Executive Summary  |   Portfolio  |   Guru Analysis  |   Watch List

Executive Summary	January 21, 2011

The Economy The economic picture keeps on improving, with even the most troublesome area of the economy -- the labor market -- showing improvement as we head into 2011. According to the Labor Department's most recent monthly report, the economy added 103,000 jobs in December, a figure that looks even better when you consider that the numbers for October and November were revised higher by a total of 70,000. It was the third straight month of job growth -- and, contrary to popular belief, it's not government hiring that's driving the growth; it's the private sector, which actually had positive job growth in every month of 2010, according to the Labor Department. The unemployment rate fell in December from 9.8% to 9.4%, the biggest drop since the start of the recession. And the "U-6" measure of unemployment -- which also includes those who have given up looking for a job -- fell from 17.0% to 16.7%. One interesting note from the report is that the overall number of unemployed people dropped by 556,000 in December, even though less than a fifth of that number of jobs were added. Looked at another way, the number of people who were not in the labor force jumped by more than 430,000. It doesn't, however, appear that that was due to discouraged workers dropping out of the labor force -- the U-6 figure is intended to pick up discouraged workers who want a job but have stopped looking, and that declined. Next month's report may give a clue as to whether the big increase of those not in the labor force was simply an anomaly, of if there is something significant behind it. Thus far in January, the employment numbers continue to be positive. According to the Labor Department's latest weekly report (for the week ending Jan. 8), continuing claims for unemployment fell to their lowest level since October 2008. New claims, meanwhile, are in the low 400,000s, well below where they were for most of 2010. In other areas, the economy continues to show improvement. Industrial production increased 0.8% in December, according to a new Federal Reserve report. A big part of the increase came from the utilities sector, thanks to colder-than-expected winter weather that led to higher heating bills, but the manufacturing and mining sectors also showed solid growth. Overall, industrial production ended the year at its highest level since August 2008, as did capacity utilization. Retail sales also continued to look good, rising 0.6% in December, according to the Commerce Department. While many pundits have proclaimed the U.S. consumer dead, the December figure represented a new high, topping the previous high that was set in November 2007, just before the "Great Recession" hit. For the full year, sales rose 6.6%, the fastest pace in 11 years. Fourth-quarter earnings reports, meanwhile, have been rolling in, and the results are mixed. Good news came from the tech sector, with bellwethers Apple and IBM posting very strong results. The retail sector also had some big winners, with Sears Holdings and Tiffany & Co. both upping their earnings forecasts. In the financial sector, reports were mixed, with Citigroup and Goldman Sachs putting up disappointing numbers, U.S. Bancorp beating expectations, and Wells Fargo meeting expectations. Some good news also came from the housing market. The National Association of Realtors reported that existing-home sales jumped 12.3% in December, reaching their highest level since May, back when the new-homebuyer tax credit was still in effect. Sales prices fell, however, to their lowest level since February. One issue to keep an eye on is inflation. While so-called "core" inflation has remained tame, food and energy prices -- which aren't included in the core figure, but are certainly core expenses for Americans -- have been rising fairly sharply. In December, home heating oil producer prices surged 12.3%, fresh and dry vegetable prices jumped 22.8%, and fresh fruits and melons surged 15.4%. Food prices have been climbing for several months, as shortages due to weather conditions have many analysts worried about a food shortage in 2011. If fuel and food prices keep on climbing and are passed on to consumers, it could put a crimp in the consumer spending rebound, as well as corporate profits. Overall since our last newsletter, the S&P 500 returned 0.5%, while the Hot List returned 2.5%. For the year, the portfolio stands at 2.0% vs. 1.8% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 175.2% vs. the S&P's 28.0% gain. Staying Small Last newsletter, I wrote about "closet indexers" -- funds that purport to be actively managed but which really act as index funds -- and how you can't beat the market by owning it. Many of the best opportunities lie outside the major indices (like the S&P 500 or Dow Jones Industrial Average), where a myriad of good stocks can fly under the radar. On today's rebalancing, the Hot List is again showing a commitment to scouring all areas of the market, adding two smaller stocks that aren't members of the S&P 500 or the Dow. The first is Atwood Oceanics, a Houston-based offshore oil drilling firm with a $2.4 billion market cap. Atwood has been a big winner for one of my most stringent -- and most successful -- strategies, the model I base on the writings of the late Benjamin Graham. Atwood's shares were hit hard by the fear surrounding the oil spill in the Gulf of Mexico in April, and my Graham-based portfolio picked it up in early September, right around when it hit bottom. Since then it's up more than 40%. Atwood isn't nearly as well known as some of the bigger oil drillers, but it has an excellent balance sheet -- its current ratio is 3.85 and it has more net current assets than long-term debt, a key criterion Graham used. Its small size and relative anonymity have also helped it fly under the radar of many investors. While big oil services firms like Halliburton or Schlumberger trade for 25 or 26 times earnings, Atwood trades for just 10 times three-year average earnings. The other new addition to the Hot List is a small-cap that has also been hot but remains an under-the-radar pick: Ariad Pharmaceuticals. Ariad is a biotech that makes drugs used to treat very aggressive types of cancer. It's not getting a ton of love from Wall Street, trading for only about 8 times earnings, but it has caught the eye of my Joel Greenblatt-based model. Ariad boasts an impressive 193% return on capital and a strong 13.8% earnings yield, making it the 19th-most-attractive stock in the market, according