to be found in streamlining opera-

tions. There are two Pershing reps on the

board to make sure this happens, and

Pershing owns about 10% of shares out-

standing. The purchase price, on average,

was around the $40 level. (4) M&A ac-

tivity supports growth and valuation.

The CEO says that this company is al-

ways for sale at the right price, and M&A

activity is very busy in this space. Since

2010 there have been 40 deals in animal

health. ZTS has been a net acquirer with

the PharmaQ deal and the acquisition of

Abbott’s animal health business in 2014.

The past three deals have averaged 17.5x

EBITDA, and ZTS is currently trading at

14.0x. (5) Valuation and earnings.

Given the impact of negative currency

impacts and restructuring, revenue and

earnings growth trends are skewed. After

backing out these impacts in Q3, revenue

was up 9% and earnings were up 22%.

Based on management guidance for 2016

and 2017, earnings growth should be

around 20%. The P/E is around 26.0x


F E A T U R E

the 2016 estimate, which is above the

average P/E of 23.0x at which the stock

has traded since ZTS went public. ZTS

has about $2.7B in long-term debt net of

cash given its acquisitions. Shareholders’

equity is $1.2B and S&P rates the debt

BBB-. In summary, we believe this stock

is suitable for growth investors looking

for an alternative healthcare investment.

REMOVALS FROM THE LIST

Freeport McMoran (FCX) was re-

moved during the quarter. The stock

recovered with the rebound in oil and

copper, more so from oil. During the

quarter, S&P downgraded the credit rat-

ing and FCX announced the sale of a

joint venture for $1B. We believe that the

road to recovery for FCX is long with its

exposure to copper and high debt levels.

Disclosures: BB&T Corporation, parent

company of BB&T Securities, owns shares of

American Tower; Analog Devices Inc.;

AT&T; ConocoPhillips; Health Care REIT;

Intel; JPMorgan; Nucor; PepsiCo; UDR, Inc.;

Williams; and Zoetis.

This information should not be used as the primary basis for investment decisions nor should it be construed as advice since it may not consider the individual needs of

the investor, and as such should not be considered an investment recommendation by BB&T Scott & Stringfellow or BB&T Capital Markets. While the information above is

from sources that we believe to be reliable, we do not guarantee their accuracy or completeness. Additional information available upon request. Price targets and

estimates based on consensus data from FactSet or from our research correspondents.

Securities and insurance products or annuities sold, offered or recommended by BB&T Scott & Stringfellow are not a deposit, not FDIC insured,

not guaranteed by a bank, not guaranteed by any federal government agency and may lose value.

EQUITY STRATEGY Current Buy List

W. Moultrie Dotterer, CFA 804-780-3279

Return Mkt Ind.

Date Price Price Since Price '14 to'15 '15 to '16 Cap Div. Salient Points

Ticker Added Added 4/27/16 Add. Target 2015 2016E Growth Growth 2015 2016 (Bil) Yield (catalysts, fundamentals)

Large Cap/Blue Chip

American Tower AMT 6/18/15 $96.18 $104.49 8.6% $116 5.08$ 5.67$ 8% 12% 20.6x 18.4x 44.4 2.0% Stability, growth

ConocoPhillips COP 5/24/12 $52.14 $48.11 -7.7% $51 (1.40)$ (2.43)$ nmf nmf nmf nmf 59.6 2.1% Oil and natural gas liquids

Intel Corp INTC 8/30/07 $24.91 $31.75 27.5% $35 2.33$ 2.10$ 1% -10% 13.6x 15.1x 149.8 3.3% New chip cycle, corporate upgrades

Pepsico PEP 1/12/09 $52.66 $102.63 94.9% $112 4.57$ 4.73$ -1% 3% 22.5x 21.7x 148.2 2.7% Global brands and growth

Williams Cos WMB 10/20/14 $52.00 $20.00 -61.5% $24 2.40$ 3.14$ 12% 31% 8.3x 6.4x 15.0 12.8% Yield and growth

Yield

Analog Devices ADI 8/25/13 $53.30 $59.64 11.9% $72 3.17$ 2.80$ 33% -12% 18.8x 21.3x 18.5 2.8% Valuation, LT growth potential

General Electric GE 2/21/12 $19.41 $30.93 59.4% $33 1.31$ 1.50$ -21% 15% 23.6x 20.6x 287.2 3.0% Resstructuring, dividend growth

Welltower HCN 4/8/14 $60.34 $69.80 15.7% $70 4.38$ 4.56$ 21% 4% 15.9x 15.3x 24.9 4.9% Aging of population

JP Morgan JPM 9/19/11 $32.69 $64.11 96.1% $71 6.00$ 5.68$ 13% -5% 10.7x 11.3x 234.8 2.7% Valuation, LT growth potential

Kinder Morgan Inc KMI 7/25/13 $34.09 $18.17 -46.7% $21 1.73$ 1.87$ 58% 8% 10.5x 9.7x 40.5 2.7% Growing yield, management

Small/Mid Cap/Aggressive

Delta Air Lines DAL 5/17/13 $18.54 $43.69 135.7% $63 4.61$ 6.56$ 38% 42% 9.5x 6.7x 33.7 1.2% Profitability, fewer players, balance sheet

Nucor NUE 3/3/11 $47.97 $50.61 5.5% $59 1.77$ 1.97$ -22% 11% 28.6x 25.7x 16.1 3.0% Return to cylical growth

UDR, Inc. UDR 1/10/14 $23.56 $35.32 49.9% $39 1.66$ 1.78$ 8% 7% 21.3x 19.8x 9.4 3.3% Contrarian, yield

Weyerhaeuser WY 9/8/14 $25.70 $32.32 25.8% $34 1.04$ 1.16$ -5% 12% 31.1x 27.8x 24.7 3.8% Yield, improving housing starts

Zoetis ZTS 2/16/16 $40.43 $47.46 17.4% $58 1.77$ 1.78$ 13% 1% 26.8x 26.6x 23.6 0.8% Diet trends, aquaculture

Consensus Earnings

P/E

BB&T Capital Markets Focus List


F E A T U R E

We initiated coverage of Atmos Energy

(ATO) with a Buy rating and an $80

price target. Our target assumes the

shares trade to 23x estimated 2017 EPS.

