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Executive Summary	October 1, 2010

The Economy Since our last newsletter, the National Bureau of Economic Research -- the group responsible for officially determining the beginnings and ends of U.S. recessions -- has confirmed what many already suspected: that the "Great Recession" ended in the middle of last year -- June 2009, to be exact. And, 15 months removed from the longest post-World War II recession, the economy is continuing to plug along, though lately it's been doing so in unspectacular fashion. Positive news does continue to come from the manufacturing sector, with the Institute for Supply Management's Chicago branch reporting a significant September jump in its business barometer. The index, which has now indicated that the manufacturing sector has been expanding for 12 straight months, was driven higher by sharp gains in production and new orders. It also saw gains in employment for the fourth straight month (on a seasonally-adjusted basis), though the gains weren't as great as they'd been in the previous three months. ISM's national manufacturing report is due out today, and it will be interesting to see if it reflects the same type of gains seen in the Chicago report, both for manufacturing activity and employment conditions. In terms of the broader labor market, new claims for unemployment fell by a greater-than-expected 3.4% in the most recent week (ending Sept. 25), the Labor Department reported. But that simply reversed an identical increase in new claims recorded the prior week. Continuing claims also fell. As always, however, these week-to-week changes by no means offer a comprehensive picture of the employment situation; weekly fluctuations and the fact that the initial figures will get revised in coming weeks make it difficult to draw conclusions from the weekly changes. Stepping back a bit, however, the numbers do give a general sense of the overall picture -- they show that claims are well below where they were a year ago, but still well above levels associated with a healthy labor market. The housing market, meanwhile, is transitioning into a post-tax-credit environment. The National Association of Realtors' latest data shows that existing home sales rose 7.6% in August vs. July. But the figure is 19% below where it stood a year ago, when the government's homebuyer tax credit was in place. The market is now working through the glut of foreclosed homes across the U.S. New data from RealtyTrac shows that almost a quarter of all homes sold in the second quarter were foreclosures. There's still a long way to go, however; RealtyTrac estimates it will take about three years to work through the inventory of distressed properties at the current pace. While the housing and job markets are struggling, another market -- M&A -- is surging. Merger & acquisition activity for the third quarter was the highest in two years, according to Bloomberg. Companies have tons of cash on their balance sheets, and with interest rates low and financing costs down, it appears firms are putting their money to work. Deals or potential deals involving big players like Intel Corp. and Sanofi-Aventis have helped restore some confidence to the markets in recent weeks. Bernanke to Set Sail with "QE2"? Speaking of confidence, the Federal Reserve's latest statement on the economy was lacking just that. Ben Bernanke's Federal Open Market Committee said in a Sept. 21 statement that it sees indications that "the pace of recovery in output and employment has slowed in recent months. "The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term." The underwhelming assessment has, however, actually seemed to help the market. That's because the second part of the FOMC's statement indicated that, because of the slowing of the recovery, the Fed is getting ready to give the economy another jolt. In addition to saying it would likely keep the key federal funds rate exceptionally low for an extended period, the Fed said it "will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate." That talk of "additional accommodation" has many investors thinking that another round of quantitative easing is coming -- and they are taking that as a bullish sign. Since our last newsletter, the S&P has returned 1.5%, while the Hot List has returned 3.5%. For the year, the portfolio stands at -0.4% vs. 2.3% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 140.1% vs. the S&P's 14.1% gain. All Shapes and Sizes As part of its regular monthly rebalancing, the Hot List is selling two stocks and replacing them with two others that now score higher on my Guru Strategies. The departing stocks were both winners. Discount clothing retailer Ross Stores was up about 9% (as of yesterday's close) since joining the portfolio on Aug. 6; the S&P 500 was barely in the black over the same period. Also leaving the portfolio: pawn broker Cash America International, which was up about 7%. It