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Executive Summary	October 23, 2015

The Economy It's been relatively calm fortnight on the economic front, with generally positive domestic data -- particularly the latest employment numbers -- being counterbalanced by fears of slowing growth overseas. At home, new claims for unemployment have fallen slightly since our last newsletter, and are now about 9% below where they were a year ago. Even more impressively, the four-week average for new claims fell to its lowest level in almost 42 years. Continuing claims, the data for which lag new claims by a week, also moved lower since our last newsletter and are also 9% below year-ago levels.. Retail sales, meanwhile, edged higher by 0.1% in September, according to a new report from the Census Bureau, driven by a nice jump in automobile sales. That's about 2.5% higher than the year-ago level. Housing starts rose 6.5%, in September, meanwhile, according to the Census Bureau, and are about 18% above year-ago levels. Permit issuance for new construction fell 5%, but is 4.4% above where it stood a year ago. Inflation is, well, deflation. The Consumer Price Index slid 0.2% in September, according to the Labor Department. That put it even with its year-ago pace. But if you strip out volatile food and energy prices, so-called "core" inflation, which was up 0.2% in September, is 1.9% ahead of its year-ago pace. The difference between the overall inflation and core inflation numbers is, of course, a result of the huge decline we have seen in oil and other commodities over the past year. And those oil and gas prices keep falling, though the declines have been moderating. As of October 21, a gallon of regular unleaded on average cost $2.24, down from $2.29 a month earlier. That's 27.5% below where it was one year ago. Overseas, China announced that gross domestic product rose 6.9% for the third quarter, marking the first time since 2009 that the figure has been below 7%. That's no surprise -- it's been clear that China's growth has been slowing for several quarters now. While the slowing growth has meant less worldwide demand for commodities, 6.9% is nothing to sneeze at, but the fact that growth dropped below 7% for the first time in six years may provide more impetus for China's leaders to increase their efforts to reinvigorate growth. In the longer term, the relatively weak quarter could thus end up being a positive. Since our last newsletter, the S&P 500 returned 1.9%, while the Hot List returned -2.3%. So far in 2015, the portfolio has returned -0.2% vs. -0.3% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 222.9% vs. the S&P's 105.2% gain. A Quant's Journey One of the reasons that I love investing is that it is a constant learning process. With so many factors impacting stocks day in and day out, no one -- not Peter Lynch, not Carl Icahn, not even Warren Buffett -- has learned all there is to know about the market, and I doubt anyone ever will. To succeed, you must constantly be looking at things from different angles, evaluating and re-evaluating your assumptions as the market tests you over and over again. Trying to wrap your arms around the enormous, dynamic machine that is the stock market is a fascinating, and sometimes humbling, endeavor. But while the specifics of financial markets are constantly changing, that doesn't mean you can't extract some enduring lessons from the shifting landscape. Given that we recently hit the 12-year anniversary of running the Hot List and our other guru-inspired portfolios, I've been thinking a lot about just what lessons I've learned over these past dozen years, and there are plenty of them. In this week's newsletter and our next rebalancing newsletter, I'd like to share those lessons with you. To start, this week I'll look at what I've learned from the copious amounts of data that we've compiled while monitoring these model portfolios. In Part Two, I will focus more on the psychological lessons I've taken away from the past dozen years. Lesson 1: Quantitative Strategies Work: The ubiquity of the Internet has made stock market information available far and wide to the masses over the past 12 years. In theory, efficient market hypothesizers would say, that should make quantitative strategies lose their effectiveness. According to the EMH, the market digests all well-known information and factors it into stock prices. The advantages that one used to get from digging through newspapers and financial reports should largely disappear when just about anyone can instantaneously get access to that information through stock screening websites. But our experience shows a much different scenario. Since their respective inception dates (most of which came in 2003), the 14 ten-stock portfolios we track (which include 12 individual guru-based portfolios and our 2 consensus portfolios) have returned an average of 8.32% annualized. Over the same timeframe, the S&P 500 has returned 5.69% annualized. Of the 14 portfolios, 11 have beaten the S&P, many by a wide margin. It's not just the 10-stock portfolios. The 20-stock versions that we track have returned 8.16% annualized, compared to that 5.69% figure for the S&P. For the larger portfolios, 12 of the 14 have beaten the index. How can this be? It's because markets are not completely efficient, and investors are far from completely rational. When times are tough, they expect