May 31, 2016 | Kailash Concepts

The Revenue Wreck

Are We Paying Rational Prices for an Ex-Growth America?

 Introduction: R1000 Sales Growth Is Approaching Great Recession Lows

 Valuations Have Not Fallen to Reflect Slowing Sales Growth
 Kailash Portfolio by Growth Quintile: Best Opportunity in Fastest Growing Kailash Portfolio Stocks
 Conclusions
 Appendix – Energy Sector Is Not the Primary Driver of Slowing Sales Growth

Introduction: R1000 Sales Growth Is Approaching Great Recession Lows

Over the last several years we have noticed that market participants seem to be paying ever larger amounts for firms that
demonstrate an ability to grow top-line irrespective of underlying fundamental firm health. The over-arching argument in favor of
such behavior has been that in a world where revenue growth has become increasingly scarce, growth is therefore intrinsically more
valuable. In this paper we explore the significant slowing of sales growth. We found that the R1000 3-year sales growth is at or near
the Great Recession low and that there has not been a corresponding decline in most valuation metrics to reflect this slower growth.
Our analysis also showed no correlation between 3-year revenue growth and average stock performance. However, we found that
the Kailash models were very effective in differentiating between stocks that would outperform and stocks that would underperform
among sales growth quintiles.

To the degree you believe that the Russell 1000 represents a reasonable proxy for public corporations in America, Figure 1 below
charts the rolling 3-year absolute revenue growth of the index’s constituents. It certainly conforms to the central construct of growth
bulls’ thesis: revenue growth is at levels last seen in the depths of the Great Recession. Market participants often categorize
themselves as bulls or bears, pessimists or optimists, or people who see the investing world as a glass half full or half empty. For
full disclosure, certain members of the Kailash team have been accused of “…looking at the investing world as if it were a half-
empty glass of dirty water with a crack in it and perpetually worrying that someone was trying to steal it from them.” Yet even given
this characterization, the chart below seems rather shocking particularly in light of just how resilient markets have been.

Fig. 1: The R1000 3-year sales growth is approaching the Great Recession lows

Rolling 3-Year Sales Growth of the R1000 Universe

50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%

Source: Kailash Capital, Russell, Compustat; Data from 4/30/1989-4/30/2016

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May 31, 2016 | Kailash Concepts

We cut the Russell 1000 up into quintiles of 3-year revenue growth with Quintile 1 representing the 200 companies with the worst 3-
year growth (Figure 2) and Quintile 5 representing the 200 companies with the best 3-year Revenue growth (Figure 6). Incredibly
there has, without exception, been nowhere to hide. From the worst to the best, every quintile of stocks in the R1000 is at or near
its Great Recession lows.

Fig. 2: Slowest growth quintile 1 Fig. 3: Quintile 2

Rolling 3-Year Sales Growth of Quintile 1 in R1000 Rolling 3-Year Sales Growth of Quintile 2 in R1000

15% 30%
10%
25%
5%
0% 20%
-5% 15%
-10%
10%
-15%
-20% 5%
-25% 0%
-30%
-5%
-35%
-40% -10%

Source: Kailash Capital, Russell, Compustat; Data from 4/30/1989-4/30/2016

Fig. 4: Middle growth quintile 3 Fig. 5: Quintile 4

Rolling 3-Year Sales Growth of Quintile 3 in R1000 Rolling 3-Year Sales Growth of Quintile 4 in R1000

70% 120%

60% 100%
50%
80%
40%
60%
30%
40%
20%

10% 20%

0% 0%

Source: Kailash Capital, Russell, Compustat; Data from 4/30/1989-4/30/2016

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Fig. 6: Fastest growth quintile 5

Rolling 3-Year Sales Growth of Quintile 5 in R1000

350%

300%

250%

200%

150%

100%

50%

0%

Source: Kailash Capital, Russell, Compustat; Data from 4/30/1989-4/30/2016

Valuations Have Not Fallen to Reflect Slowing Sales Growth

Investors seem to have become accustomed to operating in this ex-growth world and have continued to send equities in general on
a near vertical trajectory since the depths of the Great Recession as corporate America has become increasingly adept at
squeezing more cash flows out of a typical dollar of revenue. Figure 7 below shows that this trend, however, has begun to take its
toll in the form of increasingly elevated market valuations at the same time revenue growth has approached record lows. While 3-
year revenue growth today has hit the same low levels seen at the bottom of the Great Recession, market participants are paying a
65%+% higher price on EV/FCF than they did in the depths of 2009. The missing ingredient, of course, is fear and uncertainty, but
we would argue investors should be mindful of what they are paying for and cross-check that with whatever macro-economic views
they may have.