also had joined the portfolio on Aug. 6. The newcomers are about as different a pair as you can find. The first is Research in Motion, the Canadian tech giant that makes the BlackBerry smartphone. The second: L&L Energy, a small coal mining firm that, while based in Seattle, does its business in China. So, on the one hand, we have a $25 billion company which is from perhaps the flashiest sector -- technology -- and which makes one of the flashiest products -- the BlackBerry -- out there. It's a company that most investors know well; its name is constantly popping up in daily market reports because it is seen as a bellwether for the tech sector. But while it's been growing profits and revenues at a solid pace over the past year, it hasn't been good enough for investors -- shares are down about 30% over the past year. L&L, meanwhile, is a $245 million firm that comes from a drab industry and produces an ancient, dull product -- coal. On top of that, it does its business half a world away from where RIM is headquartered. Many investors probably haven't even heard of it -- it has no analysts following it. Its shares are also headed in the opposite direction as those of Research in Motion -- they've surged some 50% in the past year and 15-fold since late March 2009 as profits and revenues have soared. Likely because of its anonymity, the stock trades for just six times trailing 12-month earnings, however, and a reasonable 1.6 times trailing 12-month sales. I mention the stark contrast not just because it's an interesting tidbit. I think it also helps prove a broader point about investing -- namely that good values come in an array of different shapes and sizes. That's why, unlike funds that key in only on certain types of stocks (say, mid-cap value), we let the Hot List roam the entire market to find the best values. And, whether you are roaming the entire market or looking at a more focused area, the key to finding value is focusing on the numbers -- not the headlines, not what a co-worker tells you about the stock, not what a TV pundit says about it. That's what the gurus upon whom I base my investment strategies knew so well. Take the great Warren Buffett. While he's called the "Oracle" of Omaha, Buffett isn't blessed with any sixth sense about which way the market or individual stocks will go. How has he been so successful, then? His son Peter was once asked that. Here's what he had to say: "I think it's because he's removed emotion from his decision-making. He is not colored by anything he thinks somebody else is doing, somebody else might want, some feeling he has about something that might not be rational. Ultimately, it's because he is clear and unemotional, dispassionate about his relationship to those numbers on the page and the information he's taking in." Recently, a new study was unveiled that backs up the notion that keeping emotion at bay is key to successful investing. Performed by The Brandes Institute, the study looked at how value stocks (which it defined as those with lower price/earnings ratios, using projected earnings for the next year) and "glamour" stocks (those with higher forward-looking P/Es) fared after both beating and missing earnings expectations. What it found was intriguing: "Prices rose for value stocks when they exceeded (or beat) earnings forecasts and, perhaps counterintuitively, when they missed expectations," the study states. More popular glamour stocks, on the other hand, produced lower returns whether they beat or missed expectations. And, the trend held up regardless of whether the firm's business was improving or declining. What does that mean? It's an indication that value stocks tend to outperform other stocks not because they are riskier, as many believe; instead, they outperform because of behavioural biases that cause investors to put unrealistically high expectations on glamour stocks, and unrealistically low expectations on value stocks. "Over time," Brandes says, "as the influence of these biases weaken, security prices revert away from extreme levels." As that happens, the group concludes, "there are ample opportunities for investors who can remain rational and patient." I couldn't agree more. Being rational and focusing on the numbers is a big reason the Hot List has fared so well over the long haul. It's what guided the portfolio to a stock like HealthSpring, which was being dogged by overhyped fears of the new healthcare bill's impact when the portfolio picked it up in mid-May. As fears began to subside, investors began to realize how much of a bargain HealthSpring had become, given the strength of its underlying business; since joining the portfolio, it's up about 50% while the broader market is essentially flat. Right now, the numbers tell us that, despite the hit its shares have taken this year, Research in Motion is still running a strong business -- and that, while they have surged in the past year, L&L Energy's shares are still a bargain given the firm's strong growth. To be sure, that's no guarantee that either stock will enjoy the kind of success HealthSpring has had while in the portfolio. But in the stock market, there are no sure things; you can't be right all the time, not even if you are Warren Buffett or Peter Lynch or Marty Zweig. What you can do, however, is stack the odds in your favor. And the way to do that is to do what gurus like Buffett, Lynch, and Zweig did: focus on the numbers and the facts, and check your emotions at the door.		