Inclusive of the 2% dividend yield, total

return potential is 10%. We favor ATO

for several reasons: (1) Strong EPS

growth through end of decade. ATO is

targeting 6%–8% EPS growth from

2015–2020. No other LDC, short of

WGL Holdings (WGL–$73.33–Hold)

(which has more unregulated business

dependency), should grow earnings as

fast. (2) Guidance is low risk. We think

ATO’s guidance is, at worst, highly

achievable, and at best, conservative. This

is evidenced by the gap between its rate

base and EPS growth projections. This

de-risks the earnings profile. (3) Other

significant risk-mitigating factors.

Roughly 95% of ATO’s earnings are

regulated and rate base–driven. The com-

pany’s Texas exposure is de-coupled,

meaning it’s generally protected from a

slowdown in the state’s economy due to

energy weakness. (4) Constructive regu-

latory environment. About 80% of the

capex spend is targeted toward system

safety and reliability. Constructive regula-

tory mechanisms, driven by strong politi-

cal and regulatory support, create the

backdrop for timely conversion of capex

into earnings. (5) Dividend supple-

ments upper-single-digit EPS growth.

ATO’s dividend yields 2%. It has hiked

the dividend 32 consecutive years and is

increasing it 7.7% in fiscal 2016 after a

5% hike in 2015. Over the last five years,

the dividend has grown at a 3% CAGR.

At its current 51% payout ratio and at

expected EPS growth rates, we think

there’s still plenty of room to hike the

dividend at mid-single-digit rates going

forward. (6) May be the best takeout

candidate in the space. Because of its

size ($7.6B market cap), ATO has the

ability to move the needle for a potential

acquirer looking for strong, low-risk, and

visible rate base growth through at least

the end of the decade in favorable regula-

tory jurisdictions.

Following the sale of Aclara in 2014, Es-

co Technologies (ESE) transformed

into a more consistent growth story with

a better margin profile that is focused on

its unique and high-quality Filtra-

tion/Doble assets. ESE's Utility Solutions

business (Doble) provides engineer-

ing/testing/analysis to the electric power

industry with 95% US share. The compa-

ny also provides Filtration & Fluid Con-

trol products to aviation, space, and pro-

cess markets worldwide as well as RF

Shielding and EMC Test products for

consumer electronics, healthcare, auto,

and other applications. Q2 was a $0.05

EPS beat on revenue and margins as

most units exceeded plan. FY'16 EPS

guidance was raised $0.035 at the mid-

point, but the Q3 outlook is below con-

sensus, implying a heavily Q4-weighted

year. This isn't that unusual for ESE, and

we view the guide as a bit conservative.

As such, we are comfortable in the upper

end of the range and are nudging up our

estimates and our price target to $45.

At its annual analyst day recently, Flow-

ers Foods (FLO) announced the nation-

al roll out of Dave’s Killer Bread DKB in

late April, while updating its long-term

guidance to reflect the realities of the

current market situation; it now expects

ongoing sales growth of 2%–4%,

EBITDA margins of 12%–14%, and EPS

growth of 8%–10%. These surface head-

lines are less important, in our view, and

we would point clients towards details

that we view as more prescient. In talking

with management, we heard plans for a

de-emphasis of longstanding geographic

growth plans and thus a focus on internal

cost control and production/network

optimization. We think it is fair to say

that FLO is rotating towards an organic

bread growth strategy, and we heard for

the first time a real willingness to eventu-

ally acquire into adjacent snack areas in

years ahead. We are beyond encouraged

to hear such details from this company.

We are hopeful that such action can cre-

ate a more stable earnings environment.

We expect that FLO's FY’16 EPS guid-

ance will prove conservative and remain

confident in our above-the-range forecast

for current-year EPS. We also have

grown incrementally confident in recent

weeks and days that legal concerns for

this company are well overblown. As

such, we think that current valuation of-

fers significant opportunity for investors.

We recently upgraded Finish Line

(FINL) to Buy from Hold on several

incremental positives. Our more positive

outlook for the shares is based on: (1)

improved product allocation from Nike,

Adidas, and Under Armour; (2) increased

focus on Women's; (3) a more optimistic

long-term sales target for the Macy's

business beyond $350M on increased

penetration of Kids' and digital; (4) a

more positive outlook for the JackRabbit

business given the strategy to focus on

profitability before rolling out the full-

chain rebranding and a positive view of

the most current remodel, which will re-

main in test mode; (5) management's con-

servative outlook for ASPs, as increased

innovation and better product allocation

should contribute to upside; (6) easing

H2 comparisons as FINL laps significant

supply chain issues; (7) conservative

FY'17 guidance; (8) current valuation of

~11.2x forward FY'18 consensus esti-

mates is attractive relative to peers and on

a historical basis; and (9) we believe ex-

pectations are low for an appealing

risk/reward. We introduce a $24 price

target. In our view, FINL's shares remain

attractively valued, and we see upside

from current levels as more consistent

execution should help drive an improve-

ment in sentiment and a reversion to

mean multiples towards the group aver-

age and the shares’ historical averages.

We apply a 14x P/E, 6x EV/EBITDA

multiple, and a DCF to derive our $24

price target.


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S T E R L I N G P O R T F O L I O S

The Sterling Equity Opportunities Group

manages the CHOICE portfolios, which

are designed to help clients meet their

financial goals using equity investments,

with an objective of maximizing returns

on a risk-adjusted basis. The CHOICE

offering consists of six portfolios, two of

which are also provided as mutual funds,

managed by a team with more than 150

years of combined investment and

business experience. Sterling Capital

Management now has more than $50B

under management.

In this publication the Sterling Team will

continue to provide a snapshot of each of

the Equity Opportunities Group’s

portfolio holdings and highlight at least

one recent addition.

PORTFOLIO HIGHLIGHT—

STERLING LEADERS

PORTFOLIO

We added shares of Cerner in February

2016. Cerner is the largest standalone

healthcare information technology

company in the world. The company

continues to benefit from the ever-

increasing growth of healthcare spending

in the United States. In 2014, healthcare

spending grew more than 5% and

represented just under 18% of the

nation’s gross domestic product; the

federal government’s Center for Medicare

and Medicaid Services estimates that

healthcare spending will be 20% of gross

domestic product by the year 2024.

The “big idea” is that technology is one

of the few tools available to reduce the

rate of growth in healthcare spending.

Most recently, the federal government

provided stimulus funds that gave

hospitals and doctor groups money to

invest in software and technology to

upgrade their systems. Cerner was a big

beneficiary of this push that improved

electronic medical records, tools to

measure the quality of care, and finally

technology that enables doctors and

hospitals to be paid on quality of care

versus a simple fee for service. All of this

requires software and technology that can

track processes across departments in the

hospital, to the doctor’s office, to the

pharmacy and outside of the healthcare

network.