the difficulties to go on forever, whether it applies to an individual company or the broader market. When the good times are rolling, they expect them to go on forever. Their frequent overreaction creates an environment in which disciplined investors can take advantage of mispricings, and quantitative strategies are a great means to do so because they can give you an almost instantaneous look at cold, hard financial data for thousands of stocks. Lesson 2: Blending Strategies Helps: While many of the individual guru-inspired strategies we track have fared quite well, we have found that using multiple strategies in a single portfolio -- like we do with the Hot List -- can further enhance returns. Both the Hot List, which looks for stocks that get consensus from multiple models, and the Top 5 Gurus portfolio, which selects the top 2 picks from 5 of our best strategies, are among our best 10-stock portfolios since their inceptions 12 years ago. The Top 5 Gurus portfolio has returned 13.8% annualized, while the Hot List is up 9.8% annualized. The 20-stock versions of these portfolios also both beating the S&P, with the Hot List up 9.1% and the Top 5 Gurus up 6.7%. The average annualized return for these 4 multi-strategy portfolios: 9.85%, topping both the average for our individual-guru portfolios and the S&P 500. Lesson 3: Relative Strength Provides Consistency: One of the interesting things we found over the past dozen years is that strategies that include a 12-month relative strength component -- that is, those that look for stocks that have fared well over the past year compared to other stocks in the market -- have been more consistent than those that do not. The 10-stock Motley Fool-inspired portfolio has finished in the red in just one year since its 2003 inception; a 20-stock version of the portfolio has been in the red in just two years. The 10-stock Momentum Investor portfolio, meanwhile, has posted negative returns in just two years over that span, while its 20-stock version has done so just three times. And the James O'Shaughnessy-inspired 10- and 20-stock growth portfolios that we track internally have each been negative in just two of the years since their 2004 inceptions. In contrast, many of our other portfolios (including some of the top performers) have been in the red in 4 or more years. Whether or not this trend continues to hold up remains to be seen. The relatively small number of down years for strategies with a RS component could, perhaps, be due to the lengthy stretch of outperformance that we've seen from growth and momentum stocks in the past 5 to 10 years. But it may also be because a relative strength component can act as a sort of stop-loss. When a stock declines, there's a good chance that its relative strength will also decline (unless the whole market is declining). So, if a strategy is looking for stocks with high relative strengths, a sharply declining holding will likely lose points on that criteria, and could find itself out of the portfolio before it declines much further. That doesn't mean using a relative strength component automatically leads to better returns -- such strategies will miss out on the strong rebounds that beaten-down value stocks can have. But it does appear that it can make for smoother returns and less of a downside in a given year. Lesson 4: Concentrated Portfolios Can Provide All The Diversification You Need -- With One Big Caveat: "Don't put all your eggs in one basket" is timeless wisdom, and it certainly applies in the stock market. But our experience shows that to give yourself enough diversification, you can use far fewer baskets than you might think. As I noted in a recent newsletter, many studies show that portfolios of 20 to 50 stocks provide sufficient diversification. But keep in mind that most of those studies are operating under the premise of randomly selected portfolios -- essentially, they are saying that if you were to randomly pick stocks, you should pick 20 to 50 to get proper diversification. It's not accidental that these studies focus on random picks - efficient market hypothesis thinking is prevalent in the academic world, and the EMH stipulates that the market is too efficient for any stock-picker to consistently do better than a randomly selected portfolio. I disagree, as I think that successful investors like Warren Buffett, Peter Lynch, Joel Greenblatt, and Benjamin Graham have proven that you can use careful stock analysis to beat the market. A good quantitative stock-picking strategy should screen out financially troubled stocks or those that are wildly overvalued -- the types of trouble stocks that would require you to hold more stocks in order to get proper diversification. Over the past 12 years, our 20-stock portfolios have on average not provided better returns than our 10-stock portfolios, nor have they come with less overall volatility or smaller maximum drawdowns. The caveat is that, when you do get a big loser in a 10-stock portfolio (and it's inevitable that you will), it can have a significant impact on your short-term returns. It also just looks bad. Seeing that one of your 10 holdings is down, say 30%, can make your stomach churn in a way that it wouldn't if you held, say, 100 stocks -- and that is very likely going to make you want to jump ship and ditch your strategy. After a few big losers, you might also start wanting to veto some of your model's picks, fearing that some of the more unloved stocks that pop up on your "buy" list could end up driving down your entire portfolio. If you want to succeed, however, overriding your strategy is a line you cannot cross. Why? For the answer to that, you'll have to wait until Part Two, when I look at the psychological lessons I've learned from my 12 years of quantitative investing.		Editor-in-Chief: John Reese Since Inception   Hot List 222.9% S&P 500 105.2% Accuracy 54.2% Beta 1.2 YTD   Hot List -0.2% S&P 500 -0.3% Since Last Issue   Hot List -2.3% S&P 500 1.9% Avg. Fundamentals   Market Cap (mil) $68,597 PE Ratio 16.9 5 Yr EPS Growth 30.8% Yield 1.0% Rel. Strength 72 Portfolio Sectors Financial 5 Services 1 Technology 1 Capital Goods 1 Consumer Cyclical 1 Consumer/Non-Cyclical 1
