Re: PCI Overview of 1st Quarter, 2020

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

Towards the end of the 1st quarter of 2020, the spread of the COVID-19 pandemic from Asia and Europe into the US caused a rapid and major correction in global financial markets, with the S&P 500 Total Return Index falling very abruptly and significantly. Pacifica accounts were down substantially as well.

The market continues to show extreme volatility in response to the measures imposed to combat the Coronavirus pandemic and address the economic fallout. Fear and a “herd” mentality have driven valuations. Millions of people around the world have been at home, watching and/or reading the continuous stream of bad news, and making stock trading decisions based upon the current uncertainty that encompasses almost every aspect of our lives today. Pacifica believes perspective and a long-term focus are the keys to making sound investment decisions during such a crisis.

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 experienced substantial appreciation. The primary reason for that success is that Pacifica has had the discipline and patience to adhere to our “buy low, sell high” value-oriented investment strategy that we have detailed in previous communications.

Our portfolio of companies have the capital to survive, and later thrive, in part because the great majority have no, or very little, debt. When the US gains a stronger grip on the health crisis, economic activity should begin to resume, eventually reaching more normal levels. Furloughed and laid off employees will return to the workforce; and shoppers will return to stores and resume most facets of their normal lives as confidence returns. The stock market is likely to anticipate that dynamic and begin its recovery. Other countries ahead of us in this pandemic, like China, have begun to show a similar path forward.

Warren Buffett, long-term CEO of , discussed the Coronavirus in a Yahoo Finance interview on March 14, 2020. On the inevitability and fleeting nature of disruptions to the global economy:

"There will be interruptions, and I don't know when they will occur, and I don't how deep they will occur, I do know they will occur from time to time, and I also know that we'll come out better on the other end."

3550 Lakeline Blvd., Ste. 170, #1715 • Leander, TX 78641 Ph (858) 354-7180 • Ph (512) 310-8545 • Fax (888) 302-3545 www.PacificaCapital.Net

We continue to strongly believe in one of ’s old adages:

“Be fearful when others are greedy and greedy when others are fearful.”

Before the virus started in China, Pacifica had a retail/restaurant component to our portfolio, and companies in those sectors have seen greater price declines than the overall market during this downturn (though not as steep as airlines, lodging/gaming, and some other sectors). As such, those companies have had the greatest negative impact on Pacifica’s short-term performance. We believe when Americans are finally allowed out of their homes, they will be back in stores shopping and visiting popular restaurants once again.

Pacifica’s accounts entered this downturn positioned conservatively with large cash balances, as well as with investments in financially sounds companies capable of withstanding a prolonged economic downturn. The precipitous decline in the stock market has presented buying opportunities comparable in some ways to those we made during the Financial Crisis of 2008/2009. It is providing us the opportunity to invest in excellent companies at once-in-a-decade prices.

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 first quarter, we aggressively added shares of our long-term favorite companies: Berkshire Hathaway, Five Below, , Alphabet (Google), and Starbucks (we hope to add more shares of Starbucks if the price moves lower). Additionally, we made smaller purchases of certain companies in the retail and restaurant spaces as their prices declined to depression-like levels due to uncertainty associated with the Coronavirus. In certain cases, we sold shares in our holdings of and Jefferies to clear up additional cash to fund purchases of our long-term favorite companies.

Due to purchases made during the quarter, our cash position decreased meaningfully, as most Pacifica accounts held cash positions in the 5% to 15% range at quarter’s end.

COVID-19 Economic Impact

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Because the most effective means of stopping the spread of the virus currently is through social distancing with government imposed “stay at home” executive orders, many parts of the economy have ground to a halt over recent weeks. Industries requiring in-person engagement to function have borne the brunt of COVID-19’s disruption thus far. They include restaurants, brick and mortar retail, hospitality, and travel, as well as all companies that supply goods and services to them. Very few businesses have been spared from the ripple effects that have and will continue to reverberate through the economy in the coming weeks and months. Recent economic trends in China provide clues on how the virus could affect Western economies in the weeks to come. The chart to the right shows the sharp decline and rebound in China’s manufacturing Purchasing Managers Index (“PMI”) – a key economic indicator that measures economic trends in the manufacturing and service sectors. A reading above 50 indicates expansion and below that figure reflects contraction. Following the index’s worst reading on record in February, expansion began again in March following China’s successful measures to curb the spread of the virus. This provides an example of how an economic shutdown in the US could be followed by a similar rebound. Most likely, Coronavirus-related economic contractions will be followed by decreases in consumer confidence and spending. These economic headwinds will likely affect businesses that deal in big ticket items and capital goods more acutely than they will ones selling smaller consumable products. Most of our capital is invested in businesses in the latter group, which we think will allow our portfolio companies to recover faster than many other parts of the economy. On this note, there have been encouraging signs thus far from China. The chart below shows data collected by retail consulting firm Capillary Technologies. The retailers surveyed saw immediate and sustained increases in sales per store and customers per store following the end of the lockdown period. Capillary Technologies China Retail Data

Perhaps most reliably, US multinationals with large operations in China have reported encouraging data about their experience with operations there. In Nike’s third-quarter earnings call with shareholders, the

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company reported a sales decline in China due to store closures. On the positive side, however, it reported a 30% jump in online sales – indicating resilient demand from quarantined consumers. On a similar note, Starbucks, after closing nearly all its stores in China when the outbreak first occurred, reported in mid- March that it would reopen 95% of all closed stores by the end of the month. CEO Kevin Johnson conveyed optimism in a March 19th interview, stating: “China is on the uptick.” The company plans to replicate in the US the same model used in China.

When evaluating investment opportunities, Pacifica is assuming a significant economic downturn followed by a prolonged recovery. We believe most people will want to emerge from their locked down living conditions and resume their regular activities – work, school, shopping, eating out, socializing, etc. – as soon as they are deemed safe. Certain industries will take longer to recover, such as international travel and lodging, and businesses that rely on major consumer and business expenditures that require more confidence. We think that a conservative forecast is warranted in this uncertain environment when estimating the intrinsic value of the companies we own and are targeting to purchase. Nevertheless, we are optimistic that human ingenuity and the resiliency of the American economic system will eventually lead us to a full recovery.