As the leading pure play public company,

Cerner has and continues to benefit by

providing systems that reduce paperwork

and speed up payments that effectively

reduce costs and enhance revenue.

Cerner is experiencing growth across

numerous categories and clients due to its

rich product set that collects and

processes data across healthcare systems.

For example, Children’s Hospital of Los

Angeles uses Cerner’s system to gather

data on how sick patients in the hospital

are and then staff nurses accordingly. If

patients require more care, more staff is

assigned and vice versa, enabling the

hospital to reduce overstaffing and

overtime. Within six months, the

hospital reduced overtime by more than

8% and saved just over 2,000 skilled

nursing hours during those six months.

Perhaps unsurprisingly, the benefits of a

core market that continues to grow,

coupled with a need for technology to

bring efficiencies, has led to relatively

consistent growth for Cerner in terms of

revenue, earnings, and cash flows. A

checkup of financial metrics we prefer

also indicates a high degree of healthy

operations with a stronger balance sheet

than the average stock, better earnings

growth rates, and higher return on capital

than the average stock in the S&P 500.

We believe Cerner is well positioned help

healthcare providers reduce waste and

improve efficiency in healthcare systems

that is forecasted to grow over time as the

population in the country ages. Given

the company’s long-term history of

consistent performance, the recent stock

weakness appears to provide a unique

opportunity to acquire shares given the

valuation. Cerner is a unique company as

it is the largest pure-play stock that stands

to benefit from these healthy trends.

Oppenheimer research is more adamant,

stating that “we continue to believe this is

the best long-term large cap growth story

to own.”

There are no assurances that securities identified

will be profitable investments. The securities

described are neither a recommendation nor a

solicitation. Any implied performance is not

indicative of future results and there is no

assurance that the transactions in the future will

be profitable or will equal the performance of the

securities detailed. Security information is being

obtained from resources the firm believes to be

accurate, but no warrant is made as to the

accuracy or completeness of the information.

Source (figure below): Cerner



Portfolio Characteristics

Special Opportunities SMA

April 29, 2016

Price 52-Week Mkt EPS (Calendar, $) P/E (times) EPS Growth (%) Nt Dbt/ ROE Yield

Ticker 4/29/16 Range Cap 15E 16E 17E 15E 16E 17E 15E 16E 17E Cap (%) (%) (%)

(Bil)

Financials 10% of Portfolio 16% of S&P 500

Capital One Financial COF 72.39 92 - 59 37.6 7.07 7.56 8.19 10.2 9.6 8.8 (-7) 7 8 49 9 2.2

CBRE Group CBG 29.63 39 - 23 9.9 2.05 2.24 2.46 14.5 13.3 12.0 24 9 10 53 22 -

Ryman Hospitality* RHP 51.53 58 - 44 2.6 4.38 5.34 5.67 11.8 9.7 9.1 3 22 6 75 29 5.8

Information Technology 24% of Portfolio 20% of S&P 500

Activision Blizzard ATVI 34.47 40 - 23 25.4 1.32 1.79 2.06 26.1 19.3 16.8 (-7) 35 15 - 12 0.8

Akamai Tech AKAM 50.99 78 - 40 9.0 2.52 2.69 3.06 20.2 19.0 16.7 2 7 14 - 11 -

Alphabet GOOG 693.01 777 - 517 476.6 29.58 33.66 39.72 23.4 20.6 17.4 15 14 18 - 15 -

Autodesk ADSK 59.82 65 - 43 13.4 0.87 (0.59) 0.02 68.9 NMF NMF (-28) NMF NMF - 17 -

Cisco Systems CSCO 27.49 30 - 23 138.3 2.24 2.33 2.46 12.3 11.8 11.2 6 4 5 - 17 3.8

Check Point CHKP 82.87 90 - 73 14.5 4.17 4.54 4.99 19.9 18.3 16.6 12 9 10 - 19 -

Intuit INTU 100.89 108 - 80 25.9 2.97 3.85 4.65 34.0 26.2 21.7 (-5) 30 21 48 27 1.2

Consumer Staples 3% of Portfolio 10% of S&P 500

Mondelez Intl MDLZ 42.96 47 - 36 66.9 1.75 1.84 2.09 24.5 23.4 20.5 (-1) 5 14 39 9 1.6

Health Care 28% of Portfolio 15% of S&P 500

Gilead Sciences GILD 88.21 122 - 83 119.5 12.61 12.14 12.36 7.0 7.3 7.1 56 (-4) 2 19 62 2.1

HCA Holdings** HCA 80.62 95 - 63 31.9 5.56 6.27 6.92 14.5 12.9 11.6 18 13 10 100 10 -

IMS Health IMS 26.64 33 - 22 8.8 1.52 1.57 1.75 17.5 16.9 15.2 11 3 11 66 29 -

MEDNAX MD 71.29 85 - 62 6.6 4.07 4.29 4.71 17.5 16.6 15.1 28 6 10 33 14 -

Myriad Genetrics MYGN 36.00 46 - 31 2.6 1.55 1.75 1.90 23.2 20.5 18.9 (-20) 13 8 - 13 -

Perrigo PRGO 96.67 198 - 96 13.8 7.74 8.51 9.42 12.5 11.4 10.3 25 10 11 35 9 0.6

UnitedHealth Group UNH 131.68 134 - 109 125.1 6.45 7.86 8.94 20.4 16.8 14.7 13 22 14 6 18 1.5

Zimmer Biomet ZBH 115.77 116 - 92 23.0 6.90 7.95 8.74 16.8 14.6 13.2 14 15 10 19 1 0.8

Consumer Discretionary 24% of Portfolio 13% of S&P 500

CBS Corp CBS 55.91 63 - 39 25.4 3.31 3.99 4.40 16.9 14.0 12.7 12 21 10 58 22 1.1

Comcast CMCSA 60.76 65 - 54 147.4 3.25 3.55 3.90 18.7 17.1 15.6 11 9 10 46 16 1.8

Discovery Comm DISCK 26.78 33 - 24 11.0 1.76 1.91 2.17 15.2 14.0 12.3 (-4) 8 14 55 19 -

Ford Motor Co F 13.56 16 - 11 54.0 1.93 2.06 2.11 7.0 6.6 6.4 66 7 2 60 28 4.4

Lennar Corp LEN 45.31 56 - 38 9.7 3.50 3.92 4.31 13.0 11.6 10.5 22 12 10 47 15 0.4

