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Executive Summary	November 20, 2015

The Economy To begin this week, I'd like to say that our hearts go out to anyone impacted by the horrific attacks in France. At times like these, a discussion of monthly economic reports can seem trivial. This is what we do, however, though as we do it this week our thoughts are with all of those impacted by the senseless violence. As for the economy, the news was generally good in the US. The economy added 271,000 jobs during October, the Labor Department said, which came close to the combined 290,000 jobs added in September and August. In addition, the September and August jobs-added figures were revised higher by a total of 12,000. Average hourly wages also rose at an annual pace of more than 4.3% vs. September. Amid all this, the unemployment rate fell to 5.0%, the lowest it has been since April 2008. The "U-6" rate, which unlike the headline number takes into account those working part-time who want full-time work, and discouraged workers who have given up looking for a job, fell to 9.8% in October, the first time since May 2008 that it has been below 10%. New claims for unemployment, meanwhile, have fallen slightly since our last newsletter, and are now about 8% below where they were a year ago. Continuing claims, the data for which lag new claims by a week, ticked slightly higher, but are also 8% below year-ago levels.. Retail sales, meanwhile, edged higher by 0.1% in October, according to a new report from the Census Bureau. That's about 1.8% higher than the year-ago level -- not a great year-over-year increase, but improvement nonetheless. Housing starts tumbled more than 11% in October, according to the Census Bureau, and are slightly below where they were a year ago. Permit issuance for new construction rose 4.1%, but is also slightly below where it stood a year ago. Elsewhere, inflation actually picked up in October. The Consumer Price Index rose 0.2%, according to the Labor Department, drawing ahead of its year-ago level by just 0.2%. Stripping out volatile food and energy prices, so-called "core" inflation, which was also up 0.2% in October, is 1.9% ahead of its year-ago pace. The huge commodity price declines we've seen over the past year are, of course, the reason for the big gap between the overall inflation number and the core inflation number. As for gas prices, they keep on falling. As of November 19, a gallon of regular unleaded on average cost $2.12, down from $2.20 a month earlier. That's more than 26% below where it was one year ago. Finally, despite plenty of global concerns, Corporate America is continuing to hang in there. With about 93% of the S&P 500 companies having reported third-quarter results, 74% have beaten earnings expectations, while 45% beat revenue expectations, according to FactSet, in line with what we have seen in recent quarters. Earnings are now expected to decline by 1.8% once all of the third-quarter results are, and revenues are expected to be down 4%. Energy companies are again the main culprit, thanks to those commodity price declines. Excluding energy firms, third-quarter earnings growth is expected to now be 5.0%, with revenue growth at 1.1%. In addition, American companies issued $107.9 billion in dividends for the third quarter, a whopping 23.4% increase, CNBC reported, citing data from Henderson Global Investors. The jump "comfortably" set a new record, according to Henderson. Amid all this, the S&P 500 has returned -0.9% since our last newsletter, while the Hot List has returned -5.8%. So far in 2015, the portfolio has returned -5.1% vs. 1.1% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 207.0% vs. the S&P's 108.0% gain. A Quant's Journey: Mental Lessons In our last rebalancing newsletter, I looked at some of the lessons I've learned in my dozen years of running quantitative strategies, focusing on what I've learned from the copious amounts of data that we've compiled while monitoring our model portfolios. In Part Two this week, I will focus more on the psychological lessons I've taken away from the past dozen years. These lessons are a bit broader and more abstract, but in the end they may be even more important because they involve the ways in which one can combat the many emotional and behavioral biases that we humans face as investors. Lesson 1: Don't Try To Be Perfect As an investor, we all have the urge to be perfect. Want to be right on all of our stock picks, and we envision that great investors like Warren Buffett are, indeed, right far, far more than they are wrong. But the reality is that they aren't anywhere close to perfect, and you don't need to be right all the time. As Martin Zweig said, "If you are right 60% of the time, ride your profits, and rein in your losses, you'll find that when you're right you're very right, and