Investments

(Note: Due to the large degree of volatility in market prices over recent weeks, some of the price and valuation data used in this letter may be outdated. Nearly all the investments described in this letter have seen their prices move higher since the end of the quarter – many of them substantially so.)

Market prices in many sectors of the economy are among the most attractive we have seen throughout Pacifica’s history. Fear and panic had overtaken markets in March, and we have seen many examples of indiscriminate selling at prices that assume the world (and especially the retail and restaurant sectors) will not recover in any reasonable timeframe. We are buying aggressively into a select group of excellent businesses we believe can withstand a sustained economic downturn. Pacifica is making these purchases at extremely attractive prices that we think will set us up for many years of strong returns.

Largest Investments

We are currently concentrating nearly all our buying in our favorite companies. We rarely see opportunities to purchase these companies at prices this far below our estimate of intrinsic value. Pacifica is using cash held over the past few years to fund these purchases and is encouraging account holders to add funds to their accounts when possible. In select cases where we believe it is logical, we are selling other holdings, even if we view them as trading below their intrinsic value, in order to fund purchases of these few companies we believe will generate attractive returns for many years to come. These core investments we anticipate holding for the very long-term include:

Berkshire Hathaway (BRK/B) Since 1962, Warren Buffett has meticulously built Berkshire to be able to thrive in most any economic environment. With over $120 billion of cash as of the most recent quarter, Berkshire has one of the strongest balance sheets in the world. Furthermore, the conglomerate owns a diversified mix of high- return businesses, providing it with multiple earnings streams capable of generating cash in most any economic scenario. Berkshire is uniquely well positioned to weather the current economic storm. At recent levels, the stock is cheaper relative to book value than it has been at any point during Pacifica’s 20- year holding period for this stock. While we believe prospective returns from this price are very attractive, most importantly we think the risk of a sustained market loss – that Berkshire will trade at a discount to today’s purchase price years from now - is highly unlikely.

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Five Below (FIVE) We believe that at current levels Five Below likely represents the best mix of long-term return potential and downside protection in our portfolio. The recent stock price is roughly 20 times 2019 earnings – a ratio that is very reasonable for a company that has been growing earnings at 20%+ per year. FIVE has a rock-solid balance sheet and excellent store economics, resulting in the company’s needing relatively little capital to fund its aggressive store expansion. Despite growing stores at a rate of over 20% per year, building distribution centers, and buying back stock, FIVE has built a large cash balance – standing at over $260 million with no borrowings at the end of 2019. Its strong balance sheet gives FIVE the financial flexibility to continue to meet its fixed obligations during this downturn; so, we are not concerned about this company’s solvency.

Once all of FIVE’s stores reopen, we think the company is well-positioned among brick and mortar retailers because A) its discount model and low merchandising price point is resistant to weak economic conditions (same store sales were up mid-single digits during the last recession), B) its core customer “skews younger” – a demographic we think is much more likely to begin shopping in stores again once the virus abates, and C) school closures across the nation are likely to extend for the entire academic year, causing more parents to look for inexpensive child-oriented “distractions” to keep their children busy and engaged. This falls right into FIVE’s “sweet-spot” of customers and products. Long-term, we continue to see total store potential of over 2,500 stores in the US (up from 900 now) and regard the current stock price as a rare opportunity to buy into an excellent and growing business at a bargain price.

Alphabet (GOOG) We think Alphabet’s core advertising business, supported by the firm’s near-ubiquitous properties and platforms including Google Search, YouTube, Google Maps, Google Chrome, Android, and more, is one of the best businesses in the world. While revenue from this enterprise is likely to decline as advertising spending declines in the near-term, the company is much better positioned than most to cope with the current economic disruption caused by the Coronavirus. At yearend 2019, Alphabet held roughly $115 billion of net cash, so we believe this company has virtually no insolvency risk, though we expect revenues from the core advertising business to soften until the global economy recovers.

The recent stock price is less than 20 times 2019 GAAP earnings. However, we think the earning power of GOOG’s ad business is artificially depressed due to costs of investments the company is making that should enable long-term growth. Such investments include Waymo (autonomous vehicle technology), Google Cloud (cloud services), Verily and Calico (life sciences), Access (energy, telecom, and internet), and more. While these investments detract from near-term profitability, we think over time some of them may grow to be large sources of value as has been the case with many of its past long-term investments. We think the broad market selloff has brought the price of this business back to an attractive level, and we hope to own the shares we are purchasing now for many years to come.

Fairfax Financial (FRFHF) Much like Berkshire Hathaway, Fairfax is a conglomerate that owns a large operation as well as a widely diversified collection of operating businesses and investments in public debt and equity instruments. The company is conservatively capitalized, has an excellent management team, and has thrived through multiple market and economic downturns over its 35-year history. Fairfax is currently trading at roughly 60% of yearend 2019 book value – a valuation lower than at any time since 2006. Considering Fairfax has grown its book value per share at a compounded annual rate of 18.5% since the present management took over, we think this valuation will prove to be an extremely attractive entry point over the long-term.

Starbucks (SBUX)

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With over 30,000 stores around the world (half owned, half licensed), Starbucks holds the dominant position in the global coffee market. The company continues to grow its store count at attractive rates and expand into ancillary businesses, thereby growing its competitive advantages. As mentioned above, Starbucks was on the front lines of businesses coping with the disruptions caused by COVID-19 and demonstrated its ability to move more quickly than competitors – shutting stores before others and reopening them immediately once the threat abated in China. Given the compelling nature of its product to its customers and strong market position, we expect this business to rebound quickly once the virus is behind us.