Live Nation LYV 21.48 29 - 19 4.3 (0.16) (0.10) 0.16 NMF NMF 138.3 NMF NMF NMF 23 NMF -

Newell Brands NWL 45.54 48 - 34 20.8 2.18 2.53 2.80 20.9 18.0 16.3 9 16 11 57 14 1.7

Industrials 10% of Portfolio 10% of S&P 500

Nielsen Holdings NLSN 52.14 54 - 43 18.8 2.63 2.89 3.18 19.8 18.1 16.4 4 10 10 59 13 2.4

J.B. Hunt JBHT 82.88 89 - 65 9.3 3.66 4.05 4.54 22.6 20.5 18.2 16 11 12 43 34 1.1

Verisk Analytics VRSK 77.58 82 - 66 13.0 3.09 3.25 3.58 25.1 23.9 21.7 29 5 10 66 64 -

Energy 0% of Portfolio 7% of S&P 500

Basic Materials 0% of Portfolio 3% of S&P 500

Utilities 0% of Portfolio 3% of S&P 500

Telecom Services 0% of Portfolio 3% of S&P 500

Portfolio Average 04/29/16 29.0 50.5 19.1x 14.9x 18.1x 11% 11% 10% 36% 19% 1.1%

Portfolio Median 01/29/00 0.2 18.8 18.1x 16.8x 15.2x 11% 10% 10% 43% 16% 0.8%

S&P 500 SP50 2,065 2131 - 1829 37.5 118.30 123.69 133.40 17.5x 16.7x 15.5x 1% 5% 8% 33% 16% 2.2%

*FFO (calendar) estimates listed rather than EPS**These companies have negative GAAP equity; therefore we substitute Return on Capital for Return on Equity for a more meaningful comparison.

Source: FactSetData as of date stated abovePortfolio weights are estimated and exclude cash

The securities shown are representative of a model and do not reflect an actual account. The actual characteristics with respect to any individual client portfolio may vary, but the




Equity Income SMA

April 29, 2016

Price 52-Week Mkt EPS (Calendar, $) P/E (times) EPS Growth (%) Nt Dbt/ ROE Yield 5Yr Div

Ticker 4/29/16 Range Cap 15E 16E 17E 15E 16E 17E 15E 16E 17E Cap (%) (%) (%) CAGR(%)

(Bil)


Discover Financial DFS 56.27 60 - 43 23.3 5.13 5.64 6.06 11.0 10.0 9.3 5 10 7 32 20 2.0 69.5

Host Hotels & Resorts* HST 15.82 21 - 13 11.8 1.54 1.67 1.73 10.3 9.4 9.1 (-2) 9 3 34 8 5.1 82.1

Invesco IVZ 31.01 42 - 25 12.9 2.44 2.28 2.83 12.7 13.6 10.9 (-3) (-6) 24 27 11 3.6 21.0

Metlife MET 45.10 58 - 35 49.5 4.86 5.68 6.10 9.3 7.9 7.4 (-15) 17 7 14 10 3.5 16.7

Wells Fargo WFC 49.98 59 - 45 252.8 4.15 4.13 4.43 12.0 12.1 11.3 1 (-1) 7 57 7 3.0 50.0


Accenture ACN 112.92 116 - 92 70.9 4.98 5.49 5.99 22.7 20.6 18.9 8 10 9 - 57 1.9 14.4

Maxim MXIM 35.72 42 - 30 10.2 1.57 1.81 2.10 22.7 19.8 17.0 0 15 16 - 21 3.4 8.4

Microsoft MSFT 49.87 57 - 40 394.4 2.65 2.79 3.09 18.8 17.9 16.1 1 5 11 - 12 2.9 22.6

Qualcomm QCOM 50.52 71 - 43 74.2 4.51 4.24 4.75 11.2 11.9 10.6 (-12) (-6) 12 - 15 4.2 24.1

Western Digital WDC 40.87 100 - 40 9.5 6.59 5.56 5.73 6.2 7.3 7.1 (-17) (-16) 3 - 12 4.9 NA


Mead Johnson Nutrition**MJN 87.15 98 - 68 16.3 3.44 3.51 3.82 25.3 24.8 22.8 (-8) 2 9 55 29 1.9 12.9

PepsiCo PEP 102.96 105 - 90 148.7 4.57 4.73 5.11 22.5 21.8 20.1 (-1) 3 8 50 38 2.7 8.3

Unilever UL 44.86 48 - 39 57.2 1.98 2.10 2.26 22.7 21.4 19.9 0 6 8 38 33 3.0 3.7


Abbott Laboratories ABT 38.90 51 - 36 57.3 2.15 2.20 2.48 18.1 17.6 15.7 (-6) 3 12 10 12 2.7 10.2

AbbVie ABBV 61.00 71 - 48 98.7 4.29 4.82 5.76 14.2 12.6 10.6 29 12 19 65 180 3.7 NA

Anthem ANTM 140.77 171 - 117 37.0 10.16 10.91 12.11 13.9 12.9 11.6 15 7 11 36 10 1.8 NA

Johnson & Johnson JNJ 112.08 114 - 91 309.2 6.20 6.59 7.00 18.1 17.0 16.0 4 6 6 - 22 2.9 8.7

Merck MRK 54.84 61 - 48 151.9 3.59 3.72 3.80 15.3 14.7 14.4 3 4 2 18 10 3.4 3.9

Novartis NVS 75.97 106 - 71 180.0 4.89 4.73 5.15 15.5 16.1 14.7 (-5) (-3) 9 23 9 3.0 2.8

Pfizer PFE 32.71 36 - 29 202.5 2.20 2.30 2.52 14.9 14.2 13.0 (-3) 4 10 15 11 3.7 10.8


Dunkin' Brands DNKN 46.50 57 - 38 4.3 1.93 2.21 2.45 24.1 21.1 19.0 11 14 11 95 143 2.6 NA

General Motors GM 31.80 36 - 27 49.0 5.02 5.67 5.85 6.3 5.6 5.4 65 13 3 43 28 4.8 NA

McDonald's MCD 126.49 129 - 91 111.0 4.98 5.54 6.19 25.4 22.8 20.4 3 11 12 53 45 2.8 9.5

Omnicom Group OMC 82.97 85 - 65 19.8 4.41 4.76 5.18 18.8 17.4 16.0 4 8 9 28 41 2.4 20.1

PulteGroup PHM 18.39 22 - 15 6.4 1.36 1.61 1.91 13.5 11.4 9.6 8 18 19 28 11 2.0 NA

