Value Investing with a Contrarian Bent Value Investor Conference May 4, 2012 Omaha, Nebraska

1. Lane Five Capital Management Value Investing with a Contrarian Bent Value Investor Conference May 4, 2012 Omaha, Nebraska

2. Lane Five Investment Approach • Disciplined, long-term value-investing • Evaluate, research and invest in securities that are mispriced by the market • Market prices diverge from long-term business values when short-term issues drive investor fear • Exploit the psychology and behavior that create pricing anomalies • Use depth of research and long-term, strategic thinking to identify areas where the market is pricing adverse outcomes that are unlikely • Use a probabilistic framework to constantly evaluate business value • Create a concentrated long portfolio of significantly undervalued, high conviction positions • Opportunistically short companies that are significantly over-valued and/or inherently flawed

3. The Role of Contrarianism at Lane Five Two categories of portfolio investments emerge: • Great businesses at great prices due to short term problems • What we call “Compounders” • Ideal investments • Not often severely mispriced • Not always as “great” as they might have seemed • Technological Change • Cyclical, regulatory, secular changes • Either shortens or eliminates competitive advantage • Prices paid for these businesses rarely truly account for these risks • Low probability does not equal no probability • Out-of-favor, unloved, troubled, really cheap contrarian investments

4. Benefits of Contrarian Investing • Higher expected returns • Wider range of possible outcomes • Uncorrelated with the indices • Drivers of return or loss are not market, industry or economy specific, but rather company specific or turnaround execution related • Highly differentiated return profile for portfolio • Building relationships with managements • Subject to acquisitions • Human behavior is always searching for clarity and certainty: attractive contrarian investments are available in almost any market

5. Hunting for Contrarian Investments Areas to search: • New low list • High daily percent downward price action • Elevated volume • Sell-side downgrades • High short interest Characteristics of potentially successful candidates: • Formerly good business model • Formerly high valuation • Competitors with better margins, growth, efficiency exist • Signs of capitulation: shareholder turnover, disgust, management credibility in question • No visibility; no catalyst • Specious secular or competitive decline arguments

6. Cautions in Contrarian Investing • OFTEN THE CONSENSUS IS RIGHT • Determining consensus is difficult • Timing • Risk management/Hedging • Loneliness • The Retrospect Effect • Complacency vs. Patience • OFTEN THE CONSENSUS IS RIGHT • !!!!!!!

7. Temperament Requirements for Contrarian Investing • Patience • Weirdness • Ability to handle criticism • Ability to stand alone • Resourcefulness

8. Guidance in Analyzing Contrarian Candidates • No different than any other securities analysis: understand the risks, estimate the returns • Different than any other securities analysis: the risk will be easy to see, the return difficult • Analyze the negative arguments • Determine what is already discounted. Ask “If so, so what?” • Analyze the actual evidence of the negative case • Appropriately understand impact of leverage, covenants, etc. • Analyze valuation “hooks” that could limit downside • Cash • Sellable Assets: real estate, patents, money losing subsidiaries • Run-off value of cash flows • Dividends • Understand management abilities and incentives as well as potential for change in management to matter • Understand how the story unfolds: timing, shareholder changes, earnings momentum, cash flow inflection points • Ask: “What could go right?” • Analyze potential recovered earnings, cash flows, likely valuation in basic scenario. Don’t pay for what could go right • Understand capacity for there to be more than just a recovery

9. Current Case Study: Corinthian Colleges (COCO) • Admit it, this makes you want to throw up • For-profit education • “Low-end” vocational schools • Regulatory pressures, cyclical issues, short sellers’ playground • Negative reputations, negative press coverage • Massive mispricing due to the emotional reaction • Late 2011, rumors of bankruptcy abounded. Company was generating cash, had sellable assets, would meet covenants and likely could pay off all debt by 2012. Not a solvency issue • Two-year overhang of new Gainful Employment regulations is lifting: companies have improved, adjusted marketing, lowered price, focused on outcomes • Vocational (diploma) programs provide a huge benefit to the nation – last year Corinthian PLACED 42,000 students in jobs. Students graduate with an average of $10,000 in debt and move from minimum wage service jobs that require no skills to moderately skilled trades. The ROI is impressive, if the student can graduate • High risk students not well served by any other means. Still, graduating them is the key • Tremendous free cash flow generation as company returns to a “new normal”

10. Current Case Study: Corinthian Colleges (COCO) • Valuation: “If so, so what?” • Current valuation: @$3.87 EV = $300 million • On consensus (bearish) June 2012 estimates: 0.25x sales, 3.10x EBITDA, 12.1x EPS • On guided numbers: 11.1x EPS, 1.7x free cash flow • On Lane Five numbers: 11x EPS, 2.7x EBITDA, 3x “normal” free cash flow of $100 million • What is discounted? • On DCF, price implies ~$45 million in free cash flow for 10 years • No perpetuity • Half of 2012 “normalized” FCF (Actual will be ~$175 million) • Impact of leverage, covenants immaterial • Debt free in 3 quarters • Regulatory risks still high, still reactive to headline risk, high beta, short-heavy, story oriented stocks • Valuation “hooks”? • Value of Wyotech and Heald ~ $300 million (paid $350 for Heald, monetized 5 campuses for $45, five Wyotech automotive campuses) • Ability to close schools, shrink to maximize free cash flow

11. Current Case Study: Corinthian Colleges (COCO) • What could go right? • Vocational abandoned by competitors • CDR’s dropped to well below risky levels • Community colleges under fiscal strain • Efficiency in financial aid expenses, bad debt management, enrollment dramatically enhanced • Operating leverage from optimizing fixed assets • Regulatory environment could be less bad • Earnings power, free cash flow under scenario analysis • Current valuation discounts seriously impaired business model, but not absolute worst case • 90/10 rule changes • Negative growth from closing schools • Harkin/Durbin vendetta • $0.40 Earnings Power baseline • Past regulatory jihad’s have ended with stronger businesses • With zero growth, values range from $8.50-$10.00 as OPM ranges from 5-7% ($0.90-$1.15 EP) • With modest growth, values range from $9-$25 as OPM ranges from 7-15% ($1.15-$3.00 EP) • Previous OPM high of 18.5% (would mean $4-5 EP) • Probability Weighted Value ~$10, range of $2-25 • DCF based framework, triangulated with very low assumed multiples on Earnings Power • Current case for more than just recovery is low probability given regulatory risks, but is not zero probability • It has happened before!

12. Parting Thoughts • Consider contrarianism from the bottom-up level • Valuable tool for portfolio construction • Provides intellectual capital, firm differentiation, portfolio differentiation • Remember the downside(s) • Choose your battles wisely • Prepare to be lonely

13. May 3 - 4, 2012 Mammel Hall Omaha, Nebraska Contact Lisa Rapuano: lisa@lanefivecapital.com