Starbucks has consistently demonstrated its innovative and entrepreneurial culture, repeatedly leading its industry in areas like evolution of the store experience, technology integration, off-premise sales, international expansion, and more. We expect this company’s one-of-a-kind culture to help it navigate this crisis as it has past crises. The company has a very manageable debt load at roughly two times operating earnings. The recent stock price is roughly 20 times 2019 earnings – a price we regard as attractive for such a high-quality business. We hope to grow this company into one of our largest positions if its share price drops further.

Smaller Investments

While we want our largest investments to comprise well over 60% of our portfolios in most cases, we are also seeing valuations in the retail and restaurant sectors that we think offer extraordinary return potential. We are adding shares selectively to supplement our core holdings.

Kura Sushi USA (KRUS) Kura is a unique restaurant concept, a technology-based sushi restaurant serving patrons via a conveyor belt, limiting required staff while focusing on quality sushi. Kura has some of the strongest restaurant economics we have seen, with system wide average sales of $1,000 per square foot per year and returns on new stores at over 40% during their first year. Kura has a long runway for growth – management has stated it looks to grow to over 290 stores in the US, up from its current 25 units. Even if Kura only reached 100 stores in the US, the stock could trade at several times its current price. Despite Kura’s small market capitalization, we believe it has considerable downside protection due its strong balance sheet ($30 million of cash with no debt; Kura’s cash balance is worth about 40% of its recent stock price), and its large affiliated partner (majority owner Kura Japan has verbally committed to providing any additional liquidity that Kura may need during this downturn). We believe these factors make it highly unlikely that Kura will experience any liquidity issues despite the short-term negative impact of store closures. The combination of downside protection and potential for extremely attractive upside make this stock very appealing to us at current levels.

Retail-Related Value Investments Due to widespread store closure, most companies in the retail space have seen their share prices decline dramatically, and some are currently trading at severely depressed levels. The companies we have been buying in this space recently include Dick’s Sporting Goods (DKS), Nordstrom (JWN), and Designer Brands (DBI). Our purchases of these companies have been guided by the following thinking:

 The Coronavirus will severely disrupt the retail industry for at least multiple months as store traffic plummets and consumer confidence and spending decline. Our companies in this space have strong balance sheets with large cash holdings and little-to-no debt. In addition, they have announced dramatic cost reduction measures that will greatly limit the financial obligations they are forced to meet during this period. Likewise, each of our investments has large family owners closely involved in the business. We believe their active participation greatly reduces the risk of insolvency. Large affiliated owners can devise means of enhancing liquidity if conditions end up

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being worse than expected. As an example, the Nordstrom family attempted to take the company private in 2018 at a valuation of $50 per share; the stock recently traded under $13 per share.

 Companies with robust online businesses will be better positioned throughout the economic stoppage than single-channel brick and mortar retailers. Each of our companies in this space has a robust online business comprising 15% to 30% of sales. We expect online sales to grow during this downturn and help offset the decline in brick and mortar sales.

 These retailers are trading at extraordinarily low valuations. DKS, JWN, and DBI recently traded at three times, four times, and five and one-half times 2019 earnings, respectively. In the case of each of these businesses, we believe that if they were to lose substantial amounts of money this year and then experience a slow recovery to sustainable earnings lower than their past earnings power, the intrinsic value of their stocks would still be between 100% to200% more than their current stock prices; and we believe they can perform even better than that. We are confident that, once it becomes clear these companies will not go out of business and that retail stores will be allowed to reopen, their stocks will trade at several times their current valuations. This realization may have already started to set in with the market. From the beginning of April to the completion of this letter, DKS, JWN, and DBI have seen their prices increase 36%, 50%, and 15% respectively. We continue to think these companies are worth far more than their current market prices.

 None of our investments in this group rely on selling expensive “high ticket” items that will be more adversely affected by a weak economy.

Pacifica believes that by concentrating our investments in our long-term favorite ideas and supplementing those investments with smaller positions in companies that have extremely high near- to mid-term upside potential, we will generate attractive returns over the long-term. In fact, as of the date of this letter, many have already seen substantial increases in their stock price from March lows.

Closing Thoughts

While periods of extreme market volatility like the one we are currently experiencing can be difficult to stomach, they present the type of opportunity for which we have been waiting. History shows repeatedly that periods of fear and panic in markets create the best opportunities for long-term investors. Your portfolio is well positioned to withstand this downturn given our collection of conservatively capitalized, high-quality businesses with ample cash balances to survive and thrive. While the Coronavirus presents unique challenges to humankind, they are short-term in nature and will be overcome. Pacifica strongly believes that our not losing sight of that fact, and our willingness “to be greedy when other are fearful” as Warren Buffet admonishes will result in very attractive returns in your account(s) over the long-term.

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 of significance in your financial situation, investment objectives, or if you desire to impose any reasonable restrictions or modify existing ones on your account.

Sincerely,

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Steve Leonard Kari Pemberton Blair Bodek Managing Principal & Founder Principal, Investments & Operations Associate Director of Research [email protected] [email protected] [email protected] 858-354-7180 512-337-5521 215-519-1647

3550 Lakeline Blvd., Ste. 170, #1715 • Leander, TX 78641 Ph (858) 354-7180 • Ph (512) 310-8545 • Fax (888) 302-3545 www.PacificaCapital.Net

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 2019; 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 Pacifica 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 results 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 accounts of PCI’s principals (which do not incur management fees) and certain other accounts that have reduced management fees. Minimal leverage and short selling have been used since inception for the PCI managed accounts; the effects of such leverage and short selling on PCI’s performance figures have been nominal. Results for individual accounts are varied and will vary in the future. In addition, it is not likely that the relative performance of PCI’s managed accounts will exceed the performance of the broader stock market (as measured by the S&P 500 Total Return or other broad market indexes) by as large a margin as has occurred to date. The stock market faced an unprecedented decline in the year 2008, which strongly impacted the performance of the S&P 500 Total Return Index during the time period shown. In addition, PCI’s performance during the year 2000 was significantly enhanced by the strong performance of one large position in its accounts under management. The 12/31/19 total ending balance for all accounts was approximately $358 million and approximately $88 million was in accounts of PCI principals (Leonard and Pemberton family accounts). Total number of individual accounts was 269 as of 12/31/19.