The Fallen As we rebalance the Validea Hot List, 4 stocks leave our portfolio. These include: Zumiez Inc. (ZUMZ), Marcus & Millichap Inc (MMI), Travelers Companies Inc (TRV) and Bofi Holding, Inc. (BOFI). The Keepers 6 stocks remain in the portfolio. They are: Sanderson Farms, Inc. (SAFM), Universal Insurance Holdings, Inc. (UVE), Foot Locker, Inc. (FL), Wisdomtree Investments, Inc. (WETF), Chart Industries, Inc. (GTLS) and Heritage Insurance Holdings Inc (HRTG). The Newbies We are adding 4 stocks to the portfolio. These include: Apple Inc. (AAPL), Polaris Industries Inc. (PII), Eagle Bancorp, Inc. (EGBN) and Pinnacle Financial Partners (PNFP). Portfolio Changes Additions   APPLE INC. AAPL POLARIS INDUSTRIES INC. PII EAGLE BANCORP, INC. EGBN PINNACLE FINANCIAL PARTNERS PNFP Deletions   ZUMIEZ INC. ZUMZ MARCUS & MILLICHAP INC MMI TRAVELERS COMPANIES INC TRV BOFI HOLDING, INC. BOFI Newcomers to the Validea Hot List Apple, Inc. (AAPL): The tech behemoth is back, rejoining the Hot List this week. The iGiant has taken in nearly $225 billion in sales over the past year, and has a $650 billion market cap. Its fundamentals are still impeccable: a 41% return on equity, 23% profit margins, 27% long-term revenue growth, and a 0.45 PE-to-Growth ratio. Apple gets strong interest from my Warren Buffett- and Peter Lynch-based models. To read more about it, scroll down to the "Detailed Stock Analysis" section. Polaris Industries (PII): This Minnesota-based company makes off-road vehicles (including all-terrain and side-by-side vehicles and snowmobiles) and on-road vehicles (including motorcycles and small electric vehicles). The $7-billion-market-cap firm has taken in close to $5 billion in sales over the past year. Polaris' fundamentals earn it strong interest from my Peter Lynch- and Warren Buffett-based models. For details about its impressive balance sheet and growth numbers, scroll down to the "Detailed Stock Analysis" section. Pinnacle Financial Partners (PNFP): Pinnacle provides a full range of banking, investment, trust, mortgage and insurance products and services designed for businesses and their owners and individuals. The 15-year-old firm has about $6.5 billion in assets and is the second-largest bank holding company headquartered in Tennessee. It operates in Middle Tennessee, Memphis, East Tennessee and Chattanooga. Pinnacle gets strong interest from my Peter Lynch-based model, and high scores from my Martin Zweig-based model and Momentum Investor approach. To read more about its fundamentals, check out the "Detailed Stock Analysis" section below. Eagle Bancorp, Inc. (EGBN): This $1.5 billion market cap firm is the parent of EagleBank, a local community business bank with twenty-two offices in Maryland, Northern Virginia and Washington, DC. It also offers a complete line of personal banking products and services. Eagle is a favorite of my Peter Lynch-based model. To read more about its fundamentals, check out the "Detailed Stock Analysis" section below. News about Validea Hot List Stocks The Travelers Companies (TRV): Helped by higher underwriting gains, Travelers announced solid quarterly earnings results. Travelers' net income rose to $928 million, or $2.97 per share, up from $919 million, or $2.69 per share, a year earlier, Reuters reported. Operating income was $2.93 per share, beating the average analyst estimate of $2.27, according to Thomson Reuters I/B/E/S. Underwriting gains rose about 35% to $759 million in the third quarter. 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 GTLS CHART INDUSTRIES, INC. Misc. Capital Goods 85 UVE UNIVERSAL INSURANCE HOLDINGS, INC. Insurance (Prop. & Casualty) 82 SAFM SANDERSON FARMS, INC. Food Processing 76 FL FOOT LOCKER, INC. Retail (Apparel) 76 HRTG HERITAGE INSURANCE HOLDINGS INC Insurance (Prop. & Casualty) 73 PNFP PINNACLE FINANCIAL PARTNERS Regional Banks 57 WETF WISDOMTREE INVESTMENTS, INC. Investment Services 57 PII POLARIS INDUSTRIES INC. Recreational Products 56 AAPL APPLE INC. Communications Equipment 56 EGBN EAGLE BANCORP, INC. Regional Banks 55 Ticker Market Cap Date Added Start Price Current Price Return GTLS $677 3/13/2015 $33.50 $22.15 -33.9% UVE $1,278 8/28/2015 $24.08 $35.77 48.5% SAFM $1,545 1/16/2015 $80.96 $68.91 -14.9% FL $9,665 7/31/2015 $70.55 $69.34 -1.7% HRTG $681 9/25/2015 $18.64 $22.69 21.7% PNFP $2,204 10/23/2015 TBD $54.01 TBD WETF $2,471 9/25/2015 $17.01 $17.90 5.2% PII $7,273 10/23/2015 TBD $109.95 TBD AAPL $658,664 10/23/2015 TBD $115.50 TBD EGBN $1,516 10/23/2015 TBD $45.39 TBD

