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[PDF] Investment Positions - Pacifica Capital Investments, LLC

During the last three months of the year we added shares of: Five Below (FIVE) expansion of the price-to-earnings multiples investors assigned to businesses

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3550 Lakeline Blvd., Ste. 170, #1715 Leander, TX 78641

Ph (858) 354-Ph (512) 310-8545 Fax (888) 302-3545 www.PacificaCapital.Net

Re: PCI Overview of 4th

Quarter, 2019

Dear Pacifica Client,

While Pacifica Capital Investments reports quarterly results, we do so with reluctance. Our focus is on

generating long-term results, and our belief is that short-term performance is not meaningful. As demonstrated in the graph on page 7, PCI's long -term, aggregate results continue to be very rewarding for our clients.

Overview

During 2019

, Pacifica accounts posted a gain of 14.8%, an attractive return in most years but one that fell

well short of the S&P 500 Total Return Index's record gain of 31.5%. Looking at the long-term, Pacifica

has outperformed our benchmark by a significant margin. Since inception in 1998, Pacifica has generated

a total return of 788.8% against the S&P's 343.4% gain.

We continue to expect to outperform our

benchmark over the long term and more so in periods with volatility. Those periods when market weakness appears periodically allow us to "buy low" and later "sell high". This is when our clients typically see the strongest relative outperformance. Market volatility has been unusually low since the onset of The Great Recession, after which the longest Bull Market in history began. With the stock

market currently at historic highs, weakness could return at any time, and we are prepared for that to

occur. In the fourth quarter, we continued to implement our strategy of purchasing undervalued assets and

selling holdings trading at prices above our estimate of intrinsic value. Additionally, we continue to

closely monitor a select group of excellent businesses where we want to aggressively purchase shares when they trade at more reasonable valuations.

Activity and Positioning

(Note: Pacifica manages accounts on an individual basis. While commentary in this letter reflects aggregate metrics, individual results and positioning may vary based on when accounts were opened and other factors.)

During the fourth quarter, we were net buyers of securities as we added to our holdings in seven positions

and sold out of two small ones. During the last three months of the year we added shares of: Five Below (FIVE), Nordstrom (JWN), Fairfax Financial (FRFHF) and Fairfax India (FFXDF),

Designer Brands

(DBI), L Brands (LB), and Alliance Data Systems (ADS). Additionally, we sold out of our position in Dick's Sporting Goods (DKS) and Spectrum Brands (SPB), a spin off from our position in Jefferies

Financial Group

(JEF) that we did not directly purchase. Total returns generated by those latter two positions we sold during our brief ownership period were substantial.

At year's end, we held meaningful positions in thirteen securities. In aggregate, Pacifica accounts held

roughly 23% of portfolio assets in cash (excess cash is held in money market funds that are currently

yielding approximately 1.6%). 2

Key Issues

Our focus is on buying high

-quality businesses that can succeed in any foreseeable economic environment. While we do not base investment decisions on macro factors, we keep our eye on certain indicators to inform our understanding of the risk/reward prospects of the investment environment in which we are operating. While many economic indicators turned positive during the 4 th quarter of 2019, we continue to be wary of risks in the marketplace. These include: A. Elevated Valuations - Multiple Expansion Drives 2019 Gains - The S&P 500 index is currently trading at about 18.2 times forward earnings estimates for the next twelve months. Notably, in

2019 corporate profits only increased 0.4%. The market"s gains were almost entirely driven by

expansion of the price-to-earnings multiples investors assigned to businesses. For a business to be worth a higher multiple to earnings, it either must grow earnings at a higher rate, or the rate used to discount its future cash flows must be reduced (discount rates, which are largely determined by interest rates, represent opportunity cost and are a useful component to consider in valuing assets). We do not see any evidence to suggest that growth prospects for American businesses have improved dramatically relative to historical norms. On the contrary, we think it is more likely that the long-term future rate of growth in U.S. GDP will be lower than the historical rate of growth. Meanwhile, as discussed above, interest rates continue to be well below historical norms, thus lowering the discount rates investors use in valuing businesses. This furthers our suspicion that this year"s gains in the stock market were driven more by financial engineering than real productivity improvement. B. Interest Rates - Yields Remain Low Despite a Strong Economy; The Yield Curve Normalizes - In late October, the Fed cut interest rates for the third time in 2019. This easing came against the backdrop of an economy with historically low unemployment, record high retail sales, 2%-plus

