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Executive Summary	January 6, 2012

The Economy Throughout much of the second half of 2011, the US economy defied the gloom and doom crowd, showing improvement in several key areas. And as 2012 begins, we're seeing more of the same, with a series of solid, if unspectacular, economic reports. For starters, new claims for unemployment have for the past two weeks remained well below the 400,000 mark -- a level that proved difficult to break through throughout much of 2011. The four-week moving average of new claims has now fallen to levels not seen since the spring of 2008. Continuing claims remain around levels last seen in September 2008. Overall, unemployment remains far too high for the economy to be considered healthy, however. The Labor Department is scheduled to release its December jobs report today, and another significant decline in the unemployment rate would go a long way toward improving investor sentiment. Solid data also came from the manufacturing sector, which expanded in December for the 29th straight month, according to the Institute for Supply Management. The expansion accelerated for the month, with the sector growing at its fastest pace since June of last year. The new orders subindex reached its highest point since April of last year, and the employment subindex rose significantly. The service sector also expanded at an accelerating rate, according to ISM. It was the 25th straight month that it expanded, with the new orders and employment sub-indices also showing slight improvement. The housing market, meanwhile, offered some mixed news. On the positive side the National Association of Realtors' Pending Home Sales Index rose 7.3% in November, according to new data. The index now stands at its highest point since April 2010, when buyers were rushing to try to meet the homebuyer tax credit deadline. Home prices, however, continue to fall. The S&P/Case-Shiller Home Price Indices fell in the October, with the 10 city index falling 0.5% versus September on a seasonally adjusted basis, and the 20 city index falling 0.6%. The 10 city index is now 3% below where it was a year ago, and the 20 city index is 3.4% below the year-ago level. Of course, the European debt crisis continues to hover over the markets. The situation remains in flux, with investors reacting -- and often overreacting -- to every new detail that emerges from across the pond. Throughout the past fortnight, the European fears duked it out with the improving domestic economic numbers. Overall since our last newsletter, the S&P 500 returned 2.2%, while the Hot List returned 1.9%. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 129.2% vs. the S&P's 28.1% gain. A Guru Year In Review The past year was a difficult one for the Hot List, with the portfolio producing its worst performance relative to the S&P 500 since its 2003 inception. While the S&P was flat for the year (excluding dividends), the Hot List fell 16.2%. For much of the year the portfolio was actually faring quite well. On July 22, it was up 7.8%, and beating the S&P. It had found big winners in stocks like GT Advanced Technologies, which gained 33.1% in just one month, GameStop Corp., which jumped more than 40% from September 2010 through early July, and Ancestry.com Inc., which rose 17% in a one-month stint in the portfolio. But as European debt fears heightened, and political squabbling brought the US close to a historic default on its own debt, stocks tumbled, and the Hot List really suffered. In the two weeks between our July 22 and August 5 newsletters, the portfolio fell about 15%. Over the next two weeks it fell another 8% or so, and it never recovered. Some of the declines were no doubt due to more economically sensitive value-type picks being hit harder amid all the fear. There were also some stock specific issues. Lincoln Educational Services lost 40% during a one-month stint in the portfolio, thanks in large part to the firm's announcement that it was significantly decreasing its 2011 earnings outlook. AmTech Systems, meanwhile, lost about 57% during the four-month stint in the portfolio -- much of which came during the month of August, when the firm announced very strong sales and earnings numbers, but a dramatic decline in orders. Another firm that took a big hit around that time -- but not just because of the economic concerns -- was GT Advanced Technologies, which had been a big winner during its earlier stint in the Hot List. On its return to the portfolio in September, GT was impacted by a number of factors specific to the solar industry, including one -- the bankruptcy of fellow solar firm Solyndra -- that was more of "guilt by association" than any real problem with GT itself. Nevertheless, the stock tumbled close to 40% during its one-month stint in the portfolio. These types of losses are certainly disappointing and frustrating. But when you're running a focused portfolio, occasional painful losses on individual positions are inevitable. And for a fundamental-based system like ours, which removes emotion from the equation and focuses purely on cold hard facts, the portfolio can be particularly vulnerable at times when investors are letting fear get the best of them. This summer, between the broader market fears and some of the stock-specific issues we encountered, the market gave us a fairly painful one-two punch. But the portfolio is still far, far outperforming the market over the long haul, having generated annualized returns of more than 10% since its 2003 inception (through Jan. 4), vs. just 2.9% for the S&P 500. The Hot List's 2011 struggles didn't mean that some