G ILCHRIST B ERG , P RESIDENT W ATER S TREET C APITAL M ARCH 15, 2017 - PowerPoint PPT Presentation

G ILCHRIST B ERG , P RESIDENT W ATER S TREET C APITAL M ARCH 15, 2017

HALL OF FAME PERFORMANCE Templeton Growth A (TEPLX) – Inception 11/29/54 Year TEPLX S&P TEPLX S&P 1955 7.04% 31.41% 1974 -12.07% -26.47% 1956 4.64% 6.48% 1975 37.60% 37.23% 1957 -16.92% -10.72% 1976 46.74% 23.93% 1958 48.81% 43.15% 1977 20.37% -7.16% 1959 14.00% 11.95% 1978 19.21% 6.57% 1960 13.84% 0.45% 1979 26.84% 18.61% 1961 18.29% 26.88% 1980 25.89% 32.50% 1962 -13.52% -8.66% 1981 -0.24% -4.92% 1963 5.14% 22.76% 1982 10.81% 21.55% 1964 28.59% 16.43% 1983 32.91% 22.56% 1965 22.14% 12.46% 1984 2.17% 6.27% 1966 -5.30% -10.02% 1985 27.79% 31.72% 1967 13.74% 23.89% 1986 21.24% 18.67% 1968 37.76% 11.04% 1987 3.11% 5.25% 1969 19.66% -8.40% 1988 23.60% 16.61% 1970 -6.44% 3.94% 1989 22.56% 31.67% 1971 21.93% 14.30% 1990 -9.05% -3.09% 1972 68.56% 19.00% 1991 31.33% 30.47% 1973 -9.92% -14.69% 1/1-6/30/1992 5.77% -0.67% $1,743,085 $475,575 Value of $10,000 Time period: 1955-1992 14.75% 10.85% CAGR $19,329 $28,613 Value of $10,000 Time period: 1955-1963 7.60% 12.39% CAGR Note: TEPLX returns are from Templeton Growth Fund Investor's Guide (57 Great Years) and Morningstar. TEPLX return is without sales charges. S&P returns are with dividends reinvested (compounded monthly prior to 1988 and daily thereafter). 1

WALMART EQUITY 69.125 A. Purchase Date 12/31/1980 $0.24 C. Purchase Date 7/16/1990 $9.19 E. Purchase Date 1/17/1996 $10.00 Sell Date 12/31/1999 $70.25 Sell Date 12/31/1999 $70.25 Sell Date 12/31/1999 $70.25 IRR 34.81% IRR 23.97% IRR 63.68% SPX IRR 17.03% SPX IRR 18.56% SPX IRR 27.17% WMT Multiple 292.7x WMT Multiple 7.6x WMT Multiple 7.0x B. Purchase Date 3/31/1980 $0.11 D. Purchase Date 3/3/1993 $17.06 Sell Date 8/21/1987 $5.36 Sell Date 12/31/1999 $70.25 IRR 69.47% IRR 23.01% SPX IRR 22.76% SPX IRR 21.48% WMT Multiple 49.4x WMT Multiple 4.1x 2 Source: WSC Analysis

AMAZON EQUITY 800 765.98 700 600 E IRR 77% 500 (SPX 5%) 400 300 200 100 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 A. Purchase Date 6/20/1997 $1.50 D. Purchase Date 10/23/2007 $101.09 Sell Date 8/04/2016 $760.00 Sell Date 8/04/2016 $760.00 IRR 38.46% IRR 25.80% SPX IRR 6.66% SPX IRR 6.40% AMZN Multiple 506.7x AMZN Multiple 7.5x B. Purchase Date 12/10/1999 $106.70 E. Purchase Date 12/19/2014 $299.90 Sell Date 8/04/2016 $760.00 Sell Date 8/04/2016 $760.00 IRR 12.50% IRR 77.07% SPX IRR 4.56% SPX IRR 4.95% AMZN Multiple 7.1x AMZN Multiple 2.5x C. Purchase Date 10/01/2001 $5.51 Sell Date 8/04/2016 $760.00 IRR 39.34% SPX IRR 7.20% AMZN Multiple 137.9x 3 Source: WSC Analysis