when you're wrong you're only moderately wrong. In the long run, a 60% success rate translates into huge gains, a 50% rate into solid gains, and even a 40% rate can beat the market." My Guru Strategies are proof of that. The Hot List has just about doubled the S&P 500 since its mid-2003 inception, yet its accuracy rate (that is, the percentage of stocks that it has made money on) is 54.1%. My other 13 ten-stock portfolios -- all but three of which are beating the market since their inceptions -- have accuracy rates no higher than 59.6% and as low as 46.7%. Yes, that's right -- the Momentum Investor portfolio has actually been wrong more than it has been right, but despite its 46.7% accuracy rate it has nearly doubled the market since its mid-2003 inception. What's the significance of all this? To me, it is that the "shotgun" approach, as Zweig called it, is the way to go. As opposed to the "rifle approach", which calls for intensely studying a very small number of individual stocks, the shotgun method involves buying up a larger basket of stocks through the use of systematic fundamental analysis. Sure, this approach means you might get some duds, but that's okay. If your winners outnumber your losers (sometimes even if they don't), you can still make a heck of a lot of money. If you focus all of your energy on intense research of a small number of firms, you're going to spend a lot more time, be a lot more (perhaps too) concentrated, and still be wrong sometimes. In addition to the time and diversification benefits, the shotgun approach also lends itself to systematic, unemotional investing. Since you are just screening for stocks that have particular fundamental qualities, there's no hunch playing or guesswork. If the stock meets your criteria, you buy it; if not, you pass. With a rifle approach, you're going to get into more subjective analyses of the firm's products and business. Rare investors like Buffett, who have exceptional business acumen and the ability to keep their emotions at bay, can have great success doing that. But most individual investors lack the discipline (and time, frankly) needed to thoroughly analyze a business and not be swayed by what the rest of the world thinks. A quantitative, shotgun approach keeps emotion at bay, if you ... Lesson 2: Stay Out Of The Way Just about every guru I follow stresses the importance of discipline, and my own experience has done nothing to refute their advice. Believe me, there been many times when I've seen a stock pop up on the Hot List's "buy" list and wished we could just skip that one. But many times, those are just the types of stocks that perform the best -- their low expectations or abundant fears hovering over them create incredible value opportunities. Remember USANA Health Sciences? Fears of its multi-level marketing approach for years created all sorts of negative headlines around the nutrition/personal care product maker, so I wasn't jumping for joy when the Hot List picked it up in late 2012. About 16 months and 115% of gains later, I was glad I had trusted my models. There are numerous other examples like this, and I believe that the Hot List's purchase of these sort of stocks -- and our willingness not to override the portfolio's decisions -- is one of the big reasons that it has been so successful over the long-term. Of course, not overriding a model's picks can be incredibly hard. Because of that, any investor using quantitative strategies should ask himself or herself some hard questions before beginning: Will I trust the models even when times are tough and my portfolio is struggling? How big a loss will I be able to handle before I jump in and start overriding the models' decisions? What safeguards can I put in place to keep myself from meddling with the models? If you haven't asked yourself these questions -- and come up with good answers -- you're not ready to start investing via quantitative strategies. Lesson 3: Different Styles Win At Different Times In terms of dealing with the inevitable ups and downs of investing, it's critical to remember that strategies go in and out of favor over time. At one point early in our existence, the David Dreman-based portfolio was our top performer. Today, it is bringing up the rear. That's an extreme case, but it illustrates what can happen as difference forces lead the market. From 2003 to 2006 or 2007, value strategies were very successful, and the Dreman model flourished. Since then, however, growth has been on a major run, and the Dreman portfolio has felt the reprecussions. Ideally, you'd like to have a portfolio that is as "all-weather" as possible. We try to do that with the Hot List by using multiple, uncorrelated strategies that use a wide assortment of variables to assess stocks. Still, unless you have a portfolio that is, essentially, the market, your portfolio will