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer GTLS   |   UVE   |   SAFM   |   FL   |   HRTG   |   PNFP   |   WETF   |   PII   |   AAPL   |   EGBN   |   CHART INDUSTRIES, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Chart Industries, Inc. (Chart) is a diversified manufacturer of engineered equipment engineered equipment for the industrial gas, energy, and biomedical industries. The Company's equipment and engineered systems are used for low-temperature and cryogenic applications. It operates through three segments: Energy & Chemicals (E&C), Distribution & Storage (D&S) and BioMedical. Its products include vacuum insulated containment vessels, heat exchangers, cold boxes and other cryogenic components. Its E&C and D&S segments manufacture products used in energy-related and industrial applications, such as the separation, liquefaction, distribution and storage of hydrocarbon and industrial gases. Through its BioMedical segment, it supplies cryogenic and other equipment used in the medical, biological research and animal breeding industries. The Company, through Thermax, Inc., provides cryogenic fluid vaporizers utilized in industrial gas, petro-chemical and liquefied natural gas applications. 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. GTLS, with a market cap of $677 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. GTLS, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.69, 1.47, 2.36, 2.60 and 2.67, 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. GTLS's Price/Sales ratio of 0.60, 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. GTLS has a relative strength of 22. 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.   UNIVERSAL INSURANCE HOLDINGS, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Universal Insurance Holdings, Inc. (UIH), with its wholly owned subsidiaries, is a vertically integrated insurance holding company performing all aspects of insurance underwriting, distribution and claims. The Company's offers homeowners' insurance through the Insurance Entities, Universal Property & Casualty Insurance Company (UPCIC) and American Platinum Property and Casualty Insurance Company (APPCIC). Substantially all aspects of insurance underwriting, distribution and claims processing are performed by the Company's subsidiaries. UPCIC, a wholly owned subsidiary of the Company, is a writer of homeowners insurance in Florida and has commenced its operations in North Carolina, South Carolina, Hawaii, Georgia, Massachusetts, Maryland, Delaware, and Indiana. APPCIC, also a wholly owned subsidiary, writes homeowners multi-peril insurance on Florida homes valued in excess of $1 million, which are limits and coverages currently not targeted through its affiliate UPCIC. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider UVE a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (14.24) relative to the growth rate (35.56%), 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 UVE (0.40) 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. UVE, whose sales are $435.4 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 UVE is 35.6%, 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: [NEUTRAL] UVE is a financial company so debt to equity rules are not applied to determine the company's financial soundness. EQUITY/ASSETS RATIO: [PASS] This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. UVE's Equity/Assets ratio (24.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion. RETURN ON ASSETS: [PASS] This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. UVE's ROA (8.94%) is above the minimum 1% that this methodology looks for, thus passing the criterion. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for UVE (7.55%) 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 UVE (7.05%) 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.   SANDERSON FARMS, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Sanderson Farms, Inc. is a poultry processing company which is engaged in the production, processing, marketing and distribution of fresh and frozen chicken and other prepared chicken items. In addition, the Company is engaged in the processing, marketing and distribution of prepared chicken through its wholly owned subsidiary, Sanderson Farms, Inc. (Foods Division). It produces a range of processed chicken products and prepared chicken items. It sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, under the Sanderson Farms brand name to retailers, distributors, and casual dining operators in the south-eastern, south-western, north-eastern and western United States and to customers who resell frozen chicken into export markets. During the fiscal year ended October 31, 2013 (fiscal 2013), it processed 452 million chickens, or over 3.0 billion dressed pounds. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: SAFM is considered a "True Stalwart", according to this methodology, as its earnings growth of 18.92% lies within a moderate 10%-19% range and its annual sales of $2,885 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. SAFM is attractive if SAFM 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 SAFM was 7.67% last year, while for this year it is 6.88%. Since inventory to sales has decreased from last year by -0.80%, SAFM passes this test. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for SAFM (0.28), based on the average of the 4 and 5 year historical eps growth rates, is excellent. EARNINGS PER SHARE: [PASS] The EPS for a stalwart company must be positive. SAFM's EPS ($12.38) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for SAFM (0.98%) to be exceptionally 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 SAFM (6.75%) 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 SAFM (10.92%) 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.   FOOT LOCKER, INC. Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Foot Locker, Inc. is a retailer of shoes and apparel. The Company operates in two segments: Athletic Stores and Direct-to-Customers. The Athletic Stores segment is an athletic footwear and apparel retailer whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction and SIX:02, as well as the retail stores of Runners Point Group, including Runners Point and Sidestep. The Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and the direct-to-customer subsidiary of Runners Point Group, which sell to customers through their Internet and mobile sites and catalogs. As of January 31, 2015, the Company operated 3,423 primarily mall-based stores in the United States, Canada, Europe, Australia and New Zealand. As of January 31, 2015, the Company operated a total of 78 franchised stores, of which 31 are in the Middle East, 27 in Germany and Switzerland, and 20 in the Republic of Korea. 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 ratio between .75 and 1.5 are good values. FL's P/S ratio of 1.33 based on trailing 12 month sales, falls within the "good values" range for non-cyclical companies and is considered attractive. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. FL's Debt/Equity of 5.12% 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. FL 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 FL At this Point Is FL a "Super Stock"? NO PRICE/SALES RATIO: [FAIL] The prospective company should have a low Price/Sales ratio. To be considered a "Super Stock", non-cyclical (non-Smokestack) companies should have Price/Sales ratios below .75. However, FL, who has a P/S of 1.33, does not fall within the "Super Stock" range. It does fall between 0.75 and 1.5, which is considered the "good values" range for non-cyclical companies. Nonetheless, it does not pass this "Super Stock" criterion. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. FL's inflation adjusted EPS growth rate of 39.01% 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. FL's free cash per share of 2.70 passes this criterion. THREE YEAR AVERAGE NET PROFIT MARGIN: [PASS] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. FL, whose three year net profit margin averages 6.76%, passes this evaluation.   HERITAGE INSURANCE HOLDINGS INC Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool Heritage Insurance Holdings, Inc. (Heritage Insurance), formerly Heritage Insurance Holdings, LLC, is a property and casualty insurance holding company. The Company is engaged in providing personal and commercial residential insurance. Through Its subsidiary, Heritage Property & Casualty Insurance Company (Heritage P&C), it provides personal residential insurance for single-family homeowners and condominium owners, rental property insurance and commercial residential insurance in the state of Florida. The Company is vertically integrated and control or manage all aspects of insurance underwriting, actuRoboto analysis, distribution and claims processing, and adjusting. It has approximately 207,000 personal residential policies in force and approximately 2,400 commercial residential policies in force. Analysis Guru Score: 93% 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. HRTG's profit margin of 24.48% passes this test. RELATIVE STRENGTH: [PASS] The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. HRTG, with a relative strength of 90, satisfies this test. 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 HRTG (127.03% for EPS, and 112.91% for Sales) are good enough to pass. INSIDER HOLDINGS: [FAIL] HRTG's insiders ownership is not available at the current time. Insiders of a company should own at least 15% of the outstanding shares. 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. HRTG's free cash flow of $7.25 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] HRTG's profit margin has been consistent or even increasing over the past three years (Current year: 20.14%, Last year: 27.41%, Two years ago: -97.16%), 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 HRTG's case. CASH AND CASH EQUIVALENTS: [PASS] HRTG's level of cash $160.5 million passes this criteria. If a company is a cash generator, like HRTG, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. "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 (HRTG's is 0.18), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. HRTG passes this test. The following criteria for HRTG are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] HRTG has not been significantly increasing the number of shares outstanding within recent years which is a good sign. HRTG 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. HRTG's sales of $347.6 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". HRTG passes the sales test. DAILY DOLLAR VOLUME: [PASS] HRTG passes the Daily Dollar Volume (DDV of $7.5 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. HRTG with a price of $22.69 passes the price test, even though it doesn't fall in the preferred range. 