Editor-in-Chief: John Reese Since Inception   Hot List 140.1% S&P 500 14.1% Accuracy 56.4% Beta 1.2 YTD   Hot List -0.4% S&P 500 2.3% Since Last Issue   Hot List 3.5% S&P 500 1.5% Avg. Fundamentals   Market Cap (mil) $13,342 PE Ratio 10.4 5 Yr EPS Growth 45.9% Yield 4.4% Rel. Strength 58 Portfolio Sectors Services 4 Technology 2 Consumer Cyclical 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. The Fallen As we rebalance the Validea Hot List, 2 stocks leave our portfolio. These include: Ross Stores, Inc. (ROST) and Cash America International, Inc. (CSH). The Keepers 8 stocks remain in the portfolio. They are: Western Digital Corp. (WDC), Jos. A. Bank Clothiers, Inc. (JOSB), Aeropostale, Inc. (ARO), Sanofi-aventis Sa (Adr) (SNY), China Automotive Systems, Inc. (CAAS), Healthspring, Inc (HS), Gamestop Corp. (GME) and Dollar Tree, Inc. (DLTR). The Newbies We are adding 2 stocks to the portfolio. These include: Research In Motion Limited (Usa) (RIMM) and L&l Energy, Inc. (LLEN). Portfolio Changes Additions   RESEARCH IN MOTION LIMITED (USA) RIMM L&L ENERGY, INC. LLEN Deletions   ROSS STORES, INC. ROST CASH AMERICA INTERNATIONAL, INC. CSH Newcomers to the Validea Hot List Research in Motion Limited (RIMM): Based in Waterloo, Ontario, this Canadian tech giant designs and manufactures the BlackBerry smartphone. RIM, which has offices in North America, the Asia-Pacific region, and Europe, also makes software and the operating system used by the BlackBerry. RIM has a market cap of about $25 billion and has taken in close to $17 billion in sales in the past year. Despite posting strong earnings numbers in the past two quarters (earnings per share grew at 76% last quarter and 23% in the previous quarter, vs. the respective year-ago quarters), RIM's stock has taken a pounding since the market started to correct in early summer. That's made it a bargain, according to my Joel Greenblatt-based strategy. RIM also gets high marks from the model I base on the writings of Martin Zweig. To read more about the stock, check out the "Detailed Stock Analysis" section below. L&L Energy, Inc. (LLEN): This Seattle-based firm actually does its business in China. The coal-mining company's subsidiaries operate coal mines, coal wholesale, coking, and coal-washing facilities in China's Yunnan and Guizhou Provinces. L&L is a small-cap ($245 million), and it's been growing earnings at a blistering 149.6% pace over the long haul (using an average of the three-, four-, and five-year EPS growth rates), and an even faster rate in the past year or so. That's part of why, after briefly falling below $1 in late March of 2009, its stock has roared back and now trades above $8 a share today. It's also part of why, like Research in Motion, it gets approval from my Joel Greenblatt-inspired model, and high marks from my Martin Zweig-based strategy. See the "Detailed Stock Analysis" section below to learn more about the stock. News about Validea Hot List Stocks Sanofi-Aventis SA (SNY): On Sept. 30, Sanofi reported promising results for a final-stage study on an experimental drug used to treat Type 2 diabetes, according to The Wall Street Journal. Sanofi said the Phase-III clinical trial of lixisenatide found that once-daily doses of the drug significantly improved control of blood sugar levels in Asian patients, and presented no safety concerns, the Journal reported. GameStop Corp. (GME): The firm has announced plans to buy back $185 million worth of its 8% bonds that are coming due in 2012, the Associated Press reported on Sept. 23. GameStop said it will offer bondholders a 2% premium over the face value of the notes, AP stated, adding that one analyst says the move could cut GameStop's annual interest expenses by about $15 million. 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 JOSB JOS. A. BANK CLOTHIERS, INC. Retail (Apparel) 85 ARO AEROPOSTALE, INC. Retail (Apparel) 81 HS HEALTHSPRING, INC Insurance (Accident & Health) 75 WDC WESTERN DIGITAL CORP. Computer Storage Devices 72 CAAS CHINA AUTOMOTIVE SYSTEMS, INC. Auto & Truck Parts 67 LLEN L&L ENERGY, INC. Coal 60 RIMM RESEARCH IN MOTION LIMITED (USA) Communications Equipment 58 SNY SANOFI-AVENTIS SA (ADR) Biotechnology & Drugs 58 GME GAMESTOP CORP. Retail (Technology) 57 DLTR DOLLAR TREE, INC. Retail (Department & Discount) 57 Ticker Market Cap Date Added Start Price Current Price Return JOSB $1,173 6/11/2010 $40.16 $42.61 6.1% ARO $2,150 8/6/2010 $24.86 $23.25 -6.5% HS $1,478 5/14/2010 $17.18 $25.84 50.4% WDC $6,510 7/9/2010 $31.59 $28.39 -10.1% CAAS $414 4/16/2010 $21.39 $15.28 -28.6% LLEN $240 10/1/2010 TBD $8.02 TBD RIMM $25,538 10/1/2010 TBD $48.69 TBD SNY $86,764 9/3/2010 $30.20 $33.25 10.1% GME $2,963 9/3/2010 $19.01 $19.71 3.7% DLTR $6,190 9/3/2010 $46.03 $48.76 5.9%