Time Warner Inc. TWX 75.14 91 - 60 59.4 4.75 5.34 6.07 15.8 14.1 12.4 14 12 14 46 16 2.1 13.6


Honeywell Int'l HON 114.27 116 - 92 87.0 6.10 6.66 7.26 18.7 17.2 15.7 14 9 9 29 27 2.1 14.5

United Parcel Service UPS 105.07 107 - 89 92.9 5.43 5.80 6.23 19.3 18.1 16.9 14 7 7 57 210 3.0 10.7


Spectra Energy SE 31.27 37 - 22 21.9 1.15 1.20 1.44 27.2 26.0 21.7 (-29) 5 20 67 3 5.2 10.1


Scotts Miracle-Gro SMG 70.78 74 - 59 4.3 3.62 4.00 4.45 19.6 17.7 15.9 8 10 11 72 32 2.7 24.6



Verizon VZ 50.94 54 - 43 207.8 3.99 3.97 4.05 12.8 12.8 12.6 19 (-1) 2 83 124 4.4 3.3

Portfolio Average ###### 31.0 91.4 16.7x 15.7x 14.3x 4% 6% 10% 35% 39% 3.1% 19.1%

Portfolio Median ###### 0.2 57.3 15.8x 16.1x 14.7x 3% 7% 9% 32% 20% 3.0% 12.9%

S&P 500 SP50 2,065 2131 - 1829 37.5 118.30 123.69 133.40 17.5x 16.7x 15.5x 1% 5% 8% 33% 16% 2.2% 10.1%*FFO (calendar) estimates listed rather than EPS**These companies have negative GAAP equity; therefore we substitute Return on Capital for Return on Equity for a more meaningful comparison.

Source: FactSetData as of date stated above

Portfolio weights are estimated and exclude cash




Leaders SMA

April 29, 2016



(Bil)


Aon AON 105.12 106 - 85 28.4 6.18 6.54 7.29 17.0 16.1 14.4 8 6 11 47 24 1.3

Citigroup C 46.28 60 - 35 135.8 5.35 4.79 5.51 8.7 9.7 8.4 143 (-10) 15 42 8 0.4

Markel MKL 899.11 935 - 741 12.6 36.31 26.41 27.54 24.8 34.0 32.7 67 (-27) 4 - 8 -

MetLife MET 45.10 58 - 35 49.5 4.86 5.68 6.10 9.3 7.9 7.4 (-15) 17 7 14 8 3.5

State Street Corp STT 62.30 81 - 52 24.9 4.89 4.76 5.40 12.7 13.1 11.5 (-4) (-3) 13 43 9 2.2


Akamai Tech AKAM 50.99 78 - 40 9.0 2.52 2.69 3.06 20.2 19.0 16.7 2 7 14 - 11 -

Alphabet GOOGL 707.88 794 - 535 486.8 29.58 33.65 39.73 23.9 21.0 17.8 15 14 18 - 15 -

Amdocs DOX 56.54 61 - 52 8.5 3.43 3.64 3.90 16.5 15.5 14.5 7 6 7 - 12 1.4

Microsoft MSFT 49.87 57 - 40 394.4 2.65 2.79 3.09 18.8 17.9 16.1 1 5 11 - 12 2.9

Visa V 77.24 81 - 66 185.3 2.66 2.90 3.37 29.1 26.7 22.9 13 9 16 - 23 0.7


Kraft Heinz KHC 78.07 88 - 69 94.9 2.19 2.98 3.78 35.6 26.2 20.7 (-30) 36 27 22 7 2.9


Abbott Laboratories ABT 38.90 51 - 36 57.3 2.15 2.20 2.48 18.1 17.6 15.7 (-6) 3 12 10 12 2.7

Becton Dickinson BDX 161.26 162 - 130 34.2 7.48 8.71 9.69 21.6 18.5 16.6 15 16 11 56 11 1.6

Cerner CERN 56.14 73 - 50 19.0 2.11 2.35 2.70 26.6 23.9 20.8 28 11 15 2 15 -

HCA Holdings* HCA 80.62 95 - 63 31.9 5.56 6.27 6.92 14.5 12.9 11.6 18 13 10 100 10 -

Perrigo Co. PRGO 96.67 198 - 96 13.8 7.74 8.51 9.42 12.5 11.4 10.3 25 10 11 35 9 0.6

UnitedHealth Group UNH 131.68 134 - 109 125.1 6.45 7.86 8.94 20.4 16.8 14.7 13 22 14 25 18 1.5


CarMax KMX 52.95 74 - 42 10.3 2.99 3.28 3.57 17.7 16.1 14.8 16 10 9 76 21 -

Comcast CMCSA 60.76 65 - 54 147.4 3.25 3.55 3.90 18.7 17.1 15.6 11 9 10 46 16 1.8

Dunkin' Brands DNKN 46.50 57 - 38 4.3 1.93 2.21 2.45 24.1 21.1 19.0 11 14 11 95 143 2.6

Liberty Global LBTYA 37.73 58 - 31 33.5 -1.30 0.61 1.04 NMF 62.2 36.4 NMF NMF 71 79 NMF -

Twenty-First Century Fox FOX 30.12 34 - 24 57.8 1.71 1.92 2.30 17.6 15.7 13.1 5 12 19 45 14 1.0

Walt Disney DIS 103.26 122 - 89 168.5 5.32 5.96 6.43 19.4 17.3 16.1 18 12 8 23 21 1.4





Ecolab ECL 114.98 122 - 100 33.8 4.37 4.46 5.08 26.3 25.8 22.6 5 2 14 47 14 1.2



Portfolio Average ###### 25.0 87.4 19.0x 20.1x 17.1x 15% 8% 15% 35% 19% 1.3%

Portfolio Median 33.8 19.1x 17.6x 16.1x 11% 10% 11% 35% 13% 1.3%

S&P 500 SP50 2,065 2131 - 1829 37.5 118.30 123.69 133.40 17.5x 16.7x 15.5x 1% 5% 8% 33% 16% 2.2%

*These companies have negative GAAP equity; therefore we substitute Return on Capital for Return on Equity for a more meaningful comparison.