Past performance is not a guarantee or indicator of future results, and investors should not assume that investments made on their behalf by PCI will be profitable, and may, in fact, result in a loss. Investors also should not assume that PCI’s results will outperform the S&P 500 Total Return Index or other broad market indexes in the future. The investment objective of PCI’s managed accounts is capital appreciation. PCI’s strategy is to concentrate its investments in a limited number of positions with certain positions representing an intentionally large size in the accounts. This concentration is likely to result in greater volatility than the overall market as measured by the S&P 500 Total Return Index, which is made up of 500 large companies. The S&P 500 Total Return Index reflects both changes in the prices of stocks in the S&P 500 Index as well as the reinvestment of the dividend income from its underlying shares. The Index does not bear fees and expenses, and investors cannot invest directly in the Index. In addition, PCI’s strategy is to “hold for the long term” which reduces trading costs. 9

Investment Positions – Business Summary

Listed in approximate descending order of size in the aggregate of all accounts (within individual accounts, percentages will vary).

Larger Positions

Berkshire Hathaway – (BRKB) (initial purchase in late 1999, most recent purchase 2020) – Berkshire is a conglomerate that owns a variety of operating businesses as well as investments in public companies, bonds, and a large cash position. One of the strongest companies in the world as ranked by shareholder equity, the Warren Buffett-led firm employs an extremely prudent operating and investment philosophy. Berkshire’s largest and oldest operating businesses are its insurance subsidiaries. Berkshire’s insurance units have a combined float (money “borrowed” from policy holders) of over $129 billion – up from $65 billion since just 2010. Berkshire has profitable insurance underwriting businesses (not an easy feat) that enable it to hold and invest that float “for free,” plus make a profit on the underwriting business.

Berkshire also owns and operates a multitude of other non-insurance businesses led by: BNSF Railroad, Berkshire Hathaway Energy, Marmon, Lubrizol, IMC, and Precision Castparts along with dozens of other smaller businesses. Berkshire’s non-insurance subsidiaries now account for well over half of Berkshire’s operating profits.

. Business Outlook: Berkshire’s current operating results and investment returns are strong. Despite the company’s robust financial position, Berkshire has not completed any major acquisitions in recent years as market prices for private businesses have been very high. In April 2019, however, Berkshire announced that it would provide financing to help Occidental Petroleum fund its bid to acquire Anadarko. For $10 billion, Berkshire will receive 100,000 preferred shares yielding 8% and warrants to purchase up to 80 million shares at $62.50 apiece. We regard this as the most recent example of Berkshire’s ability to derive attractive terms from companies looking for Berkshire’s financial backing. In recent years, the Berkshire Board of Directors has taken steps to ensure a smooth leadership transition in anticipation of the retirement of the 89-year-old Warren Buffett. These include promoting longtime executives Greg Abel and Ajit Jain to the roles of Co- Vice Chairman and bringing in Todd Combs and Ted Weschler to assist Mr. Buffett in managing Berkshire’s vast investment portfolio. While we do not believe anyone can replace Mr. Buffett per se, we like these moves, and believe they demonstrate the company’s focus on preserving its unique culture and positioning Berkshire to thrive for many years to come. As of 12/31/2019 Berkshire had a very strong cash position of over $125 billion. The current disruption in financial markets will create opportunities for Berkshire to deploy its large cash balances into attractive investments.

. Investment Activity: Berkshire’s stock price has only been this heavily discounted relative to book value a handful of times over the past 20 years. We regard the current price as very attractive and have been adding shares aggressively over recent weeks. This is now a large position in all client accounts. At around current prices, we are comfortable growing this position to comprise 20% or more of assets depending on individual account considerations.

Fairfax Financial – (FRFHF) (initial purchase in 2001, most recent purchase 2020) – A that engages in property and casualty insurance and reinsurance worldwide. Fairfax owns significant operations in the United States, Canada and Europe, and most importantly, growing operations in much of the developing world. In addition to its insurance subsidiaries, Fairfax also owns a growing group of operating businesses, primarily based in Canada. Fairfax also formed separate companies in Africa and India focused on investing in public and private debt and equity instruments in these growth markets (two other Pacifica holdings – see “Fairfax Africa and India” section below).

 Business Outlook: Historically, Fairfax has managed its large investment balances (approximately three times its book value) shrewdly through various investment environments while generating very attractive returns. However, over the last few years, investment results have not been up to historical standards, resulting in slower growth in its book value and a lower multiple to book value for its stock. Fairfax has historically outperformed during financial downturns given its robust financial strength and highly capable management team. We expect the company to take advantage of the opportunity presented by weak financial markets to make attractive investments. The company entered the current downturn with elevated cash levels. On the insurance side of the business, underwriting results at Fairfax’s insurance subsidiaries have been very strong over recent years. While conditions in the insurance industry will likely weaken in the near-term due to the negative effect of an economic downturn on demand, we think Fairfax’s conservative underwriting culture is likely to continue generating low cost funds with which it can invest for long-term appreciation. This combination will result in the growth of book value and a higher stock price. Our confidence in Fairfax is bolstered by the company’s top-notch management team, led by long time CEO . Mr. Watsa has an excellent track record, having grown Fairfax’s book value by approximately 19% annually after accounting for dividends distributed over 34 years. Fairfax pays an annual dividend of $10 per share, or roughly 3.5% of its recent stock price.

 Investment Activity: Amidst the current downturn, Fairfax’s stock price has declined to levels we consider very attractive. The recent stock price is roughly 60% of book value, a valuation the company has only traded near on two occasions over the past 20 years. We expect this position to generate significant upside over both the near and long-term due to growth in book value per share and expansion of the multiple at which the company trades relative to book value. On this last point, over the past five years, the stock has traded at an average price to book value ratio of 1.2 times. If the stock were to trade at that valuation, it would command a price at roughly double its recent market price. We have thus built Fairfax into a large position in most accounts.

Five Below – (FIVE) (initial purchase 2015, most recent purchase 2020) – Five Below is a rapidly growing specialty value retailer offering a broad range of trend-right merchandise targeted at the teen and pre-teen customer. With an assortment of products predominantly priced at $5 and below, it offers a unique merchandising strategy and high-energy retail concept that aims to be fun and exciting. Products include branded and private label merchandise across several categories: Style, Room, Sports, Media, Crafts, Party, Candy and Seasonal. The average store size is approximately 8,500 sq. ft. FIVE began operations in 2002 and currently operates 900 stores in 36 states.

 Business Outlook: We believe FIVE has the potential for very strong and rapid growth over the next many years. While it has been expanding its store base at 20% per year, it still does not have stores within trade areas of much of the US population. We believe FIVE has the potential for 2,500+ stores in the US given its unique value proposition, fun shopping environment, and lack of direct competition. New stores continue to generate fantastic economics: first year sales exceed $2 million per store, and the company generally recoups its entire investment in new stores within one year! Equally impressive, even with its rapid new store growth – FIVE remains debt free and continues to build cash.

As the Coronavirus came to the US, Five Below announced plans to close all stores until governmental authorities deem it safe to reopen. In the meantime, the company has furloughed a majority of store and distribution center associates. FIVE entered this crisis with a rock-solid balance sheet with over $260 million of cash and no debt. The company’s financial strength combined with aggressive actions to reduce costs will allow it to weather this downturn. Once the Coronavirus abates, we think FIVE is well positioned to rebound before other retailers because 1) it caters to a young demographic group that is likely to return to stores before older-age ones, 2) the company’s bargain concept is economically resilient (same store sales were up by over 5% in the last financial downturn), and 3) schools are likely to remained closed for the remainder of the school year, providing more time and reason for parents and kids to shop at Five Below’s stores.

 Investment Activity: Because of the short-term uncertainty associated with the Coronavirus, FIVE’s stock has traded at levels we consider very attractive over the past few weeks. The recent valuation of about 20 times earnings is very low for a company growing earnings at 20%+ per year. We have added shares of this excellent and growing business that we expect to own for many years to come.

Alphabet Inc. – (GOOG) (initial purchase 2019) – A holding company whose largest business is selling online advertising, primarily through a network of owned properties including Google, YouTube, Android, Google Maps, and Google Chrome. In addition to its large advertising enterprises, Alphabet owns smaller businesses that sell products ranging from hardware to cloud services. Through Alphabet’s “Other Bets” segment, the company invests in long-term projects with the potential to grow into large businesses over time, most notably Waymo (self- driving car technology), Loon (LTE balloon technology), Wing (drone delivery), and Calico and Verily (life sciences).

 Business Outlook: In little more than 20 years, Google has grown from a Stanford graduate school project into one of the largest companies in the world. The company’s burgeoning ad business is anchored by some of the most popular properties on the web. Its value is enhanced by Alphabet’s proprietary ad selling software which is used by advertisers around the world to bid on ad space on both Alphabet and non-Alphabet properties. Under the guidance of Founders Larry Page and Sergey Brin, and current CEO Sundar Pichai, Google has proven to be one of the most innovative companies in the world, continuously anticipating trends and using cash generated by its ad business to invest in and capitalize on new technologies. While the core advertising business would likely be far more profitable in the absence of these investments, we feel that management has proven itself to be capable allocators of capital, and therefore Pacifica is comfortable to have the company invest excess cash flow for the long-term benefit of shareholders.

We are attracted to Alphabet for three primary reasons: 1) We regard its advertising business as having a large moat around it protecting if from competition. That competitive advantage will allow this part of the business to continue to grow and earn high returns on capital well into the future. 2) We think at least some of the investments it is making in cloud services, self-driving cars, and other areas are likely to pay off in the long-term. 3) The company has a robust financial position with roughly $116 billion of net cash as of the end of 2019 (roughly 14% of its recent market cap). The company’s financial strength will insulate it from the current financial turmoil. While GOOG’s ad business will surely suffer from the economic weakness caused by the coronavirus, the company is better positioned than most to withstand this downturn.

 Investment Activity: We initiated a position in GOOG in May 2019 after antitrust concerns caused the stock price to fall below our target price. That selloff was short- lived, and the stock price quickly increased past a level at which we were comfortable adding shares. More recently, the market-wide selloff has brought the price of GOOG down below our buy price. We have taken the opportunity to add shares aggressively and to build this into a large position in most accounts. The recent stock price is roughly 20 times its 2019 GAAP earnings after subtracting net cash. We view this as an attractive price at which to own shares, particularly since we think GAAP earnings understate true earnings power due to discretionary investments GOOG is making in long-term growth initiatives.

Medium-Sized Positions

Starbucks – (SBUX) (initial purchase 1998, most recent purchase 2020) – Starbucks is one of the world’s leading consumer brands and should continue to show impressive growth in many international markets for years to come. Loyal customers around the world frequently visit Starbucks to enjoy one of their favorite, affordable, “addictive” indulgences.

 Business Outlook: We think the Starbucks brand and customer loyalties are second to none. With Starbucks’ core North American business showing strong margins and moderate growth, it is now focused on new opportunities, such as: aggressively expanding internationally (especially in China and India), broadening food and juice offerings both in-store and in-grocery aisles, and expanding in-store services to include mobile ordering and delivery.