to this model. Ariad and Atwood replace two stocks that were added to the portfolio last month. As of yesterday afternoon, one -- Cash America International -- was up about 3%, while the other -- Fossil, Inc. -- was down about 3%. Sentiment-al Thoughts Lately, there's been a lot of talk about how "optimistic" investors have become. And, to be sure, sentiment seems to be better than it was a year ago, and it's dramatically better than it was two years ago. For a contrarian investor -- and, because of its value tilt, the Hot List does tend to have a strong contrarian streak -- the question is, has sentiment gotten too bullish? After all, in the past 11 years we've seen two bubbles burst as sentiment grew to unreasonably high levels. Professional investors do seem to be bullish. In fact, according to a recent Bank of America-Merrill Lynch survey, fund managers are as bullish as they've been since July 2007, with a net 55% of asset allocators saying they are 'overweight' global equities. (The "net" 55% figure means that's the spread between the percentage of those who are overweight stocks and the percentage of those who are underweight.) There have also been indications that individual investors have made a major bullish turn. On the American Association of Individual Investors' Sentiment Survey, for example, the spread between the percentage of respondents who are bullish and the percentage who are bearish has favored the bearish side by at least 20 percentage points for nine straight weeks -- the first time that has happened in more than six years. On the surface, that might seem to be a troubling statistic. But there are some important caveats to consider when looking at these numbers. For one thing, the AAII survey measures what investors say -- not what they do. For another, there is no discussion of magnitude. That is, a person who is ever-so-slightly bullish is counted the same as someone who has emptied the bank account, sold the house, and dumped every last penny they have into the market. (The same goes for the BOA/Merrill survey of fund managers.) Because of that, I think it may be more instructive to look at fund flow data to determine just how much bullishness is out there. There are a variety of groups that track fund flows, but one that is particularly useful is Lipper, Inc., which tracks not only the flows in and out of mutual funds, but also those in and out of exchange-traded funds, which have become a major tool for individual investors. Looking at the latest Lipper data, the sentiment picture doesn't seem nearly as bullish as those other number indicate. In fact, for U.S. stocks, it's downright bearish. In December, net inflows to stock and mixed equity mutual funds were just over $11 billion, according to Lipper. That's a solid increase, but by no means an indication of overwhelming bullishness. (Back in January 2007, by comparison, net inflows were more than $38 billion.) What's more, domestic funds actually detracted from that $11.1 billion total; U.S. domestic mutual funds had outflows of $10.9 billion for the month. World equity funds had inflows of $12.5 billion, while mixed equity funds (which contain both stocks and other assets) and sector equity funds also had significant inflows. ETFs were a different story. Overall net inflows to stock and mixed equity ETFs were $18.4 billion in December, with $14.4 billion of that coming from U.S. domestic equity ETFs. When we combine the mutual fund and ETF data, we thus see that a net of about $29.5 billion flowed into stock and mixed equity funds in December -- but that only $3.5 billion of that went toward U.S. domestic funds. That's not even enough to make up for the $3.8 billion that flowed out of U.S. domestic equity mutual funds and ETFs in November. (Also, keep in mind that the BOA/Merrill survey asked managers whether they were bullish on global equities, not U.S. equities. For the Hot List, that's a good sign. Sentiment has improved recently, but it doesn't seem to be close to really troublesome levels for U.S. stocks. And, while the Hot List has keyed on a number of foreign firms and American Depository Receipts in recent years, it remains predominantly invested in U.S. companies. Currently, for example, it holds three foreign companies, and two of them -- Europe-based Telefonica and Sanofi-Aventis -- are from a region that many investors have actually been avoiding. On the other side of the coin, it's possible that some other parts of the world have gotten a bit frothy; emerging markets, for example, have seen major inflows in the past year. But when it comes to those regions, the Hot List's value bias should be particularly useful. Because it focuses on so many valuation metrics -- the price/book, price/earnings, price/cash flow, and price/divided ratios to name a few -- it should be able to avoid the really overhyped stocks in those regions. The bottom line is that, overall, despite the talk of "frothy" sentiment, it looks like a sizeable wall of worry remains in place for U.S. equities. In the short term, of course, anything can happen. But from a long-term perspective, I think the U.S. market remains in good position, with sentiment in check, strong corporate earnings underpinning the market's gains, and numerous individual stocks still looking quite attractive.		Editor-in-Chief: John Reese Since Inception   Hot List 175.2% S&P 500 28.0% Accuracy 56.9% Beta 1.2 YTD   Hot List 2.0% S&P 500 1.8% Since Last Issue   Hot List 2.5% S&P 500 0.5% Avg. Fundamentals   Market Cap (mil) $15,989 PE Ratio 10.0 5 Yr EPS Growth 34.6% Yield 3.8% Rel. Strength 53 Portfolio Sectors Services 5 Healthcare 2 Capital Goods 1 Energy 1 Financial 1