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 JOSB   |   ARO   |   HS   |   WDC   |   CAAS   |   LLEN   |   RIMM   |   SNY   |   GME   |   DLTR   |   JOS. A. BANK CLOTHIERS, INC. Profile Strategy: Growth Investor Based on: Martin Zweig Jos. A. Bank Clothiers, Inc. (Jos. A. Bank) is a designer, manufacturer, retailer and direct marketer (through stores, catalog and Internet) of men's tailored and casual clothing and accessories. The Company sells substantially all of its products exclusively under the Jos. A. Bank label through its 473 retail stores (as of January 30, 2010, which includes seven outlet stores and 13 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. Jos. A. Bank operates through two segments: Stores and Direct Marketing. The Company's Stores segment consists of its 453 Full-line Stores. The Company opened 14 stores (and closed one store) during the fiscal year ended January 30, 2010 (fiscal 2009). The Company's Direct Marketing segment consists of its Internet and catalog channels. Analysis Guru Score: 97% 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. JOSB's P/E is 14.91, based on trailing 12 month earnings, while the current market PE is 15.00. 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. JOSB's revenue growth is 13.70%, while it's earnings growth rate is 19.56%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, JOSB 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 (12.3%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (10%) of the current year. Sales growth for the prior must be greater than the latter. For JOSB 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. JOSB's EPS ($0.59) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. JOSB's EPS for this quarter last year ($0.45) 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. JOSB's growth rate of 31.11% 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 JOSB is 9.78%. This should be less than the growth rates for the 3 previous quarters, which are 23.53%, 15.45%, and 39.02%. JOSB 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, 22.16%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 31.11%, (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, 31.11% must be greater than or equal to the historical growth which is 19.56%. JOSB 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. JOSB, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.30, 1.57, 1.82, 2.11 and 2.56, 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. JOSB's long-term growth rate of 19.56%, 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. JOSB's Debt/Equity (0.00%) is not considered high relative to its industry (30.31%) 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. For JOSB, this criterion has been met, indicating an insider buy signal.   AEROPOSTALE, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy 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: 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. ARO, with a market cap of $2,150 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. ARO, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.67, 0.88, 1.15, 1.47 and 2.27, 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. ARO's Price/Sales ratio of 0.92, 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. ARO has a relative strength of 30. 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.   HEALTHSPRING, INC Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy HealthSpring, Inc. (HealthSpring) is a managed care organization with a primary focus on Medicare, the federal government-sponsored health insurance program for United States citizens aged 65 and older, qualifying disabled persons and persons suffering from end-stage renal disease. As of December 31, 2009, the Company operated coordinated care Medicare Advantage plans in Alabama, Florida, Illinois, Mississippi, Tennessee, and Texas. As of January 1, 2010, it also commenced operations of Medicare Advantage plans in three counties in Northern Georgia. As of December 31, 2009, the Company's Medicare Advantage plans had over 189,000 members. The Company also offers prescription drug benefits in accordance with Medicare Part D to its Medicare Advantage plan members, in addition to providing other medical benefits (MA-PD) plans. It also offers prescription drug benefits nationally on a stand-alone basis in accordance with Medicare Part D (PDP). 