of my individual 10-stock guru-based portfolios didn't have strong years, however. My Momentum Investor portfolio, for example, returned more than 20% for the year. My James O'Shaughnessy-based growth/value model returned 13.3%, mostly on the strength of its growth picks. And my Warren Buffett-based portfolio posted a strong 10.2% return, despite the market turbulence. Other individual models to beat the market were my Martin Zweig-based growth model, and my Motley Fool-based small-cap growth strategy. The Fool-inspired portfolio has now beaten the broader market in each of the nine years since its inception, a remarkable feat, and it is now my top performer over the long haul. It has returned more than 200% since its 2003 inception, vs. just 27.7% for the S&P (through Jan. 4). On the other side of the coin, there were some major laggards among my individual 10-stock portfolios. My Joseph Piotroski-based portfolio lost 24.4%; my Peter Lynch-inspired portfolio fell 21.4%; and my Benjamin Graham-based portfolio lost 19%. All three of those strategies still have excellent long-term track records, however, with the Piotroski-based model more than tripling the market since its inception, the Lynch portfolio more than doubling the market, and the Graham-based model more than quadrupling it. All in all, the strategies that go into the Hot List are still very good strategies. Eleven of the twelve individual strategies are beating the S&P over the long term, and the one that isn't (the John Neff-based portfolio) was in a virtual dead heat through Wednesday. In fact, most of the individual 10-stock portfolios have more than doubled the index's returns over the long haul, with several tripling or even quadrupling it. The silver lining in this year's subpar performance for the Hot List is that some of the big losses we took on specific positions appear to be anomalous. I do not, for example, expect to see too many more instances of stocks gaining 26% between the time my models identify it and the time it gets locked into the portfolio, as Stamps.com did. So while some of these poor performers caused short-term pain, I don't believe that they are indications that the models that go into the Hot List have stopped working. Far from it. These approaches focus on fundamentals that get to the core of good business and good investing. Fundamentals like return on equity, debt/equity ratios, price/earnings ratios, and dividend yields always been good ways to evaluate companies and their stocks, and they will continue to be going forward. In addition, the US economy not only weathered the storm in the second half of 2011, it showed significant improvement in a number of areas. And, ever so slowly, the European debt crisis is getting closer to a resolution. So as we head into 2012, I'm confident that the Hot List is very well positioned to rebound and add to its exceptional long-term track record.		Editor-in-Chief: John Reese Since Inception   Hot List 129.2% S&P 500 28.1% Accuracy 56.2% Beta 1.2 YTD   Hot List 1.4% S&P 500 1.9% Since Last Issue   Hot List 1.9% S&P 500 2.2% Avg. Fundamentals   Market Cap (mil) $18,862 PE Ratio 9.9 5 Yr EPS Growth 32.3% Yield 2.5% Rel. Strength 54 Portfolio Sectors Services 6 Basic Materials 1 Energy 1 Financial 1 Healthcare 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. Guru Spotlight: Martin Zweig Generally, my Guru Strategies have a distinct value bias. The majority of these models -- ranging from my Benjamin Graham approach to my Warren Buffett model to my Joseph Piotroski strategy -- are focused on finding good, often beaten-down stocks selling at bargain prices; that is, they target value stocks. But that doesn't mean that all of my gurus were cemented on the value side of the growth/value pendulum. In fact, the guru we'll examine today, Martin Zweig, used a methodology that was dominated by earnings-based criteria. He looked at a stock's earnings from a myriad of angles, wanting to ensure that he was getting stocks that had been producing strong growth over the long haul and even better growth recently -- and that their growth was coming from the right sources. Zweig's thoroughness paid off. His Zweig Forecast was one of the most highly regarded investment newsletters in the country, ranking number one for risk-adjusted returns during the 15 years that Hulbert Financial Digest monitored it. It produced an impressive 15.9 percent annualized return during that time. Zweig has also managed several mutual funds, and was co-founder of Zweig Dimenna Partners, a multibillion-dollar New York-based firm that has been ranked in the top 15 of Barron's list of the most successful hedge funds. Before we delve into Zweig's strategy, a few words about the man himself. While some of the gurus we've looked at in recent Guru Spotlights -- Buffett and John Neff in particular come to mind -- lived modest lifestyles, Zweig put his fortune to use in some pretty fun, flashy ways. He has owned what Forbes reported was the most expensive apartment in New York City, a penthouse atop Manhattan's Pierre Hotel that was at one time valued at more than $70 million. He's also an avid collector of a variety of different kinds of memorabilia. The Wall Street Journal has reported that he's owned such one-of--a-kind items as Buddy Holly's guitar, the gun from Dirty Harry, the motorcycle from Easy Rider, and Michael Jordan's jersey from his rookie season with the Chicago Bulls. A Serious Strategy Zweig may spend his cash on some flashy, fun items, but the strategy he used to compile that cash was a disciplined, methodical approach. His earnings examination of a firm spanned several categories: Trend of Earnings: Earnings should be higher in the current quarter than they were a year ago in the same quarter. Earnings Persistence: Earnings per share should have increased in each year of the past five-year period; EPS should also have grown in each of the past four quarters (vs. the respective year-ago quarters). Long-Term Growth: EPS should be growing by at least 15 percent over the long term; a growth rate over 30 percent is exceptional. Earnings Acceleration: EPS growth for the current quarter (vs. the same quarter last year) should be greater than the average growth for the previous three quarters (vs. the respective three quarters from a year ago). EPS growth in the current quarter also should be greater than the long-term growth rate. These criteria made sure that Zweig wasn't getting in late on a stock that had great long-term growth numbers, but which was coming to the end of its growth run. While Zweig's EPS focus certainly puts him on the "growth" side of the growth/value spectrum, his approach was by no means a growth-at-all-costs strategy. Like all of the gurus I follow, he included a key value-based component in his method. He made sure that a stock's price/earnings ratio was no greater than three times the market average, and no greater than 43, regardless of what the market average was. (He also didn't like stocks with P/Es less than 5, because they could be indicative of an outright dog that investors were wisely avoiding.) In addition, Zweig wanted to know that a firm's earnings growth was sustainable over the long haul. And that meant that the growth was coming primarily from sales -- not cost-cutting or other non-sales measures. My Zweig model requires a firm's revenue growth to be at least 85 percent of EPS growth. If a stock fails that test but its revenues are growing by at least 30 percent a year, it passes, however, since that is still a very strong revenue growth rate. Like earnings growth, Zweig believed sales growth should be increasing. My model thus requires that a stock's sales growth for the most recent quarter (vs. the year-ago quarter) to be greater than the previous quarter's sales growth rate (vs. the year-ago quarter). Finally, Zweig also wanted to makes sure a firm's growth wasn't driven by unsustainable amounts of leverage (a key observation given all that's happened recently). Realizing that different industries require different debt loads, he looked for stocks whose debt/equity ratios were lower than their industry average. Macro Issues There's one more thing you should know about Zweig. He relied a good amount on technical factors to adjust how much of his portfolio he put into stocks. Some of the indicators he used to move in and out of the market included the Federal Reserve's discount rate; installment debt levels; and the prime rate. His mottos included "Don't fight the Fed" (meaning investors should be more bullish when interest rates were low or falling) and "Don't fight the tape" (which related to his practice of getting more bullish or bearish based on market trends). Those rules are tough for an individual investor to put into practice; Zweig used what he called a "Super Model" that meshed all of his indicators into a system that determined how bullish or bearish he was. But over the years, I've found that using only the quantitative, fundamental-based criteria Zweig outlined in his book can produce very strong results. My Zweig-inspired 10-stock portfolio has been a very strong performer since its July 2003 inception, returning 89.8%, or 7.9% per year, while the S&P 500 has gained just 27.7%, or 2.9% per year. Last year, the Zweig portfolio posted positive returns (+1.7%) while the S&P was flat. The model tends to choose stocks from a variety of areas. Here are the portfolio's current holdings: Quality Systems Inc. (QSII) SolarWinds, Inc. (SWI) IntercontinentalExchange, Inc. (ICE) Intuitive Surgical, Inc. (ISRG) Buffalo Wild Wings (BWLD) Cash America International, Inc. (CSH) Discover Financial Services (DFS) Synovis Life Technologies, Inc. (SYNO) Altisource Portfolio Solutions S.A. (ASPS) American Public Education, Inc. (APEI) As you might expect with a growth strategy, the Zweig portfolio tends not to hold on to stocks for a long time. Usually it will hold a stock for a few months, though it is not averse to longer periods if the stock continues to be a prospect for more growth. What I really like about the Zweig strategy is that, while it certainly would qualify as a growth approach, it doesn't look at growth in a vacuum. As you've seen, it examines earnings growth from a variety of angles, making sure that it is strong, improving, and sustainable. In doing so, it allows you to find some fast-growing growth stocks that are not paper tigers, but instead solid prospects for continued long-term success. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will rebalance the portfolio. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score TX TERNIUM S.A. (ADR) Iron & Steel 100 FRX FOREST LABORATORIES, INC. Biotechnology & Drugs 93 JOSB JOS. A. BANK CLOTHIERS, INC. Retail (Apparel) 85 BPI BRIDGEPOINT EDUCATION, INC. Schools 79 CSH CASH AMERICA INTERNATIONAL, INC. Misc. Financial Services 72 CPLA CAPELLA EDUCATION COMPANY Schools 71 ARO AEROPOSTALE, INC. Retail (Apparel) 65 BIG BIG LOTS, INC. Retail (Specialty) 58 DV DEVRY INC. Schools 52 PBR PETROLEO BRASILEIRO SA (ADR) Oil & Gas - Integrated 30 Ticker Market Cap Date Added Start Price Current Price Return TX $3,833 9/2/2011 $24.48 $19.12 -21.9% FRX $8,156 9/2/2011 $33.10 $30.53 -7.8% JOSB $1,312 12/23/2011 $49.89 $47.13 -5.5% BPI $1,155 3/18/2011 $18.02 $22.38 24.2% CSH $1,347 12/23/2011 $47.96 $46.00 -4.1% CPLA $530 9/2/2011 $30.42 $36.67 20.5% ARO $1,298 10/28/2011 $14.30 $16.08 12.4% BIG $2,539 12/23/2011 $38.11 $38.70 1.5% DV $2,627 12/23/2011 $38.50 $39.05 1.4% PBR $165,820 9/30/2011 $22.45 $26.11 16.3%

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 TX   |   FRX   |   JOSB   |   BPI   |   CSH   |   CPLA   |   ARO   |   BIG   |   DV   |   PBR   |   TERNIUM S.A. (ADR) Profile Strategy: Contrarian Investor Based on: David Dreman Ternium SA is a steel company in Latin America that manufactures and processes flat and long steel products for the construction, home appliances, capital goods, container, food, energy and automotive industries. The Company operates in three segments: Flat Steel Products, comprising the manufacturing and marketing of hot rolled coils and sheets, cold rolled coils and sheets, tin plate, welded pipes, hot dipped galvanized and electro-galvanized sheets and pre-painted sheets; Long Steel Products, comprising the manufacturing and marketing of billets (steel in its basic, semi-finished state), wire rod and bars; Others, comprising mainly pig iron, pellets and pre-engineered metal buildings. During the year ended December 31, 2010, Flat Steel Products accounted to 86% of the Company's overall revenues. Approximately 57% of Ternium's sales were generated in North America and 41% in South and Central America. Analysis Guru Score: 71% MARKET CAP: [PASS] Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. TX has a market cap of $3,833 million, therefore passing the test. EARNINGS TREND: [PASS] A company should show a rising trend in the reported earnings for the most recent quarters. TX's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.00, 0.03 have been increasing, and therefore the company passes this test. EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: [FAIL] This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. TX fails this test as its EPS growth rate for the past 6 months (-70.00%) does not beat that of the S&P (3.71%). This methodology would utilize four separate criteria to determine if TX is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest". P/E RATIO: [FAIL] The P/E of a company should be in the bottom 20% of the overall market. Dreman uses the PE based on five year average earnings for cyclicals to counteract the fluctations in earnings they experience. TX's P/E of 94.70 is higher than the bottom 20% criterion (below 8.30), and therefore fails this test. PRICE/CASH FLOW (P/CF) RATIO: [PASS] The P/CF of a company should be in the bottom 20% of the overall market. TX's P/CF of 3.72 meets the bottom 20% criterion (below 4.54) and therefore passes this test. PRICE/BOOK (P/B) VALUE: [FAIL] The P/B value of a company should be in the bottom 20% of the overall market. TX's P/B is currently 0.65, which does not meet the bottom 20% criterion (below 0.64), and it therefore fails this test. PRICE/DIVIDEND (P/D) RATIO: [FAIL] The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). TX's P/D of 25.51 does not meet the bottom 20% criterion (below 17.99 or yield above 3.7%), and it therefore fails this test. This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below. CURRENT RATIO: [PASS] A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [2.15] or greater than 2). This is one identifier of financially strong companies, according to this methodology. TX's current ratio of 2.68 passes the test. PAYOUT RATIO: [PASS] A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for TX is 10.32%, while its historical payout ratio has been 15.43%. Therefore, it passes the payout criterion. RETURN ON EQUITY: [FAIL] The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 largest cap stocks, which is 18.07%, and would consider anything over 27% to be staggering. The ROE for TX of 8.43% is not high enough to pass this criterion. PRE-TAX PROFIT MARGINS: [PASS] This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. TX's pre-tax profit margin is 10.29%, thus passing this criterion. YIELD: [PASS] The company in question should have a yield that is high and that can be maintained or increased. TX's current yield is 3.92%, while the market yield is 2.77%. TX passes this test. LOOK AT THE TOTAL DEBT/EQUITY: [PASS] The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 76.85%. TX's Total Debt/Equity of 34.52% is considered acceptable.   FOREST LABORATORIES, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Forest Laboratories, Inc. (Forest) develops, manufactures and sells branded forms of ethical drug products, most of which requires a physician's prescription. The Company also focuses on the development and introduction of new products, including products developed in collaboration with licensing partners. Its products include those developed by the Company and those acquired from other pharmaceutical companies and integrated into its marketing and distribution systems. The Company's principal products include Lexapro, Namenda, Bystolic, Savella and Teflaro. On April 13, 2011, the Company acquired Clinical Data Inc. (Clinical Data), a specialty pharmaceutical company. Analysis Guru Score: 98% DETERMINE THE CLASSIFICATION: FRX is considered a "True Stalwart", according to this methodology, as its earnings growth of 14.50% lies within a moderate 10%-19% range and its annual sales of $4,586 million are greater than the multi billion dollar level. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. FRX is attractive if FRX can hold its own during a recession. INVENTORY TO SALES: [PASS] When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for FRX was 11.16% last year, while for this year it is 10.21%. Since inventory to sales has decreased from last year by -0.94%, FRX passes this test. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for FRX (0.52), based on the average of the 3, 4 and 5 year historical eps growth rates, is O.K. EARNINGS PER SHARE: [PASS] The EPS for a stalwart company must be positive. FRX's EPS ($4.04) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for FRX (0.00%) to be wonderfully low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company. 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 FRX (9.24%) 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: [BONUS PASS] 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 FRX (46.04%) is considered favorable.   JOS. A. BANK CLOTHIERS, INC. Profile Strategy: Patient Investor Based on: Warren Buffett Jos. A. Bank Clothiers, Inc. (Jos. A. Bank) is a designer, manufacturer, retailer and direct marketer of men's tailored and casual clothing and accessories and is a retailer of tuxedo rental products. It sells substantially all of its products exclusively under the Jos. A. Bank label through its 506 retail stores (as of January 29, 2011, which includes 12 outlet and factory stores and 14 franchise stores) located throughout 42 states and the District of Columbia in the United States, as well as through the Company's nationwide catalog and Internet (www.josbank.com) operations. It sources substantially all of its merchandise from suppliers and manufacturers or through buying agents using Jos. A. Bank designs and specifications. The Company operates in two segments: Stores and Direct Marketing. The Stores segment consists of all Company-owned stores, excluding outlet and factory stores (full-line stores). The Direct Marketing segment consists of its Internet and catalog operations. Analysis Guru Score: 92% 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 0.30, 0.44, 0.62, 0.92, 1.30, 1.57, 1.82, 2.11, 2.56, 3.08. Buffett would consider JOSB's earnings predictable. In fact EPS have increased every year. JOSB's long term historical EPS growth rate is 18.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 15.0% 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. JOSB 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 JOSB, over the last ten years, is 18.0%, 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 12.0%, 14.5%, 17.9%, 20.2%, 22.0%, 20.4%, 19.0%, 18.0%, 17.9%, 17.6%, and the average ROE over the last 3 years is 17.9%, 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 JOSB, over the last ten years, is 15.5% and the average ROTC over the past 3 years is 17.9%, 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 9.2%, 12.1%, 11.4%, 15.4%, 17.5%, 17.0%, 19.0%, 18.0%, 17.9%, 17.6%, 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. JOSB's free cash flow per share of $2.76 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 $14.72 and compares it to the gain in EPS over the same period of $2.78. JOSB's management has proven it can earn shareholders a 18.9% 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: [NEUTRAL] 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. JOSB's shares outstanding have not fallen in either the current year or the last 3 or 5 years and so it fails 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 JOSB 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 $3.38 and divide it by the current market price of $47.13. An investor, purchasing JOSB, could expect to receive a 7.17% initial rate of return. Furthermore, he or she could expect the rate to increase 15.0% 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 JOSB's initial yield of 7.17%, which will expand at an annual rate of 15.0%, 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] JOSB currently has a book value of $19.40. It is safe to say that if JOSB can preserve its average rate of return on equity of 17.9% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 17.9% and it will have a book value of $100.23 in ten years. If it can still earn 17.9% on equity in ten years, then expected EPS will be $17.89. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $17.89 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (14.0) (5 year average P/E in this case), which is 11.4 and you get JOSB's projected future stock price of $204.31. 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 $204.31. These numbers indicate that one could expect to make a 15.8% average annual return on JOSB's stock at the present time. Buffett would consider this a great return. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 15.0%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $13.67. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (14.0) (5 year average P/E in this case), which is 11.4. This equals the future stock price of $156.16. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $156.16. 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 $47.13 and the future expected stock price, including the dividend pool, of $156.16. If you were to invest in JOSB at this time, you could expect a 12.7% 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 12.7% and 15.8%. 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 14.3% on JOSB stock for the next ten years, based on the current fundamentals. Buffett likes to see a 15% return, but nonetheless would accept this return, thus passing the criterion.   