Advertisement Validea Capital Management - Private Portfolio Management Based on Strategies of Legends Are you looking for an alternative to your underperforming mutual funds or financial advisor? Click here to download Validea Capital's investment kit and learn more about the firm's guru-based portfolios. Get More Information on Validea Capital! ** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. Thre information above in not intended as personal investment advice and should not be interpreted as such. The Fallen As we rebalance the Validea Hot List, 2 stocks leave our portfolio. These include: Cash America International, Inc. (CSH) and Fossil, Inc. (FOSL). The Keepers 8 stocks remain in the portfolio. They are: Telefonica S.a. (Adr) (TEF), Millicom International Cellular Sa (Usa) (MICC), Raytheon Company (RTN), Aeropostale, Inc. (ARO), Sanofi-aventis Sa (Adr) (SNY), Tower Group, Inc. (TWGP), Gamestop Corp. (GME) and Dollar Tree, Inc. (DLTR). The Newbies We are adding 2 stocks to the portfolio. These include: Ariad Pharmaceuticals, Inc. (ARIA) and Atwood Oceanics, Inc. (ATW). Portfolio Changes Additions   ARIAD PHARMACEUTICALS, INC. ARIA ATWOOD OCEANICS, INC. ATW Deletions   CASH AMERICA INTERNATIONAL, INC. CSH FOSSIL, INC. FOSL Newcomers to the Validea Hot List Ariad Pharmaceuticals (ARIA): Based in Cambridge, Mass., Ariad is a biotech firm that develops small-molecule drugs to treat aggressive cancers for which current therapies are inadequate. The firm recently announced that its ridaforolimus drug, which is being developed in collaboration with Merck, had a successful Phase 3 trial for patients with metastatic soft-tissue or bone sarcomas. Ariad is a small-cap ($800 million), and it has taken in about $180 million in sales in the past year. Ariad gets strong interest from the Guru Strategy I base on the writings of Joel Greenblatt. To read more about it, check out the "Detailed Stock Analysis" section below. Atwood Oceanics (ATW): Like many offshore oil drillers, Atwood shares were hit particularly hard after the big Gulf of Mexico oil spill. But they've bounced back strong, climbing back to around their pre-spill levels. The Bureau of Ocean Energy Management's chief also recently said new permits for drilling in the Gulf should be issued in the first half of this year, a good sign. Even if they aren't, Houston-based Atwood has operations all around the globe, and increased both earnings and sales in its 2010 fiscal year despite the temporary ban on drilling in the Gulf. The $2.4-billion-market-cap firm has taken in about $650 million in sales in the past year. Atwood gets strong interest from both my Benjamin Graham- and Peter Lynch-inspired strategies. See the "Detailed Stock Analysis" section below to learn more about the stock. News about Validea Hot List Stocks Telefonica SA (TEF): Telefonica was one of two firms awarded the first private licenses to provide cell phone service in Costa Rica. Telefonica had the highest bid, at $95 million, and received the best of the available licenses, Reuters reported. If approved by Costa Rica's president, the awards could be granted in two weeks and the private cell service could begin in September, according to Reuters. Sanofi-Aventis SA (SNY): Sanofi and Genzyme's merger talks are heating up again. According to The Wall Street Journal, the firms have been discussing ways to structure a deal that would eventually value Genzyme at about $80 per share. The sides are discussing the option of using a "contingent value right", which usually goes into effect after an acquired company meets sales or regulatory goals, to push the price up toward that $80 figure, the Journal reports. Sanofi's previous $69 a share tender offer for the biotech firm expires on Jan. 21. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will take a closer look at my strategies and investment approach. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score ARO AEROPOSTALE, INC. Retail (Apparel) 100 MICC MILLICOM INTERNATIONAL CELLULAR SA (USA) Communications Services 83 TEF TELEFONICA S.A. (ADR) Communications Services 82 RTN RAYTHEON COMPANY Aerospace & Defense 81 TWGP TOWER GROUP, INC. Insurance (Prop. & Casualty) 67 ARIA ARIAD PHARMACEUTICALS, INC. Biotechnology & Drugs 64 SNY SANOFI-AVENTIS SA (ADR) Biotechnology & Drugs 58 GME GAMESTOP CORP. Retail (Technology) 57 DLTR DOLLAR TREE, INC. Retail (Department & Discount) 57 ATW ATWOOD OCEANICS, INC. Oil Well Services & Equipment 54 Ticker Market Cap Date Added Start Price Return ARO $2,254 11/26/2010 $26.90 $25.62 -4.8% MICC $10,170 11/26/2010 $91.58 $94.25 2.9% TEF $111,438 11/26/2010 $67.16 $73.25 9.1% RTN $19,091 11/26/2010 $46.48 $52.37 12.7% TWGP $1,088 12/23/2010 $25.75 $26.19 1.7% ARIA $807 1/21/2011 TBD $6.36 TBD SNY $2,957 9/3/2010 $30.20 $34.08 12.8% GME $3,181 9/3/2010 $19.01 $21.01 10.5% DLTR $6,478 9/3/2010 $46.03 $51.73 12.4% ATW $2,429 1/21/2011 TBD $37.68 TBD

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer ARO   |   MICC   |   TEF   |   RTN   |   TWGP   |   ARIA   |   SNY   |   GME   |   DLTR   |   ATW   |   AEROPOSTALE, INC. Profile Strategy: Patient Investor Based on: Warren Buffett Aeropostale, Inc. is a mall-based specialty retailer of casual apparel and accessories. The Company designs, markets and sells its own brand of merchandise principally targeting 14 to 17 year-old young women and young men. The Company also sells Aropostale merchandise through its e-commerce Website, www.aeropostale.com. During the fiscal year ended January 30, 2010 (fiscal 2009), the Company launched P.S. from Aeropostale, which offers casual clothing and accessories focused on elementary school children between the ages of 7 and 12. During fiscal 2009, the Company completed the closure of its 14 store Jimmy'Z concept. Jimmy'Z Surf Co., Inc., a wholly owned subsidiary of Aeropostale, Inc., was a contemporary lifestyle brand targeting young women and men aged 18 to 25. Analysis Guru Score: 100% STAGE 1: "Is this a Buffett type company?" A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage. LOOK FOR EARNINGS PREDICTABILITY: [PASS] Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.08, 0.23, 0.24, 0.41, 0.65, 0.67, 0.88, 1.15, 1.47, 2.27. Buffett would consider ARO's earnings predictable. In fact EPS have increased every year. ARO's long term historical EPS growth rate is 33.6%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 14.1% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers. LOOK AT THE ABILITY TO PAY OFF DEBT [PASS] Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. ARO has no long term debt and therefore would pass this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [PASS] Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for ARO, over the last ten years, is 32.9%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 24.3%, 34.7%, 22.5%, 28.0%, 34.1%, 28.5%, 32.8%, 58.4%, 41.7%, 49.1%, and the average ROE over the last 3 years is 49.7%, thus passing this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: [PASS] Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for ARO, over the last ten years, is 35.4% and the average ROTC over the past 3 years is 49.7%, which is high enough to pass. It is not enough that the average be at least 12%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROTC must be at least 9% for Buffett to feel comfortable that the ROTC is consistent. The ROTC for the last 10 years, from earliest to latest, is 24.3%, 34.7%, 22.5%, 28.0%, 34.1%, 28.5%, 32.8%, 58.4%, 41.7%, 