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. HS, with a market cap of $1,478 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. HS, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.24, 1.44, 1.51, 2.12 and 2.41, 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. HS's Price/Sales ratio of 0.52, 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. HS, whose relative strength is 95, is in the top 50 and would pass this last criterion.   WESTERN DIGITAL CORP. Profile Strategy: Contrarian Investor Based on: David Dreman Western Digital Corporation (WD) designs, develops, manufactures and sells hard drives. It sells its products worldwide to original equipment manufacturers (OEMs) and original design manufacturers (ODMs) for use in computer systems, subsystems or consumer electronics (CE) devices, and to distributors, resellers and retailers. Its hard drives are used in desktop computers, notebook computers, and enterprise applications such as servers, workstations, network attached storage, storage area networks and video surveillance equipment. Its hard drives are used in CE applications, such as digital video recorders (DVRs), and satellite and cable set-top boxes (STBs). It also sells its hard drives as stand-alone storage products by integrating them into finished enclosures, embedding application software and offering the products as WD-branded external storage appliances for personal data backup and portable or expanded storage of digital music, video and other digital data. Analysis Guru Score: 76% 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. WDC has a market cap of $6,510 million, therefore passing the test. EARNINGS TREND: [FAIL] A company should show a rising trend in the reported earnings for the most recent quarters. WDC's EPS for the latest quarter is not greater than the prior quarter, (from earliest to most recent quarter) 1.71, 1.13. Hence the stock fails this test, but the investor should evaluate this company qualitatively to see if it qualifies under this methodology's "exception rule". 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. WDC fails this test as its EPS growth rate for the past 6 months (-38.91%) does not beat that of the S&P (25.07%). This methodology would utilize four separate criteria to determine if WDC 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. WDC's P/E of 4.78, based on trailing 12 month earnings, meets the bottom 20% criterion (below 9.11), and therefore passes 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. WDC's P/CF of 3.44 meets the bottom 20% criterion (below 5.52) 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. WDC's P/B is currently 1.39, which does not meet the bottom 20% criterion (below 0.77), 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%). WDC's P/D is not available, and hence an opinion cannot be rendered at this time. 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 [5.36] or greater than 2). This is one identifier of financially strong companies, according to this methodology. WDC's current ratio of 2.33 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 WDC is 0.00%. Unfortunately, its historical payout ratio is not available. Nonetheless it passes the payout criterion, as this is a very low payout. RETURN ON EQUITY: [PASS] 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 large cap stocks, which is 17.12%, and would consider anything over 27% to be staggering. The ROE for WDC of 34.98% is 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. WDC's pre-tax profit margin is 15.43%, thus passing this criterion. YIELD: [FAIL] The company in question should have a yield that is high and that can be maintained or increased. WDC's current yield is not available (or one is not paid) at the present time, while the market yield is 2.78%. Hence, this criterion cannot be evaluated. 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 15.17%. WDC's Total Debt/Equity of 8.49% is considered acceptable.   CHINA AUTOMOTIVE SYSTEMS, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy China Automotive Systems, Inc. (China Automotive) is a holding company and has no significant business operations or assets other than its interest in Great Genesis Holdings Limited (Genesis). Through Genesis, the Company manufactures power steering systems and other component parts for automobiles. All operations are conducted through eight Sino-foreign joint ventures in China and a wholly owned subsidiary in the United States. The Company has business relations with more than 60 vehicle manufacturers, including FAW Group and Dongfeng Auto Group, automobile manufacturers in China; Shenyang Brilliance Jinbei Co., Ltd., light vehicle manufacturer in China; Chery Automobile Co., Ltd, state-owned car manufacturer in China, and Xi'an BYD Auto Co., Ltd and Zhejiang Geely Automobile Co., Ltd., car manufacturers. 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. CAAS, with a market cap of $414 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. CAAS, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.15, 0.21, 0.37, 0.46 and 0.78, 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. CAAS's Price/Sales ratio of 1.30, 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. CAAS, whose relative strength is 89, is in the top 50 and would pass this last criterion.   