Given the company’s large business in China, Starbucks was among the first US companies to address the challenges created by the Coronavirus outbreak. The company served as an exemplar of how to deal with the disruption – closing stores early on and reopening nearly all closed units within a little more than a month. The company is following a similar plan to combat outbreaks in other countries. Starbucks strong balance sheet and nimble operating culture will allow it to withstand the disruption caused by the coronavirus. Once stores reopen, we think its sales will rebound better than most restaurants given the compelling nature of its products and customer experience. CEO Kevin Johnson has expressed optimism about the rebound the company has experienced in China following the reopening of the economy there.

 Investment Activity: Since the latter part of the 1990’s, we have owned a large position in Starbucks at several times – buying when the price is below our estimate of intrinsic value and selling when it is well above that figure. Amidst the Coronavirus-related downturn, the stock price has declined to a level at which we are comfortable adding shares. We have been purchasing its stock in most accounts over recent weeks. While we would like to grow this holding into one of our largest positions at the right price, the stock is still trading at a higher valuation relative to our other long-term favorite companies. We have therefore been prioritizing purchases of those other stocks over Starbucks. We hope to grow this into one of our largest positions if the stock price moves lower.

Goldman Sachs - (GS) (initial purchase 2010, most recent purchase 2020) – A leading provider of financial services to the major institutional participants in global capital markets. Revenue sources include 1) trading, 2) investment banking, 3) asset management and security services, and 4) interest and income from balances and holdings. Goldman Sachs has grown its international presence, particularly in Asia, to take advantage of developing capital markets. Goldman Sachs is often ranked as the top operator worldwide across its range of financial services and offerings.

 Business Outlook: Goldman Sachs has grown its book value per share from $20.94 at the end of its first year as a public company in 1999 to approximately $219 as of 9/30/2019 – a compounded growth rate of over 14% when including dividends paid. Keep in mind that during this period the stock market had some very challenging periods, and many financial companies suffered severe setbacks. Nonetheless, Goldman Sachs outperformed its competitors, and its long-term shareholders have been handsomely rewarded. We are attracted to Goldman Sachs’ industry position, strength in many emerging growth markets, durable reputation, and entrepreneurial culture.

The financial disruption caused by the Coronavirus will pressure the investment banking industry due to the economic and financial disruption it will cause. Fortunately, Goldman enters this downturn in a strong financial position and continues to hold a dominant position in most markets in which it competes. Due to its relative position of strength and diverse array of revenue streams, we think Goldman will continue to outperform its industry during this downturn and continue to earn attractive returns on capital over the long-term.

 Investment Activity: We believe Goldman’s recent stock price, at roughly 70% of book value, is well below the company’s intrinsic value. Despite our belief that prospective returns from these levels are attractive, we think our other investments have prospects for better returns over both the long and short terms as compared to Goldman’s. As such, we have been selling shares in instances where we think it is logical and redirecting the proceeds into investments in our long-term favorite companies. While it is difficult to sell a stock for less than it is worth, we believe it is the right thing to do given the bargains we are seeing elsewhere in the market for businesses of superior quality.

Jefferies Financial Group (formerly Leucadia National Corp) – (JEF) (initial purchase 2014, most recent purchase 2019) – A diversified holding company that primarily operates in the investment banking and capital markets sector. Its main subsidiaries are the Jefferies Group LLC (investment banking), Berkadia (commercial mortgage financing, a 50/50 joint venture with Berkshire Hathaway), and various other financial, manufacturing, and energy businesses.

 Business Outlook: Jefferies owns a variety of operating businesses, and it regularly buys and sells businesses and assets in order to realize value for shareholders. Over the past few years, Jefferies has been raising cash by refinancing debt at lower rates and strategically divesting non-core assets. Those moves have allowed the company to position itself to take advantage of future investment opportunities and to focus on its core investment banking business. Over the past two years, Jefferies sold its stake in beef processor National Beef and its auto dealership group, Garcadia. In mid-September 2019, Jefferies’ also distributed its interest in Spectrum Brands (a publicly held company) to Jefferies’ shareholders via a special dividend, representing a yield of about 7% of its stock price at the time. (Note, Pacifica sold out of the Spectrum Brands position in all accounts in late 2019 after an additional 20% increase in its share price). We view these moves as positive developments that will enhance organizational focus and allow it to realize the disconnect between the value of the core investment banking business and the company’s current stock price.

Like all investment banks, Jefferies will likely see certain parts of its business suffer due to coronavirus-related financial disruption. Fortunately, the company is well capitalized and run by honest and capable managers with a strong track record of creating value for shareholders. To this last point, the cash Jefferies raised over recent years should allow management to capitalize on attractive opportunities presented by the recent precipitous decline in asset values in the current investment marketplace.

 Investment Activity: Jefferies is currently trading at levels we believe are considerably lower than intrinsic value. The company’s recent stock price was roughly one-third of book value, whereas we think it is inherently worth closer to book value. While Pacifica believes Jefferies has attractive upside potential from here, we continue to prefer the other opportunities we are seeing in the marketplace. We would prefer to buy into those excellent businesses at attractive prices rather than invest in attractive businesses at excellent prices. Therefore, we are selectively selling shares of this holding in order to fund purchases of our long-term favorite companies.

Alliance Data Systems – (ADS) (initial purchase 2018 most recent purchase 2019) – Alliance Data Systems’ largest and most important business is Card Services. Through this segment, ADS provides receivables financing for private label credit cards issued to customers of over 160 small- to-mid-sized retailers. Customers include Victoria’s Secret, Williams Sonoma, Ikea, Sephora and Ulta, to name a few. ADS also owns a smaller business including Loyalty One, a provider of loyalty marketing services to enterprises in retail, financial services, groceries, and other sectors worldwide.