49.1%, thus passing this criterion. LOOK AT CAPITAL EXPENDITURES: [PASS] Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. ARO's free cash flow per share of $2.78 is positive, indicating that the company is generating more cash that it is consuming. This is a favorable sign, and so the company passes this criterion. LOOK AT MANAGEMENT'S USE OF RETAINED EARNINGS: [PASS] Buffett likes to see if management has spent retained earnings in a way that benefits shareholders. To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $8.05 and compares it to the gain in EPS over the same period of $2.19. ARO's management has proven it can earn shareholders a 27.2% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work. HAS THE COMPANY BEEN BUYING BACK SHARES: [BONUS PASS] Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. ARO's shares outstanding have fallen over the past five years from 121,610,001 to 93,000,000, thus passing this criterion. This is a bonus criterion and will not adversely affect the ability of a stock to pass the strategy as a whole if it is failed. The preceding concludes Buffett's qualitative analysis. If and when he gets positive responses to all the above criteria, he would then proceed with a price analysis. The price analysis will determine whether or not the stock should be bought. The following is how he would evaluate ARO quantitatively. STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return. CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail] Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $2.55 and divide it by the current market price of $25.62. An investor, purchasing ARO, could expect to receive a 9.95% initial rate of return. Furthermore, he or she could expect the rate to increase 14.1% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 3.47%. Compare this with ARO's initial yield of 9.95%, which will expand at an annual rate of 14.1%, based on the analysts' consensus estimated long term growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding. CALCULATE THE FUTURE EPS: [No Pass/Fail] ARO currently has a book value of $5.49. It is safe to say that if ARO can preserve its average rate of return on equity of 32.9% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 32.9% and it will have a book value of $94.08 in ten years. If it can still earn 32.9% on equity in ten years, then expected EPS will be $30.92. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $30.92 and multiply them by the lower of the 5 year average P/E ratio (13.2) or current P/E ratio (current P/E in this case), which is 10.0 and you get ARO's projected future stock price of $310.16. CALCULATE THE EXPECTED RATE OF RETURN BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now add in the total expected dividend pool to be paid over the next ten years, which is $0.00. This gives you a total dollar amount of $310.16. These numbers indicate that one could expect to make a 28.3% average annual return on ARO's stock at the present time. Buffett would consider this an absolutely fantastic expected return. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 14.1%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $9.56. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (13.2) or current P/E ratio (current P/E in this case), which is 10.0. This equals the future stock price of $95.90. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $95.90. CALCULATE THE EXPECTED RETURN USING THE AVERAGE EPS GROWTH METHOD: [No Pass/Fail] Now you can figure out your expected return based on a current price of $25.62 and the future expected stock price, including the dividend pool, of $95.90. If you were to invest in ARO at this time, you could expect a 14.1% average annual return on your money. Buffett likes to see a 15% return, but nonetheless would accept this return. LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [PASS] Based on the two different methods, you could expect an annual compounding rate of return somewhere between 14.1% and 28.3%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 21.2% on ARO stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   MILLICOM INTERNATIONAL CELLULAR SA (USA) Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Millicom International Cellular S.A. (Millicom) is a global mobile telecommunications operator. The Company also operates fixed telephony, cable and broadband businesses in five countries in Central America. As of December 31, 2009, the Company had 14 mobile operations in 14 countries focusing on emerging markets in Central America, South America, Africa and Asia. Millicom operates its mobile businesses in El Salvador, Guatemala and Honduras in Central America; in Bolivia, Colombia and Paraguay in South America; in Chad, the Democratic Republic of Congo, Ghana, Mauritius, Rwanda, Senegal and Tanzania in Africa; and in Laos in Asia. In November 2009, the Company announced that it has completed the sale of its Cambodian operations to The Royal Group. In October 2009, the Company announced the sale of Tigo (Private) Limited, its Sri Lanka operation, to Etisalat. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: This methodology would consider MICC a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (6.28) relative to the growth rate (33.39%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for MICC (0.19) is very favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. MICC, whose sales are $3,775.0 million, needs to have a P/E below 40 to pass this criterion. MICC's P/E of (6.28) is considered acceptable. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for MICC is 33.4%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [FAIL] MICC's Debt/Equity (95.17%) is above 80% and is considered very weak. Therefore, MICC fails this test. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for MICC (8.48%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for MICC (-2.70%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.   TELEFONICA S.A. (ADR) Profile Strategy: Growth Investor Based on: Martin Zweig Telefonica SA (Telefonica) together with its subsidiaries and investees operates in the telecommunications, media and contact center industries. Telefonica basic purpose is the provision of all manner of public or private telecommunications services, including ancillary or complementary telecommunications services or related services. The Company operates in three business areas: Telefonica Spain, Telefonica Latin America and Telefonica Europe. During the year ended December 31, 2009, Telefonica Moviles Espana, SAU, a wholly owned subsidiary of the Company completed the sale of its 32.18% stake in Medi Telecom, SA. In January 2010, the Telefonica Group, through its wholly owned subsidiary, Telefonica Europe plc completed the acquisition of JAJAH. Analysis Guru Score: 54% P/E RATIO: [PASS] The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. TEF's P/E is 7.47, based on trailing 12 month earnings, while the current market PE is 16.