Source: FactSet

Data as of date stated above

Portfolio weights are estimated and exclude cash

The securities shown are representative of a model and do not reflect an actual account. The actual characteristics with respect to any individual client portfolio may vary, but




SMID Opportunities SMA

April 29, 2016



(Bil)

Financial Services 7% of Portfolio 17% of Russell 2500

Encore Capital Group ECPG 28.15 44 - 17 0.7 5.15 5.39 6.02 5.5 5.2 4.7 14 5 12 80 7 -

Portfolio Recovery PRAA 33.18 64 - 23 1.5 3.47 3.80 4.18 9.6 8.7 7.9 (-1) 9 10 66 20 -

REITs 3% of Portfolio 10% of Russell 2500

Colony Financial CLNY 17.68 26 - 15 2.0 1.88 2.05 2.21 9.4 8.6 8.0 13 9 8 57 6 9.0

Technology 20% of Portfolio 11% of Russell 2500

Akamai AKAM 50.99 78 - 40 9.0 2.52 2.69 3.06 20.2 19.0 16.7 2 7 14 - 11 -

Amdocs DOX 56.54 61 - 52 8.5 3.43 3.64 3.90 16.5 15.5 14.5 7 6 7 - 12 1.4

Blackhawk Network HAWK 32.13 48 - 32 1.8 2.33 2.52 2.79 13.8 12.7 11.5 32 8 10 0 9 -

F5 Networks FFIV 104.75 134 - 87 7.0 6.74 7.30 8.09 15.5 14.3 12.9 18 8 11 0 28 -

Fiserv FISV 97.72 103 - 77 21.8 3.87 4.39 4.95 25.3 22.3 19.7 15 13 13 58 24 -

Global Payments GPN 72.18 77 - 50 11.1 2.75 3.23 3.74 26.3 22.3 19.3 21 18 16 43 36 0.1

Consumer Staples 3% of Portfolio 3% of Russell 2500

Ingredion INGR 115.09 115 - 79 8.3 5.88 6.67 7.21 19.6 17.3 16.0 13 13 8 35 19 1.6

Health Care 13% of Portfolio 11% of Russell 2500

AmerisourceBergen ABC 85.10 115 - 84 19.2 5.16 5.96 6.68 16.5 14.3 12.7 22 15 12 61 82 1.6

MEDNAX MD 71.29 85 - 62 6.6 4.07 4.29 4.71 17.5 16.6 15.1 28 6 10 33 14 -

Varian Medical VAR 81.18 90 - 71 7.8 4.36 4.66 5.05 18.6 17.4 16.1 6 7 8 - 25 -

VCA Inc. WOOF 62.97 65 - 45 5.1 2.38 2.84 3.19 26.5 22.2 19.7 26 19 13 37 17 -

Consumer Discretionary 23% of Portfolio 16% of Russell 2500

Advance Auto Parts AAP 156.10 200 - 138 11.5 7.82 8.88 9.93 20.0 17.6 15.7 1 14 12 31 21 0.2

Aramark ARMK 33.51 34 - 29 8.1 1.59 1.72 1.96 21.1 19.5 17.1 4 8 14 72 13 1.1

CarMax KMX 52.95 74 - 42 10.3 2.99 3.28 3.57 17.7 16.1 14.8 16 10 9 76 21 -

Gentex GNTX 16.04 18 - 13 4.6 1.08 1.18 1.29 14.9 13.6 12.4 10 10 9 0 19 2.1

Liberty Tax TAX 11.95 28 - 12 0.2 1.41 1.65 NA 8.4 7.2 NA 2 17 NA 68 15 5.4

Newell Brands NWL 45.54 48 - 34 20.8 2.18 2.53 2.80 20.9 18.0 16.3 9 16 11 57 14 1.7

PulteGroup PHM 18.39 22 - 15 6.4 1.36 1.61 1.91 13.5 11.4 9.6 8 18 19 28 11 2.0

Producer Durables 17% of Portfolio 14% of Russell 2500

The Brink's Co BCO 33.84 35 - 26 1.7 1.69 1.93 2.15 20.0 17.6 15.7 41 14 12 32 26 1.2

Kansas City Southern KSU 94.75 104 - 64 10.2 4.49 4.64 5.24 21.1 20.4 18.1 (-7) 3 13 37 13 1.4

Ryder Systems R 68.92 97 - 48 3.7 6.13 6.16 6.51 11.2 11.2 10.6 10 0 6 73 12 2.4

Stericycle SRCL 95.56 151 - 96 8.1 4.40 4.95 5.59 21.7 19.3 17.1 3 13 13 53 12 -

Waste Connections WCN 67.28 67 - 46 8.3 1.98 2.12 2.34 34.0 31.8 28.8 (-3) 7 10 52 12 0.9

Energy 3% of Portfolio 3% of Russell 2500

Newfield Exploration NFX 36.25 41 - 22 7.2 1.02 0.03 0.67 35.5 NMF 53.7 (-43) NMF NMF 57 12 -

Materials & Processing 7% of Portfolio 8% of Russell 2500

Ball Corp BLL 71.38 76 - 61 10.1 3.48 3.59 4.01 20.5 19.9 17.8 (-10) 3 12 77 25 0.7

Scotts Miracle-Gro SMG 70.78 74 - 59 4.3 3.62 4.00 4.45 19.6 17.7 15.9 8 10 11 72 32 2.7

Utilities 3% of Portfolio 6% of Russell 2500

AES Corp AES 11.16 14 - 9 7.4 1.22 1.01 1.14 9.1 11.0 9.8 (-6) (-17) 12 77 12 3.9

Portfolio Average ##### 30.0 7.8 18.3x 15.6x 15.6x 9% 9% 10% 44% 19% 1.3%


Russell 2500 R25 1,102 1221 - 928 4.2 23.05 22.42 19.89 23.1x 22.4x 19.9x 0% 3% 13% 28% 10% 1.7%

*These companies have negative GAAP equity; therefore we substitute Return on Capital for Return on Equity for a more meaningful comparison.