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: [PASS] HRTG's income tax paid expressed as a percentage of pretax income this year was (36.58%) and last year (38.32%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.   PINNACLE FINANCIAL PARTNERS Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Pinnacle Financial Partners, Inc. (Pinnacle) is a bank holding company. Pinnacle operates through its wholly owned subsidiary, Pinnacle Bank. The Company operates as a community bank primarily in the urban markets of Nashville and Knoxville, Tennessee. As an urban community bank, Pinnacle provides the personalized service associated with small community banks, while seeking to offer the products and services, such as investments and treasury management, offered by large regional and national banks. Pinnacle Bank offers an array of convenience-centered products and services, including 24-hour telephone and internet banking, mobile banking, debit and credit cards, direct deposit, remote deposit and cash management services for small- to medium-sized businesses. In addition, Pinnacle Bank is associated with a network of automated teller machines of other financial institutions that its clients are able to use throughout Tennessee and other regions across the nation. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider PNFP a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (22.43) relative to the growth rate (28.12%), 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 PNFP (0.80) makes it 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. PNFP, whose sales are $230.9 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 PNFP is 28.1%, based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, which is acceptable. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] PNFP is a financial company so debt to equity rules are not applied to determine the company's financial soundness. EQUITY/ASSETS RATIO: [PASS] This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. PNFP's Equity/Assets ratio (13.00%) is healthy and above the minimum 5% this methodology looks for, thus passing the criterion. RETURN ON ASSETS: [PASS] This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. PNFP's ROA (1.21%) is above the minimum 1% that this methodology looks for, thus passing the criterion. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for PNFP (4.09%) 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 PNFP (-4.45%) 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.   WISDOMTREE INVESTMENTS, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool WisdomTree Investments, Inc. is an asset management company that focuses on exchange-traded funds (ETFs). The Company's family of ETFs includes fundamentally weighted funds that track its own indexes, funds that track third party indexes and actively managed funds. The Company distributes its ETFs through all major channels within the asset management industry, including brokerage firms, registered investment advisers, institutional investors, private wealth managers and discount brokers. Most of its index-based funds employ a fundamental weighted investment methodology, which weights securities on the basis of factors, such as dividends or earnings, whereas most other ETF industry indexes use a capitalization weighted methodology. In addition, it also offers actively managed ETFs, which are ETFs that are not-based on a particular index but rather are actively managed with complete transparency into the ETF's portfolio on a daily basis. Analysis Guru Score: 92% 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. WETF's profit margin of 23.69% passes this test. RELATIVE STRENGTH: [PASS] The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. WETF, with a relative strength of 93, satisfies this test. 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 WETF (125.00% for EPS, and 84.82% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] WETF's insiders should own at least 10% (they own 37.38% ) of the company's outstanding shares which is extremely attractive since the minimum requirement is 10%. A high percentage 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. WETF's free cash flow of $0.48 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] WETF's profit margin has been consistent or even increasing over the past three years (Current year: 33.22%, Last year: 34.48%, Two years ago: 13.01%), 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 WETF's case. CASH AND CASH EQUIVALENTS: [PASS] WETF's level of cash $165.3 million passes this criteria. If a company is a cash generator, like WETF, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. 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 WETF was 11.77% last year, while for this year it is 9.89%. Since the AR to sales is decreasing by -1.87% the stock passes this criterion. "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 (WETF's is 0.39), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. WETF passes this test. The following criteria for WETF are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [FAIL] WETF has either issued a significant amount of new shares over the past year or has been issuing more and more shares over the past five years. WETF currently has 138.0 million shares outstanding. Neither of these are a good sign. Generally when a small-cap company issues more stock, the existing stock becomes devalued by the market, and hence diluted. SALES: [PASS] Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. WETF's sales of $238.4 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". WETF passes the sales test. DAILY DOLLAR VOLUME: [FAIL] WETF does not pass the Daily Dollar Volume (DDV of $53.9 million) test. It exceeds the maximum requirement of $25 million. Stocks that fail the test are too liquid for a small individual investor and many institutions have already discovered it. 