L&L ENERGY, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool L & L Energy, Inc. (L & L) is engaged in the businesses of coal mining, coal washing, coal coking and coal wholesaling. The Company's operations are conducted in Yunnan and Guizhou provinces in the southwest region of the People's Republic of China. As of April 30, 2010, the Company had three operating subsidiaries: KMC, which has coal wholesale operations and Ping Yi Coal Mine (mining operations PYC); two coal mining operations (DaPuAn Mine and SuTsong Mine), including DaPuAn's coal washing operations (the 2 Mines or LLC), and L&L Yunnan Tianneng Industry Co. Ltd. (including Hong Xing coal washing and ZoneLin coking operations) (TNI). Analysis Guru Score: 83% 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. LLEN's profit margin of 30.16% passes this test. RELATIVE STRENGTH: [FAIL] 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. Although LLEN's relative strength of 86 is below the acceptable level, yet it is very close. Keep an eye on the stock as it could move into the acceptable range. COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: [PASS] 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 LLEN (200.00% for EPS, and 394.46% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] LLEN's insiders should own at least 10% (they own 29.84% ) of the company's outstanding shares which is the minimum required. A high percentage typically indicates that the insiders are confident that the company will do well. CASH FLOW FROM OPERATIONS: [PASS] 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. LLEN's free cash flow of $0.44 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] LLEN's profit margin has been consistent or even increasing over the past three years (Current year: 30.13%, Last year: 24.33%, Two years ago: 4.19%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. R&D AS A PERCENTAGE OF SALES: [NEUTRAL] This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in LLEN's case. CASH AND CASH EQUIVALENTS: [FAIL] LLEN's level of cash and cash equivalents per sales, 9.18 %, does not pass this criteria of roughly 20%(a number we determined to be appropriate based on various examples). LLEN will have a more difficult time paying off debt (if it has any) or acquiring other companies than a company that passes this criteria. 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 LLEN was 3.71% last year, while for this year it is 8.79%. Although the inventory to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive. ACCOUNT RECEIVABLE TO SALES: [PASS] This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for LLEN was 42.43% last year, while for this year it is 25.06%. Since the AR to sales is decreasing by -17.37% the stock passes this criterion. LONG TERM DEBT/EQUITY RATIO: [PASS] LLEN's trailing twelve-month Debt/Equity ratio (4.57%) is a little higher than what this methodology is looking for, but is still at an acceptable level. The superior companies that you are looking for don't need to borrow money in order to grow. This company has borrowed very little which is still OK. "THE FOOL RATIO" (P/E TO GROWTH): [PASS] The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (LLEN's is 0.04), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. LLEN passes this test. The following criteria for LLEN are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] LLEN has not been significantly increasing the number of shares outstanding within recent years which is a good sign. LLEN currently has 30.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock. 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. LLEN's sales of $151.8 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". LLEN passes the sales test. DAILY DOLLAR VOLUME: [PASS] LLEN passes the Daily Dollar Volume (DDV of $5.4 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: [PASS] 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. LLEN with a price of $8.02 passes the price test. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions. INCOME TAX PERCENTAGE: [FAIL] LLEN's income tax paid expressed as a percentage of pretax income either this year (10.63%) or last year (6.51%) is below 20% which is cause for concern. Because the tax rate is below 20% this could mean that the earnings that were reported are unrealistically inflated due to the lower level of income tax paid. However, we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%).   