Fig. 7: EV/FCF valuation has risen 65+% since the Great Recession despite 3-year revenue growth falling similarly low

EV/FCF of the R1000 Universe

26x

24x

22x

20x

18x

16x

14x
Valuations have risen
12x north of 65% since the
Great Recession
10x

Source: Kailash Capital, Russell, Compustat; Data from 2/28/2009-4/30/2016

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May 31, 2016 | Kailash Concepts

While the data above certainly support the assertion that growth has become scarce, we find it a little surprising that investors are
so readily convinced that revenue growth is somehow more valuable. History is unequivocal in demonstrating that revenue growth
has had virtually no predictive value for stock returns. Figure 8 below splits the universe into rolling 3-year growth quintiles and
shows there is no correlation between revenue growth and stock returns.

Fig. 8: There is no correlation between revenue growth quintile and stock performance

Average 12-Month Absolute Stock Returns by 3-Year Revenue Growth Quintile

14%

12%

10%

8%

6%

4%

2%

0%
Universe 1 2 3 4 5
Slowest Fastest
Growers Growers

Source: Kailash Capital, Russell, Compustat; Data from 4/30/1989-4/30/2016

In an effort to better understand the dynamics of “what are we getting and what are we paying” we started with a simple
fundamental view of the cross-sectional characteristics of each group. Figure 9 below shows the historical averages for the R1000
Universe and by quintile. These historical averages are then followed by where we are today. When reviewing this table, it is again
easy to conclude that we are in a significant revenue recession viewed by the universe or by quintile. Current revenue trends are
abysmal relative to their history. However, it would appear that this current lack of revenue growth is not reflected in more modest
valuations. In fact, most valuation metrics are higher now (e.g., EV/Sales and P/E) despite the near-record low sales growth. With
that said, there are a few instances where ROE and operating margin are currently healthier than historic averages, but these
positive variances are usually marginal and seem inadequate to justify the premiums we see. This raises the question: Are we
overpaying for the current near-record low sales growth?

Fig. 9: Quintile analysis confirms a disconnect between deteriorating sales growth and very high valuation metrics

Rolling 3-Yr Operating

Sales Growth FCF/EV EV/Sales P/E ROE Margins
R1000 Historical Average 23.3% 3.5% 1.6x 21.5x 19.1% 24.7%
Universe Where We Are Today 3.0% 4.4% 2.2x 24.3x 23.6% 26.3%
Quintile Historical Average -12.7% 3.7% 1.4x 24.8x 14.6% 23.5%
1 Where We Are Today -28.8% 3.6% 2.1x 40.2x 15.0% 19.6%
Quintile Historical Average 13.2% 3.8% 1.5x 19.0x 21.3% 23.5%
2 Where We Are Today -0.1% 5.5% 2.0x 18.4x 23.0% 30.2%
Quintile Historical Average 31.1% 3.7% 1.5x 19.5x 22.5% 23.8%
3 Where We Are Today 11.9% 4.5% 2.0x 20.9x 38.0% 26.2%
Quintile Historical Average 57.6% 3.6% 1.7x 20.1x 20.6% 25.9%
4 Where We Are Today 25.8% 5.0% 2.2x 19.5x 27.8% 29.2%
Quintile Historical Average 153.9% 2.5% 2.1x 26.6x 16.3% 28.0%
5 Where We Are Today 70.4% 3.3% 2.6x 32.9x 15.0% 27.7%
Source: Kailash Capital, Russell, Compustat; Data from 4/30/1989-4/30/2016

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May 31, 2016 | Kailash Concepts

To try and answer this question we thought it would be productive to research what history suggests we have historically paid for
revenue growth that is comparable to today’s growth. While the explanation behind Figure 10 below sounds complex, the
process is actually pretty straightforward. We essentially took the R1000 universe and each of its quintiles and then deciled the
time periods for each quintile based on revenue growth. This allows us to match the current revenue growth situation for each
quintile with the closest historical decile of revenue growth. To help explain what that means, let’s start by looking at the second
column of the R1000 Universe, “Current Decile of 3-Yr Sales Growth within Group,” shows a “1.” That means that across the time-
series history of the R1000, today’s 3-year revenue growth rate of 3% (found in R1000, row “Where We Are Today”) puts the
current growth rate in the bottom decile of time series monthly observations of rolling three year growth rates. Across every quintile
the current growth rate is in the historic worst decile of time periods. This clearly indicates a revenue recession. We then present
the historical averages for critical financial metrics that were associated with this worst decile. The conclusion is not encouraging.
The third row to the R1000 which is “Premium/(Discount)” allows us to quickly conclude we are currently paying a significant
premium compared to history in other periods of similarly slow revenue growth particularly as you move up the growth spectrum
(Q3-Q5). In our minds this speaks to the need for particular care to be taken when considering high-growth firms for portfolio
inclusion, and we believe the Kailash models may help investors remain disciplined.

Fig. 10: Most of the quintiles are in bottom time-series decile and look expensive relative to the average of the decile

Current Decile of
3-Yr Sales Growth Rolling 3-Yr
Group within Group Sales Growth FCF/EV EV/Sales P/E ROE Margins
Historical Average 4.0% 5.4% 1.6x 19.2x 19.8% 26.2%
R1000
1 Where We Are Today 3.0% 4.4% 2.2x 24.3x 23.6% 26.3%
Universe
Premium/Discount 20% 35% 26% 19% 0%
Historical Average -30.8% 3.3% 1.8x 34.7x 10.5% 24.9%
Quintile 1 1 Where We Are Today -28.8% 3.6% 2.1x 40.2x 15.0% 19.6%
Premium/Discount -10% 15% 16% 43% -22%
Historical Average -3.6% 5.1% 1.4x 17.4x 19.6% 24.1%
Quintile 2 1 Where We Are Today -0.1% 5.5% 2.0x 18.4x 23.0% 30.2%
Premium/Discount -8% 39% 6% 17% 26%
Historical Average 8.9% 6.1% 1.4x 16.3x 23.3% 24.6%
Quintile 3 1 Where We Are Today 11.9% 4.5% 2.0x 20.9x 38.0% 26.2%
Premium/Discount 25% 39% 28% 63% 7%
Historical Average 22.5% 6.6% 1.4x 16.8x 22.1% 26.8%
Quintile 4 1 Where We Are Today 25.8% 5.0% 2.2x 19.5x 27.8% 29.2%
Premium/Discount 24% 61% 16% 26% 9%
Historical Average 71.3% 5.2% 2.4x 21.4x 18.0% 31.5%
Quintile 5 1 Where We Are Today 70.4% 3.3% 2.6x 32.9x 15.0% 27.7%
Premium/Discount 36% 5% 53% -17% -12%

Source: Kailash Capital, Russell, Compustat; Data from 4/30/1989-4/30/2016

In Figures 11 and 12 below we have graphed the premiums/(discounts) shown above paid for FCF Yields and the ROE differentials,
respectively, for all revenue growth quintiles. We are struck by the dispersion of the two tails. Slow growers are priced at a discount
to historical average FCF/EV despite significantly better ROE while at the other end of the spectrum, growth investors seem to be
paying what some might argue are reckless premiums for revenue growth despite atypically low ROE when compared to similar
periods in history. So while our analysis above does indeed agree with growth aficionados’ assertions that we are in a period of
epically low growth, the simple analysis below would indicate that investors are simply paying significantly more than they have in
other periods where growth has been unusually scarce. We believe this is cause for caution.

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May 31, 2016 | Kailash Concepts

Fig. 11: Despite large premiums paid for the fastest Fig. 12: …investors are receiving 17% lower ROE relative to
growers… history

FCF/EV Premium/Discount Today vs. History ROE Premium/Discount Today vs. History
40% 36% 70% 63%
60%
30% 25% 24% 50% 43%

20% 40%
30% 26%
17%
10% 20%
10%
0% 0%
-10% -10%
-10% -8% -20%
-17%
-20% -30%
1 2 3 4 5 1 2 3 4 5
Slowest Fastest Slowest Fastest
Growers Growers Growers Growers

Source: Kailash Capital, Russell, Compustat; Data from 4/30/1989-4/30/2016

Kailash Portfolio by Growth Quintile: Best Opportunity in Fastest Growing Kailash Portfolio Stocks

In an effort to see how the Kailash models were faring in attempting to optimize stock selection across all the various quintiles of
revenue growth, Figure 13 below shows the Kailash portfolio characteristics and the market characteristics for each quintile of
growth. In Quintiles 1-4 we find a fairly homogenous story where the Kailash picks in each quintile deliver roughly equivalent rates
of historical revenue growth while offering investors substantially higher cash flows, lower EV/sales, lower P/E despite equivalent if
not higher ROEs and operating margins. Intuitively then, we would encourage investors to cross-check the various levels of growth
of their holdings and compare their fundamental metrics with the relevant quintiles and associated Kailash picks. We hope that by
doing this it helps clients reconcile various levels of valuation and firm health with different rates of revenue growth. For example, if
a client owns a deep cyclical that has been under significant revenue pressure over the last few years (a stock that would be in
quintile 1) and you believe the firm is due to benefit from mean reversion, we imagine it would be beneficial to see if this stock was
among the Kailash picks and, if not, consider the possible opportunity costs of this stock vs. one of those held in the Kailash
portfolio. With that said, we have to admit that Quintile 5 represents a serious outlier. Unlike Quintiles 1-4, the Kailash quintile 5
high-growth stocks, while offering a significant value advantage, also have historical growth rates that trail the group’s growth rate
by a significant margin (55.8% vs. 70.4%). We believe that this is a function of a select few ultra high-growth stocks that lack an
economic model and do not generate the things we are most fond of (e.g., good profits and FCF). By avoiding these high revenue
growth firms that lack profitable and self-funding business models, we are effectively forced down the growth curve. With that said
we would encourage our readers to take a hard look at some of these ultra high-growth firms that Kailash portfolios have avoided
and ask “when will they be profitable?” and “what type of equity risk premium would decimate the share prices?”.

Fig. 13: Kailash portfolio stocks are consistently less expensive across all quintiles while typically having higher ROEs

Rolling 3-Yr
Sales Growth FCF/EV EV/Sales P/E ROE Margins
Large Cap Where R1000 Portfolio Is Today 1.0% 7.3% 1.5x 15.9x 32.8% 26.1%
Universe Where LC Universe Is Today 3.0% 4.4% 2.2x 24.3x 23.6% 26.3%
Where R1000 Portfolio Is Today -20.8% 6.6% 1.3x 18.5x 23.4% 24.2%
Quintile 1
Where LC Universe Is Today -28.8% 3.6% 2.1x 40.2x 15.0% 19.6%
Where R1000 Portfolio Is Today 0.8% 7.7% 1.8x 15.0x 41.8% 27.6%
Quintile 2
Where LC Universe Is Today -0.1% 5.5% 2.0x 18.4x 23.0% 30.2%
Where R1000 Portfolio Is Today 11.4% 7.8% 1.1x 15.2x 33.2% 24.2%
Quintile 3
Where LC Universe Is Today 11.9% 4.5% 2.0x 20.9x 38.0% 26.2%
Where R1000 Portfolio Is Today 27.6% 7.9% 1.8x 15.2x 24.1% 29.5%
Quintile 4
Where LC Universe Is Today 25.8% 5.0% 2.2x 19.5x 27.8% 29.2%
Where R1000 Portfolio Is Today 55.8% 3.5% 1.7x 13.1x 48.0% 24.5%
Quintile 5
Where LC Universe Is Today 70.4% 3.3% 2.6x 32.9x 15.0% 27.7%
Source: Kailash Capital, Russell, Compustat; Data from 4/30/1989-4/30/2016

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May 31, 2016 | Kailash Concepts

It is our core belief that markets are indeed inefficient and, with the tidal wave of money flowing to index funds and trendy lo w
volatility vehicles, these imbalances have been expanding at a pace not seen since deep into the Tech Bubble. What is fascinating
to us is the degree to which some investors allow “investment stories” to carry the day despite poor fundamental metrics.

In working through this research, we could not help but ask ourselves once again, what might be a better way to source reasonably
priced revenue growth? We think an excellent area of opportunity would be to focus on fast growing and highly ranked stocks in the
Kailash Ranking Tools. These stocks usually have stable businesses with robust capital structures, honest accounting, adept
management, and reasonable or attractive valuations. We think that the fastest growers among the highly ranked Kailash stocks
would represent an excellent pond to source growth and generate alpha.

The data confirm the attractiveness of the top ranked stocks with the highest 3-year sales growth. We ran a simple grid that showed
the intersection of our aggregate model rank with trailing 3-year revenue growth and found that there was indeed a robust sample of
firms that, despite having logged top rates of growth over the prior three years have still not been embraced and elevated to “story
stock” status. These stocks are shown in the green bars in the back right corner of Figure 14 below. These stocks’ average
performances have been impressive and are worth further investigation should any of these names be on your radar. In particular,
the stocks in the top quintile of both Kailash rank and sales growth (5, 5) performed particularly well with 1,200 bps of average
annual outperformance. The neighboring green bars (4, 5 and 5, 4) also performed quite well with ~500 bps of average annual
outperformance.

Fig. 14: Stocks in the corner of best rank and fastest sales growth have been the best opportunities for outperformance

12m Excess Returns by Kailash Rank and 3-Year Sales Growth

15%

10%

5%

5
0%
4
3
-5%
2
1
-10%
1 2 3 4 5

Aggregate Rank Quintiles

Source: Kailash Capital, Russell, Compustat; Data from 4/30/1989-4/30/2016

It is worth noting that there is an especially wide range of stock performance within the top quintile of 3-year sales growth. In fact,
the Kailash Rank Quintiles have the most profound effect within the fastest growing sales quintile in differentiating the stocks that
significantly outperform vs. those that significantly underperform. There is a whopping 1,900 bps 12-month performance spread
between the top-ranked quintile vs. the bottom-ranked quintile within the fastest growing quintile of stocks. There also seems to be
a significant dispersion in the number of firms making up these groups as the fastest growers with the highest aggregate rank have
nearly 50% fewer firms today than their historical average. On the other end of the spectrum, the fastest growers with the poorest
aggregate rank have nearly 50% more firms today than their historical average.

Given the significant opportunities historically seen among the green bars in Figure 14, we list below in Exhibits 1-3 the attractive
stocks currently in each of the three green bars. We also provide in Exhibit 4 the unattractive stocks currently in the back left corner
red group. We hope that clients will find some compelling investments among these stocks. Please contact your
Kailash Concepts representative if you have any questions or comments.

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May 31, 2016 | Kailash Concepts

Exhibit 1: Attractive Top Quintile 5 of Aggregate Rank and Top Quintile 5 of 3-Year Sales Growth

May 2016 R1000 Rolling 3-Yr Balance

Aggregate Portfolio Market Sales Sheet Earnings Analyst Market
Rank Ticker Stock Company Name Price Cap ($m) Growth Valuation Quality Quality Quality Quality
14 ADS Y ALLIANCE DATA SYSTEMS CORP 203.31 12,377 76.8% 4 5 5 4 1
52 AAL Y AMERICAN AIRLINES GROUP INC 34.69 20,316 79.4% 4 5 5 4 2
90 KORS Y MICHAEL KORS HOLDINGS LTD 51.66 9,268 133.9% 5 3 5 5 5
91 RDC ROWAN COMPANIES PLC 18.81 2,348 53.5% 5 4 3 4 3
123 DISCA DISCOVERY COMMUNICATIONS INC 27.31 12,459 42.5% 4 4 4 1 4
135 MCHP MICROCHIP TECHNOLOGY INC 48.59 9,888 44.9% 4 5 4 3 4
154 LRCX LAM RESEARCH CORP 76.40 12,172 73.5% 5 5 4 5 4
165 GILD GILEAD SCIENCES INC 88.21 125,435 236.4% 5 5 5 5 1
166 TRN TRINITY INDUSTRIES 19.51 2,940 55.9% 4 5 5 4 1

Source: Kailash Capital, Russell, Compustat; Data from 4/30/2016

Exhibit 2: Attractive Top Quintile 5 of Aggregate Rank and Quintile 4 of 3-Year Sales Growth

May 2016 R1000 Rolling 3-Yr Balance

Aggregate Portfolio Market Sales Sheet Earnings Analyst Market
Rank Ticker Stock Company Name Price Cap ($m) Growth Valuation Quality Quality Quality Quality
6 AAPL Y APPLE INC 93.74 513,550 34.2% 5 5 5 5 1
11 AMP Y AMERIPRISE FINANCIAL INC 95.90 16,402 18.9% 5 5 4 4 1
29 GPN Y GLOBAL PAYMENTS INC 72.18 9,330 21.4% 4 3 5 5 3
42 ADI Y ANALOG DEVICES 56.32 17,460 28.3% 3 5 4 3 3
44 URBN Y URBAN OUTFITTERS INC 30.32 3,557 23.3% 5 3 5 3 4
50 AMGN Y AMGEN INC 158.30 119,358 25.5% 4 5 5 5 3
54 ON Y ON SEMICONDUCTOR CORP 9.47 3,902 20.8% 4 5 4 1 3
59 CIM Y CHIMERA INVESTMENT CORP 14.20 2,666 34.3% 4 4 2 1 5
68 MSM Y MSC INDUSTRIAL DIRECT -CL A 77.50 4,756 19.6% 4 1 5 4 5
76 TSN TYSON FOODS INC -CL A 65.82 23,900 19.1% 4 3 4 4 5
78 EXC EXELON CORP 35.09 32,280 25.4% 4 4 3 4 5
80 EMN Y EASTMAN CHEMICAL CO 76.38 11,286 19.1% 5 3 5 1 4
93 LEA Y LEAR CORP 115.13 8,573 25.0% 5 4 4 5 2
95 GRPN GROUPON INC 3.62 2,141 33.6% 4 5 2 4 5
101 WLK Y WESTLAKE CHEMICAL CORP 50.19 6,536 25.0% 5 3 5 2 1
104 WDR Y WADDELL&REED FINL INC -CL A 20.34 1,685 27.7% 5 4 4 1 1
110 FFIV F5 NETWORKS INC 104.75 7,016 36.8% 5 5 5 5 1
111 CDNS CADENCE DESIGN SYSTEMS INC 23.19 6,980 27.4% 3 5 5 5 4
113 BA BOEING CO 134.80 86,247 19.0% 5 4 5 3 2
117 CTXS Y CITRIX SYSTEMS INC 81.84 12,588 26.7% 4 4 5 5 4
122 CREE CREE INC 24.51 2,474 34.0% 2 5 2 3 5
127 WYN WYNDHAM WORLDWIDE CORP 70.95 7,937 20.4% 5 4 5 3 2
128 JKHY HENRY (JACK) & ASSOCIATES 81.03 6,390 23.6% 3 1 5 5 5
131 RMD RESMED INC 55.80 7,812 21.2% 4 3 5 2 4
132 JWN NORDSTROM INC 51.13 8,871 18.8% 5 4 5 1 2
146 SNI SCRIPPS NETWORKS INTERACTIVE 62.35 8,024 30.8% 5 3 5 5 5
147 CPA COPA HOLDINGS SA 63.75 2,768 29.5% 5 4 3 1 5
159 LAZ Y LAZARD LTD 36.05 4,525 20.3% 5 5 5 3 2
161 ALK ALASKA AIR GROUP INC 70.43 8,816 20.2% 5 4 5 5 2
163 URI UNITED RENTALS INC 66.93 5,982 27.4% 5 4 5 2 3
171 SPR Y SPIRIT AEROSYSTEMS HOLDINGS 47.15 5,937 23.1% 5 4 5 3 1
173 RPM RPM INTERNATIONAL INC 50.53 6,713 18.6% 4 2 5 1 4

Source: Kailash Capital, Russell, Compustat; Data from 4/30/2016

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Exhibit 3: Attractive Quintile 4 of Aggregate Rank and Top Quintile 5 of 3-Year Sales Growth

May 2016 R1000 Rolling 3-Yr Balance

Aggregate Portfolio Market Sales Sheet Earnings Analyst Market
Rank Ticker Stock Company Name Price Cap ($m) Growth Valuation Quality Quality Quality Quality
184 IPGP IPG PHOTONICS CORP 86.67 4,583 60.2% 3 3 4 3 5
185 RAX RACKSPACE HOSTING INC 22.87 2,994 52.9% 4 5 5 3 1
201 AVGO Y BROADCOM LTD 145.75 40,535 192.8% 3 3 5 5 4
204 LPNT Y LIFEPOINT HEALTH INC 67.56 2,914 55.2% 4 4 3 4 3
222 UTHR UNITED THERAPEUTICS CORP 105.20 4,814 60.0% 4 5 4 4 1
225 ABC AMERISOURCEBERGEN CORP 85.10 17,557 72.5% 5 3 5 4 1
226 SAVE SPIRIT AIRLINES INC 43.93 3,128 57.6% 3 4 5 4 2
227 PKG PACKAGING CORP OF AMERICA 64.88 6,237 101.9% 5 2 5 2 2
229 VNTV VANTIV INC 54.54 8,480 69.6% 4 2 5 5 4
233 ALGN ALIGN TECHNOLOGY INC 72.19 5,739 51.0% 1 3 4 5 5
274 GOOGL Y ALPHABET INC 707.88 486,560 49.5% 2 3 4 5 4
281 VMW Y VMWARE INC -CL A 56.91 24,013 44.3% 4 5 4 4 1
285 RHT Y RED HAT INC 73.37 13,294 54.0% 2 4 4 5 3

Source: Kailash Capital, Russell, Compustat; Data from 4/30/2016

Exhibit 4: Unattractive Quintile 1 of Aggregate Rank and Top Quintile 5 of 3-Year Sales Growth

May 2016 R1000 Short Rolling 3-Yr Balance

Aggregate Portfolio Market Sales Sheet Earnings Analyst Market
Rank Ticker Stock Company Name Price Cap ($m) Growth Valuation Quality Quality Quality Quality
851 ACHC Y ACADIA HEALTHCARE CO INC 63.19 4,470 307.1% 1 1 1 3 1
850 DXCM Y DEXCOM INC 64.38 5,369 307.1% 1 2 1 2 1
849 TSLA Y TESLA MOTORS INC 240.76 31,642 307.1% 1 2 1 1 1
847 BMRN Y BIOMARIN PHARMACEUTICAL INC 84.68 13,678 77.7% 1 2 1 2 1
840 GPOR Y GULFPORT ENERGY CORP 31.30 3,390 185.2% 1 1 1 4 2
837 NFLX Y NETFLIX INC 90.03 38,559 90.4% 1 2 1 2 1
833 BKD Y BROOKDALE SENIOR LIVING INC 18.46 3,477 79.1% 1 2 1 1 1
832 SRCL Y STERICYCLE INC 95.56 8,109 56.1% 1 1 2 3 2
831 AGN Y ALLERGAN PLC 216.56 85,433 154.8% 1 2 1 3 1
828 INCY Y INCYTE CORP 72.27 13,489 153.7% 1 3 2 2 1
827 WWAV Y WHITEWAVE FOODS CO 40.21 7,087 66.3% 1 1 3 4 2
826 KHC Y KRAFT HEINZ CO 78.07 94,775 73.7% 1 2 1 2 3
824 SKX Y SKECHERS U S A INC 33.05 5,077 101.7% 1 2 2 4 1
822 ALXN Y ALEXION PHARMACEUTICALS INC 139.28 31,428 129.6% 1 3 1 3 1
820 HAIN Y HAIN CELESTIAL GROUP INC 41.86 4,316 82.2% 1 1 2 2 1
819 N Y NETSUITE INC 81.04 6,467 140.0% 1 3 1 3 2
818 MIC Y MACQUARIE INFRASTRUCTURE CP 70.39 5,632 58.5% 2 1 2 3 2
813 NOW Y SERVICENOW INC 71.48 11,493 307.1% 1 3 1 5 1
812 HHC Y HOWARD HUGHES CORP 105.17 4,177 111.5% 1 3 1 3 2
811 SIG Y SIGNET JEWELERS LTD 108.56 8,620 65.1% 1 1 3 4 1
809 PANW Y PALO ALTO NETWORKS INC 150.87 13,337 255.2% 1 3 1 5 1
804 SGEN Y SEATTLE GENETICS INC 35.48 4,956 59.8% 1 4 1 2 2
801 TOL Y TOLL BROTHERS INC 27.30 4,656 116.3% 1 4 1 3 1
800 AAP Y ADVANCE AUTO PARTS INC 156.10 11,444 56.9% 2 1 3 1 1
798 P Y PANDORA MEDIA INC 9.93 2,234 203.6% 1 4 1 2 2
796 SCTY Y SOLARCITY CORP 30.32 2,967 210.6% 1 5 1 2 1
792 FANG Y DIAMONDBACK ENERGY INC 86.58 5,783 307.1% 1 1 2 4 4
790 SPLK Y SPLUNK INC 51.98 6,838 236.0% 1 4 1 5 1
786 MHK Y MOHAWK INDUSTRIES INC 192.63 14,241 39.5% 2 1 3 4 2
785 CRM Y SALESFORCE.COM INC 75.80 50,856 118.6% 1 2 2 3 3

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784 MIDD Y MIDDLEBY CORP 109.64 6,283 84.4% 1 1 3 3 2

783 MD Y MEDNAX INC 71.29 6,683 53.0% 2 1 3 3 1
779 DLTR Y DOLLAR TREE INC 79.71 18,729 109.6% 1 2 1 2 4
778 SSNC Y SS&C TECHNOLOGIES HLDGS INC 61.15 6,021 81.3% 1 3 1 5 2
773 PRGO Y PERRIGO CO PLC 96.67 13,833 64.0% 2 3 2 4 1
769 ZBRA ZEBRA TECHNOLOGIES CP -CL A 62.56 3,263 268.3% 1 4 1 3 1
768 ICE INTERCONTINENTAL EXCHANGE 240.03 28,564 243.5% 1 2 2 3 2
763 MLM Y MARTIN MARIETTA MATERIALS 169.23 10,912 73.7% 1 1 3 3 3
760 ATHN Y ATHENAHEALTH INC 133.30 5,190 119.0% 1 2 2 5 3
759 LNKD Y LINKEDIN CORP 125.31 16,735 189.9% 1 4 2 5 1
753 YELP Y YELP INC 21.00 1,596 299.6% 1 4 1 1 2
752 JLL JONES LANG LASALLE INC 115.17 5,188 51.7% 3 2 2 4 1
750 CMG CHIPOTLE MEXICAN GRILL INC 420.97 12,355 50.7% 1 1 5 1 1
746 PDCO Y PATTERSON COMPANIES INC 43.35 4,296 40.8% 1 2 1 2 4
743 LKQ Y LKQ CORP 32.05 9,794 74.5% 2 1 2 3 4
742 HUM HUMANA INC 177.07 26,257 38.8% 1 4 1 3 2
736 ULTI ULTIMATE SOFTWARE GROUP INC 196.59 5,660 86.0% 1 2 2 5 3
730 REGN REGENERON PHARMACEUTICALS 376.71 39,422 197.7% 1 2 5 3 1
720 AAN AARON'S INC 26.21 1,903 43.1% 3 1 2 3 2
718 WEC Y WEC ENERGY GROUP INC 58.21 18,376 39.6% 2 1 1 4 4
717 IONS Y IONIS PHARMACEUTICALS INC 40.97 4,931 178.0% 1 4 1 2 2
715 CSGP Y COSTAR GROUP INC 197.31 6,414 103.4% 1 3 1 5 3
713 CY Y CYPRESS SEMICONDUCTOR CORP 9.03 3,000 108.9% 1 4 1 1 3
707 HAR Y HARMAN INTERNATIONAL INDS 76.76 5,439 59.5% 2 3 2 4 1
703 TRIP Y TRIPADVISOR INC 64.59 9,381 95.6% 1 1 4 1 2
700 THC TENET HEALTHCARE CORP 31.69 3,121 104.3% 3 4 1 3 1
697 LEN LENNAR CORP 45.31 9,728 124.8% 1 3 3 5 2
693 CCI Y CROWN CASTLE INTL CORP 86.88 28,998 50.6% 2 1 2 2 4
689 EQT EQT CORP 70.10 10,694 42.5% 1 3 3 1 2

Source: Kailash Capital, Russell, Compustat; Data from 4/30/2016

Conclusion:

We believe the following to be key conclusions from our analysis:

1. The Russell 1000 3-year sales growth is at or near the Great Recession lows for not only the index as a whole but also for each
of the sales growth quintiles.

2. Despite the significant decline in revenue growth, there has not been a corresponding decline in most valuation metrics to
reflect the slower growth. Even our analysis of each of the quintiles of sales growth confirms a disconnect between
deteriorating sales growth and very high valuation metrics. Our analysis by sales growth quintile showed that we are currently
in the worst decile of growth periods for each of the groups and we are currently paying a significant premium compared to
history in other periods of similarly slow revenue growth, particularly as you move up the growth spectrum.

3. Our analysis showed no correlation between revenue growth quintile and average stock performance for the quintiles as a
whole.

4. However, we found that the Kailash models were very effective in differentiating between stocks that would outperform and
stocks that would underperform among the sales growth quintiles. In particular, we found that the fastest growers among the
highly ranked Kailash stocks (green bars in Figure 14) represented an excellent pond to source growth and generate alpha. In
particular, the stocks in the top quintile of both Kailash rank and sales growth (5, 5) performed particularly well with 1,200 bps of
average annual outperformance. The neighboring green bars (4, 5 and 5, 4) also performed quite well with ~500 bps of average
annual outperformance. The Kailash Rank Quintiles have the most profound effect within the fastest growing sales quintile in
differentiating the stocks that significantly outperform vs. those that significantly underperform. There is a whopping 1,900 bps
12-month performance spread between the top-ranked quintile vs. the bottom-ranked quintile within the fastest growing quintile
of stocks.

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Appendix:

As some clients may wonder if the slowing R1000 sales growth is driven in large part due to falling energy prices and the
corresponding drop in the energy sector’s revenues, we show below the R1000 sales growth excluding the energy sector to show
that the results are only modestly different.

Fig. 15: R1000 sales growth is not materially different when the energy sector is excluded

Rolling 3-Year Sales Growth of the R1000 Universe ex Energy

140%

120%

100%

80%

60%

40%

20%

0%

Source: Kailash Capital, Russell, Compustat; Data from 4/30/1989-4/30/2016

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Disclaimer

The information, data, analyses and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for
informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be
correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively,
“Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the
information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner
without the prior written consent of Kailash Capital.

Kailash Capital, in preparing the information, data, analyses and opinions presented herein, has obtained data, statistics and
information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent
verification of any of the data, statistics, and information it receives.

Kailash Capital and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational
purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult
your own tax, legal and accounting advisors before engaging in any transaction.

© 2018 Kailash Capital, LLC – All rights reserved.

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