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. WETF with a price of $17.90 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] WETF's income tax paid last year is not available. This could be the cause for some concern according to this strategy. However, because this is not a critical criterion, it should not make or break your investment decision. In order to ensure that you receive a fair analysis we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%).   POLARIS INDUSTRIES INC. Profile Strategy: Patient Investor Based on: Warren Buffett Polaris Industries Inc. (Polaris) designs, engineers and manufactures off-road vehicles (ORV), including all-terrain vehicles (ATV) and side-by-side vehicles for recreational and utility use, snowmobiles, motorcycles and small vehicles (SV). These products are sold through dealers and distributors located in the United States, Canada and Europe. The Company's ORVs include core ATVs, and RANGER and RZR side-by-side vehicles. The Company produces a range of snowmobiles, consisting of 32 models, ranging from youth models to utility and economy models to performance and competition models. Polaris' Motorcycles division consists of Victory, Indian motorcycles and three-wheel roadster motorcycle, Slingshot. The Company offer products in the light-duty hauling, people mover and urban/suburban commuting sub-sectors of the small vehicles industry. The Company produces or supplies a range of replacement parts and accessories for its product lines. 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 1.57, 1.36, 1.55, 1.75, 1.53, 2.14, 3.20, 4.40, 5.40, 6.65. Buffett would consider PII's earnings predictable, although earnings have declined 2 time(s) in the past seven years, with the most recent decline 6 years ago. The dips have totaled 25.9%. PII's long term historical EPS growth rate is 16.1%, based on the 10 year average EPS growth rate, 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. PII has a debt of 311.8 million and earnings of 473.7 million, which could be used to pay off the debt in less than two years, which is considered exceptional. 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 PII, over the last ten years, is 42.1%, 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 34.8%, 57.7%, 61.3%, 82.9%, 48.8%, 39.5%, 43.8%, 43.7%, 66.2%, 51.2%, and the average ROE over the last 3 years is 53.7%, thus passing this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: [PASS] Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for PII, over the last ten years, is 33.2% and the average ROTC over the past 3 years is 40.6%, 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 33.2%, 23.1%, 28.4%, 33.7%, 24.7%, 31.1%, 36.3%, 38.0%, 43.2%, 40.7%, 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. PII's free cash flow per share of $2.89 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 $19.61 and compares it to the gain in EPS over the same period of $5.08. PII's management has proven it can earn shareholders a 25.9% 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: [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. PII's shares outstanding have fallen over the past five years from 68,470,001 to 67,000,000, 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 PII 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 $7.07 and divide it by the current market price of $109.95. An investor, purchasing PII, could expect to receive a 6.43% 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 3.15%. Compare this with PII's initial yield of 6.43%, 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] PII currently has a book value of $14.17. It is safe to say that if PII can preserve its average rate of return on equity of 42.1% and continues to retain 67.44% of its earnings, it will be able to sustain an earnings growth rate of 28.4% and it will have a book value of $172.63 in ten years. If it can still earn 42.1% on equity in ten years, then expected EPS will be $72.70. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $72.70 and multiply them by the lower of the 5 year average P/E ratio (21.8) or current P/E ratio (current P/E in this case), which is 15.6 and you get PII's projected future stock price of $1,131.28. 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 $53.75. This gives you a total dollar amount of $1,185.03. These numbers indicate that one could expect to make a 26.8% average annual return on PII'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 15.0%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $28.60. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (21.8) or current P/E ratio (current P/E in this case), which is 15.6. This equals the future stock price of $445.05. Add in the total expected dividend pool of $53.75 to get a total dollar amount of $498.80. 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 $109.95 and the future expected stock price, including the dividend pool, of $498.80. If you were to invest in PII at this time, you could expect a 16.32% average annual return on your money. Buffett would consider this a great 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 16.3% and 26.8%. 