BRIDGEPOINT EDUCATION, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Bridgepoint Education, Inc. (Bridgepoint) is a provider of postsecondary education services. The Company's wholly owned subsidiaries, Ashford University and the University of the Rockies, are regionally accredited academic institutions that offer associate's, bachelor's, master's and doctoral programs in the disciplines of business, education, psychology, social sciences and health sciences. These institutions deliver programs online, as well as at its traditional campuses located in Clinton, Iowa, and Colorado Springs, Colorado. As of December 31, 2010, it offered approximately 1,345 courses, 71 degree programs and 134 specializations. As of December 31, 2010, it had 77,892 students enrolled in its institutions, 99% of whom were attending classes online. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider BPI a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (7.34) relative to the growth rate (36.60%), based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, 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 BPI (0.20) is very favorable. SALES AND P/E RATIO: [NEUTRAL] 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 rate high enough to support a P/E above this threshold. BPI, whose sales are $904.5 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. 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 BPI is 36.6%, based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for BPI (0.00%) to be wonderfully low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company. 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 BPI (12.24%) 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 BPI (22.27%) 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.   CASH AMERICA INTERNATIONAL, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Cash America International, Inc. provides specialty financial services to individuals through retail services locations and through electronic distribution platforms known as e-commerce activities. These services include secured non-recourse loans, commonly referred to as pawn loans and unsecured consumer loans. The Company's consumer loan portfolio includes short-term single payment loans, longer-term multi-payment installment loans, credit services and participation interests purchased from third parties in the micro line of credit (MLOC) services channel. Through the Credit Services Organization program (the CSO program), it provides a third-party lender's consumer loan product in some markets by acting as a credit services organization on behalf of consumers. As of December 31, 2010, it operated in two segments: retail services and e-commerce. During the year ended December 31, 2010, the Company renamed its Internet Services Division as the E-Commerce Division. Analysis Guru Score: 100% 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. CSH, with a market cap of $1,347 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. CSH, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 2.00, 2.61, 2.70, 3.17 and 3.66, 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. CSH's Price/Sales ratio of 0.93, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [PASS] 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. CSH, whose relative strength is 87, is in the top 50 and would pass this last criterion.   CAPELLA EDUCATION COMPANY Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Capella Education Company is an online postsecondary education services company. Through its wholly owned subsidiary, Capella University, the Company offers a range of doctoral, master's and bachelor's programs. As December 31, 2010, it offered over 1,250 online courses and 43 academic programs with 136 specializations to over 39,000 learners. It also offers certificate programs, which consist of a series of courses focused on a particular area of study. In addition, Capella Education Company also offers academic services, such as new learner orientation, technical support, academic advising, research services (particularly for doctoral degree candidates), writing services and online tutoring. It also provides appropriate educational accommodations to learners with documented disabilities through its disability support services team. During the year ended December 31, 2010, it formed the joint-venture Sophia Learning, LLC, as majority owner. Analysis Guru Score: 100% DETERMINE THE CLASSIFICATION: This methodology would consider CPLA a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (10.08) relative to the growth rate (36.33%), 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 CPLA (0.28) is very favorable. SALES AND P/E RATIO: [NEUTRAL] 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 rate high enough to support a P/E above this threshold. CPLA, whose sales are $434.8 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. 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 CPLA is 36.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for CPLA (0.00%) to be wonderfully low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company. 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 CPLA (10.20%) 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: [BONUS PASS] 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 CPLA (35.13%) is high enough to add to the attractiveness of this company.   AEROPOSTALE, INC. Profile Strategy: Patient Investor Based on: Warren Buffett Aeropostale, Inc. is a mall-based, specialty retailer of casual apparel and accessories, principally targeting 14 to 17 year-old young women and men through its Aeropostale stores and 7 to 12 year-old kids through its P.S. from Aeropostale stores. The Company designs, sources, markets and sells all of its own merchandise. P.S. from Aeropostale products can be purchased in P.S. from Aeropostale stores, in certain Aeropostale stores, including its new Times Square store in New York City and online at www.ps4u.com. As of January 29, 2011, it operated 965 Aeropostale stores, consisting of 906 stores in 49 states and Puerto Rico, 59 stores in Canada, as well as 47 P.S. from Aeropostale stores in 13 states. In addition, pursuant to a Licensing Agreement, one of its international licensees operated 10 Aeropostale stores in the United Arab Emirates as of January 29, 2011. During March 2011, it announced that it had signed a second licensing agreement. 