 Business Outlook: ADS attracted our attention because it has earned very strong returns on equity of over 30% for decades. In recent years, ADS made the decision to proactively discontinue relationships with struggling clients in order to free up capital to pursue relationships with healthier and other retail clients that were growing. The shift has caused some distortion to the company’s financial results to which the stock market has reacted very negatively. While we think moving away from struggling clients was the right move long-term, divesting these accounts took away these earnings streams in the near-term and resulted in one-time charges that lowered current earnings. Meanwhile, as the newer programs recently implemented will provide a platform for growth, they will take time to grow to a level that will significantly bolster profits for ADS. We continue to think ADS will return to higher levels of profitability and growth as it exits this transitional phase for its business. On this note, a new CEO from outside the company took over in early 2020 and has outlined a plan for cutting costs, adding additional capabilities, and returning the company to past profitability. We were pleased to see multiple directors and executives purchase stock aggressively over recent weeks.

ADS stock rice is being negatively affected by the Coronavirus outbreak because: A) the company will earn lower interest and fees as its retail partners have lower sales; and B) the company will likely see higher loss rates due to the economic disruption caused by the virus. While concerns related to these issues are legitimate, we think the market is drastically over-estimating the effect they will have on the company’s long-term earning power. While weakness in retail sales does effect portfolio growth, it does not affect the company’s ability to earn a return on its current receivables portfolio – ADS is lending to the customer, not the retailers. Furthermore, while we recognize that a weaker economy will lead to a higher loss rate, we think the market is drastically over-estimating the effect of higher loss rates on the earning power of this business. Based on our models, we believe ADS would still be profitable in a scenario where loss rates rose more than they did in 2008-09. Longer-term, we expect ADS to benefit from growth in its new client portfolios, cost cutting measures implemented by new management, and continued shareholder-friendly capital allocation policies.

 Investment Activity: ADS is currently trading at under two times our initial estimate of 2020 earnings. While earnings will likely be lower now due to various factors related to the Coronavirus and a weaker economy, ADS is trading at an extremely low price. Across our portfolio we think this stock has the most upside in the near-term of any of our investments. If the stock were to sell at five times the current price, it would still be trading at under ten times our estimate of sustainable earnings (a relatively very low price), which we think is certainly possible. Despite our confidence in return prospects for this position, we are not adding shares currently as we are prioritizing investments in our long-term favorite companies.

Smaller Positions

Nordstrom – (JWN) (initial purchase 2019, most recent purchase 2020) – Nordstrom is a highly regarded, high-end department store in the US, with a reputation for top quality service and merchandise curation. The company operates 120 full-price department stores and 240 off-price “Nordstrom Rack” stores across North America.

 Business Outlook: Nordstrom was ahead of many other brick and mortar retailers in investing in capabilities that are necessary to compete in the modern retail environment. As a result, Nordstrom now possesses world-class omni-channel capabilities. As evidence of that successful transformation, its digital sales in 2019 made up 30% of overall sales – and they continue to grow at a rapid pace. As a result of investments in online and other areas having already been made, management expects to be able to decrease capital expenditures significantly in future years which will free up capital to be returned to shareholders via buybacks and dividends. On this note, Nordstrom has repurchased $890 million of stock over the past two years (over 30% of the recent market capitalization). The combination of Nordstrom’s strong balance sheet and robust online presence will allow it to withstand the coronavirus related downturn. Over recent years, Nordstrom has gained customers when its weaker competitors closed department stores – a trend we expect to be exacerbated by fallout from the pandemic. We gain additional confidence by the involvement of the Nordstrom family which just last year attempted to take the business private at $50 per share – over twice its recent market price.

 Investment Activity: We believe that Nordstrom’s stock will trade much higher once the Coronavirus panic passes. Recently, the stock has traded for less than five times 2019 earnings – a level that implies the stock market believes the business will be severely and permanently impaired. While we recognize the challenges presented by the pandemic, it will eventually pass. Even if sustainable earnings never return to their prior levels, we believe the stock is worth at least twice its recent price – and it certainly could go much higher. We added shares selectively in accounts during the quarter, though we continue to favor large purchases of our long-term favorite companies.

Dick’s Sporting Goods – (DKS) (initial purchases 2018, most recent purchase 2020) – Dick’s is a specialty retailer operating 850 stores across 47 states. The company primarily sells sporting goods, apparel, and footwear out of big box stores (averaging 40,000 square feet). Dick’s also has two smaller retail concepts: Golf Galaxy (golf equipment) and Field and Stream (hunting and outdoor equipment).

 Business Outlook: Dick’s holds a commanding position in the sporting goods retail market, with no direct national competitor. Dick’s has a strong omni-channel presence (combining the online and in-store experience) and currently derives nearly 20% of sales from its online business. Over recent years, Dick’s has continued to gain market share in the sporting goods industry as the challenges facing many brick and mortar retailers have and will continue to push out weaker competitors.

Like other brick and mortar retailers, Dick’s has moved aggressively to implement measures aimed at addressing the Coronavirus, including closing stores and increasing the availability of credit under its revolving facility. Given Dick’s strong balance sheet and substantial online business, we are confident it will be able to withstand the current Coronavirus-related disruption. Likewise, we believe that the current crisis will accelerate the market share gains Dick’s has been experiencing over recent years as weaker competitors continue to be removed from the market.

 Investment Activity: We believe that at recent prices, Dick’s stock price is dramatically below the company’s intrinsic value. At its recent price of roughly $20 per share, the company is trading at only about six times earnings – a price we consider way low for a growing and industry-leading business. We have been adding shares selectively in many accounts, though we continue to favor large purchases of our long-term favorite businesses.

Designer Brands – (DBI) (initial purchase 2019) – Designer Brands is a vertically integrated retail operation focused on the development and sale of branded footwear and accessories. Its largest business is Designer Shoe Warehouse (DSW), a leading retailer of designer footwear that operates 650 locations in North America. In late 2018, Designer Brands purchased Camuto Group, a leading producer of designer footwear with expertise in design, sourcing, marketing, and manufacturing.