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 21.6% on PII stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   APPLE INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Apple Inc. designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players and sells a variety of related software, services, peripherals, networking solutions and third-party digital content and applications. The Company's products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud and a variety of accessory, service and support offerings. The Company offers a range of mobile communication and media devices, personal computing products and portable digital music players, as well as a variety of related software, services, peripherals, networking solutions and third-party hardware and software products. The Company's primary products include iPhone, iPad, Mac, iPod, iTunes, Mac App Store, iCloud, Operating System Software, Application Software and Other Application Software. Analysis Guru Score: 80% MARKET CAP: [PASS] The Cornerstone Value Strategy looks for large, well known companies whose market cap is greater than $1 billion. These companies exhibit solid and stable earnings. AAPL's market cap of $658,664 million passes this test. CASH FLOW PER SHARE: [PASS] The second criterion requires that the company exhibit strong cash flows. Companies with strong cash flow are typically the value oriented investments that this strategy looks for. The company's cash flow per share must be greater than the mean of the market cash flow per share ($1.75). AAPL's cash flow per share of $10.67 passes this test. SHARES OUTSTANDING: [PASS] This particular strategy looks for companies whose total number of outstanding shares are in excess of the market average (634 million shares). These are the more well known and highly traded companies. AAPL, who has 5,773 million shares outstanding, passes this test. TRAILING 12 MONTH SALES: [PASS] A company's trailing 12 month sales ($224,337 million) are required to be 1.5 times greater than the mean of the market's trailing 12 month sales ($21,262 million). AAPL passes this test. DIVIDEND: [FAIL] The final step in the Cornerstone Value strategy is to select the 50 companies from the market leaders group (those that have passed the previous four criteria) that have the highest dividend yield. AAPL's dividend yield of 1.80% fails this final criterion. Even though it did pass the previous four criteria it would fail the overall methodology.   EAGLE BANCORP, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Eagle Bancorp, Inc. is a bank holding company for EagleBank (the Bank). The Bank is the Company's principal operating subsidiary. The Bank is a chartered commercial bank. The Bank operates twenty two banking offices: seven in Montgomery County, Maryland; five located in the District of Columbia, and ten in Northern Virginia. The Bank offers a range of commercial banking services to its business and professional clients, as well as consumer banking services to individuals living or working in the service area. The Bank also provides commercial banking services to sole proprietorships, small, medium and large-sized businesses, partnerships, corporations, non-profit organizations and associations, and investors. The Bank offers a range of retail banking services to accommodate the individual needs of both corporate customers as well as the community the Bank serves. The Bank also offers online banking, mobile banking and a remote deposit service. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider EGBN a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (19.39) relative to the growth rate (24.78%), 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 EGBN (0.78) makes it 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. EGBN, whose sales are $242.0 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 EGBN is 24.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] EGBN is a financial company so debt to equity rules are not applied to determine the company's financial soundness. EQUITY/ASSETS RATIO: [PASS] This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. EGBN's Equity/Assets ratio (13.00%) is healthy and above the minimum 5% this methodology looks for, thus passing the criterion. RETURN ON ASSETS: [PASS] This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. EGBN's ROA (1.52%) is above the minimum 1% that this methodology looks for, thus passing the criterion. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for EGBN (4.30%) 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 EGBN (-3.95%) 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.   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 MMI MARCUS & MILLICHAP INC Real Estate Operations 65 HOMB HOME BANCSHARES INC Regional Banks 59 CALM CAL-MAINE FOODS INC Fish/Livestock 54 AGO ASSURED GUARANTY LTD. Insurance (Prop. & Casualty) 53 ALK ALASKA AIR GROUP, INC. Airline 50 GCI GANNETT CO INC Advertising 44 WAL WESTERN ALLIANCE BANCORPORATION Regional Banks 43 AFSI AMTRUST FINANCIAL SERVICES INC Insurance (Prop. & Casualty) 43 PLUS EPLUS INC. Software & Programming 42 GILD GILEAD SCIENCES, INC. Biotechnology & Drugs 42

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