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 0.23, 0.24, 0.41, 0.65, 0.67, 0.88, 1.15, 1.47, 2.27, 2.49. Buffett would consider ARO's earnings predictable. In fact EPS have increased every year. ARO's long term historical EPS growth rate is 29.6%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 12.6% 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 35.6%, 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 34.7%, 22.5%, 28.0%, 34.1%, 28.5%, 32.8%, 58.4%, 41.7%, 49.1%, 48.8%, and the average ROE over the last 3 years is 46.5%, 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 37.9% and the average ROTC over the past 3 years is 46.5%, 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 34.7%, 22.5%, 28.0%, 34.1%, 28.5%, 32.8%, 58.4%, 41.7%, 49.1%, 48.8%, 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 $1.76 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 $10.46 and compares it to the gain in EPS over the same period of $2.26. ARO's management has proven it can earn shareholders a 21.6% 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 116,199,997 to 81,000,000, 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 $1.48 and divide it by the current market price of $16.08. An investor, purchasing ARO, could expect to receive a 9.20% initial rate of return. Furthermore, he or she could expect the rate to increase 12.6% 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 9.20%, which will expand at an annual rate of 12.6%, 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 $4.73. It is safe to say that if ARO can preserve its average rate of return on equity of 35.6% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 35.6% and it will have a book value of $99.29 in ten years. If it can still earn 35.6% on equity in ten years, then expected EPS will be $35.33. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $35.33 and multiply them by the lower of the 5 year average P/E ratio (11.6) or current P/E ratio (current P/E in this case), which is 10.9 and you get ARO's projected future stock price of $385.12. 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 $385.12. These numbers indicate that one could expect to make a 37.4% 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 12.6%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $4.84. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (11.6) or current P/E ratio (current P/E in this case), which is 10.9. This equals the future stock price of $52.76. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $52.76. 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 $16.08 and the future expected stock price, including the dividend pool, of $52.76. If you were to invest in ARO at this time, you could expect a 12.6% 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 12.6% and 37.4%. 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 25.0% on ARO stock for the next ten years, based on the current fundamentals. Buffett would consider this an exceptional return, thus passing the criterion.   BIG LOTS, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Big Lots, Inc. is a closeout retailer. The Company's merchandising categories include Consumables, Furniture, Home, Hardlines, Seasonal, and Other. The Consumables category includes the food, health and beauty, plastics, paper, chemical, and pet departments. The Furniture category includes the upholstery, mattresses, ready-to-assemble, and case goods departments. Case goods consist of bedroom, dining room, and occasional furniture. The Home category includes the domestics, stationery, and home decorative departments. The Hardlines category includes the electronics, appliances, tools, and home maintenance departments. The Seasonal category includes the lawn and garden, Christmas, summer, and other holiday departments. The Other category includes the toy, jewelry, infant accessories, and apparel departments. At January 29, 2011, it operated a total of 1,398 stores in 48 states. In July 2011, the Company acquired Liquidation World Inc. Analysis Guru Score: 100% 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. BIG, with a market cap of $2,539 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. BIG, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.01, 1.47, 1.89, 2.44 and 2.83, 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. BIG's Price/Sales ratio of 0.50, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [PASS] 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. BIG, whose relative strength is 89, is in the top 50 and would pass this last criterion.   DEVRY INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch DeVry Inc. (DeVry) is a provider of educational services and the parent organization of Advanced Academics, Becker Professional Education, Carrington College and Carrington College California, Chamberlain College of Nursing, DeVry Brasil, DeVry University, and Ross University. These institutions offer a range of programs in business, healthcare and technology and serve students in middle school through postsecondary education, as well as accounting and finance professionals. In August 2011, the Company acquired the business operations of privately held American University of the Caribbean. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider DV a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (8.72) relative to the growth rate (44.60%), 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 DV (0.20) 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. DV, whose sales are $2,180.0 million, needs to have a P/E below 40 to pass this criterion. DV's P/E of (8.72) 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 DV is 44.6%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for DV (0.00%) to be wonderfully low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company. 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 DV (9.32%) 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 DV (16.69%) 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.   PETROLEO BRASILEIRO SA (ADR) Profile Strategy: Contrarian Investor Based on: David Dreman Petroleo Brasileiro SA Petrobras (Petrobras) is a Brazilian integrated oil and gas company. It operates in five segments: exploration and production; refining, commercialization and transport of oil and natural gas; petrochemicals; distribution of derivatives, electrical energy, biofuels and other renewable energy sources. Directly or through its subsidiaries, Petrobras is engaged in the research, extraction, refining, processing, commercialization and transport of oil from wells, shales and other rocks, its derivatives, natural gas and other liquid hydrocarbons, as well as in activities related to energy, promoting research, development, production, transport, distribution and commercialization of all forms of energy. As of December 31, 2010, it had 132 production platforms, 16 refineries, 291 vessels, 29,398 kilometers of pipelines, six biofuel plants and 16 thermoelectric plants. On December 27, 2011, the Company acquired remaining 80% capital of CPDU to own the company completely. Analysis Guru Score: 71% MARKET CAP: [PASS] Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. PBR has a market cap of $165,820 million, therefore passing the test. EARNINGS TREND: [PASS] A company should show a rising trend in the reported earnings for the most recent quarters. PBR's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.30, 0.59 have been increasing, and therefore the company passes this test. EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: [PASS] This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. PBR passes this test as its EPS growth rate over the past 6 months (15.68%) has beaten that of the S&P (3.71%). PBR's estimated EPS growth for the current year is (86.08%), which indicates the company is expected to experience positive earnings growth. As a result, PBR passes this test. This methodology would utilize four separate criteria to determine if PBR is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest". P/E RATIO: [PASS] The P/E of a company should be in the bottom 20% of the overall market. PBR's P/E of 7.43, based on trailing 12 month earnings, meets the bottom 20% criterion (below 8.30), and therefore passes this test. PRICE/CASH FLOW (P/CF) RATIO: [FAIL] The P/CF of a company should be in the bottom 20% of the overall market. PBR's P/CF of 5.13 does not meet the bottom 20% criterion (below 4.54), and therefore fails this test. PRICE/BOOK (P/B) VALUE: [FAIL] The P/B value of a company should be in the bottom 20% of the overall market. PBR's P/B is currently 1.33, which does not meet the bottom 20% criterion (below 0.64), and it therefore fails this test. PRICE/DIVIDEND (P/D) RATIO: [FAIL] The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). PBR's P/D of 20.53 does not meet the bottom 20% criterion (below 17.99 or yield above 3.7%), and it therefore fails this test. This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below. CURRENT RATIO: [PASS] A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.38] or greater than 2). This is one identifier of financially strong companies, according to this methodology. PBR's current ratio of 1.81 passes the test. PAYOUT RATIO: [FAIL] A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for PBR is 29.57%, while its historical payout ratio has been 29.48%. Therefore, it fails the payout criterion. RETURN ON EQUITY: [FAIL] The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 largest cap stocks, which is 18.07%, and would consider anything over 27% to be staggering. The ROE for PBR of 17.75% is not high enough to pass this criterion. PRE-TAX PROFIT MARGINS: [PASS] This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. PBR's pre-tax profit margin is 20.53%, thus passing this criterion. YIELD: [PASS] The company in question should have a yield that is high and that can be maintained or increased. PBR's current yield is 4.87%, while the market yield is 2.77%. PBR passes this test. LOOK AT THE TOTAL DEBT/EQUITY: [FAIL] The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20%. PBR's Total Debt/Equity of 44.75% is not acceptable.   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 TECD TECH DATA CORPORATION Computer Hardware 70 ASPS ALTISOURCE PORTFOLIO SOLUTIONS S.A. Consumer Financial Services 66 WRLD WORLD ACCEPTANCE CORP. Consumer Financial Services 62 ALLT ALLOT COMMUNICATIONS LTD. Computer Services 62 KLIC KULICKE AND SOFFA INDUSTRIES INC. Semiconductors 61 SWI SOLARWINDS, INC. Software & Programming 60 HITK HI-TECH PHARMACAL CO. Biotechnology & Drugs 58 ROST ROSS STORES, INC. Retail (Apparel) 56 TJX THE TJX COMPANIES, INC. Retail (Department & Discount) 56 CACI CACI INTERNATIONAL INC Software & Programming 55

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