GDP growth, and

the stock market at record highs. We are concerned that the market appears to be overly-reliant on the role of the Fed in driving asset values. Furthermore, we are concerned about the unintended consequences and unknown risks that may emerge as a result of years of accommodative monetary policy. After being inverted since mid-March, the yield curve normalized in October, as short-term rates fell due to dovish Fed policy and long -term rates subsequently rallied on positive global 3 economic news. As discussed in past letters, an inverted yield curve is widely regarded as a negative economic indicator, as one has preceded each recession since the end of World War II. While the recent normalization of the yield curve indicates improving sentiment about the direction of the economy, it does not necessarily mean the risk of an imminent recession has dissipated. For example, the yield curve inverted in 2006, only to normalize in 2007, just prior to the 2008 recession. C. Elevated Public and Private Debt Levels - As discussed in prior communications, debt levels in both the public and private sectors remain elevated. We view this issue as being inextricably linked to easy monetary policy, as low interest rates encourage borrowing. We are very concerned about the risks associated with excessive debt leve ls as cheap credit compresses risk premiums, allowing riskier borrowers easier access to credit. Moreover, we are concerned about the ability of certain governments and businesses to continue to meet their obligations in a more historically typical (i.e., higher) interest rate environment.

Investments

Our objective is to buy businesses for less than they are worth and hold them for the long-term. Ideally,

we want to own businesses with strong cash flow, good returns, and opportunities for growth, allowing us to benefit from the compounding benefit of reinvesting cash back into the business over time. 4 We view our investments as broken down into three categories: A. Growth companies that earn high returns on incremental invested capital and have long runways for growth. These "compounders" generate large amounts of cash from their core business and have ample opportunities to reinvest that cash in other high return en deavors. For these businesses, we are willing to pay seemingly high prices and build large positions so long as we are highly confident in their future growth prospects and believe that the discounted value of future cash flows justifies paying a high multiple to current earnings.

B. First class businesses that earn high returns on equity but don't have an abundance of reinvestment opportunities in their core businesses. This group of "stalwarts" typically consists of

large, established businesses. We are pe rfectly happy to own these types of businesses so long as a) they have a durable competitive advantage that will protect their economic franchise over the long -term, b) they have high quality management teams that have a proven track record of shareholder-friendly capital allocation policies, and c) we can buy them at a fair price relative to intrinsic value. We are willing to build large positions in these businesses depending on how attractive we think our entry price is. C. Good businesses with solid returns on equity and competitive positioning that are experiencing short-term issues causing their stock prices to trade at low levels. This group is comprised of "value plays " where we are buying businesses that are not as high quality as those in the first and second group but are still attractive businesses that we are happy to own. With businesses in this group, we tend to take smaller positions and consider price as a more important factor in order to build a margin of safety into our investment. We are also very focused on the quality of management and its capital allocation policies when investing in businesses in this group.

The below chart shows our investments by group (note: this list includes investments that in aggregate

are over 1% of assets under management): Group A: "Compounders" Group: B "Stalwarts" Group C: "Value Plays" Alphabet (GOOG) Berkshire Hathaway (BRK/B) Alliance Data Systems (ADS) Five Below (FIVE) Fairfax Financial (FRFHF) Designer Brands (DBI)

Goldman Sachs (GS) Fairfax Africa (FFXXF)

Starbuck (SBUX) Fairfax India (FFXDF)

Nordstrom (JWN) Jefferies Financial Group (JEF)

L Brands (LB)

While our preference is for our portfolio to be concentrated in our best ideas in Group A or Group B, the

current marketplace has presented us with more opportunities in Group C. That allocation has emerged because most very high-quality companies and growing companies are trading at what look like excessively high valuations.

Recent Purchases

During the quarter we predominantly added to our positions in the retail sector that we have discussed

previously. To recap, the primary factors we are looking for in our investments in this space include:

- High quality management teams 5 - Dominant positions within their category with limited direct competition - Demonstrated e-commerce capabilities (each of our retailers generates over 10% of sales online - some are as high as 30%) - High levels of customer service and the ability to drive traffic to stores - Strong balance sheets - Shareholder friendly capital allocation policies - Low entry prices

We continue to believe that certain retail businesses will do well in the evolving retail space. Broad

negative sentiment around this sector in 2019 brought the prices of man y retailers down to extremely low

levels. We believe the investments we made during the quarter were in businesses that are well positioned

to succeed in the coming years. We gain additional confidence from the fact that our recent purchases in

this space were made at low valuations (in most cases below ten times forward earnings) for businesses that we believe will continue to be successful. Furthermore, most of our retail investments offer dividend

yields that are attractive. Please see the attached "Investment Positions" summary for more detail on these

and other investments.