APPLE EQUITY 108.37 B IRR 110% (SPX 10%) A. Purchase Date 12/19/2003 $1.41 C. Purchase Date 12/27/2007 $28.99 Sell Date 4/28/2015 $134.54 Sell Date 4/28/2015 $134.54 IRR 49.35% IRR 23.26% SPX IRR 8.21% SPX IRR 7.32% APPL Multiple 95.4x APPL Multiple 4.6x B. Purchase Date 12/1/2003 $1.40 D. Purchase Date 2/20/2009 $12.71 Sell Date 12/27/2007 $28.99 Sell Date 4/28/2015 $134.54 IRR 110.40% IRR 46.43% SPX IRR 10.24% SPX IRR 20.24% APPL Multiple 20.7x APPL Multiple 10.6x 4 Source: WSC Analysis

CSX: 5X VERSUS THE S&P OVER NINE YEARS, DIVIDENDS REINVESTED 600% CSX CORP 500% 400% 300% 200% S&P500 100% 0% -100% 06/09/05 06/28/06 07/19/07 08/06/08 08/25/09 09/14/10 09/30/11 10/18/12 11/08/13 11/28/14 Source: Bloomberg and Capital IQ. Chart is from June 9, 2005 to December 31, 2014 5

THE IMPACT OF A HIGH RETURN COMPOUND WINNER % of Dollars Year portfolio invested 1 2 3 4 5 6 7 8 9 10 25.0% $25.0 $31.3 $39.1 $48.8 $61.0 $76.3 $95.4 $119.2 $149.0 $186.3 $232.8 % of the portfolio 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% Annual growth 75.0% $75.0 $82.5 $90.8 $99.8 $109.8 $120.8 $132.9 $146.2 $160.8 $176.8 $194.5 % of the portfolio 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Annual growth 100.0% $100.0 Total $427.4 Total portfolio - end of year 10 15.6% IRR of the portfolio Year 1 2 3 4 5 6 7 8 9 10 Growth in $100: 10% $110 $121 $133 $146 $161 $177 $195 $214 $236 $259 Annual return 25% $125 $156 $195 $244 $305 $381 $477 $596 $745 $931 Annual return 2.6 Multiple return - at 10% annually 9.3 Multiple return - at 25% annually 3.6 25%/10% 159% % gain - at 10% annually 831% % gain - at 25% annually 5.2 25%/10% 6

WHY BOTHER TO SHORT STOCKS? (VERSION 1.0) RULE #1, RULE #2, RULE #3…! Sequence #1 Year 1 Return 40% Year 2 Return 40% Year 3 Return 40% Year 4 Return (-40%) IRR = 13% Sequence #2 Year 1 Return (-40%) Year 2 Return 40% Year 3 Return 40% Year 4 Return 40% IRR = ??? 7

NO SHORT AND HOLD FOR SHORTS: TEN DAYS FROM HELL QQQQ Equity: April 4-18, 2001 8

TIMING WAIT UNTIL YOU SEE THE WHITES OF THEIR EYES “It isn’t a very good fraud unless it goes against you at least 50%.” – Robert Wilson ASCEND / LUCENT COUNTRYWIDE CDS $120 $2,000 $110 $1,800 WSC Involvement $100 $1,600 $90 $1,400 $80 $1,200 $70 WSC Involvement $60 $1,000 $50 $800 $40 $600 $30 $400 $20 $200 $10 $0 $0 Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Mar-02 Jun-03 Sep-04 Dec-05 Mar-07 Jun-08 Countrywide Credit Default Swaps Ascend Lucent 9

PERFORMANCE OF 1991 TOP TEN SHORT POSITIONS 0.97 relative, 4.50 10/11/02 Parametric 4.00 1.5 relative, 4/13/94 Summit 3.50 0.4 relative, Mylan 10/8/98 3.00 Normalized Price 0.4 relative, Cendant 10/8/98 2.50 1.8 relative, 10/5/92 2.00 0.9 relative, 5/13/94 1.50 Carnival Xoma 0.3 relative, National Health 6/15/95 1.00 Nintendo 0.05 relative, 3/31/95 0.50 0.3 relative, Westinghouse Community 11/20/92 0.00 12/31/1990 1/24/1991 2/19/1991 3/14/1991 4/9/1991 5/2/1991 5/28/1991 6/20/1991 7/16/1991 8/8/1991 9/3/1991 9/26/1991 10/21/1991 11/13/1991 12/9/1991 1/3/1992 1/28/1992 2/21/1992 3/17/1992 4/9/1992 5/5/1992 5/29/1992 6/23/1992 7/17/1992 8/11/1992 9/3/1992 9/29/1992 10/22/1992 11/16/1992 12/10/1992 0.3 relative, 7/16/96 Xoma Community Psychiatric Carnival Nintendo National Health Labs Parametric Tech Westinghouse Summit Tech Mylan Labs Cendant 10