RESEARCH IN MOTION LIMITED (USA) Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Research In Motion Limited (RIM) is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software and services that support multiple wireless network standards, RIM provides platforms and solutions for seamless access to time-sensitive information, including e-mail, phone, short message service (SMS), Internet and intranet-based applications. RIM's portfolio of products, services and embedded technologies are used by organizations worldwide and include the BlackBerry wireless solution, the RIM Wireless Handheld product line, software development tools and other software and hardware. Its subsidiaries include Research In Motion Corporation, Research In Motion UK Limited and RIM Finance, LLC. On June 2, 2010, Harman International sold its software operating systems unit, QNX Software Systems, to the Company. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: This methodology would consider RIMM a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (9.36) relative to the growth rate (61.08%), 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 RIMM (0.15) 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. RIMM, whose sales are $16,860.8 million, needs to have a P/E below 40 to pass this criterion. RIMM's P/E of (9.36) is considered acceptable. 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 RIMM was 6.17% last year, while for this year it is 4.16%. Since inventory to sales has decreased from last year by -2.01%, RIMM passes this test. EPS GROWTH RATE: [FAIL] 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 RIMM is 61.1%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered too fast. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for RIMM (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 RIMM (5.79%) 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 RIMM (7.19%) 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.   SANOFI-AVENTIS SA (ADR) Profile Strategy: P/E/Growth Investor Based on: Peter Lynch 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. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: SNY is considered a "True Stalwart", according to this methodology, as its earnings growth of 17.70% lies within a moderate 10%-19% range and its annual sales of $42,889 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. SNY is attractive if SNY 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 SNY was 12.46% last year, while for this year it is 14.45%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (1.99%) is below 5%. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for SNY (0.48), based on the average of the 3 and 4 year historical eps growth rates, is excellent. EARNINGS PER SHARE: [PASS] The EPS for a stalwart company must be positive. SNY's EPS ($3.15) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for SNY (18.25%) to be acceptable (equity is three to 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 SNY (6.05%) 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 SNY (-0.43%) 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.   GAMESTOP CORP. Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher 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: 90% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. GME's P/S of 0.32 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. GME's Debt/Equity of 16.94% 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. GME 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: Some Interest in GME At this Point Is GME a "Super Stock"? NO PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.GME's P/S ratio of 0.32 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. GME's inflation adjusted EPS growth rate of 28.78% passes the 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. GME's free cash per share of 2.86 passes this criterion. THREE YEAR AVERAGE NET PROFIT MARGIN: [FAIL] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. GME, whose three year net profit margin averages 4.25%, fails this evaluation.   DOLLAR TREE, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy 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: 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. DLTR, with a market cap of $6,190 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. DLTR, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.07, 1.23, 1.39, 1.68 and 2.37, 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. DLTR's Price/Sales ratio of 1.12, 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. DLTR, whose relative strength is 86, is in the top 50 and would pass this last 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 LULU LULULEMON ATHLETICA INC. Apparel/Accessories 56 ROST ROSS STORES, INC. Retail (Apparel) 55 SLT STERLITE INDUSTRIES INDIA LIMITED (ADR) Misc. Fabricated Products 55 EZPW EZCORP, INC. Consumer Financial Services 54 CSH CASH AMERICA INTERNATIONAL, INC. Misc. Financial Services 54 NOV NATIONAL-OILWELL VARCO, INC. Oil Well Services & Equipment 52 EME EMCOR GROUP, INC. Construction Services 51 RTN RAYTHEON COMPANY Aerospace & Defense 50 ARCC ARES CAPITAL CORPORATION Misc. Financial Services 49 NDAQ NASDAQ OMX GROUP, INC. Investment Services 47

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