In addition to our retail purchases, we

continued to add to our holdings in a select group of financial

businesses during the quarter. Purchases in this sector primarily consist of businesses we have followed

for many years and know extremely well. Our investments in the financial sector during the quarter were

predominantly made at prices below book value. Entering at or below that price point we believe gives us

an attractive margin of safety and the likelihood of strong future returns.

Sold Positions

During the quarter we sold out entirely of small positions in Dick"s Sporting Goods (DKS) and Spectrum

Brands (SPB). (NOTE: Jefferies (JEF) distributed its interest in Spectrum Brands, a publicly held

company, to shareholders via a special dividend on September 30, 2019, representing a yield of about 7%

of Jefferies" stock price at the time). Pacifica sold out of both positions after significant gains in a

relatively short holding period (see the attached “Investment Positions" for more details). We believe our successful investment in DKS, which generated on average over 50% gains plus dividends during our approximately one year of ownership demonstrates the viability of our strategy with other retail investments.

Closing Thoughts

Despite our continued belief that most stocks continue to trade at high valuations, in recent quarters we

have found opportunities to deploy capital into investments we believe have attractive future return potential. Our portfolio is comprised of high -quality businesses trading at prices we regard as below intrinsic value , and in many cases, substantially so. We believe this balance of business quality and low purchase price provides us downside protection while simultaneously seizing on attractive future return potential.

Over the last 20 years

since Pacifica has been managing public equity investments for its clients - the world has experienced multiple "shocks," including: the 9/11 attacks, wars in Iraq and Afghanistan,

significant natural disasters (hurricanes, earthquakes, tsunamis, floods, etc.), the rise of terrorism,

including attacks in Europe, Africa, and the US; booms and subsequent busts in many industries

(technology, internet, housing, raw materials, etc.); a credit-related crisis; significant shifts in political

power bases and policies, and more. However, over a period that included all these "events," our clients'

accounts have benefited from substantial appreciation. The primary reason for that success is that Pacifica 6 has had the discipline and patience to adhere to our investment strategy as we have detailed in previous communications and on our website at www.pacificacapital.net

Please do not hesitate to contact us as indicated below with questions, comments, or to set up a time to

review and discuss your investments . Also, it is important that you contact us if there have been any

changes in your financial situation, investment objectives, or if you desire to impose any reasonable

restrictions or modify existing ones on your account.

Sincerely,

Steve Leonard

Managing Principal & Founder

steve@pacificacapital.net 858
-354-7180

Kari Pemberton

Principal, Investments & Operations

kari@pacificacapital.net 512
-337-5521

Blair Bodek

Associate Director of Research

blair@pacificacapital.net 215
-519-1647 7

PCI's Results and Performance Record

PCI has outperformed the market and has provided significant gains to its longest-term clients. More significantly, PCI

accounts have not suffered nearly as much in the years when the stock market suffered its greatest losses. The following

are PCI's Performance Results from inception (1998) through 201

9; they are compared to those of the S&P 500 Total

Return Index. PCI accounts, in aggregate, vastly outperformed the overall market over the long-term because our declines

were much less during periods of market weakness and our gains were strong during periods of market strength. Over more recent periods Pa cifica has underperformed versus the overall market. Our cautious outlook - due to our skepticism of market strength outpacing economic fundamentals - caused us to hold large cash balances, which have earned almost no return versus equity positions during a very strong market. We continue to believe our caution will be well rewarded by with strong, long-term results.

We update this graph annually, as we do not believe comparisons for any shorter periods are meaningful.

*PCI performance for each year is unaudited and is a Time Weighted Rate of Return for that year, except for 1998

-2004, which is an Internal Rate of Return for those years. IRR is

a dollar-weighted return that accounts for contributions and withdrawals during the period. TWR is a time-weighted return that effectively eliminates the effects of contributions

and withdrawals and their timing. 1998 is a partial year. The S&P 500 Total Return measures the change from the start of the period to the end of the period, assuming no

contributions and/or withdrawals and includes dividends. The "Total" is for the entire period, compounded annually. PCI resul

ts are shown net of all fees, including management

fees, brokerage fees and custodial expenses, and reflect the reinvestment of all dividends and earnings. Performance results provided herein are the aggregate of all fully

discretionary accounts managed by PCI, including those accounts no longer with PCI, and include the performance of the accoun

ts of PCI's principals (which do not incurquotesdbs_dbs21.pdfusesText_27