WATER STREET CAPITAL: POLAR FUND THE RACE IS NOT TO THE SWIFT POLAR: GROWTH OF A DOLLAR INVESTED AT INCEPTION $7 $6 $5 $4 $3 $2 $1 $0 S&P (with divs) POLAR (Net) 11

WHY BOTHER TO SHORT STOCKS? (VERSION 2.0) THE BEST KEPT SECRET Green Mountain (GMCR) Facebook (FB) $160 $180 $137.82 $158.87 7.9x $150 $120 9.3x $120 $80 $90 $60 $40 $30 $17.11 $17.55 $0 $0 1/3/2012 1/17/2013 2/1/2014 2/16/2015 3/2/2016 5/17/2012 5/2/2013 4/17/2014 4/2/2015 3/17/2016 3/2/2017 FirstSolar (FSLR) Netflix (NFLX) $180 $160 $145.95 $150 $120 $120 19.4x 6.5x $90 $80 $74.84 $60 $40 $30 $11.43 $7.54 $0 $0 1/3/2011 1/13/2012 1/22/2013 2/1/2014 2/11/2015 2/21/2016 3/2/2017 1/3/2011 1/13/2012 1/22/2013 2/1/2014 2/11/2015 2/21/2016 3/2/2017 12

VALEANT PHARMACEUTICALS: A GOOD LONG AND A GREAT SHORT $300 $250 $200 $150 $100 $50 $0 7/31/2014 10/31/2014 1/31/2015 4/30/2015 7/31/2015 10/31/2015 1/31/2016 4/30/2016 7/31/2016 10/31/2016 13

GOLDMAN SHORT BASKET VERSUS AVERAGES – THREE YEARS 135 S&P500 125 Russell 2000 115 105 95 85 Short Basket 75 65 55 45 03/03/14 09/03/14 03/03/15 09/03/15 03/03/16 09/03/16 03/03/17 GSCBMSAL Index SPX index RTY Index Source: Bloomberg. 14

GOLDMAN SHORT BASKET VERSUS AVERAGES – ONE YEAR 135 130 Russell 2000 Short Basket 125 120 S&P500 115 110 105 100 95 3/3/16 4/3/16 5/3/16 6/3/16 7/3/16 8/3/16 9/3/16 10/3/16 11/3/16 12/3/16 1/3/17 2/3/17 3/3/17 GSCBMSAL Index SPX index RTY Index Source: Bloomberg. 15

AIRLINES – GREAT LONGS OR SHORTS? CURRENT OPPORTUNITY TOP AIRPORT DEPARTURE SLOTS • Consolidation set the Wheels in Motion 7,000 – Retrenching around Traditional Network strongholds 6,600 – Leverage Real Estate strengths – Focus on Profit 6,200 • The Moat is created by Real Estate – Slots & Gates – All Departures are not created equal. Position matters 5,800 – Valuable departure times are taken and locked down All Slots are not created equal! Crucial – Profitable network connections are established 5,400 departure times fit network schedules. • Ticket prices establish a Relative Value Proposition New capacity during prime time is 0%!!! – Plenty of room to grow 5,000 – Further segmentation is available 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 – Technology enhancements enable future revenue capture Source:FAA CONSOLIDATION AIRLINE TICKET PRICE HISTORY Inflation Adjusted Ticket Price NETWORK $540 $490 It’s never been cheaper to Fly $440 REAL ESTATE – SLOTS – GATES $390 $340 Management IT Systems Ancillary and Revenue Inflation adjusted ticket prices down 30% $290 Fees Labor Optimization in the last 25 years* $240 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 VALUE & PROFIT * Prices in 2016 Dollars Bureau of Transportation Statistics. 16