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [FAIL] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. TEF's revenue growth is 9.02%, while it's earnings growth rate is 22.40%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, TEF fails this criterion. SALES GROWTH RATE: [FAIL] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (7.3%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (9%) of the current year. Sales growth for the prior must be greater than the latter. For TEF this criterion has not been met and fails this test. The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria. CURRENT QUARTER EARNINGS: [PASS] The first of these criteria is that the current EPS be positive. TEF's EPS ($1.50) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. TEF's EPS for this quarter last year ($0.56) pass this test. POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: [PASS] The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. TEF's growth rate of 167.86% passes this test. EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: [FAIL] Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for TEF is 11.20%. This should be less than the growth rates for the 3 previous quarters which are 8.62%, 2.08% and 16.67%. TEF does not pass this test, which means that it does not have good, reasonably steady earnings. This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: [PASS] If the growth rate of the prior three quarter's earnings, 9.38%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 167.86%, (versus the same quarter one year ago) then the stock passes. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: [PASS] The EPS growth rate for the current quarter, 167.86% must be greater than or equal to the historical growth which is 22.40%. TEF would therefore pass this test. EARNINGS PERSISTENCE: [FAIL] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. TEF, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.18, 1.30, 2.50, 2.18, and 2.28, fails this test. LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. TEF's long-term growth rate of 22.40%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. TOTAL DEBT/EQUITY RATIO: [FAIL] A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. TEF's Debt/Equity (272.71%) is considered high relative to its industry (86.29%) and fails this test.   RAYTHEON COMPANY Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Raytheon Company, together with its subsidiaries, develops products, services and solutions in defense markets; sensing, effects, command, control, communications and intelligence (C3I), and mission support, as well as the cybersecurity and homeland security markets. The Company serves both domestic and international customers, principally as a prime contractor on a portfolio of defense and related programs for government customers. It operates in six business segments Integrated Defense Systems (IDS), Intelligence and Information Systems (IIS), Missile Systems (MS), Network Centric Systems (NCS), Space and Airborne Systems (SAS) and Technical Services (TS). In October 2009, the Company acquired BBN Technologies Corp. and related entities. In November 2010, the Company acquired Trusted Computer Solutions, a company that delivers a portfolio of cross-domain, operating system and network security solutions. Analysis Guru Score: 75% MARKET CAP: [PASS] The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. RTN, with a market cap of $19,091 million, passes this criterion. EARNINGS PER SHARE PERSISTENCE: [PASS] The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. RTN, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.98, 2.63, 3.78, 3.92 and 4.89, passes this test. PRICE/SALES RATIO: [PASS] The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. RTN's Price/Sales ratio of 0.76, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [FAIL] The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. RTN has a relative strength of 34. This does not pass the final criterion. As a result, this methodology would not consider the stock even though it passed the previous three criteria.   TOWER GROUP, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Tower Group, Inc. (Tower), through its subsidiaries, offers a range of commercial, personal and specialty property and casualty insurance products and services to businesses in various industries and to individuals. The Company operates in three segments: Brokerage Insurance, Specialty Business and Insurance Services. On February 5, 2009, Tower acquired CastlePoint Holdings, Ltd. (CastlePoint). On February 27, 2009, the Company and its subsidiary, CastlePoint, completed the acquisition of HIG, Inc. (Hermitage), a property and casualty insurance holding company. On October 14, 2009, the Company completed the acquisition of the renewal rights to the workers compensation business of AequiCap Program Administrators, Inc. (AequiCap), an underwriting agency. On November 13, 2009, it acquired Specialty Underwriters Alliance, Inc. (SUA). In July 2010, Tower Group, Inc. acquired the Personal Lines Division of OneBeacon Insurance Group, Ltd. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider TWGP a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (10.40) relative to the growth rate (28.45%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for TWGP (0.37) is very favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. TWGP, whose sales are $1,310.4 million, needs to have a P/E below 40 to pass this criterion. TWGP's P/E of (10.40) is considered acceptable. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for TWGP is 28.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] TWGP is a financial company so debt to equity rules are not applied to determine the company's financial soundness. EQUITY/ASSETS RATIO: [PASS] This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. TWGP's Equity/Assets ratio (26.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion. RETURN ON ASSETS: [PASS] This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. TWGP's ROA (3.20%) is above the minimum 1% that this methodology looks for, thus passing the criterion. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for TWGP (17.14%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for TWGP (-18.54%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.   ARIAD PHARMACEUTICALS, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool ARIAD Pharmaceuticals, Inc. (ARIAD) is a biopharmaceutical company focused on the discovery and development of drugs to provide therapeutic intervention in treating human diseases at the cellular level. The Company's lead cancer product candidate, ridaforolimus, is an internally discovered, potent inhibitor of the protein mTOR. mTOR acts as a central reguRobotor of protein synthesis, cell proliferation, cell cycle progression and cell survival. Its second product candidate, AP24534, is an investigational, pan BCR-ABL inhibitor that has potential applications in various hematological cancers and solid tumors and is wholly owned by the Company. Its third product candidate, AP26113, is an investigational anaplastic lymphoma kinase (ALK), inhibitor that has the potential to regulate multiple cancer pathways and to be used in the treatment of certain patients with various cancers, including non-small cell lung cancer, lymphoma and neuroblastoma. Analysis Guru Score: 59% PROFIT MARGIN: [PASS] This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. ARIA's profit margin of 53.72% passes this test. RELATIVE STRENGTH: [PASS] The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. ARIA, with a relative strength of 97, satisfies this test. COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: [FAIL] Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for ARIA (-14.29% for EPS, and -42.33% for Sales) are not good enough to pass. INSIDER HOLDINGS: [FAIL] ARIA's insiders should own at least 10% (they own 4.25%) of the company's outstanding shares. This does not satisfy the minimum requirement, and companies that do not pass this criteria are less attractive. CASH FLOW FROM OPERATIONS: [FAIL] A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. ARIA's free cash flow of $-0.59 per share fails this test. PROFIT MARGIN CONSISTENCY: [PASS] ARIA's profit margin has been consistent or even increasing over the past three years (Current year: -963.98%, Last year: -1,003.53%, Two years ago: -1,634.64%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. R&D AS A PERCENTAGE OF SALES: [PASS] ARIA is either maintaining the same levels of R&D expenditures(currently $63.5 million) or increasing these levels which is a good sign. This allows the company to develop the superior technology and new products that will put everyone else out of business. This criterion is particularly important for high-tech and medical stocks because they are so R&D dependant. CASH AND CASH EQUIVALENTS: [PASS] ARIA's level of cash $40.4 million passes this criteria. If a company is a cash generator, like ARIA, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. INVENTORY TO SALES: [PASS] This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for ARIA was 57.34% last year, while for this year it is 23.49%. Since the inventory to sales is decreasing by -33.85% the stock passes this criterion. LONG TERM DEBT/EQUITY RATIO: [FAIL] ARIA's trailing twelve-month Debt/Equity ratio (19.93%) is too high, according to this methodology. You can find other more superior companies that do not have to borrow money in order to grow. "THE FOOL RATIO" (P/E TO GROWTH): [FAIL] The "Fool Ratio" is an extremely important aspect of this analysis. Unfortunately, ARIA's "Fool Ratio" is not available due to a lack of one or more important figures. Hence, an opinion cannot be given at this time. The following criteria for ARIA are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [FAIL] ARIA has either issued a significant amount of new shares over the past year or has been issuing more and more shares over the past five years. ARIA currently has 111.0 million shares outstanding. Neither of these are a good sign. Generally when a small-cap company issues more stock, the existing stock becomes devalued by the market, and hence diluted. SALES: [PASS] Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. ARIA's sales of $180.6 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". ARIA passes the sales test. DAILY DOLLAR VOLUME: [PASS] ARIA passes the Daily Dollar Volume (DDV of $14.3 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf." PRICE: [FAIL] This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. ARIA with a price of $6.36 fails the price test as it is considered too low. It is required that the price to be at least greater than $7 to eliminate penny stocks. INCOME TAX PERCENTAGE: [FAIL] ARIA's income tax paid for the current year is not available. This could be the cause for some concern according to this strategy. However, because this is not a critical criterion, it should not make or break your investment decision. In order to ensure that you receive a fair analysis we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%).   SANOFI-AVENTIS SA (ADR) Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Sanofi-Aventis is a pharmaceutical group engaged in the research, development, manufacture and marketing of healthcare products. The Company's business includes two main activities: pharmaceuticals and human vaccines through sanofi pasteur. The Company is also present in animal health products through Merial Limited (Merial). In its pharmaceutical activity, the Company specializes in six therapeutic areas: diabetes, oncology, thrombosis and cardiovascular, central nervous system (CNS), and internal medicine. The global portfolio of sanofi-aventis also consists of a range of other pharmaceutical products in Consumer Health Care (CHC) and other prescription drugs, including generics. It offers vaccines in five areas: pediatric combination vaccines, influenza vaccines, adult and adolescent booster vaccines, meningitis vaccines and travel and endemic vaccines. In October 2010, Siegfried Holding AG sold its PulmoJet Inhalation Project to the Company. Analysis Guru Score: 100% MARKET CAP: [PASS] The Cornerstone Value Strategy looks for large, well known companies whose market cap is greater than $1 billion. These companies exhibit solid and stable earnings. SNY's market cap of $2,957 million passes this test. CASH FLOW PER SHARE: [PASS] The second criterion requires that the company exhibit strong cash flows. Companies with strong cash flow are typically the value oriented investments that this strategy looks for. The company's cash flow per share must be greater than the mean of the market cash flow per share ($1.26). SNY's cash flow per share of $136.32 passes this test. SHARES OUTSTANDING: [PASS] This particular strategy looks for companies whose total number of outstanding shares are in excess of the market average (666 million shares). These are the more well known and highly traded companies. SNY, who has 2,616 million shares outstanding, passes this test. TRAILING 12 MONTH SALES: [PASS] A company's trailing 12 month sales ($43,061 million) are required to be 1.5 times greater than the mean of the market's trailing 12 month sales ($17,965 million). SNY passes this test. DIVIDEND: [PASS] The final step in the Cornerstone Value strategy is to select the 50 companies from the market leaders group (those that have passed the previous four criteria) that have the highest dividend yield. SNY, with a dividend yield of 4.30%, is one of the 50 companies that satisfy this last criterion.   