ebb and flow relative to the market depending on what sections of the market are doing best. Being aware of these cyclical trends can help you ride out the tough times, just as it can help prevent you from jumping onto a hot strategy that is simply reaping the short-term benefits of a broader cyclical trend that may well run out soon after you get on board. It is not just the growth/value, large-cap/small-cap cycles that you need to be aware of. You also need to be aware of other strategy-specific issues. For example, in 2008, our Benjamin Graham-based model did far better than the broader market. Part of that, I believe, is because it is a good strategy, but there's no getting around the fact that it benefited greatly from circumstance: the model does not invest in financial stocks, which were the bane of the market during the 2008 meltdown. The Graham strategy's exceptional relative performance that year led to a lot of interest from investors, and I tried to be clear with anyone who was interested in the model that, while it is a very good long-term strategy, no one should expect it to beat the market by 20-plus percent every year, as it did in 2008. Indeed, because it did not invest in financials, the Graham-based strategy didn't get some of the bounce back that occurred following the financial crisis. Investors who did not understand that may well have been disappointed by the short-term results, and bailed on a very good long-term strategy. Timeless Lessons Twelve years is a good amount of time, but I'd be foolish to think that these past dozen years have taught me all there is to know about using quantitative strategies -- or that the specifics of what has happened over that time won't change. But while specifics will change, I would be stunned if the lessons I've learned and shared with you today become less relevant in the next dozen years, or the dozen years after that. In particular, preparation, discipline, and value, which are at the center of these lessons, are concepts that have been crucial to investing success since Benjamin Graham's day. Their importance endures because they get to the heart of good business principles and provide ways for us to deal with our own hard-wired emotions and behavioral biases, which aren't likely to change any time soon. Over the next dozen years and beyond, I'll be keeping these lessons at the forefront of my investment process, and I hope you will, too.		Editor-in-Chief: John Reese Since Inception   Hot List 207.0% S&P 500 108.0% Accuracy 54.0% Beta 1.2 YTD   Hot List -5.1% S&P 500 1.1% Since Last Issue   Hot List -5.8% S&P 500 -0.9% Avg. Fundamentals   Market Cap (mil) $73,353 PE Ratio 12.1 5 Yr EPS Growth 29.2% Yield 1.7% Rel. Strength 75 Portfolio Sectors Technology 3 Consumer/Non-Cyclical 2 Energy 2 Financial 1 Services 1 Consumer Cyclical 1
The Fallen As we rebalance the Validea Hot List, 7 stocks leave our portfolio. These include: Wisdomtree Investments, Inc. (WETF), Chart Industries, Inc. (GTLS), Heritage Insurance Holdings Inc (HRTG), Universal Insurance Holdings, Inc. (UVE), Eagle Bancorp, Inc. (EGBN), Pinnacle Financial Partners (PNFP) and Foot Locker, Inc. (FL). The Keepers 3 stocks remain in the portfolio. They are: Apple Inc. (AAPL), Polaris Industries Inc. (PII) and Sanderson Farms, Inc. (SAFM). The Newbies We are adding 7 stocks to the portfolio. These include: Valero Energy Corporation (VLO), Tesoro Corporation (TSO), Cal-maine Foods Inc (CALM), Syntel, Inc. (SYNT), Silicon Motion Technology Corp. (Adr) (SIMO), Banco Macro Sa (Adr) (BMA) and Trueblue Inc (TBI). Portfolio Changes Additions   VALERO ENERGY CORPORATION VLO TESORO CORPORATION TSO CAL-MAINE FOODS INC CALM SYNTEL, INC. SYNT SILICON MOTION TECHNOLOGY CORP. (ADR) SIMO BANCO MACRO SA (ADR) BMA TRUEBLUE INC TBI Deletions   WISDOMTREE INVESTMENTS, INC. WETF CHART INDUSTRIES, INC. GTLS HERITAGE INSURANCE HOLDINGS INC HRTG UNIVERSAL INSURANCE HOLDINGS, INC. UVE EAGLE BANCORP, INC. EGBN PINNACLE FINANCIAL PARTNERS PNFP FOOT LOCKER, INC. FL Newcomers to the Validea Hot List Syntel Inc. (SYNT): This Michigan-based firm provides business analytics, cloud computing, IT infrastructure management, and other services. Syntel ($4 billion market cap) has taken in close to $1 billion in sales over the past year. Syntel gets strong interest from my Peter Lynch- and Warren Buffett-based models. To read more about it, scroll down to the "Detailed Stock Analysis" section below. Tesoro Corporation (TSO): This Texas-based petroleum refining and marketing company transports crude oil and manufactures, transports, and sells transportation fuels. It owns and operates six petroleum refineries in the western United States and sells transportation fuels in approximately 16 states through a network of about 2,267 retail stations under the ARCO, Shell, Exxon, Mobil, USA Gasoline and Tesoro brands. