u.s. equity view - bb&t scott & stringfellow · monthly market commentary april 2020 . u.s....

Private Client Research

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. While the information above is from sources that BB&T Scott & Stringfellow believes to be reliable, we do not guarantee their accuracy or completeness. Additional information available upon request. Ratings, Price Targets, and Estimates based on consensus data from FactSet. Past performance is no guarantee of future results. Any analysis or calculation is for informational purposes only.

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BB&T Scott & Stringfellow See pages 34-36 for analyst certification and important disclosures

Monthly Market Commentary April 2020

U.S. Equity View

Recent U.S. Equity Market Performance Stocks Decline Again And Then Snap Back. Following a 14-month period when the market (S&P 500) increased more than 40% peak to trough, stocks fell again for the second straight month, giving up all of this previous gain, and then recovering about a third of that in a very short period of time (3 days), marking the sharpest rise since 1933. The world’s economies and thus financial markets remain in a period of extremely high volatility and uncertainty given the coronavirus.

Investment Advisory Group Equity View It is impossible to say with certainty that we have seen the final low of this bear market. History tells us that some of the sharpest short-term rallies often happen during bear markets; however, strong rallies are also common coming off of major market lows. We also know from history that the market’s initial bottom often gets tested again or broken. Normally, we would place the probability of a retest of the market low somewhere around 70% to 80%. However, we think the odds of the market retesting last Monday’s low are less than history would suggest, closer to 50/50. For markets to make a new low from here, the data will likely need to come in worse relative to already depressed expectations. Also, the aggressive fiscal and monetary policy response underway is likely to take the worst-case scenario off the table. History also shows that markets tend to bottom about five months before the economy does. While acknowledging the potential for wider outcomes, our macro team’s base case outlook is that the trough (though not back to full capacity) for the U.S. economy will be around July or August of this year. Thus, stocks bottoming around the current time period or over the next month would be perfectly normal with historical trends.

With the recent sharp move up in the market, we now advocate for a more gradual, averaging-in approach, using pullbacks to become more aggressive in deploying cash. We expect that volatility will remain elevated and dependent on the path of the coronavirus and its impact on economic activity. We believe longer-term investors will be rewarded at current levels and that now this is a good time to revisit current asset allocations to ensure consistency with long-term goals and risk tolerance.

From a positioning standpoint, we see a better risk/reward in U.S. equities relative to most global markets given higher quality companies, favorable sector exposure, relative earnings strength and the stronger relative economic outlook. We also hold a large cap bias as these companies should be better able to navigate the environment given stronger balance sheets and profitability trends. We have a favorable bias toward the growth style, where technology is the largest sector. Although we could see a sharp cyclical snapback in value, growth is likely to show more sustained leadership given technology’s more conservative and cash rich balance sheets, the increasing need of technology to conduct business, and the likelihood that investors will continue to pay a premium for growth in a subdued global economic growth environment.

Our Current Favorite Ideas: See page 2

Sector Performance And Commentary: See pages 4-27

Our Focus Lists: See pages 28-33

Source: FactSet, Bloomberg

+36%

1,200

1,600

2,000

2,400

2,800

3,200

3,600

2015 2016 2017 2018 2019 2020 2021

S&P 500 – Price

Estimate based on consensus target

0%

0%

12%

21%

1% 1%

14%

-5%

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2015 2016 2017 2018 2019 2020E 2021E

S&P 500 – Earnings Growth

Avg

+1SD

–1SD

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1990

1992

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S&P 500 – Forward P/E


BB&T Scott & Stringfellow | Private Client Research 2 of 38

Favorite Ideas, ETF Sector Plays

Favorite Ideas Focus Lists ETF

Sector Equity

Appreciation Equity Income

High Income Ladder

Sector Play

Communication Services FB VZ CenturyLink 7.5% due 4/1/24

XLC

Consumer Discretionary – – – XLY

Consumer Staples MDLZ PM – XLP

Energy LNG CVX – XLE

Financials C PRU Navient Corporation 6.75% due 6/25/25

XLF

Health Care UNH PFE – XLV

Industrials KSU HASI United Rentals, Inc. 6.5% due 12/15/26

XLI

Information Technology ADBE AVGO NCR Corp. 5.0% due 7/15/22

XLK

Materials GRA LYB – XLB

Real Estate CBRE IRM – XLRE

Utilities – D NRG Energy, Inc. 7.25% due 5/15/26

XLU



Monthly Market Commentary

Contents Click any title to jump directly to that section. A “Back to Contents” link at the top of each section will return you to this page.

Sector Performance 4

Historical Returns 4 Expected Returns 5

Sector Commentary 6

Communication Services 6 Consumer Discretionary 8 Consumer Staples 10 Energy 12 Financials 14 Health Care 16 Industrials 18 Information Technology 20 Materials 22 Real Estate 24 Utilities 26

Focus Lists 28

Equity Appreciation 28 Equity Income 30 High Income Ladder 32

Disclosures 34



Sector Performance Back to Contents

Historical Returns Sector Weightings Matter. Sector returns can vary significantly from year to year. Since 2008, for example, the top sector returns have averaged 25%, while the bottom sector returns have averaged (9%). It is notable that no sector has been the top performer in consecutive years. In fact, more often than not the top sector underperformed the S&P 500 the following year. Given this historical pattern, we believe it is important for investors to have some exposure to every segment of the market unless compelling fundamental reasons suggest otherwise.

Cumulative and Annualized

Source: FactSet

Performance Quilt

Source: FactSet

Index Our Sector Cumulative AnnualizedSector Weight Outlook 1 Month YTD 1 Year 3 Year 5 Year 10 Year 15 Year Yea 3 Year 5 Year 10 Year 15 Year Communication Services 11% Market Weight -19.6% -20.8% -8.1% -6% 14% 108% 140% -2% 3% 8% 6%Consumer Discretionary 10% Overweight -18.9% -20.2% -10.7% 19% 42% 252% 278% 6% 7% 13% 9%Consumer Staples 8% Market Weight -17.3% -18.4% -5.5% 2% 21% 143% 237% 1% 4% 9% 8%Energy 3% Market Weight -40.4% -51.2% -52.7% -52% -54% -31% -5% -21% -14% -4% 0%Financials 11% Market Weight -28.5% -33.2% -17.1% -8% 16% 91% 24% -3% 3% 7% 1%Health Care 15% Overweight -15.9% -19.8% -7.9% 16% 23% 207% 263% 5% 4% 12% 9%Industrials 8% Market Weight -25.2% -28.5% -19.0% -6% 14% 125% 142% -2% 3% 8% 6%Information Technology 26% Market Weight -15.6% -15.1% 7.9% 59% 113% 317% 442% 17% 16% 15% 12%Materials 2% Market Weight -21.4% -28.2% -17.0% -9% 1% 70% 107% -3% 0% 5% 5%Real Estate 3% Market Weight -27.7% -24.7% -16.4% 3% 10% 138% 173% 1% 2% 9% 7%Utilities 3% Underweight -24.2% -20.3% -9.6% 9% 39% 155% 214% 3% 7% 10% 8%S&P 500 100% -20.7% -23.0% -9.8% 12% 33% 161% 189% 4% 6% 10% 7%

Spread between best and worst performing sectors 24.7% 36.1% 60.6% 110% 167% 348% 447% 38% 31% 19% 12%

Sector outperformed the S&P 500



Sector Performance Back to Contents

Expected Returns

Expected total returns based on bottom-up consensus price targets and NTM dividend estimates from FactSet

Energy valuation range based on NTM EPS 12 months forward to normalize the multiple

Source: All charts and tables based on data from FactSet

Technical Comment Key Levels: 50-Day Moving Avg. = 3032 (+19%) 200-Day Moving Avg. = 3030 (+19%) Drawn Support Line = 2192 (-14%) Drawn Resistance Line = 3394 (+34%) Weekly Relative Strength (RSI): 34 Comment: The S&P 500’s total return during the past month was -20.7%, with five sectors outperforming and six sectors underperforming. For the past twelve months, the total return for the S&P 500 was -9.8%, also with five sectors outperforming (in order from highest to lowest – Information Technology, Consumer Staples, Health Care, Communication Services and Utilities) and the remaining six sectors underperforming. The market experienced a dramatic sell-off as COVID-19 continued to wreak global havoc. We expect the outlook regarding the impact of COVID-19 will remain the focus of the market and that volatility will remain at elevated levels.

Valuation Return ComponentsMarket Industry Current Target 10-Year Current Fwd EPS Multiple Forward Total

Group Cap ($Bs) Weight Fwd P/E Fwd P/E Median vs. Med Growth Change Yield ReturnS&P 500 20,524 100% 14.5x 17.9x 15.4x (6%) 12.6% 23.5% 2.6% 41.6%

Communication Services 2,196 10.7% 14.6x 18.5x 14.1x 4% 12.8% 26.4% 1.7% 44.4%Consumer Discretionary 2,075 10.1% 19.1x 22.1x 17.6x 9% 16.4% 16.2% 1.7% 37.0%Consumer Staples 1,562 7.6% 16.3x 20.0x 17.7x (8%) 6.3% 22.3% 3.5% 33.4%Energy 559 2.7% 27.2x 20.1x 14.9x 82% 98.4% (26.0%) 8.3% 55.1%Financials 2,302 11.2% 8.9x 12.7x 12.3x (28%) 8.0% 42.8% 3.4% 57.5%Health Care 3,030 14.8% 12.7x 16.2x 15.2x (16%) 9.8% 27.1% 2.3% 41.7%Industrials 1,727 8.4% 13.9x 16.0x 15.6x (10%) 21.4% 14.9% 2.8% 42.3%Information Technology 5,261 25.6% 17.7x 21.6x 15.2x 16% 9.9% 21.6% 1.6% 35.3%Materials 508 2.5% 14.3x 17.5x 15.1x (5%) 14.4% 22.3% 3.1% 43.1%Real Estate 600 2.9% 15.0x 20.3x 17.9x (16%) 5.9% 35.5% 4.3% 47.8%Utilities 705 3.4% 15.6x 20.1x 15.7x (0%) 5.2% 28.8% 4.1% 39.7%

5%6%6%8%10%10%13%13%14%16%

21%98%

0% 20% 40% 60% 80% 100% 120%

UtilitiesReal Estate

Consumer StaplesFinancials

Health CareInformation Technology

S&P 500Communication Services

MaterialsConsumer Discretionary

IndustrialsEnergy

Expected Growth in Forward EPS19.1x

17.7x16.3x

15.6x15.0x14.6x14.5x14.3x

13.9x13.7x

12.7x8.9x

0x 5x 10x 15x 20x 25x 30x

Consumer DiscretionaryInformation Technology

Consumer StaplesUtilities

Real EstateCommunication Services

S&P 500Materials

IndustrialsEnergy

Health CareFinancials

10-Year Valuation Ranges



Sector Commentary Back to Contents

Communication Services

Summary Forward earnings growth is expected to exceed the broader market while the sector trades in line with its historical median forward P/E vs. a premium of 1% for the S&P 500.

Key Points Facebook (FB) provided some stats about the impact of COVID-19 to its services through the company blog. In countries hit hardest by the virus, total messaging has increased more than 50% over the last month. In addition voice and video calling have more than doubled on Messenger and WhatsApp. “Much of the increased traffic is happening on our messaging services, but we've also seen more people using our feed and stories products to get updates from their family and friends. At the same time, our business is being adversely affected like so many others around the world. We don't monetize many of the services where we're seeing increased engagement, and we've seen a weakening in our ads business in countries taking aggressive actions to reduce the spread of COVID-19.”

Verizon (VZ) is doing its part to help deal with the pandemic by waiving overage charges and late fees, announcing two months waived internet, and voice service charges for current Lifeline customers. Also Fios and DSL broadband internet plans have no data caps, and wireless consumer and small business customers will see an additional 15GB of data added to their plan for no additional charge.

Sector Valuation. The current forward P/E of 14.6x compares to the S&P 500 at 14.5x and a 10-year median of 14.1x. Communication Services trades in line with its historical median vs. a 1% premium for the S&P 500 with the Entertainment sector, which trades at a 70% premium, mostly offset by Telecom, and Media. By group, Entertainment trades at the highest multiple of 24.7x while Telecom trades at the lowest, 8.7x.

Expected Returns. The bottom-up consensus target for the S&P 500 Communication Services index implies total return potential of about 44% vs. 42% for the overall market. Given the volatility and uncertainty about earnings, we believe these targets will be adjusted going forward. For the sector, returns should be driven by multiple recovery, earnings, and a nominal dividend yield.

Top Picks Equity Appreciation Focus List: Facebook (FB)

Equity Income Focus List: Verizon (VZ)

High Income Ladder: CenturyLink 7.5% Sr. Unsec. Notes Due 4/1/24

W. Moultrie Dotterer, CFA / 804-780-3279 / [email protected]

Source: FactSet

S&P 500 Communication Services – Price

Annual EPS Growth

Forward P/E – Absolute

Forward P/E – Relative to S&P 500

107

127

147

167

187

207

227

247

267

2015 2016 2017 2018 2019 2020

Sector S&P 500

21%

-6%

4%

-32%

4%8%

13%

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1.1x

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1.7x

2005 2007 2009 2011 2013 2015 2017 2019

mailto:[email protected]




Expected Returns by Group


Technical Comment Key Levels: 50-Day Moving Avg. = 174 (+19%) 200-Day Moving Avg. = 172 (+18%) Drawn Support Line = 131 (-10%) Drawn Resistance Line = 193 (+32%) Weekly Relative Strength (RSI): 32 Comment: The total return for Communication Services during the past month was -19.6% vs. -20.7% for the S&P 500 and ranked 5th out of the 11 sectors. For the past twelve months, the sector’s total return was -8.1% vs. -9.8% for the S&P 500 and ranked 4th out of all the sectors. Similar to the overall market, the sector fell sharply and is close to testing long-term support levels. We believe the current as well as expected future impact of COVID-19 will remain the near-term driver for stock prices.


Valuation Return ComponentsMarket Current Target 10-Year Current Fwd EPS Multiple Forward Total

Group Cap ($Bs) Weight Fwd P/E Fwd P/E Median vs. Med Growth Change Yield ReturnS&P 500 20,524 100% 14.5x 17.9x 15.4x (6%) 13% 23% 2.6% 42%

Communication Services 2,196 11% 14.6x 18.5x 14.1x 4% 13% 26% 1.7% 44%

Diversified Telecom Services 423 2% 8.7x 10.6x 13.2x (34%) 5% 23% 6.3% 36%Entertainment 417 2% 24.7x 28.1x 25.1x (1%) 18% 14% 0.9% 35%Interactive Media & Services 1,056 5% 18.6x 23.6x 23.1x (19%) 18% 27% 0.0% 50%Media 275 1% 10.5x 14.2x 15.0x (30%) 12% 35% 2.2% 52%

5%

12%

13%

13%

18%

18%

0% 5% 10% 15% 20%

DiversifiedTelecom Services

Media

S&P 500

CommunicationServices

Interactive Media& Services

Entertainment

Expected Growth in Forward EPS

24.7x

18.6x

14.6x

14.5x

10.5x

8.7x

5x 10x 15x 20x 25x 30x 35x

Entertainment

Interactive Media & Services

Communication Services

S&P 500

Media

Diversified Telecom Services





Consumer Discretionary

Source: FactSet

Summary Consumer Discretionary has modestly outperformed the broader market in recent weeks, with select internet and specialty retailers proving comparatively strong versus travel, leisure, and auto. COVID-19 concerns continue to impact investor sentiment for discretionary purchases, and we believe further demand deterioration is possible in the weeks ahead. We continue to favor companies with comparatively limited leverage and plentiful liquidity. XLY is our preferred ETF.

Key Points Auto/Auto Components. We remain notably cautious on auto OEM and auto component manufacturers. Reduced OEM production continues to weigh on major component manufacturers, to include Borg Warner (BWA) and Aptiv (APTV), which have also announced limited operations in recent days. Moreover, we believe the potential exists for added credit rating downgrades in the weeks ahead, particularly for those with materially higher leverage.

Homebuilders/Household Durables. Many homebuilders and household durable manufacturers continue to react to COVID-19 related challenges with guidance suspensions, reduced land development, and fewer new starts. While lower interest rates have spurred domestic activity in recent months, we now expect a more material pullback in overall activity for the months ahead. Major contributing factors include escalated unemployment, shelter-in-place regulations and increased overall financial uncertainty, particularly among first-time buyers.

Hotel & Leisure. Hotel & leisure stocks remain notably discounted given COVID-19 concerns and materially reduced consumer spend. We would generally advise investors to avoid this subsector given elevated risk, limited visibility, and the potential for added selling pressure.

Restaurants. With many restaurants impacted by the spread of COVID-19, we advise investors to be cautious. Asset-light firms with increased delivery/digital integration remain best positioned, in our view, as are providers with robust drive-thru infrastructure. We prefer those names with comparatively lower leverage.

Retailing. We urge investors to avoid heavily leveraged department stores and select mall-based providers. Moreover, continued retail closures could exacerbate structural industry deficiencies in a more prolonged outage, in our view. Diversified providers like Walmart (WMT) and Target (TGT) should benefit from a robust digital presence and continued demand for staple goods. Additionally, we believe Home Depot (HD) remains well-positioned long-term despite our expectation for reduced new housing activity near-term.

Top Picks Equity Appreciation Focus List: Consumer Discretionary Select Sector SPDR (XLY)

Charles E. Redding / 804-782-8853 / [email protected]

S&P 500 Consumer Discretionary – Price

Annual EPS Growth



443

543

643

743

843

943

1,043

1,143

2015 2016 2017 2018 2019 2020

Sector S&P 500

12%

8%

5%

12%

2%

-1%

19%

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Technical Comment Key Levels: 50-Day Moving Avg. = 929 (+18%) 200-Day Moving Avg. = 949 (+20%) Drawn Support Line = 702 (-11%) Drawn Resistance Line = 1048 (+33%) Weekly Relative Strength (RSI): 34 Comment: The total return for Consumer Discretionary during the past month was -18.9% vs. -20.7% for the S&P 500 and ranked 4th out of the 11 sectors. For the past twelve months, the sector’s total return was -10.7% vs. -9.8% for the S&P 500 and ranked 6th out of all the sectors. Similar to the overall market, the sector fell sharply and is close to testing long-term support levels. We believe the current as well as expected future impact of COVID-19 will remain the near-term driver for stock prices.




Consumer Discretionary 2,075 10% 19.1x 22.1x 17.6x 9% 16% 16% 1.7% 37%

Auto Components 18 1% 8.8x 13.3x 12.0x (27%) 16% 51% 2.1% 77%Automobiles 51 2% 6.0x 6.9x 7.5x (19%) 31% 15% 8.8% 59%Distributors 16 1% 9.5x 14.3x 16.3x (42%) 6% 51% 4.9% 65%Diversified Consumer Svcs 3 0% 5.7x 8.2x 12.4x (54%) (0%) 45% 7.6% 53%Hotels Restaurants & Leisure 337 16% 16.6x 19.8x 18.7x (11%) 22% 19% 3.2% 48%Household Durables 69 3% 8.2x 11.6x 13.7x (41%) 4% 42% 2.5% 51%Internet & Direct Mktg Retail 873 42% 44.4x 42.4x 48.6x (9%) 34% (5%) 0.1% 28%Leisure Products 8 0% 15.4x 20.4x 16.7x (7%) 14% 32% 4.3% 54%Multiline Retail 106 5% 12.5x 16.1x 14.1x (11%) 5% 29% 2.7% 38%Specialty Retail 457 22% 14.8x 18.7x 17.3x (14%) 9% 26% 2.5% 39%Textiles & App & Lux Goods 136 7% 17.1x 19.5x 19.2x (11%) 17% 14% 2.0% 35%

(0%)4%5%6%

9%13%14%

16%16%17%

22%31%

34%

(5%) 0% 5% 10% 15% 20% 25% 30% 35% 40%

Diversified Consumer SvcsHousehold Durables

Multiline RetailDistributors

Specialty RetailS&P 500

Leisure ProductsAuto Components

Consumer DiscretionaryTextiles & App & Lux Goods

Hotels Restaurants & LeisureAutomobiles

Internet & Direct Mktg RetailExpected Growth in Forward EPS

19.1x17.1x16.6x

15.4x14.8x14.5x

12.5x9.5x8.8x

6.0x5.7x

0x 10x 20x 30x 40x 50x

Consumer DiscretionaryTextiles & App & Lux Goods

Hotels Restaurants & LeisureLeisure Products

Specialty RetailS&P 500

Multiline RetailDistributors

Auto ComponentsAutomobiles

Diversified Consumer Svcs





Consumer Staples

Source: FactSet

Summary Consumer Staples outperformed the S&P 500 (the market) over the past month, with the sector down 17.3% while the market was down 20.7%, supporting the view that Staples tend to outperform during a big selloff. Year-to-date, Staples are down 18.4% versus the market down 23.0%. The sector EPS estimate for 2020 is $31.43, and it has come down from $32.20 projected a year ago. On a forward twelve-month basis, earnings growth is 6%, which compares to overall market growth of 13% (likely to come down). P/E valuation is 16.3X compared to the market at 14.5X. Consumer Staples stocks often hold up better when the market sells off or flattens out given the defensive nature of the businesses. Looking at sector performance over the past ten years, Staples have never been the best performing group, and have never been the worst. In 2008, the market was down 37% while Staples were down just 15% (so best house on a bad block). In the past ten years, Staples have outperformed in just three periods. During 2008, the sector traded at a 30%+ premium to the market, while the current premium is 12%, which is in-line with the five-year average.

Key Points Beverages. This group of companies focuses on brand name beer, spirits, and soft drinks. This sector is under pressure from microbreweries and distilleries as well as niche brands and healthier alternatives. PepsiCo (PEP) announced the acquisition of Rockstar Energy Beverages, the energy drink maker, for $3.85 billion. Rockstar produces beverages that are created for those who lead “active lifestyles,” and they are available in over 30 flavors in over 30 countries. PepsiCo has had a distribution agreement with Rockstar in North America since 2009. In addition to Rockstar, PEP’s energy drinks include Mountain Dew's Kickstart, GameFuel, and AMP.

Food & Staples Retailing. This subsector is made up of grocery, wholesale, and drug stores. There has been a considerable amount of consolidation in this sector, which is highly competitive. This group is vulnerable to the “Amazon factor” which has created an even more competitive environment.

Food Products. This group consists of brand name, premium foods companies that have been around for years. Smaller niche and private label brands have put pressure on these iconic companies.

Household Products. These are the brand name, established companies that have long operating histories. The focus for growth has been consolidation, international sales, and product innovation.

Tobacco. A relatively small group with just two companies in the S&P 500. While U.S. tobacco use has been declining for years, these companies have been able to raise prices and grow earnings.

Top Picks

Equity Appreciation Focus List: Mondelez International (MDLZ)

Equity Income Focus List: Philip Morris International (PM)


S&P 500 Consumer Staples – Price

Annual EPS Growth



380430480530580630680730780830880

2015 2016 2017 2018 2019 2020

Sector S&P 500

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-1%0%1%2%3%4%5%6%7%8%9%

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1.1x

1.2x

1.3x

1.4x

1.5x

2005 2007 2009 2011 2013 2015 2017 2019







Technical Comment Key Levels: 50-Day Moving Avg. = 622 (+13%) 200-Day Moving Avg. = 623 (+13%) Drawn Support Line = 501 (-9%) Drawn Resistance Line = 665 (+21%) Weekly Relative Strength (RSI): 37 Comment: The total return for Consumer Staples during the past month was -17.3% vs. -20.7% for the S&P 500 and ranked 3rd out of the 11 sectors. For the past twelve months, the sector’s total return was -5.5% vs. -9.8% for the S&P 500 and ranked 2nd out of all the sectors. The defensive nature of Staples is the primary reason for the outperformance. Similar to the overall market, however, the sector fell sharply and is close to testing long-term support levels. We believe the current as well as expected future impact of COVID-19 will remain the near-term driver for stock prices.




Consumer Staples 1,562 8% 16.3x 20.0x 17.7x (8%) 6% 22% 3.5% 33%

Beverages 376 24% 18.2x 22.9x 19.9x (8%) 7% 26% 3.5% 38%Food & Staples Retailing 356 23% 18.0x 21.0x 16.6x 9% 6% 17% 2.0% 25%Food Products 246 16% 14.3x 17.3x 16.6x (14%) 7% 21% 3.3% 32%Household Products 378 24% 19.4x 23.1x 18.8x 3% 6% 19% 3.1% 30%Tobacco 167 11% 9.8x 13.6x 15.1x (35%) 7% 39% 8.4% 56%

6%

6%

6%

7%

7%

7%

13%

0% 2% 4% 6% 8% 10% 12% 14%

Food & Staples Retailing

Household Products

Consumer Staples

Food Products

Tobacco

Beverages

S&P 500


18.2x

18.0x

16.3x

14.5x

14.3x

9.8x

5x 10x 15x 20x 25x 30x

Household Products

Beverages

Food & Staples Retailing

Consumer Staples

S&P 500

Food Products

Tobacco





Energy

Summary With the coronavirus and the threat to transportation along with the OPEC saga, the Energy sector has sold off dramatically. As background, Energy was the worst performing sector for 2019. Energy stocks underperformed during the month, down 40% versus the market’s decline of 21%. Energy is in negative territory on YTD basis (down 51%) while the market is down 23%. The price of oil hit $63 per barrel in January and is now trading at $20 per barrel. That is almost a 70% drop in three months. In the current environment, we have already seen dividend and capital expenditure cuts, and we expect this to continue. According to Moody’s, energy companies have over $200B in debt due between 2020 and 2024, and thus we expect bankruptcies will accelerate (there were over 30 in 2019). However, production is already dropping and, over time, pricing is expected to recover. This boom/bust cycle has been played out many times in the energy sector. The consensus oil estimates for 2020 and 2021 are $38 and $49, respectively. The price of natural gas has been in free fall after peaking around $2.80 ($/MMBtu) in November and it is now at the $1.60 level. A warm winter and excess supply have not been helpful. Price estimates for this year and next are now around $2.20 and $2.60 respectively. As a way to gauge investor interest, the Energy sector as a percentage of the S&P 500 now stands below 3%, whereas in times past it has been as high as 15% (1990s and 2008/2009). At the end of 2019, the Energy sector dipped below 5% for the first time in 25 years. At this point we urge investors to stick with quality and those companies with strong balance sheets and growing production profiles. We also recommend a focus on a reasonable dividend yield to get paid to wait on a turnaround in the sector.

Key Points Oil, Gas & Consumable Fuels. Many of these companies have direct exposure to commodity prices, and thus trade in anticipation of price moves. The large-cap majors tend to be more insulated as marketing and refinery businesses can offset weakness in exploration and production (E&P). The pipeline business is capital intensive and many of the companies operate in a regulated, fee-based environment, which mitigates exposure to commodity price swings. To adapt to the new environment, Chevron (CVX) announced plans to “protect dividend, prioritize long-term value, and support industry leading balance sheet.” Actions include cutting capex by 20% to $16B, reducing Permian Basin production by 20%, and suspending a $5B share repurchase program. Oil Service/Equipment. Typically a volatile business that has been consolidated over the years. Customers often contract or “rent” equipment to be used in the drilling and production process. These companies provide innovation to the industry through technology. The latest technology advances include horizontal drilling and fracking. This group usually moves in anticipation of an upswing in commodity prices since the utilization of drilling equipment is often the first thing that the E&P companies do when they are bullish on commodity prices.

Top Picks Equity Appreciation Focus List: Cheniere Energy (LNG)

Equity Income Focus List: Chevron Corp (CVX)


Source: FactSet

S&P 500 Energy – Price

Annual EPS Growth



155255355455555655755855955

1,055

2015 2016 2017 2018 2019 2020

Sector S&P 500

-61%-75%

248%

101%

-29%

-69%

115%

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

2015 2016 2017 2018 2019 2020E 2021E

Avg

+1SD

–1SD5x

15x

25x

35x

45x

55x

65x

75x

85x

2005 2007 2009 2011 2013 2015 2017 2019

Avg

+1SD

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

2005 2007 2009 2011 2013 2015 2017 2019







Valuation range based on NTM EPS 12 months forward to normalize the multiple

Technical Comment Key Levels: 50-Day Moving Avg. = 345 (+58%) 200-Day Moving Avg. = 419 (+93%) Drawn Support Line = 180 (-17%) Drawn Resistance Line = 579 (+166%) Weekly Relative Strength (RSI): 19 Comment: The total return for Energy during the past month was -40.4% vs. -20.7% for the S&P 500 and ranked 11th out of all the sectors. For the past twelve months, the sector’s total return was -52.7% vs. -9.8% for the S&P 500, also worst of all the sectors. In addition to the weakness in the overall equity market, the sector is also underperforming given the decline in global energy prices. The sector is currently trading at levels not seen since ’03 and now represents less than 3% of the overall market. Energy continues to be the most oversold sector.




Energy 559 3% 27.2x 20.1x 14.9x 82% 98% (26%) 8.3% 55%

Energy Equipment and Service 43 8% 14.9x 22.8x 18.8x (20%) 20% 52% 10.5% 93%Oil Gas & Consumable Fuels 516 92% 29.2x 19.9x 14.9x 96% 111% (32%) 8.1% 52%

13%

20%

98%

111%

0% 20% 40% 60% 80% 100% 120%

S&P 500

Energy Equipment and Services

Energy

Oil Gas & Consumable Fuels


13.8x

13.7x

12.9x

12.5x

0x 10x 20x 30x 40x 50x

Oil Gas & Consumable Fuels

Energy

S&P 500

Energy Equipment and Services





Financials

Source: FactSet

Summary For the past twelve months, the total return for Financials has been -17.1% (ranked 9th out of the eleven sectors), meaningfully below the overall market’s return of -9.8%. In terms of subsectors, banks are responsible for most of the underperformance given the overall level of interest rates, the shape of the yield curve and concerns regarding the outlook for the economy, particularly in light of the yet to be known full impact from COVID-19.

Key Points Asset Managers. The market is most bullish on the passive managers, which is reflected not only in the earnings outlook but also in valuation. We have taken a contrarian stance, with two high quality, primarily active managers, Invesco (IVZ) and Affiliated Managers Group (AMG)), on one of our Focus Lists. We also like these names given IVZ’s growth in passives and AMG’s position in alternatives.

Banks/Thrifts. As mentioned, the poor performance of bank stocks is largely due to the low level of interest rates, the flat/inverted yield curve and the potential implications of a recession (slower loan growth, fee income pressure, higher credit costs, etc.). Our favorites include Citigroup (C), which we believe offers the best risk/reward of the major banks while Bank OZK (OZK) and First Horizon (FHN) are the best ways to play smaller banks. All three are on our Equity Appreciation Focus List (EAFL).

BDCs. Three best-in-class players, Ares Capital Corp. (ARCC), Fidus Investment Corp. (FDUS), and TPG Specialty Lending (TSLX) are on our Equity Income Focus List (EIFL).

Financial Data And Exchanges. We view most companies in this subsector as fully- valued and reflective of the premium the market is willing to pay for growth.

Insurance. A diverse group (brokers, underwriters, reinsurers), with many that are expected to benefit at some point in the future from higher long-term interest rates. Our current favorite is Prudential Financial (PRU), which is on the EIFL.

Investment Banking/Brokerage. Recent capital markets volatility is putting pressure on the group, particularly the companies more dependent on the level and spread of interest rates and fee income pressure from lower equity market levels.

Mortgage REITs. The business model for this subsector is generally based on low margins and high leverage, which keeps us highly selective.

Specialty Finance. The uniqueness of many of the individual companies and current valuation levels make this the most interesting group to us. Air Lease (AL), Ally Financial (ALLY), and Synchrony (SYF) are currently on our EAFL.

Top Picks Equity Appreciation Focus List: Citigroup Inc. (C)

Equity Income Focus List: Prudential Financial Inc. (PRU)

High Income Ladder: Navient Corporation 6.75% Sr. Unsecured Notes due 6/25/25

Vernon C. Plack, CFA, CMT / 804-780-3257 / [email protected]

S&P 500 Financials – Price

Annual EPS Growth



220

270

320

370

420

470

520

570

2015 2016 2017 2018 2019 2020

Sector S&P 500

10%8% 9%

28%

6%

3%

9%

0%

5%

10%

15%

20%

25%

30%

2015 2016 2017 2018 2019 2020E 2021E

Avg

+1SD

–1SD

6x

8x

10x

12x

14x

16x

18x

20x

2005 2007 2009 2011 2013 2015 2017 2019

Avg

+1SD

–1SD

0.5x

0.6x

0.7x

0.8x

0.9x

1.0x

1.1x

1.2x

1.3x

1.4x

2005 2007 2009 2011 2013 2015 2017 2019







Technical Comment Key Levels: 50-Day Moving Avg. = 450 (+29%) 200-Day Moving Avg. = 467 (+34%) Drawn Support Line = 265 (-24%) Drawn Resistance Line = 516 (+48%) Weekly Relative Strength (RSI): 29 Comment: The total return for Financials during the past month was -28.5% vs. -20.7% for the S&P 500 and ranked 10th out of the 11 sectors. For the past twelve months, the sector’s total return was -17.1% vs. -9.8% for the S&P 500 and ranked 9th out of all the sectors. Similar to the overall market, the sector fell sharply and is close to testing long-term support levels. We believe the current as well as expected future impact of COVID-19 will remain the near-term driver for stock prices.




Financials 2,302 11% 8.9x 12.7x 12.3x (28%) 8% 43% 3.4% 58%

Diversified Banks 707 31% 7.1x 11.0x 11.0x (35%) 8% 54% 4.8% 71%Regional Banks 176 8% 7.1x 11.5x 12.2x (42%) 6% 64% 5.6% 80%Asset Mgmt & Custody Banks 150 7% 9.1x 11.9x 13.3x (32%) 7% 31% 4.3% 44%Consumer Finance 106 5% 6.4x 10.0x 10.6x (40%) 8% 57% 2.9% 73%Investment Banking & Brokera 145 6% 7.6x 10.7x 11.5x (34%) 8% 41% 3.3% 56%Financial Exchanges & Data 240 10% 21.3x 25.0x 22.3x (4%) 8% 18% 1.9% 29%Multi-Sector Holdings 353 15% 16.7x 22.0x 19.2x (13%) 5% 32% 0.0% 39%Life & Health Insurance 94 4% 5.1x 8.1x 8.7x (42%) 6% 61% 5.7% 77%Insurance Brokers 117 5% 15.7x 19.9x 16.3x (4%) 9% 27% 1.8% 40%Multi-line Insurance 40 2% 6.1x 11.4x 10.8x (44%) 9% 86% 4.4% 108%Property & Casualty Insurance 164 7% 10.2x 13.8x 13.0x (22%) 6% 36% 3.2% 48%

5%6%6%6%7%

8%8%8%8%8%9%

9%13%

0% 2% 4% 6% 8% 10% 12% 14%

Multi-Sector HoldingsProperty & Casualty Insurance

Regional BanksLife & Health Insurance

Asset Mgmt & Custody BanksFinancials

Investment Banking & BrokerageDiversified Banks

Consumer FinanceFinancial Exchanges & Data

Insurance BrokersMulti-line Insurance

S&P 500Expected Growth in Forward EPS

21.3x

16.7x

15.7x

14.5x

10.2x

9.1x

8.9x

7.1x

6.4x

6.1x

5.1x

0x 5x 10x 15x 20x 25x 30x

Financial Exchanges & Data

Multi-Sector Holdings

Insurance Brokers

S&P 500

Property & Casualty Insurance

Asset Mgmt & Custody Banks

Financials

Diversified Banks

Consumer Finance

Multi-line Insurance

Life & Health Insurance





Health Care

Summary After underperforming the market in 2019, the Health Care sector has reversed course and continues to be an outperformer in 2019, with a total return down 20% while the S&P 500 (the market) is down 23%. In the past month, the sector has proved its merit as a defensive investment and was down 16% while the market was down 21%. With the pandemic underway, the race to create a vaccine or a cure is on. In addition, the focus on products like ventilators and respirators has increased dramatically, and facilities like hospitals are scrambling to prepare for an increase in cases. From an investment standpoint it is hard to pick the winners and losers at this juncture, but utilization of health care products and services has increased significantly. Consumers typically do not forego expenditures for good health and with the aging of the baby boomers, the population over 65 continues to grow. In 2008, the population over 65 was 12.5% of the total, and currently it is closer to 16% (latest data from 2017). As a result, health care expenditures have risen – in 2008, expenditures were 13% of GDP and, according to the latest data from 2018, expenditures are now 18% of GDP (cms.gov). Total expenditures have risen at an average of 8.4% per year since 1960 and over the past ten years have increased an average of 4% per year. The relative valuation of the sector has moved from a 5% premium to the market in December 2018 (the last peak) to a 12% discount at present. Forward EPS growth projected for Health Care is 10%, which is below the S&P 500 (13%).

Key Points Biotech. This group of companies is out of favor with investors. There have been no major drug pipeline catalysts in recent years, and many drugs are seeing weak pricing.

Pharmaceuticals. This group is comprised of the large-cap, blue-chip pharmaceutical companies that pay attractive dividends. Over the past several years, Pharma has suffered from patent expirations and the lack of new major drugs. Currently there are 60 active development programs for COVID–19 treatments and 40 for vaccines. Pfizer (PFE) recently announced that it’s working on a potential COVID-19 vaccine with BioNTech, a German company working on new kinds of immunotherapy treatments. These companies are working on an RNA-based vaccine that seeks to prevent people from contracting the new coronavirus.

Health Care Equipment and Supplies. This group of companies makes medical equipment and devices, which are typically more stable and slower growth businesses.

Health Care Providers and Services. This group covers hospital companies, managed care providers, and lab companies. For the most part, these companies benefit from the growing expenditures in health care.

Life Sciences. A relatively small group of companies focused on the tools and services used in drug discovery, testing, and product development. The emphasis is more on the technology side of health care.

Top Picks Equity Appreciation Focus List: UnitedHealth Group (UNH) Equity Income Focus List: Pfizer (PFE)


Source: FactSet

S&P 500 Health Care – Price

Annual EPS Growth



595695795895995

1,0951,1951,2951,3951,495

2015 2016 2017 2018 2019 2020

Sector S&P 500

11%

6%7%

15%

9%

7%

10%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2015 2016 2017 2018 2019 2020E 2021E

Avg

+1SD

–1SD

7x

9x

11x

13x

15x

17x

19x

2005 2007 2009 2011 2013 2015 2017 2019

Avg

+1SD

–1SD

0.6x

0.7x

0.8x

0.9x

1.0x

1.1x

1.2x

1.3x

2005 2007 2009 2011 2013 2015 2017 2019







Technical Comment Key Levels: 50-Day Moving Avg. = 1122 (+13%) 200-Day Moving Avg. = 1098 (+11%) Drawn Support Line = 733 (-26%) Drawn Resistance Line = 1220 (+23%) Weekly Relative Strength (RSI): 39 Comment: The total return for Health Care during the past month was -15.9% vs. -20.7% for the S&P 500 and ranked 2nd out of the 11 sectors. For the past twelve months, the sector’s total return was -7.9% vs. -9.8% for the S&P 500 and ranked 3rd out of all the sectors. Similar to the overall market, the sector fell sharply and broke through previous support levels. We believe the current as well as expected future impact of COVID-19 will remain the near-term driver for stock prices.




Health Care 3,030 15% 12.7x 16.2x 15.2x (16%) 10% 27% 2.3% 42%

Biotechnology 474 16% 10.5x 12.5x 13.1x (20%) 7% 19% 3.1% 31%Equipment & Supplies 740 24% 18.9x 24.6x 17.2x 10% 11% 30% 1.2% 46%Health Care Technology 18 1% 17.9x 22.0x 26.5x (32%) 11% 23% 0.7% 38%Life Sciences 221 7% 20.4x 24.2x 18.1x 13% 12% 19% 0.3% 33%Pharmaceuticals 992 33% 11.7x 14.6x 14.9x (21%) 9% 25% 3.4% 39%Providers & Services 585 19% 10.3x 13.9x 13.6x (24%) 12% 35% 1.8% 53%

7%

9%

10%

11%

11%

12%

12%

13%

0% 2% 4% 6% 8% 10% 12% 14%

Biotechnology

Pharmaceuticals

Health Care

Equipment & Supplies

Health Care Technology

Providers & Services

Life Sciences

S&P 500


18.9x

17.9x

14.5x

12.7x

11.7x

10.5x

10.3x

0x 10x 20x 30x 40x

Life Sciences

Equipment & Supplies

Health Care Technology

S&P 500

Health Care

Pharmaceuticals

Biotechnology

Providers & Services





Industrials

Summary Near-term Industrial weakness, in our view, may likely be defined by those industries most exposed to COVID-19 (i.e. airlines, commercial aerospace, etc.) and softer global energy demand. To the positive, we believe the recent dislocation also provides unique opportunities for patient investors. We continue to prefer diversified companies with lower relative leverage, which we expect will be critical given added global macro pressures. A comprehensive federal infrastructure package could also positively impact certain industrials later in 2020. Overall, we continue to advise investors to remain selective. Key Points Aerospace & Defense. Global aerospace stocks remain pressured on materially reduced flight demand, limited new production, and overall COVID-19 related uncertainty. Within the subsector, we believe defense stocks are comparatively better positioned given near-term investor flight-to-quality and the potential for added industry consolidation over time. We prefer companies with lower relative leverage and higher dividend coverage.

Building Products. Renewed near-term uncertainty is likely to negatively impact many building product stocks over the coming months, in our view. Major contributing factors include escalated unemployment, comprehensive shelter-in-place regulations and increased overall financial uncertainty, particularly among first-time buyers. Federal infrastructure spend could be a catalyst for select names most exposed to domestic construction.

Machinery/Multi-Industry. We expect both machinery and multi-industry providers to face added near-term uncertainty from suspended manufacturing production and extensive supply chain disruption. Global demand deterioration, to include the impact from reduced energy pricing and weaker mining demand, could also impact those with relevant exposure. Over time, we expect companies with less debt and better access to capital to remain best positioned. The subsector could also benefit from federal government infrastructure spending over time.

Road & Rail/Logistics. Railway freight operators are not immune to the global pullback in capital spend, in our view, and we would expect a more appreciable decline in overall rail volumes over the coming months. Select trucking and air freight/logistics companies have fared comparatively better in recent weeks given added growth in e-commerce deliveries and COVID-19 related volume.

Airlines. We remain cautious on airlines given substantial capacity reductions, ongoing travel restrictions, and overall consumer spending uncertainty. Moreover, select airlines face debt covenant restrictions, elevated leverage levels and limited available liquidity. We recommend avoiding the subsector barring added clarity.

Top Picks Equity Appreciation Focus List: Kansas City Southern (KSU)

Equity Income Focus List: Hannon Armstrong Sus. Infrastructure Capital, Inc. (HASI)

High Income Ladder: United Rentals, Inc. 6.5% Sr. Unsecured Notes due 12/15/26


Source: FactSet

S&P 500 Industrials – Price

Annual EPS Growth



340390440490540590640690740790840

2015 2016 2017 2018 2019 2020

Sector S&P 500

5%

0%

5%

19%

-3%-5%

25%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2015 2016 2017 2018 2019 2020E 2021E

Avg

+1SD

–1SD

6x

8x

10x

12x

14x

16x

18x

20x

22x

2005 2007 2009 2011 2013 2015 2017 2019

Avg

+1SD

–1SD

0.7x

0.8x

0.9x

1.0x

1.1x

1.2x

1.3x

2005 2007 2009 2011 2013 2015 2017 2019







Technical Comment Key Levels: 50-Day Moving Avg. = 627 (+26%) 200-Day Moving Avg. = 652 (+31%) Drawn Support Line = 413 (-17%) Drawn Resistance Line = 718 (+44%) Weekly Relative Strength (RSI): 31 Comment: The total return for Industrials during the past month was -25.2% vs. -20.7% for the S&P 500 and ranked 8th out of the 11 sectors. For the past twelve months, the sector’s total return was -19.0% vs. -9.8% for the S&P 500 and ranked 10th out of all the sectors. Similar to the overall market, the sector fell sharply and broke through previous support levels. We believe the current as well as expected future impact of COVID-19 will remain the near-term driver for stock prices.




Industrials 1,727 8% 13.9x 16.0x 15.6x (10%) 21% 15% 2.8% 42%

Aerospace & Defense 432 25% 13.3x 15.6x 15.7x (15%) 24% 17% 3.1% 49%Air Freight & Logistics 114 7% 12.2x 13.7x 16.4x (25%) 10% 12% 3.4% 27%Airlines 54 3% 30.7x 7.1x 10.4x 194% 517% (77%) 2.9% 46%Building Products 70 4% 12.8x 16.6x 18.6x (31%) 10% 29% 2.7% 46%Commercial Svcs & Supplies 86 5% 21.7x 27.1x 18.2x 19% 7% 25% 2.1% 36%Construction & Engineering 14 1% 10.5x 16.4x 14.9x (30%) (3%) 56% 0.9% 52%Electrical Equipment 94 5% 14.1x 18.6x 16.4x (14%) 7% 32% 3.3% 45%Industrial Conglomerates 264 15% 14.3x 17.5x 16.1x (11%) 12% 22% 2.5% 39%Machinery 289 17% 12.7x 16.2x 14.6x (13%) 10% 28% 3.0% 44%Professional Services 69 4% 18.1x 22.1x 18.0x 1% 8% 22% 1.3% 33%Road & Rail 207 12% 14.1x 18.1x 15.7x (10%) 10% 28% 2.3% 44%Trading Comp & Distributors 35 2% 11.0x 13.2x 18.3x (39%) 8% 20% 2.4% 31%

(3%)7%7%8%8%

10%10%10%10%12%13%

21%24%

(10%) 0% 10% 20% 30%

Construction & EngineeringElectrical Equipment

Commercial Svcs & SuppliesTrading Comp & Distributors

Professional ServicesAir Freight & Logistics

MachineryRoad & Rail

Building ProductsIndustrial Conglomerates

S&P 500Industrials

Aerospace & Defense


18.1x

14.5x

14.3x

14.1x

14.1x

13.9x

13.3x

12.7x

12.2x

11.0x

0x 5x 10x 15x 20x 25x 30x 35x

Commercial Svcs & Supplies

Professional Services

S&P 500

Industrial Conglomerates

Electrical Equipment

Road & Rail

Industrials

Aerospace & Defense

Machinery

Air Freight & Logistics

Trading Comp & Distributors





Information Technology

Summary IT has outperformed the broad market in recent weeks, with investors seeking names comparatively less exposed to the current COVID-19 outbreak. Over time, we expect IT to benefit from changing demand trends, to include a focus on cloud computing, cyber security, and mobile connectivity. IT currently represents a significant portion of the S&P 500 (now over one-quarter by total market cap).

Key Points Semiconductors. On 3/23, Applied Materials (AMAT) withdrew guidance for FY’20 given continued supply chain disruption from COVID-19. Prior FQ2’20 revenue guidance ($4.34B; +23% yr/yr) included ~$300M of expected Coronavirus-related headwinds. The company also indicated that it remains committed to closing the proposed acquisition of Kokusai Electric, subject to regulatory approval.

On 3/26, S&P assigned its ‘A-‘ issue-level rating to NVIDIA Corp.’s (NVDA) new senior unsecured notes. Last quarter, the company beat consensus EPS expectations ($1.89 vs. projected $1.67) on higher top-line growth and better margins. Results benefitted from stronger data center revenue and material growth in gaming.

Networking. On 3/3, Cisco (CSCO) announced a host of new solutions for small business, to include a new Cisco Business Wireless Mobile App, cloud-managed smart camera, and secure connectivity. Last quarter, the company reported a penny EPS beat versus consensus, as revenue, margins, and operating income were all slightly higher than anticipated. By segment, Infrastructure Platforms and Applications were each down 8%, while Security and Services increased by 9% and 5%, respectively. Additionally, subscription revenue increased to 72% of total software sales.

Business Services. On 3/24, Mastercard (MA) updated forward guidance to reflect low single-digit net revenue (2% headwind from forex) and Q1 operating expenses in the low-mid single-digits range. Previous Q1 guidance of 9%-10% growth yr/yr reflected reduced cross-border travel related to COVID-19. The company also suspended its annual FY’20 outlook for net revenue and operating expense growth, but indicated that long-term business fundamentals remained strong.

Hardware. On 3/31, Xerox (XRX) withdrew its unsolicited exchange offer for HP, Inc. (HPQ), due largely to macro concerns related to COVID-19. Last quarter HPQ posted an $0.11 beat versus consensus for FQ1’20 on strong commercial and PC demand. The quarter also benefitted from stronger PC margins and ongoing cost reductions.

Top Picks Equity Appreciation Focus List: Adobe Inc. (ADBE)

Equity Income Focus List: Broadcom (AVGO)

High Income Ladder: NCR Corp. 5.0% Sr. Unsec. Notes due 7/15/22


Source: FactSet

S&P 500 Information Technology – Price

Annual EPS Growth



517

717

917

1,117

1,317

1,517

1,717

1,917

2015 2016 2017 2018 2019 2020

Sector S&P 500

4%6%

20%

24%

2%

9%

14%

0%

5%

10%

15%

20%

25%

30%

2015 2016 2017 2018 2019 2020E 2021E

Avg

+1SD

–1SD

8x

10x

12x

14x

16x

18x

20x

22x

24x

2005 2007 2009 2011 2013 2015 2017 2019

Avg

+1SD

–1SD

0.8x

0.9x

1.0x

1.1x

1.2x

1.3x

1.4x

1.5x

2005 2007 2009 2011 2013 2015 2017 2019







Semiconductors valuation range based on NTM EPS 12 months forward to normalize the multiple

Technical Comment 50-Day Moving Avg. = 1599 (+16%) 200-Day Moving Avg. = 1493 (+8%) Drawn Support Line = 1011 (-27%) Drawn Resistance Line = 1802 (+30%) Weekly Relative Strength (RSI): 41 Comment: The total return for Information Technology during the past month was -15.6% vs. -20.7% for the S&P 500 and ranked 1st out of the 11 sectors. For the past twelve months, the sector’s total return was 7.9% vs. -9.8% for the S&P 500 and also ranked 1st out of all the sectors. Information Technology is the only sector with a positive total return for the past twelve months. We believe the current as well as expected future impact of COVID-19 will remain the near-term driver for stock prices.




Information Technology 5,261 26% 17.7x 21.6x 15.2x 16% 10% 22% 1.6% 35%

Communications Equipment 206 4% 12.0x 14.8x 13.2x (9%) 4% 24% 3.4% 32%Electronic Equipment 106 2% 14.9x 17.8x 15.4x (4%) 15% 20% 1.8% 39%IT Services 1,180 22% 18.6x 21.9x 16.1x 15% 14% 18% 1.4% 35%Semiconductors 929 18% 13.9x 17.3x 14.3x (3%) 10% 24% 2.4% 39%Software 1,745 33% 24.3x 28.6x 17.3x 40% 12% 18% 1.1% 33%Technology Hardware 1,095 21% 15.6x 18.9x 12.4x 25% 10% 21% 1.6% 35%

4%

10%

10%

10%

12%

13%

14%

15%

0% 2% 4% 6% 8% 10% 12% 14% 16%

Communications Equipment


Semiconductors

Technology Hardware

Software

S&P 500

IT Services

Electronic Equipment


18.6x

17.7x

15.6x

14.9x

14.5x

12.6x

12.0x

5x 10x 15x 20x 25x 30x 35x

Software

IT Services


Technology Hardware

Electronic Equipment

S&P 500

Semiconductors

Communications Equipment





Materials

Summary Material stocks have underperformed the broader market in recent weeks on weaker global growth, lower energy pricing, and added COVID-19 apprehension. A comprehensive federal infrastructure package could prove positive for select construction material stocks later in 2020/2021, in our view, although near-term spending visibility is limited. We continue to prefer equities with lower relative leverage and added liquidity, and we advise investors to remain selective.

Key Points Chemicals. On 3/25, Eastman (EMN) announced reduced capex (now $325M-$375M, previously $450M-$475M) to help bolster the company’s near-term liquidity position. Eastman will access an incremental $400M of revolving debt, and it expects to have ~$600M of available cash in early Q2. On 3/18, Ecolab (ECL) confirmed Q1 EPS guidance of $1.05-$1.13, which now includes an expected $0.05 negative impact related to COVID-19. By end market, ECL expects a more substantial slowdown within restaurants and lodging, but has also maximized production within hand care and antimicrobial manufacturing.

Construction Materials. The primary near-term concern among Material investors relates to COVID-19, and the likely impact on related supply chains and overall construction investment. To the positive, a comprehensive federal infrastructure spending package could have a meaningful impact on the subsector later in 2020/2021. Barring more significant near-term federal assistance, we expect the potential for added disruption across most construction end markets.

Containers & Packaging. We remain generally cautious on most packaging stocks given mixed global demand and overall COVID-19 related uncertainty. On 4/1, PCA announced its plans to temporary idle both paper machines and sheet-converting operations at the company’s Jackson, AL manufacturing facility. PCA expects the move to reduce paper production by roughly 70,000 tons. The company has targeted July 6 for an expected restart.

Metals & Mining. In the coming months, we expect added mining dislocation from weaker global demand and ongoing COVID-19 related restrictions. On 3/23, Freeport McMoRan (FCX) suspended its quarterly $0.05 dividend and announced a review of the company’s global copper and molybdenum operations for added cost reductions. We attribute the review to added copper pricing pressure and weaker global demand. On 3/31, Newmont (NEM) announced the completed sale of its Red Lake complex in Ontario, Canada to Evolution Mining Ltd. (EVN) for cash proceeds of $375M. The sale included an additional $100M contingent payment arrangement for new resource discoveries, whereby Evolution will pay Newmont $20M for each 1M ounces of new gold added over a 15-year period.

Top Picks Equity Appreciation Focus List: W.R. Grace & Co. (GRA)

Equity Income Focus List: LyondellBasell Industries NV (LYB)


Source: FactSet

S&P 500 Materials – Price

Annual EPS Growth



193

243

293

343

393

443

493

543

2015 2016 2017 2018 2019 2020

Sector S&P 500

-7%-10%

12%

25%

-16%

0%

16%

-20%-15%-10%

-5%0%5%

10%15%20%25%30%

2015 2016 2017 2018 2019 2020E 2021E

Avg

+1SD

–1SD

6x

11x

16x

21x

26x

31x

36x

2005 2007 2009 2011 2013 2015 2017 2019

Avg

+1SD

–1SD0.6x0.8x1.0x1.2x1.4x1.6x1.8x2.0x2.2x2.4x2.6x

2005 2007 2009 2011 2013 2015 2017 2019







Technical Comment Key Levels: 50-Day Moving Avg. = 341 (+22%) 200-Day Moving Avg. = 360 (+29%) Drawn Support Line = 235 (-16%) Drawn Resistance Line = 402 (+44%) Weekly Relative Strength (RSI): 31 Comment: The total return for Materials during the past month was -21.4% vs. -20.7% for the S&P 500 and ranked 6th out of the 11 sectors. For the past twelve months, the sector’s total return was -17.0% vs. -9.8% for the S&P 500 and ranked 8th out of all the sectors. Similar to the overall market, the sector fell sharply and is close to testing long-term support levels. We believe the current as well as expected future impact of COVID-19 will remain the near-term driver for stock prices.




Materials 508 2% 14.3x 17.5x 15.1x (5%) 14% 22% 3.1% 43%

Chemicals 356 70% 14.2x 17.7x 16.0x (11%) 13% 25% 3.1% 44%Construction Materials 24 5% 16.4x 24.3x 25.4x (36%) (3%) 48% 1.2% 45%Containers & Packaging 68 13% 12.4x 17.0x 14.2x (13%) 3% 37% 4.2% 46%Metals & Mining 59 12% 17.6x 16.2x 11.8x 50% 44% (8%) 2.7% 34%

(3%)

3%

13%

13%

14%

44%

(10%) 0% 10% 20% 30% 40% 50%

Construction Materials

Containers & Packaging

S&P 500

Chemicals

Materials

Metals & Mining


14.5x

14.3x

14.2x

12.4x

0x 5x 10x 15x 20x 25x

S&P 500

Materials

Chemicals

Containers & Packaging





Real Estate

Source: FactSet

Summary The Real Estate sector is comprised primarily of equity real estate investment trusts (REITs), and within REITs, there are many subsectors that cover essentially all of the different property types, to include health care, hotel/resort, industrial, office, residential, retail and a diverse group of niche/specialized players.

Key Points Stock Performance. For the past twelve months, the total return for Real Estate was -16.4%, underperforming the overall market (-9.8%) and ranking 7th out of the 11 sectors. This past month, the total return for Real Estate was -27.7% (ranking 9th out of the 11 sectors), compared to -20.7% for the overall market. Up until this past month, the sector performed relatively well as investors viewed the surety of returns from dividends as attractive. This changed quickly as the outlook shifted to recession risks and the possibility of subsequent dividend cuts and potential balance sheet issues. Some subsectors in particular, such as Lodging and Retail, were particularly hit hard due to the impact of COVID-19 on travel, entertainment, and shopping. The best performing REIT subsectors during this past month were Data Center, Self Storage and Industrial.

Expected Earnings Growth. Consensus estimates for 12-month forward Funds From Operations (FFO) growth is 6%, with Specialized REITs at the upper end (+9%), and Hotel/Resort REITs (-2%) at the lower end. We believe current estimates are too high and do not fully reflect what is already known about the impact of COVID-19. We expect estimates to be reduced further following the reporting of the March quarter financial results.

Valuation Dependent On Subsector. In light of recent relative underperformance, valuations have pulled back meaningfully on both an absolute and relative basis, although also dependent on the particular sub-sector. Not surprisingly, investors are assigning higher multiples to sub-sectors with more defensive characteristics regarding growth and certainty. For example, Data Center REITs are currently trading at more than 20 times next twelve months (NTM) funds from operations (FFO) estimates, while Hotel/Lodging and Regional Mall REITs are trading at single-digit NTM FFO, reflecting skepticism in current estimates.

Equity Appreciation Focus List Real Estate Ideas: CBRE Group, Inc. (CBRE - c-corp. and global leader in commercial real estate services); and Equinix, Inc. (EQIX - data center REIT).

Equity Income Focus List Real Estate Ideas: All are REITs, and include Iron Mountain, Inc. (IRM – storage, both physical and digital); Kite Realty Group Trust (KRG – open-air shopping centers); and Simon Properties (SPG – regional malls).

Top Picks Equity Appreciation Focus List: CBRE Group Inc., Class A (CBRE)

Equity Income Focus List: Iron Mountain, Inc. (IRM)

Vernon C. Plack, CFA, CMT / 804-780-3257 / [email protected]

S&P 500 Real Estate – Price

Annual EPS Growth



134154174194214234254274294314334

2015 2016 2017 2018 2019 2020

Sector S&P 500

6%

7%

1%

6%

1%

4%

6%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2015 2016 2017 2018 2019 2020E 2021E

11x

13x

15x

17x

19x

21x

23x

2016 2018

0.8x

0.9x

0.9x

1.0x

1.0x

1.1x

1.1x

1.2x

1.2x

1.3x

2016 2018







Technical Comment Key Levels: 50-Day Moving Avg. = 231 (+19%) 200-Day Moving Avg. = 236 (+22%) Drawn Support Line = 158 (-18%) Drawn Resistance Line = 260 (+34%) Weekly Relative Strength (RSI): 37 Comment: The total return for Real Estate during the past month was -27.7% vs. -20.7% for the S&P 500 and ranked 9th out of the 11 sectors. For the past twelve months, the sector’s total return was -16.4% vs. -9.8% for the S&P 500 and ranked 7th out of all the sectors. Similar to the overall market, the sector fell sharply. Real Estate also traded at levels not seen since in ‘14. We believe the current as well as expected future impact of COVID-19 will remain the near-term driver for stock prices.



Group Cap ($Bs) Weight Fwd P/E Fwd P/E Median vs. Med Growth Change Yield ReturnS&P 500 20,524 100% 14.5x 17.9x 15.4x (6%) 12.6% 23.5% 2.6% 41.6%

Real Estate 600 3% 15.0x 20.3x 17.8x (16%) 5.9% 35.5% 4.3% 47.8%

Specialized REITs 306 51% 20.4x 24.3x 19.2x 6% 9.0% 19.1% 3.3% 33.1%Health Care REITs 40 7% 10.2x 16.5x 15.0x (32%) 2.1% 62.5% 8.3% 74.2%Hotel & Resort REITs 9 1% 7.7x 9.6x 10.8x (29%) (1.8%) 25.8% 6.7% 30.2%Industrial REITs 64 11% 19.1x 24.5x 20.9x (8%) 4.8% 28.0% 3.2% 37.4%Office REITs 39 6% 12.4x 18.9x 19.3x (36%) 4.8% 52.8% 4.7% 64.9%Residential REITs 77 13% 14.3x 21.4x 20.4x (30%) 4.5% 49.6% 4.4% 60.7%Retail REITs 54 9% 8.1x 14.1x 15.9x (49%) 3.7% 75.6% 8.7% 90.8%Real Estate Services 12 2% 8.7x 13.4x 14.8x (41%) 9.4% 54.5% 0.0% 69.0%

(2%)

2%

4%

4%

5%

5%

6%

9%

9%

13%

(4%) (2%) 0% 2% 4% 6% 8% 10% 12% 14%

Hotel & Resort REITs

Health Care REITs

Retail REITs

Residential REITs

Office REITs

Industrial REITs

Real Estate

Specialized REITs

Real Estate Services

S&P 500


19.1x

15.0x

14.5x

14.3x

12.4x

10.2x

8.7x

8.1x

7.7x

0x 5x 10x 15x 20x 25x 30x

Specialized REITs

Industrial REITs

Real Estate

S&P 500

Residential REITs

Office REITs

Health Care REITs

Real Estate Services

Retail REITs

Hotel & Resort REITs





Utilities

Summary Utility sector stocks have outperformed the broader market YTD given COVID-19 uncertainties. Going forward, we believe utilities will continue to provide attractive income generation potential. Additionally, the current low interest rate environment remains generally positive for utilities given elevated fixed costs, substantial capex requirements, and higher relative leverage. We continue to prefer utilities located in higher-growth footprints with material ongoing renewable investment and a favorable regulatory climate. Our preferred sector ETF, Select Sector SPDR (XLU) provides diversified exposure, while we believe that our Top Pick, Dominion Energy, Inc. (D) maintains solid earnings/dividend growth over time.

Key Points Electric & Multi Utilities. In the months ahead, we expect a material impact on overall electricity load demand from added industrial outages and widespread travel restrictions. We generally prefer the modestly higher growth profiles (and added diversification) of multi-utilities relative to traditional electrics.

Gas Utilities. We expect regulated gas consolidation to continue as select utilities seek higher growth and added diversification. Extensive natural gas reserves have also facilitated ongoing infrastructure build in recent years. Next Era Energy (NEE) recently noted an increase in domestic anti-gas sentiment, which we believe could have larger demand implications over time.

Renewables. We expect that a more prolonged COVID-19-related outage could have broad-reaching implications for renewable components. Through early March, supply chain disruption had proven largely limited in Asia, although shutdowns in Spain, Italy, Malaysia and portions of the U.S. have subsequently been noted. Long-term, lower production costs (particularly as it relates to battery storage and PV cells) is expected to facilitate increased renewable investment. We also believe the added shift toward ESG-centric financing bodes well for renewable energy companies over time.

Dominion Update. Recent efforts have focused primarily on liquidity and service continuity during the COVID-19 outbreak. On 3/16, Dominion entered into a $500M 364-day term loan. The company subsequently announced (3/19) a new $700M one-year revolving facility, which may be increased by an incremental $500M if needed. We believe the liquidity provides added flexibility should near-term load demand for power and gas prove meaningfully weaker than expected. Despite the near-term uncertainty, Dominion remains well-positioned for steady long-term earnings and free cash growth, in our view. The company’s five-year investment outlook currently includes 6% annual rate base growth and 5%+ earnings growth through 2023.

Top Pick Equity Income Focus List: Dominion Energy Inc. (D)

High Income Ladder: NRG Energy, Inc. 7.25% Senior Unsecured Notes due 5/15/26


Source: FactSet

S&P 500 Utilities – Price

Annual EPS Growth



165

215

265

315

365

415

2015 2016 2017 2018 2019 2020

Sector S&P 500

-1%

6%

0%

3%

7%

3%

5%

-2%-1%0%1%2%3%4%5%6%7%8%

2015 2016 2017 2018 2019 2020E 2021E

Avg

+1SD

–1SD

7x

9x

11x

13x

15x

17x

19x

21x

23x

2005 2007 2009 2011 2013 2015 2017 2019

Avg

+1SD

–1SD

0.7x

0.8x

0.9x

1.0x

1.1x

1.2x

1.3x

1.4x

2005 2007 2009 2011 2013 2015 2017 2019







Technical Comment Key Support Levels: 50-Day Moving Avg. = 325 (+15%) 200-Day Moving Avg. = 319 (+13%) Drawn Support Line = 207 (-27%) Drawn Resistance Line = 359 (+27%) Weekly Relative Strength (RSI): 42 Comment: The total return for Utilities during the past month was -24.2% vs. -20.7% for the S&P 500 and ranked 7th out of the 11 sectors. For the past twelve months, the sector’s total return was -9.6% vs. -9.8% for the S&P 500 and ranked 5th out of all the sectors. Similar to the overall market, the sector fell sharply and is close to testing long-term support levels. We believe the current as well as expected future impact of COVID-19 will remain the near-term driver for stock prices.




Utilities 705 3% 15.6x 20.1x 15.7x (0%) 5% 29% 4.1% 40%

Electric Utilities 443 63% 15.5x 20.2x 15.3x 1% 5% 31% 4.1% 41%IPPs and Renewables 9 1% 8.7x 11.3x 12.6x (31%) 8% 30% 4.6% 45%Multi-Utilities 223 32% 15.6x 19.8x 16.3x (4%) 6% 27% 4.4% 39%Water Utilities 20 3% 28.0x 31.6x 30.2x (7%) 10% 13% 2.0% 26%

5%

5%

6%

8%

10%

13%

0% 2% 4% 6% 8% 10% 12% 14%

Electric Utilities

Utilities

Multi-Utilities

IPPs and Renewables

Water Utilities

S&P 500


15.6x

15.6x

15.5x

14.5x

8.7x

5x 10x 15x 20x 25x 30x 35x 40x

Water Utilities

Utilities

Multi-Utilities

Electric Utilities

S&P 500

IPPs and Renewables




Focus Lists Back to Contents

Equity Appreciation Focus List March 31, 2020

See pages 34-36 for important disclosures.

Company & Price Sector Company Ticker 3/31/20 Weight Key Points Communication Services (10.6% of the S&P 500) 10.0%

Facebook, Inc. Class A FB $166.76 1.5% Ad model enabled by unique dataset, strong network effects, and unparalleled user baseAlphabet Inc. Class C GOOG $1,146.73 2.5% Leader in search, mobile, and digital ads; Using machine learning on massive collection of user dataCommunication Services Select Sector SPDR XLC $44.36 6.0% A diversified ETF that approximates sector exposure vs. the overall market

Consumer Discretionary (9.8%) 11.0%Consumer Discretionary Select Sector SPDR XLY $99.25 11.0% A diversified ETF that approximates sector exposure vs. the overall market

Consumer Staples (7.8%) 7.5%Mondelez International, Inc. Class A MDLZ $50.80 3.0% Valuation; International exposure; New management; Earnings growthVanguard Consumer Staples ETF VDC $139.09 4.5% Broadens exposure to Staples; Tracks S&P 1500; 104 stocks

Energy (2.6%) 5.0%Cheniere Energy, Inc. LNG $33.76 2.5% Liquid natural gas growth story; First to market; Stable cash flow with LT contractsConocoPhillips COP $30.14 2.5% Strong production growth; Solid balance sheet; Capital discipline

Financials (11.1%) 14.0%Affiliated Managers Group, Inc. AMG $60.22 2.0% Compelling valuation given challenging environment; Well-positioned for long-term successAir Lease Corporation Class A AL $22.30 2.0% Positive global demand; Attractive portfolio, profitability, and valuationAlly Financial Inc ALLY $14.94 2.0% Expected higher profitability/product mix shift should lead to higher valuationBank OZK OZK $17.12 2.0% High-quality commercial real estate lender; Outstanding profitability; Attractive valuation Citigroup Inc. C $43.62 2.0% Global bank with attractive risk/reward First Horizon National Corporation FHN $8.38 2.0% Acquisition benefits expected to lead to strong EPS growth and higher profitabilitySynchrony Financial SYF $16.57 2.0% Leading provider of private label credit cards; Attractive valuation

Health Care (15.2%) 16.0%Baxter International Inc. BAX $81.53 3.0% High quality growth story; Strong balance sheet; Potential to make acquisitions; Margin growthUnitedHealth Group Incorporated UNH $245.31 3.0% Leader in managed care; Valuation opportunity; long term growth trendsVanguard Health Care ETF VHT $165.59 10.0% Broadens exposure to Health Care; Tracks MSCI Index; 345 stocks

Industrials (8.2%) 9.5%Fortune Brands Home & Security, Inc. FBHS $43.93 2.0% Quality brands with an attractive valuation; Material LT earnings upside potentialJohnson Controls International plc JCI $26.26 2.0% Shift to higher margin portfolio continues; LT synergies potentially significantKansas City Southern KSU $129.29 2.0% Well-positioned rail with leverage to key industrial marketsIndustrial Select Sector SPDR Fund XLI $59.35 3.5% A diversified ETF that approximates sector exposure vs. the overall market

Information Technology (25.6%) 20.0%Applied Materials AMAT $46.69 2.0% Best-in-class semiconductor capital equip. provider w/ high free cash flowAdobe Inc. ADBE $315.03 3.0% High-margin, high-FCF core Creative business; Growth levered to ad tech/digital marketing/analyticsMastercard Incorporated Class A MA $247.29 3.0% One of the leading payment processors; Attractive margins, free cash flow, and expected growthsalesforce.com, inc. CRM $149.07 3.0% Growth story based on secular shift to SaaS and outsourced IT infrastructureVanguard Information Technology ETF VGT $214.87 9.0% A diversified ETF that approximates sector exposure vs. the overall market

Materials (2.4%) 3.0%Axalta Coating Systems Ltd. AXTA $17.36 1.5% Well-positioned long term in coatings; Valuation discounted to peersW R Grace & Co GRA $37.01 1.5% Strong core demand trends ongoing; Positive pricing offsets raw material inflation

Real Estate (3.1%) 2.5%CBRE Group, Inc. Class A CBRE $40.39 1.0% Global leader in commercial real estate services; Favorable growth prospects and valuationEquinix Inc. EQIX $622.53 1.0% Largest provider of collocated data centers globally; Growth due to secular rise in data/public cloudReal Estate Select Sector SPDR Fund XLRE $31.18 0.5% A diversified ETF that approximates sector exposure vs. the overall market

Utilities (3.7%) 1.5%Utilities Select Sector SPDR Fund XLU $56.58 1.5% A diversified ETF that approximates sector exposure vs. the overall market

Cash - - 0.0%Bold indicates top pick




Equity Appreciation Focus List


Market Ann'd Div Yld NTM NTM Price Average Date Company Ticker Cap ($B) Dividend (Ann'd) P/E EPS Grth Target Rating Added Communication Services

Facebook, Inc. Class A FB 475.9 - - 19.9x 30% $233 Buy 1/20/17Alphabet Inc. Class C GOOG 797.5 - - 23.6x -1% $1,529 Buy 10/26/18Communication Services Select Sector SPDR XLC 6.6 $0.45 1.0% - - NA NA 10/26/18

Consumer DiscretionaryConsumer Discretionary Select Sector SPDR XLY 10.1 $1.69 1.7% - - NA NA 11/30/17

Consumer StaplesMondelez International, Inc. Class A MDLZ 72.8 $1.14 2.2% 19.3x 7% $61 Buy 6/27/18Vanguard Consumer Staples ETF VDC 4.6 $2.47 1.8% - - NA NA 1/20/17

EnergyCheniere Energy, Inc. LNG 8.6 - - 14.4x 1% $68 Buy 1/20/17ConocoPhillips COP 32.6 $1.68 5.6% -85.6x -110% $48 Buy 8/27/19

FinancialsAffiliated Managers Group, Inc. AMG 2.9 $1.28 2.1% 4.5x -7% $68 Hold 1/20/17Air Lease Corporation Class A AL 2.5 $0.60 2.7% 4.6x -5% $41 Buy 1/20/17Ally Financial Inc ALLY 5.6 $0.76 5.1% 4.0x 1% $31 Buy 1/20/17Bank OZK OZK 2.2 $1.04 6.1% 6.4x -20% $28 Hold 5/18/18Citigroup Inc. C 91.5 $2.04 4.7% 5.6x -3% $82 Buy 4/26/18First Horizon National Corporation FHN 2.6 $0.60 7.2% 5.8x 4% $15 Buy 5/18/18Synchrony Financial SYF 10.2 $0.88 5.3% 4.7x -21% $32 Buy 3/27/18

Health CareBaxter International Inc. BAX 41.4 $0.88 1.1% 23.0x 2% $92 Buy 8/27/19UnitedHealth Group Incorporated UNH 232.7 $4.32 1.8% 14.9x 9% $327 Buy 3/27/19Vanguard Health Care ETF VHT 8.6 $1.78 1.1% - - NA NA 1/20/17

IndustrialsFortune Brands Home & Security, Inc. FBHS 6.1 $0.96 2.2% 11.5x 6% $61 Buy 1/20/17Johnson Controls International plc JCI 20.1 $1.04 4.0% 11.0x 9% $41 Hold 1/20/17Kansas City Southern KSU 12.4 $1.60 1.2% 16.4x 14% $164 Hold 10/26/18Industrial Select Sector SPDR Fund XLI 7.2 $1.58 2.7% - - NA NA 10/26/18

Information TechnologyApplied Materials AMAT 42.9 $0.84 1.8% 11.8x 23% $68 Buy 6/27/18Adobe Inc. ADBE 151.8 $0.00 0.0% 31.3x 19% $339 Buy 3/27/19Mastercard Incorporated Class A MA 245.9 $1.60 0.6% 31.1x 2% $310 Buy 8/27/19salesforce.com, inc. CRM 133.4 - - 48.1x 3% $201 Buy 1/20/17Vanguard Information Technology ETF VGT 22.8 $3.36 1.6% - - NA NA 1/20/17

MaterialsAxalta Coating Systems Ltd. AXTA 4.1 - - 10.6x -9% $26 Buy 1/20/17W R Grace & Co GRA 2.5 $1.20 3.2% 8.3x 2% $61 Buy 8/28/18

Real EstateCBRE Group, Inc. Class A CBRE 13.5 $0.00 0.0% - - $60 Buy 9/25/18Equinix Inc. EQIX 53.2 $10.64 1.7% - - $666 Buy 9/25/18Real Estate Select Sector SPDR Fund XLRE 3.0 $1.18 3.8% - - NA NA 11/30/17

UtilitiesUtilities Select Sector SPDR Fund XLU 10.4 $1.90 3.4% - - NA NA 10/26/18

Cash - - - - - -- - - -

Average 77 10.7x -2%

Consensus




Equity Income Focus List March 31, 2020


Company &Price Current Sector

Company Ticker 3/31/20 Yield Weight Key Points

Communication Services (10.6% of the S&P 500) 5.26%Verizon Communications VZ $53.98 4.6% 5.26% Best-in-class carrier with leverage to wireless and an attractive dividend yield

Consumer Discretionary (9.8%) 0.00%- - - - - -

Consumer Staples (7.8%) 6.00%PepsiCo, Inc. PEP $123.27 3.1% 3.00% Dividend growth track record, cash flow generationPhilip Morris International Inc. PM $73.21 6.4% 3.00% International diversification and growth in e-cigarettes

Energy (2.6%) 12.00%Chevron Corporation CVX $73.07 6.6% 3.00% Major oil with strong balance sheet, production and dividend growthEnterprise Products Partners L.P. EPD $13.86 12.8% 3.00% One of the largest, most diversified energy midstream cos, solid balance sheetKinder Morgan Inc. KMI $13.51 7.4% 3.00% Strong balance sheet, good management, and growing dividendWilliams Companies WMB $14.07 11.4% 3.00% Leverage to natural gas, restructuring, low risk growth projects

Financials (11.1%) 16.00%Ares Capital Corporation ARCC $11.10 14.4% 3.00% "Best in Class" BDC with an outstanding manager, in our view Fidus Investment Corporation FDUS $6.90 22.6% 3.00% An attractive way to invest in the lower middle marketInvesco Ltd. IVZ $9.22 13.4% 4.00% Well-positioned (active/passive) global asset manager; Compelling valuationPrudential Financial , Inc. PRU $52.41 8.4% 3.00% Global divers. Ins./Inv. mgmt. co.; Attractive val.; Expected strong div. growthTPG Specialty Lending, Inc. TSLX $14.34 11.4% 3.00% BDC with strong performance track record and NAV/sh growth

Health Care (15.2%) 8.26%Pfizer Inc. PFE $32.27 4.7% 3.00% Diversification over a wide platform of drug therapiesWelltower, Inc. WELL $46.18 7.5% 5.26% Strong demographic tailwinds and high quality assets

Industrials (8.2%) 8.00%Fortress Transportation & Infrastructure FTAI $7.89 16.7% 4.00% Diversified infrastructure portfolio currently trading at a material discountHannon Armstrong HASI $19.72 6.9% 4.00% Conservative portfolio, leverage structure; Benefits from increased ESG awareness

Information Technology (25.6%) 14.26%Broadcom Inc. AVGO $244.10 5.3% 3.00% Portfolio of profitable, high FCF businesses with a reasonable valuationCisco Systems, Inc. CSCO $39.73 3.6% 4.00% Quality company with good div coverage and growth potentialCrown Castle International Corp. CCI $145.45 3.3% 5.26% Wireless network investment should drive strong cash flow and div growthIntel Corporation INTC $54.72 2.4% 2.00% Best-in-class company w/ good div coverage + some growth potential

Materials (2.4%) 2.00%LyondellBasell Industries NV LYB $50.01 8.4% 2.00% Diversified chemical manufacturer with substantial free cash and attractive div.

Real Estate (3.1%) 9.00%Iron Mountain, Inc. IRM $24.23 10.2% 3.00% Global storage leader with growth opportunities in data and emerging marketsKite Realty Group Trust KRG $9.34 13.6% 3.00% High-quality portfolio of open-air shopping centersSimon Property Group, Inc. SPG $55.99 15.0% 3.00% Leader in global retail real estate with an attractive portfolio

Utilities (3.7%) 5.26%Dominion Energy, Inc. D $74.15 5.1% 5.26% Attractive regulatory footprint, dividend well positioned for steady growth

Cash 1.00% 13.95%

Wtd. Average 7.7%Bold indicates top pick




Equity Income Focus List


Current ConsensusMarket Dividend 12-Month Price Average Date

Company Ticker Cap ($B) (Ann.) Div Growth Target Rating Added

Communication ServicesVerizon Communications VZ 226.7 $2.46 1% $61 Hold 11/9/17

Consumer Discretionary- - - - - - - -

Consumer StaplesPepsiCo, Inc. PEP 174.3 $3.82 6% $141 Buy 5/29/18Philip Morris International Inc. PM 113.0 $4.68 3% $88 Buy 11/4/16

EnergyChevron Corporation CVX 135.2 $4.85 9% $95 Buy 3/27/18Enterprise Products Partners L.P. EPD 29.7 $1.78 2% $28 Buy 6/20/17Kinder Morgan Inc. KMI 30.1 $1.00 23% $20 Buy 10/26/18Williams Companies WMB 16.8 $1.60 2% $23 Buy 11/27/18

FinancialsAres Capital Corporation ARCC 4.6 $1.60 0% $19 Buy 11/4/16Fidus Investment Corporation FDUS 0.2 $1.56 1% $14 Hold 11/4/16Invesco Ltd. IVZ 4.4 $1.24 3% $12 Hold 11/4/16Prudential Financial , Inc. PRU 21.3 $4.40 5% $86 Hold 8/28/18TPG Specialty Lending, Inc. TSLX 1.0 $1.64 0% $21 Buy 7/23/18

Health CarePfizer Inc. PFE 181.2 $1.52 3% $42 Hold 11/4/16Welltower, Inc. WELL 19.4 $3.48 2% $68 Hold 11/4/16

IndustrialsFortress Transportation & Infrastructure FTAI 0.7 $1.32 9% $22 Buy 6/20/17Hannon Armstrong HASI 1.4 $1.36 2% $34 Buy 11/4/16

Information TechnologyBroadcom Inc. AVGO 96.0 $13.00 9% $294 Buy 7/23/18Cisco Systems, Inc. CSCO 171.0 $1.44 6% $49 Buy 11/4/16Crown Castle International Corp. CCI 61.7 $4.80 8% $163 Hold 11/4/16Intel Corporation INTC 237.3 $1.32 6% $63 Hold 11/4/16

MaterialsLyondellBasell Industries NV LYB 16.5 $4.20 8% $67 Buy 3/27/19

Real EstateIron Mountain, Inc. IRM 7.1 $2.47 0% $32 Buy 6/27/18Kite Realty Group Trust KRG 0.8 $1.27 3% $17 Hold 6/27/18Simon Property Group, Inc. SPG 17.3 $8.40 -2% $122 Hold 11/4/16

UtilitiesDominion Energy, Inc. D 64.4 $3.76 2% $85 Hold 11/4/16

Cash

Wtd. Average 4%




High Income Ladder March 31, 2020


PriceIssuer CUSIP Maturity Coupon 3/31/20 Key Points2022NCR CORP NEW 62886EAJ7 07/15/2022 5.000% $94.00 Vendor of ATMs and point-of-sale/self check-out systems; Improving profitability 2024CENTURYLINK INC 156700BA3 04/01/2024 7.500% $105.50 3rd largest landline telco in the U.S.; Stable top line/good cash flow

2025NAVIENT CORPORATION 63938CAH1 06/25/2025 6.750% $88.47 Leading student loan servicer; Service provider to health care and gov. clients

2026NRG ENERGY INC 629377CA8 05/15/2026 7.250% $103.00 Produces, sells and delivers energy products and servicesUNITED RENTALS NORTH AMERICA 911365BK9 12/15/2026 6.500% $101.25 Provides equipment rental services; Solid execution ongoing




High Income Ladder


S&P S&P

Current Call Out Issuer SecurityIssuer CUSIP Security Yield YTM YTW Date Call Price ($M) Rating Rating

2022NCR CORP NEW 62886EAJ7 Sr. Unsec. Note 5.32% 7.91% 7.91% 03/26/2013 Par + MW Prem.* 600 BB BB

07/15/2017 $102.50007/15/2018 $101.66707/15/2019 $100.83307/15/2020 Par

2024CENTURYLINK INC 156700BA3 Sr. Unsec. Note 7.11% 5.94% 5.85% 04/01/2019 Par + MW Prem.* 1,000 BB B+

01/01/2024 Par 2025NAVIENT CORPORATION 63938CAH1 Sr. Unsec. Note 7.63% 9.60% 9.60% 05/26/2017 Par + MW Prem.* 500 B+ B+

06/25/2025 Par 2026NRG ENERGY INC 629377CA8 Sr. Unsec. Note 7.04% 6.64% 6.41% 02/15/2017 Par + MW Prem.* 1,000 BB BB

02/15/2021 $103.62502/15/2022 $102.41702/15/2023 $101.20802/15/2024 Par

UNITED RENTALS NORTH AMERICA 911365BK9 Sr. Unsec. Note 6.42% 6.27% 6.18% 10/30/2018 Par + MW Prem.* 1,100 BB- BB-10/30/2021 $103.25010/30/2022 $102.16710/30/2023 $101.08310/30/2024 Par

*Issue features Make Whole Premium



Research Department Sector Focus Vernon C. Plack, CFA, CMT / 804-780-3257 / [email protected] Financials and Real Estate

W. Moultrie Dotterer, CFA / 804-780-3279 / [email protected] Communication Services, Consumer Staples, Energy, and Health Care

Charles E. Redding / 804-782-8853 / [email protected] Consumer Discretionary, Industrials, Information Tech., Materials, and Utilities

IMPORTANT DISCLOSURES BB&T Securities, LLC, Research Disclosures as of March 31, 2020 Companies Mentioned and Associated Disclosures Adobe Inc. (ADBE), 1a Affiliated Managers Group, Inc. (AMG), 3, 6, 12, 13 Air Lease Corporation Class A (AL), 2, 3, 12 Ally Financial Inc. (ALLY), none Alphabet Inc. Class C (GOOG), 1a Applied Materials (AMAT), 1a Axalta Coating Systems Ltd. (AXTA), none Bank OZK (OZK), 1a, 9a Baxter International Inc. (BAX), none CBRE Group, Inc. Class A (CBRE), 4, 7, 14 Cheniere Energy, Inc. (LNG), none Citigroup Inc. (C), 2, 3, 4, 6, 12, 13 Communication Services Select Sector SPDR (XLC), none ConocoPhillips (COP), none Consumer Discretionary Select Sector SPDR (XLY), none Equinix, Inc. (EQIX), 1a, Facebook, Inc. Class A (FB), 1a, 9a First Horizon National Corporation (FHN), 9a Fortune Brands Home & Security, Inc. (FBHS), none Industrial Select Sector SPDR Fund (XLI), none Johnson Controls International plc (JCI), 9a Kansas City Southern (KSU), 2, 3, 4, 6, 12, 13 Mastercard Incorporated Class A (MA), 2, 3, 4, 12 Mondelez International, Inc. Class A (MDLZ), 1a, 3, 4, 6, 7, 12, 13, 14 Real Estate Select Sector SPDR Fund (XLRE), none salesforce.com, inc. (CRM), 4, 7, 14 Synchrony Financial (SYF), 9a UnitedHealth Group Incorporated (UNH), 2, 3, 4, 6, 7, 9a, 12, 13, 14 Utilities Select Sector SPDR Fund (XLU), none Vanguard Consumer Staples ETF (VDC), none Vanguard Health Care ETF (VHT), none Vanguard Information Technology ETF (VGT), none W R Grace & Co (GRA), none Ares Capital Corporation (ARCC), 1a, 2, 3, 4, 6, 7, 9a, 12, 13, 14 Broadcom Inc. (AVGO), 1a, 2, 3, 4, 7, 12, 14 Chevron Corporation (CVX), none Cisco Systems, Inc. (CSCO), 1a, 4 Crown Castle International Corp. (CCI), 1a, 2, 3, 12 Dominion Energy, Inc. (D), 2, 3, 4, 6, 7, 9a, 12, 13, 14 Enterprise Products Partners L.P. (EPD), 2, 3, 7, 12, 14 Fidus Investment Corporation (FDUS), 1a, 2, 3, 4, 9a, 12 Fortress Transportation & Infrastructure (FTAI), 1a Hannon Armstrong (HASI), none Intel Corporation (INTC), 1a






Invesco Ltd. (IVZ), 4, 6, 9a, 13 Iron Mountain, Inc. (IRM), 2, 3, 7, 12, 14 Kinder Morgan Inc. (KMI), 3, 6, 7, 12, 13, 14 Kite Realty Group Trust (KRG), none LyondellBasell Industries NV (LYB), 9a PepsiCo, Inc. (PEP), 1a, 7, 14 Pfizer Inc. (PFE), none Philip Morris International Inc. (PM), 9a Prudential Financial, Inc. (PRU), 4, 6, 13 Simon Property Group, Inc. (SPG), 2, 3, 4, 6, 7, 9a, 12, 13, 14 TPG Specialty Lending, Inc. (TSLX), 2, 3, 4, 7, 12, 14 Verizon Communications (VZ), 7, 14 Welltower, Inc. (WELL), 2, 3, 4, 7, 12, 14 Williams Companies (WMB), 9a CENTURYLINK INC, 1b, 2, 3, 6, 7, 12, 13, 14 NAVIENT CORPORATION, 1b NCR CORP NEW, 1b, 2, 3, 4, 7, 12, 14 NRG ENERGY INC, 1b, 6, 13 UNITED RENTALS NORTH AMERICA, 1b, 2, 3, 5, 12 Disclosure Codes: 1.

a. BB&T Securities, LLC, or an affiliate member makes a market in the securities of the subject company. b. BB&T Securities, LLC, or an affiliate member trades or may trade as principal, or make a market, in the debt securities (or in

related derivatives) of the subject company 2. BB&T Securities, LLC, or an affiliate member has managed or co-managed a public offering of securities of the subject company in

the last 12 months. 3. BB&T Securities, LLC, or an affiliate member has received compensation for investment banking services from the subject company

in the last 12 months. 4. BB&T Securities, LLC, or an affiliate member expects to receive or intends to seek compensation for investment banking services

from the subject company in the next three months. 5. BB&T Securities, LLC, or its affiliates beneficially own 1% or more of the common stock of the subject company. 6. BB&T Securities, LLC, or an affiliate member provided noninvestment banking securities-related services to the subject company

during the past 12 months. The analyst or employees of BB&T Securities, LLC, with the ability to influence the substance of this report knows the foregoing facts.

7. An affiliate of BB&T Securities, LLC, received compensation from the subject company for products or services other than investment banking services during the past 12 months. The analyst or employees of BB&T Securities, LLC, with the ability to influence the substance of this report know or have reason to know the foregoing facts.

8. The analyst serves as an officer, director, or advisory board member of the subject company. 9.

a. The research analyst or a member of the research analyst’s household has a financial interest in the common stock of the subject company.

b. The research analyst or a member of the research analyst’s household has a financial interest in the preferred stock of the subject company.

c. The research analyst or a member of the research analyst’s household has a financial interest in options on the common stock of the subject company.

d. The research analyst or a member of the research analyst’s household has a financial interest in rights for the securities of the subject company.

e. The research analyst or a member of the research analyst’s household has a financial interest in warrants for the securities of the subject company.



f. The research analyst or a member of the research analyst’s household has futures contracts on the securities of the subject company.

g. The research analyst or a member of the research analyst’s household has a short position in the common stock of the subject company.

h. The research analyst or a member of the research analyst’s household has a financial interest in a debt security of the subject company.

10. The analyst received compensation from the subject company in the previous 12 months. 11. The analyst or an associated person of BB&T Securities, LLC, with the ability to influence the content of a research report knows or

has reason to know that a material conflict of interest with the analyst or BB&T Securities, LLC, exists at the time of this report. 12. The subject company is, or over the 12-month period preceding the date of the publication or distribution of this report has been a

client of BB&T Securities, LLC, or an affiliate member, and has received investment banking services. 13. The subject company is, or over the 12-month period preceding the date of the publication or distribution of this report has been a

client of BB&T Securities, LLC, or an affiliate member, and has received noninvestment banking securities-related services. 14. The subject company is, or over the 12-month period preceding the date of the publication or distribution of this report has been a

client of BB&T Securities, LLC, or an affiliate member, and has received non-securities services.

ADDITIONAL INFORMATION AVAILABLE UPON REQUEST The analyst(s) principally responsible for the preparation of this report received compensation that is based upon many factors, possibly including sales and trading or principle trading revenues, but not including the firm’s 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. The opinions expressed are those of the analyst(s) and not those of Truist Financial Corporation or its executives.


Home Office — Richmond, VA 901 East Byrd Street, Ste. 500 800-552-7757 804-643-1811

Alexandria, VA 201 N. Union Street, Ste. 240 888-250-7212 703-836-9755 Asheville, NC 301 College Street, 2nd Fl. 866-231-7650 828-258-7031 Atlanta, GA 3630 Peachtree Road NE, Ste. 250 866-329-5338 404-264-6800 Aventura, FL 19235 Biscayne Blvd. 877-211-5405 305-521-0220 Bedford, VA 1 Cedar Hill Court, Ste. A 888-473-8164 540-586-4422 Birmingham, AL 2501 20th Place South, Ste. 110 844-300-7692 205-445-2202 Blacksburg, VA 902 Prices Fork, Ste. 2025 800-553-1574 540-953-0003 Bluefield, VA 1934 Leatherwood Lane 800-733-0850 276-322-2900 Charleston, SC 235 Magrath Darby Blvd., Ste. 330 800-400-7078 843-722-7800 Charleston, WV 300 Summers Street, Ste. 500 800-448-5480 304-357-6500 Charlotte, NC 6805 Morrison Blvd., Ste 120 800-476-3768 704-367-3800 Charlotte, NC – Uptown 200 S. College St., Suite 750 877-890-9099 704-496-4062 Charlottesville, VA 310 4th Street NE, Ste. 100 800-868-7726 434-971-8557

Columbia, SC 2422 Devine Street, Ste. A 888-825-1234 803-748-1177 Culpeper, VA 1300 Sunset Lane, Ste. 3210 800-476-2566 540-825-0783 Dallas, TX 8115 Preston Road, Ste. 200 866-741-3145 972-232-4877 Danville, VA 120 Crown Drive, Ste. A 800-476-0587 434-799-1000 Fort Lauderdale, FL 110 E. Broward Blvd., Ste. 105 888-327-3550 954-233-9777 Fort Worth, TX 5128 Apache Plume Rd., Ste. 340 833-515-3205 817-344-7190 Greensboro, NC 3318 W. Friendly Ave., Ste. 330 800-476-1824 336-378-1824 Greenville, NC 1440 E. Arlington Blvd., Ste. B 800-207-3201 252-321-7808 Greenville, SC 40 W. Broad Street, Ste. 420 800-476-3662 864-233-3655 Harrisonburg, VA 250 Neff Ave., Ste. 200 800-768-2882 540-434-2882 High Point, NC 620 N. Main Street, 2nd Floor 866-263-1053 336-889-1145 Houston, TX 333 Clay Street, Ste. 3830 832-308-6080 Hunt Valley, MD 303 International Circle, Ste. 400 855-711-4950 410-891-0200

King of Prussia, PA 150 South Warner Road 866-229-4226 610-263-0530

Lexington, KY 200 West Vine Street, Ste. 120 844-334-4433 859-629-3200 Lexington, VA 537 E. Nelson Street, Ste. 101 800-436-7218 540-463-4302 Lynchburg, VA 810 Main Street 800-868-0413 434-846-2711 Manassas, VA 9200 Church Street, Ste. 100 800-476-5288 703-368-4970

Miami, FL 1200 Brickell Ave., Ste. 1020 855-399-9579 305-423-0330 Morehead City, NC 2806 Arendell Street, Ste. 210 800-810-2763 252-222-0022 Myrtle Beach, SC 2619 N. Oak Street, 3rd Fl. 888-728-2265 843-918-7600 Naples, FL 5551 Ridgewood Drive, Ste. 101 855-537-0360 239-249-5080 Nashville, TN 700 12th Avenue South, Ste. 304 833-242-1708 615-873-2133 Norfolk, VA 500 East Main Street, Ste. 300 800-515-0294 757-446-6800 Ocala, FL 4414 SW College Road, Ste. 1450 855-506-0252 352-390-2825 Palm Beach, FL 125 Worth Avenue, Ste. 210 844-393-3832 561- 653-5570

L O C A T I O N S


Pinehurst, NC 100 Pavilion Way, Ste. F 910-992-3275 Ponte Vedra Beach, FL 814 North A1A, Ste. 200 855-783-6333 904-543-6261 Raleigh, NC 3605 Glenwood Ave., Ste. 400 800-763-1893 919-571-1893 Reston, VA 12010 Sunset Hills Road, Ste. 740 866-208-2918 703-471-3892 Richmond, VA 901 East Byrd Street, Ste. 500 800-552-7757 804-643-1811 Roanoke, VA 111 Franklin Road, Ste. 200 800-476-0014 540-344-5414

Saint Augustine, FL 1100 Plantation Island Drive, Ste. 240 844-276-3489 904-671-8150 Savannah, GA 314 Stephenson Avenue, Suite A 877-512-9758 912-999-3360 Savannah, GA – Downtown 7 East Congress Street, Suite 706 844-235-4279 912-344-9800 Staunton, VA 205 North Central Ave. 800-541-3851 540-886-2396 Sumter, SC 216 North Main Street, Suite 200 888-901-6688 803-774-2700 Tampa, FL 400 N Tampa Street, Ste. 2300 833-614-8126 813-314-5700 Tysons Corner, VA 8200 Greensboro Drive, Ste. 100-A 877-807-3974 703-342-1740

Virginia Beach, VA 2101 Parks Ave., Ste. 402 800-745-2355 757-417-4900 Warrenton, VA 560 Broadview Ave., Ste. 100 800-476-3547 540-347-0200 Williamsburg, VA 5238 Monticello Ave. 800-851-4313 757-220-3800 Williamston, NC 603 East Boulevard, Ste. A1 833-544-3107 252-508-7180 Wilmington, NC 2512 Independence Blvd., Ste. 100 800-476-0405 910-392-7200 Winchester, VA 115 N. Cameron Street, Ste. 210 800-476-9847 540-667-3311 Winston-Salem, NC 110 S. Stratford Road, Ste. 400 800-476-7268 336-722-4702

u.s. equity view - bb&t scott & stringfellow · monthly market commentary april 2020 . u.s....

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