 Business Outlook: Designer Brands has performed well over recent years, growing organic sales by implementing a series of innovative strategies. These include building out a highly successful kids section, building a robust online business (estimated to represent over 20% of sales), expanding its strong loyalty program (to which over 90% of sales is linked), growing its higher-margin private label business, adding services like shoe repair and even nail salons in some stores to drive traffic, and sharing best practices for store productivity between its US and Canadian businesses. The company has also boosted shareholder returns by paying a generous dividend (yielding 8% at recent prices despite its lowering the dividend to maintain liquidity) and buying back stock. Despite these investments, the company maintains a strong balance sheet.

The company has closed stores and cut expenses dramatically in order to preserve liquidity amidst the current downturn. Due to its solid financial position and strong online business, we expect DBI to withstand the current downturn and emerge in a stronger position as weaker competition is removed from the market.

 Investment Activity: The current valuation of DBI’s stock is extremely low. The company recently traded at roughly three times 2019 earnings and under 60% of tangible book value. This market valuation implies that DBI will not recover anytime soon from the current downturn. While we recognize that the Coronavirus-related economic slowdown will cause serious issues for brick and mortar retailers in the short-term, these issues will eventually end. When this happens, we think this stock will trade at multiples of its recent valuation. We have made small purchases of this business in recent weeks. Despite what we regard as a very attractive stock price, we prefer to buy our long-term favorite companies at current prices.

Fairfax Africa and Fairfax India Holdings Corporations – (FFXXF and FFXDF) (initial purchases 2017 and 2015, most recent purchases 2019) – Investment holding companies created by Fairfax Financial (our largest holding – see page 1) to achieve long-term capital appreciation, while preserving capital, by investing in African and Indian businesses.

 Business Outlook: Fairfax Africa and India were formed in 2017 and 2015 respectively with Fairfax Financial as their largest owner. Those new companies were formed to participate in the growing African and Indian economies. We share Fairfax’s view that demographic tailwinds and political and economic reforms are likely to drive strong economic growth in these emerging economies. Further, we feel that a partnership with Fairfax in these growing economies is likely a long-term winner for Pacifica clients. Given the exposure that these companies have to emerging markets, it is likely that their businesses will be negatively affected in the near-term as the countries in which they operate attempt to cope with the Coronavirus health crisis. Longer-term however, these companies will benefit from lower asset prices in these markets as they will provide opportunities to make long-term investments at more attractive prices. Given Fairfax Financials’ backing and their individually solid balance sheets, these companies are in a strong position from a liquidity perspective.

 Investment Activity: We regard the current prices of these companies as very low relative to value, as both are trading at roughly one third of book value. We continue to think that these holdings present an attractive means of investing in growing international markets. With that said, we are not adding shares currently given our preference for investing in our long-term favorite companies.

L Brands – (LB) (initial purchase 2017, most recent purchase 2019) – L Brands is a specialty retailer of women’s intimate and other apparel, beauty and personal care products, and accessories. The company operates in three segments: Victoria’s Secret (including PINK), Bath & Body Works, and International.

 Business Outlook: L Brands operates in niche retail markets where it is a category leader. Its concepts are Victoria’s Secret and the related Pink banner, as well as Bath and Body Works. In early 2020, L Brands announced plans to sell a majority interest in the Victoria’s Secret/PINK business to Sycamore Partners, a private equity firm that has been very active in the retail space. The stock rallied on the news. The deal will allow L Brands to pay down some debt and focus more intently on Bath & Body Works. We are additionally hopeful that Sycamore will be more successful in turning around Victoria’s Secret (L Brands still own 45% of this business). Bath & Body Works continues to be a standout performer in the retail space, with some of the best comparable sales, margins, and unit economics in the industry.

Like other brick and mortar retailers, L Brands has announced plans to close stores and cut costs dramatically due to the coronavirus. While stores are shuttered, the company will benefit from its robust online business. Also, Bath & Body Works is well positioned in the current environment relative to other retailers given its focus on home décor, discount prices, and strong online business.

 Investment Activity: Following the announcement that L Brands would sell the Victoria’s Secret business, the stock rallied, and we took the opportunity to sell many of our holdings in this company. We believe Bath & Body Works is an excellent concept that is worth more than the current market cap alone. Furthermore, we think there is tremendous upside if Sycamore is able to turn around the Victoria’s Secret business. While we think the current stock price is attractive, we are focusing our buying on Pacifica’s long-term favorite businesses, of which this is not one.

Build-A-Bear Workshop, Inc. – (BBW) (initial purchases 2017, most recent purchase 2018) – Build-A-Bear Workshop operates as a specialty retailer of stuffed animals, and their clothing, shoes, and accessories. Customers typically stuff and accessorize cloth animals themselves in stores. Products are sold via company-owned stores, franchised ones, licensed retail products, and wholesale partners (like cruise ships).

 Business Outlook: We believe Build-A-Bear offers a unique retail experience for children of all ages to create a personalized stuffed toys. Amidst declining mall traffic, Build-A- Bear has undertaken several initiatives, including: expanding the store base through kiosks that require less capital and offer more attractive returns; adding “store-in-store” locations inside Wal-Mart stores; building stores in tourist locations; and expanding its commercial and licensed channels. The company’s fiscal fourth quarter was its strongest in over a year, as it began to show progress on these initiatives. Unfortunately, this coincided with the market selloff, and the stock now trades for less than it did before that period. Build-A-Bear’s recent stock price, at just over $1 per share, is lower than the cash the company has on its balance sheet ($1.40 per share as of the end of the year). We expect the company’s financial strength to allow it to withstand the current disruption to retail businesses. Furthermore, we think that once malls reopen, parents are more likely to take their children to a Build-A-Bear store than they are to other attractions that have more people in a restricted space (like movie theatres, arcades, etc.).

 Investment Activity: We believe BBW’s fourth quarter results are indicative of the company’s finally turning the corner to where brick and mortar sales stabilize, and the success of the new initiatives are large enough to offset weakness in other areas of its business. Prospective returns based on the current price are very attractive. With that said, we have avoided adding shares of this business in most accounts, preferring to purchase our long-term favorite companies at current prices.