Source: FactSetData as of date stated abovePortfolio weights are estimated and exclude cash

The securities shown are representative of a model and do not reflect an actual account. The actual characteristics with respect to any individual client portfolio may vary, but




Insight SMA

April 29, 2016



(Bil)


Aetna AET 112.27 133 - 94 39.4 7.71 8.03 8.85 14.6 14.0 12.7 15 4 10 22 16 0.9

Aon AON 105.12 106 - 85 28.4 6.18 6.54 7.29 17.0 16.1 14.4 8 6 11 47 24 1.3

Berkshire Hathaway BRK.B 145.48 148 - 124 358.6 7.04 7.94 8.35 20.7 18.3 17.4 5 13 5 4 10 -

FirstService Corp FSV 45.01 45 - 25 1.6 1.20 1.54 1.82 37.5 29.2 24.7 48 29 18 41 16 1.0

GEO Group* GEO 32.03 39 - 26 2.4 2.76 2.87 3.08 11.6 11.1 10.4 1 4 7 66 14 8.1

Invesco IVZ 31.01 42 - 25 12.9 2.44 2.28 2.83 12.7 13.6 10.9 (-3) (-6) 24 27 11 3.6


Activision Blizzard ATVI 34.47 40 - 23 25.4 1.32 1.79 2.06 26.1 19.3 16.8 (-7) 35 15 - 12 0.8

Alphabet GOOG 693.01 777 - 517 476.6 29.58 33.66 39.72 23.4 20.6 17.4 15 14 18 - 15 -

Apple AAPL 93.74 133 - 93 513.5 9.01 8.60 9.32 10.4 10.9 10.1 26 (-5) 8 - 39 2.4

Fidelity National FIS 65.80 74 - 56 21.4 3.22 3.75 4.34 20.4 17.6 15.2 4 16 16 50 8 1.6

Microsoft MSFT 49.87 57 - 40 394.4 2.65 2.79 3.09 18.8 17.9 16.1 1 5 11 - 12 2.9

TE Connectivity TEL 59.48 71 - 52 21.3 3.69 4.09 4.51 16.1 14.5 13.2 (-1) 11 10 24 15 2.2

Total System Services TSS 51.14 56 - 38 9.4 2.46 2.82 3.18 20.8 18.2 16.1 26 15 13 32 20 0.8

Visa V 77.24 81 - 66 185.3 2.66 2.90 3.37 29.1 26.7 22.9 13 9 16 - 23 0.7



Cardinal Health CAH 78.46 91 - 76 25.8 4.81 5.52 6.14 16.3 14.2 12.8 17 15 11 26 21 2.0

Johnson & Johnson JNJ 112.08 114 - 91 309.2 6.20 6.59 7.00 18.1 17.0 16.0 4 6 6 - 22 2.9

Thermo Fisher Sci TMO 144.25 147 - 118 56.8 7.39 8.11 8.95 19.5 17.8 16.1 6 10 10 36 9 0.4

Quintiles** Q 69.07 79 - 56 8.3 3.33 3.78 4.22 20.7 18.3 16.4 23 13 12 78 22 -

Zimmer Biomet ZBH 115.77 116 - 92 23.0 6.90 7.95 8.74 16.8 14.6 13.2 14 15 10 46 1 0.8


Comcast CMCSA 60.76 65 - 54 147.4 3.25 3.55 3.90 18.7 17.1 15.6 11 9 10 46 16 1.8

Dollar General DG 81.91 87 - 60 23.5 3.92 4.52 5.09 20.9 18.1 16.1 13 15 13 34 21 1.2

Target TGT 79.50 85 - 68 47.4 4.65 5.23 5.75 17.1 15.2 13.8 11 12 10 34 25 2.8


Crown Holdings** CCK 52.96 57 - 44 7.4 3.59 3.88 4.26 14.8 13.6 12.4 5 8 10 85 7 -

FedEx FDX 165.11 185 - 123 44.3 10.01 11.61 12.86 16.5 14.2 12.8 24 16 11 25 7 0.6



Schlumberger SLB 80.34 95 - 61 111.7 3.37 1.29 2.10 23.8 62.3 38.3 (-39) (-62) 63 12 4 2.5




AT&T T 38.82 39 - 32 238.8 2.71 2.85 3.01 14.3 13.6 12.9 8 5 5 48 13 4.9

Portfolio Average ###### 27.0 116.8 19.1x 18.6x 16.0x 9% 8% 13% 31% 15% 1.8%


S&P 500 SP50 2,065 2131 - 1829 37.5 118.30 123.69 133.40 17.5x 16.7x 15.5x 1% 5% 8% 33% 16% 2.2%

*FFO (calendar) estimates listed rather than EPS**These companies have negative GAAP equity; therefore we substitute Return on Capital for Return on Equity for a more meaningful comparison. 569Source: FactSetData as of date stated abovePortfolio weights are estimated and exclude cash


MPORTANT DISCLOSURES

To receive price charts on the companies mentioned in this report, please contact BB&T Capital Markets Research at 800-552-7757 x8785.

BB&T Capital Markets’ rating distribution by percentage (as of May 5, 2016):

All companies

under coverage:

All companies under coverage to which it has provided invest-

ment banking services in the previous 12 months:

Buy (1) 43.19% Buy (1) 28.86%

Hold (2) 53.33% Hold (2) 15.76%

Underweight/Sell (3) 3.48% Underweight/Sell (3) 33.33%

Not Rated (NR) 0.00% Not Rated (NR) 0.00%

BB&T Capital Markets Ratings System:

The BB&T Capital Markets Equity Research Department Stock Rating System consists of three separate ratings. The appropriate rating is de-

termined by a stock’s estimated 12-month total return potential, which consists of the percentage price change to the 12-month price target

and the current yield on anticipated dividends. A 12-month price target is the analyst’s best estimate of the market price of the stock in 12

months. A 12-month price target is highly subjective and the result of numerous assumptions, including company, industry, and market fun-

damentals, both on an absolute and relative basis, as well as investor sentiment, which can be highly volatile.

The definition of each rating is as follows:

Buy (1): estimated total return potential greater than or equal to 10%, Hold (2): estimated total return potential greater than or equal to 0%

and less than 10%, Underweight (3): estimated total return potential less than 0%

B: Buy H: Hold UW: Underweight NR: Not Rated NA: Not Applicable NM: Not Meaningful SP: Suspended

Stocks rated Buy (1) are required to have a published 12-month price target, while it is not required on stocks rated Hold (2) and Underweight

(3).