GAMESTOP CORP. Profile Strategy: Growth Investor Based on: Martin Zweig GameStop Corp. (GameStop) is a retailer of video game products and personal computer (PC) entertainment software. The Company sells new and used video game hardware, video game software and accessories, as well as PC entertainment software, and related accessories and other merchandise. As of January 30, 2010, the Company operated 6,450 stores in the United States, Australia, Canada and Europe, primarily under the names GameStop and EB Games. GameStop also operates the electronic commerce Website www.gamestop.com and publish Game Informer, a multi-platform video game magazine in the United States based on circulation, with approximately 4 million subscribers. During the fiscal year ended January 30, 2010 (fiscal 2009), GameStop operated its business in four segments: United States, Canada, Australia and Europe. Analysis Guru Score: 69% P/E RATIO: [PASS] The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. GME's P/E is 8.80, based on trailing 12 month earnings, while the current market PE is 16.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [PASS] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. GME's revenue growth is 29.25%, while it's earnings growth rate is 31.10%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, GME passes this criterion. SALES GROWTH RATE: [PASS] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (3.5%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (3.5%) of the current year. Sales growth for the prior must be greater than the latter. For GME this criterion has been met. The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria. CURRENT QUARTER EARNINGS: [PASS] The first of these criteria is that the current EPS be positive. GME's EPS ($0.36) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. GME's EPS for this quarter last year ($0.31) pass this test. POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: [PASS] The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. GME's growth rate of 16.13% passes this test. EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: [FAIL] Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for GME is 15.55%. This should be less than the growth rates for the 3 previous quarters which are -7.19%, 14.29% and 13.04%. GME does not pass this test, which means that it does not have good, reasonably steady earnings. This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: [PASS] If the growth rate of the prior three quarter's earnings, -0.49%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 16.13%, (versus the same quarter one year ago) then the stock passes. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: [FAIL] The EPS growth rate for the current quarter, 16.13% must be greater than or equal to the historical growth which is 31.10%. Since this is not the case GME would therefore fail this test. EARNINGS PERSISTENCE: [FAIL] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. GME, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.81, 1.00, 1.75, 2.38, and 2.25, fails this test. LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. GME's long-term growth rate of 31.10%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. TOTAL DEBT/EQUITY RATIO: [PASS] A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. GME's Debt/Equity (8.98%) is not considered high relative to its industry (119.90%) and passes this test. INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For GME, this criterion has not been met (insider sell transactions are 6, while insiders buying number 16). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.   DOLLAR TREE, INC. Profile Strategy: Growth Investor Based on: Martin Zweig Dollar Tree, Inc. (Dollar Tree) is an operator of discount variety stores offering merchandise at the fixed price of one dollar. At January 30, 2010, the Company operated 3,806 discount variety retail stores. Approximately 3,650 of these stores sell substantially all items for one dollar or less. The remaining stores, operating as Deal$, sell items for one dollar or less but also sell items for more than one dollar. Dollar Tree's stores operate under the names of Dollar Tree, Deal$ and Dollar Bills. Analysis Guru Score: 85% P/E RATIO: [PASS] The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. DLTR's P/E is 18.21, based on trailing 12 month earnings, while the current market PE is 16.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [FAIL] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. DLTR's revenue growth is 10.60%, while it's earnings growth rate is 21.20%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, DLTR fails this criterion. SALES GROWTH RATE: [PASS] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (14.2%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (12.7%) of the current year. Sales growth for the prior must be greater than the latter. For DLTR this criterion has been met. The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria. CURRENT QUARTER EARNINGS: [PASS] The first of these criteria is that the current EPS be positive. DLTR's EPS ($0.73) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. DLTR's EPS for this quarter last year ($0.51) pass this test. POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: [PASS] The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. DLTR's growth rate of 43.14% passes this test. EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: [PASS] Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for DLTR is 10.60%. This should be less than the growth rates for the 3 previous quarters, which are 31.17%, 11.36%, and 45.24%. DLTR passes this test, which means that it has good, reasonably steady earnings. This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: [PASS] If the growth rate of the prior three quarter's earnings, 29.45%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 43.14%, (versus the same quarter one year ago) then the stock passes. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: [PASS] The EPS growth rate for the current quarter, 43.14% must be greater than or equal to the historical growth which is 21.20%. DLTR would therefore pass this test. EARNINGS PERSISTENCE: [PASS] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. DLTR, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.07, 1.23, 1.39, 1.68 and 2.37, passes this test. LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. DLTR's long-term growth rate of 21.20%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. TOTAL DEBT/EQUITY RATIO: [PASS] A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. DLTR's Debt/Equity (18.87%) is not considered high relative to its industry (56.48%) and passes this test. INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For DLTR, this criterion has not been met (insider sell transactions are 10, while insiders buying number 14). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.   ATWOOD OCEANICS, INC. Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Atwood Oceanics, Inc., along with its subsidiaries, is engaged in the international offshore drilling and completion of exploratory and developmental oil and gas wells. The Company's operations include nine offshore mobile drilling units located in five regions: offshore Southeast Asia, offshore Africa, offshore Australia, offshore South America and the Mediterranean Sea. During the fiscal year ended September 30, 2010 (fiscal 2010), the Company had a utilization rate of 88%. Its offshore drilling equipments include semisubmersible rigs, jack-up drilling rigs, semisubmersible tender assist rigs and submersible drilling rigs. The Company obtains the contracts, under which it operates its units either through individual negotiation with the customer or by submitting proposals in competition with other contractors. In October 2010, the Company entered into turnkey construction agreements with PPL Shipyard PTE LTD to construct two Pacific Class 400 jack-up drilling units. Analysis Guru Score: 60% PRICE/SALES RATIO: [FAIL] The prospective company should have a low Price/Sales ratio. Smokestack (cyclical) companies with Price/Sales ratios greater than .8 are considered very unattractive and should even be sold according to this methodology. ATW's P/S ratio of 3.73 based on trailing 12 month sales, exceeds the acceptable level for cyclical companies, being extremely unfavorable. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. ATW's Debt/Equity of 16.79% is acceptable, thus passing the test. PRICE/RESEARCH RATIO: [PASS] This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. ATW is neither a Technology nor Medical company. Therefore the Price/Research ratio is not available and, hence, not much emphasis should be placed on this particular variable. PRELIMINARY GRADE: No Interest in ATW At this Point Is ATW a "Super Stock"? NO Price/Sales Ratio: [FAIL] The Price/Sales ratio is the most important variable according to this methodology. The prospective company should have a low Price/Sales ratio. ATW's Price/Sales ratio of 3.73 does not pass this criterion. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. ATW's inflation adjusted EPS growth rate of 33.86% passes this test. FREE CASH PER SHARE: [PASS] This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. ATW's free cash per share of 1.84 passes this criterion. THREE YEAR AVERAGE NET PROFIT MARGIN: [PASS] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. ATW's three year net profit margin, which averages 41.05%, passes this criterion.   Watch List The Watch List contains the highest scoring stocks according to our guru consensus system that are not currently in the Hot List portfolio. We provide this list both for informational purposes and for investors who are not comfortable with a portfolio of ten stocks. Ticker Company Name Industry Guru Score WDC WESTERN DIGITAL CORP. Computer Storage Devices 79 FOSL FOSSIL, INC. Jewelry & Silverware 54 T AT&T INC. Communications Services 52 CSH CASH AMERICA INTERNATIONAL, INC. Misc. Financial Services 50 ESV ENSCO PLC Oil Well Services & Equipment 50 CKH SEACOR HOLDINGS, INC. Water Transportation 48 HS HEALTHSPRING, INC Insurance (Accident & Health) 47 LLY ELI LILLY & CO. Major Drugs 45 HITT HITTITE MICROWAVE CORPORATION Semiconductors 45 ULTA ULTA SALON, COSMETICS & FRAGRANCE, INC. Retail (Specialty) 45

Disclaimer

The names of individuals (i.e., the 'gurus') appearing in this report are for identification purposes of his methodology only, as derived by Validea.com from published sources, and are not intended to suggest or imply any affiliation with or endorsement or even agreement with this report personally by such gurus, or any knowledge or approval by such persons of the content of this report. All trademarks, service marks and tradenames appearing in this report are the property of their respective owners, and are likewise used for identification purposes only. Validea is not registered as a securities broker-dealer or investment advisor either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. Validea is not responsible for trades executed by users of this site based on the information included herein. The information presented on this website does not represent a recommendation to buy or sell stocks or any financial instrument nor is it intended as an endorsement of any security or investment. The information on this website is generic by nature and is not personalized to the specific situation of any individual. The user therefore bears complete responsibility for their own investment research and should seek the advice of a qualified investment professional prior to making any investment decisions. Performance results are based on model portfolios and do not reflect actual trading. Actual performance will vary based on a variety of factors, including market conditions and trading costs. Past performance is not necessarily indicative of future results. Individual stocks mentioned throughout this web site may be holdings in the managed portfolios of Validea Capital Management, a separate asset management firm founded by Validea.com founder John Reese. Validea Capital Management, which is a separate legal entity and an SEC registered investment advisory firm, uses, in part, the strategies on the web site to select stocks for its clients.