BB&T Capital Markets Equity Research Disclosures as of May 5, 2016

BB&T Capital Markets makes a market in the securities of Advance Auto Parts, Inc., Atmos Energy Corporation, Air Transport Services Group,

Inc., Best Buy Co., Inc., The Brink’s Company, Builders FirstSource, Inc., Chatham Lodging Trust, Compass Diversified Holdings, Canadian Pa-

cific Railway Ltd., Capitala Finance Corp., Covanta Holding Corporation, Covenant Transportation Group, Inc., Darling Ingredients Inc., Dollar

General Corporation, Dycom Industries, Inc., Engility Holdings, Inc., ESCO Technologies Inc., Freeport-McMoRan Inc., FedEx Corp., The Finish

Line, Inc., Flowers Foods, Inc., Genuine Parts Company, W.W. Grainger, Inc., Hormel Foods Corporation, Hexcel Corporation, Ingredion Inc.,

Illinois Tool Works Inc., J.B. Hunt Transport Services, Inc., Kilroy Realty Corporation, Kansas City Southern, L Brands, Inc., LKQ Corporation, The

Middleby Corporation, McCormick & Company, Incorporated, Mueller Water Products, Inc., Nucor Corporation, Pentair plc, Ryder System, Inc.,

Stoneridge, Inc., Sovran Self Storage, Inc., Steel Dynamics, Inc., SYSCO Corporation, TreeHouse Foods, Inc., The TJX Companies, Inc., UDR,

Inc., United Natural Foods, Inc., United Parcel Service, Inc., V.F. Corporation, Walgreens Boots Alliance, Inc., Waste Connections, Inc., WGL

Holdings, Inc. and Westmoreland Coal Company.

BB&T Capital Markets has managed or co-managed a public offering of securities for Builders FirstSource, Inc., Dollar General Corporation,

J.B. Hunt Transport Services, Inc., LKQ Corporation, Ryder System, Inc., Sovran Self Storage, Inc., SYSCO Corporation, TreeHouse Foods, Inc.,

Waste Connections, Inc. and WGL Holdings, Inc. in the last 12 months.

BB&T Capital Markets has received compensation for investment banking services from Builders FirstSource, Inc., Dollar General Corporation,

J.B. Hunt Transport Services, Inc., LKQ Corporation, Ryder System, Inc., Sovran Self Storage, Inc., SYSCO Corporation, TreeHouse Foods, Inc.,

Waste Connections, Inc. and WGL Holdings, Inc. in the last 12 months.

BB&T Capital Markets expects to receive or intends to seek compensation for investment banking services from Advance Auto Parts, Inc., At-

mos Energy Corporation, Air Transport Services Group, Inc., Best Buy Co., Inc., The Brink’s Company, Builders FirstSource, Inc., Chatham Lodg-

ing Trust, Compass Diversified Holdings, Canadian Pacific Railway Ltd., Capitala Finance Corp., Covanta Holding Corporation, Covenant Trans-

portation Group, Inc., Darling Ingredients Inc., Dollar General Corporation, Dycom Industries, Inc., Engility Holdings, Inc., ESCO Technologies

Inc., Freeport-McMoRan Inc., FedEx Corp., The Finish Line, Inc., Flowers Foods, Inc., Genuine Parts Company, W.W. Grainger, Inc., Hormel

Foods Corporation, Hexcel Corporation, Ingredion Inc., Illinois Tool Works Inc., J.B. Hunt Transport Services, Inc., Kilroy Realty Corporation,

Kansas City Southern, L Brands, Inc., LKQ Corporation, The Middleby Corporation, McCormick & Company, Incorporated, Mueller Water Prod-

ucts, Inc., Nucor Corporation, Pentair plc, Ryder System, Inc., Stoneridge, Inc., Sovran Self Storage, Inc., Steel Dynamics, Inc., SYSCO Corpora-

tion, TreeHouse Foods, Inc., The TJX Companies, Inc., UDR, Inc., United Natural Foods, Inc., United Parcel Service, Inc., V.F. Corporation,

Walgreens Boots Alliance, Inc., Waste Connections, Inc., WGL Holdings, Inc. and Westmoreland Coal Company in the next three months.

Dollar General Corporation, Flowers Foods, Inc., J.B. Hunt Transport Services, Inc., Sovran Self Storage, Inc., SYSCO Corporation, Waste Con-

nections, Inc. and WGL Holdings, Inc. is, or during the past 12 months was, a client of BB&T Capital Markets, which provided noninvestment

banking, securities-related services to, and received compensation from Dollar General Corporation, Flowers Foods, Inc., J.B. Hunt Transport

Services, Inc., Sovran Self Storage, Inc., SYSCO Corporation, Waste Connections, Inc. and WGL Holdings, Inc. for such services. The analyst or

employees of BB&T Capital Markets with the ability to influence the substance of this report knows the foregoing facts.

An affiliate of BB&T Capital Markets received compensation from Advance Auto Parts, Inc., Atmos Energy Corporation, Air Transport Services

Group, Inc., Compass Diversified Holdings, Covanta Holding Corporation, Darling Ingredients Inc., Dollar General Corporation, Dycom Indus-

tries, Inc., The Finish Line, Inc., Flowers Foods, Inc., Genuine Parts Company, W.W. Grainger, Inc., Ingredion Inc., J.B. Hunt Transport Services,

Inc., Kansas City Southern, LKQ Corporation, The Middleby Corporation, Nucor Corporation, Ryder System, Inc., Sovran Self Storage, Inc., Steel

Dynamics, Inc., SYSCO Corporation, TreeHouse Foods, Inc., UDR, Inc., United Natural Foods, Inc., V.F. Corporation, Walgreens Boots Alliance,

Inc., Waste Connections, Inc. and WGL Holdings, Inc. for products or services other than investment banking services during the past 12

months. The analyst or employees of BB&T Capital Markets with the ability to influence the substance of this report know or have reason to

know the foregoing facts.


ADDITIONAL INFORMATION IS AVAILABLE ON REQUEST

For valuation methodology and related risk factors on BB&T Capital Markets Buy–rated stocks, please refer to the body text of this report or to

individual reports on covered companies referenced in this report.

The analyst(s) principally responsible for preparation of this report received compensation that is based upon many factors, including the

firm’s overall investment banking revenue.

ANALYST CERTIFICATION

The analyst(s) principally responsible for the preparation of this research report certify that the views expressed in this research report

accurately reflect his/her (their) personal views about the subject security(ies) or issuer(s) and that his/her (their) compensation was not, is

not, or will not be directly or indirectly related to the specific recommendations or views contained in this research report.

OTHER DISCLOSURES

The information and statistics in this report have been obtained from sources we believe are reliable but we do not warrant their accuracy or

completeness. We do not undertake to advise the reader as to changes in figures or our views. This is not a solicitation of an order to buy or

sell any securities.

BB&T Scott & Stringfellow and BB&T Capital Markets are divisions of BB&T Securities, LLC, member FINRA/SIPC, a wholly owned nonbank

subsidiary of BB&T Corporation. The securities sold, offered or recommended are not a deposit, not FDIC insured, not guaranteed by a bank,

not guaranteed by any federal government agency and may go down in value.

The opinions expressed are those of the analyst(s) and not those of BB&T Corporation or its executives.

(This page is intentionally left blank.)

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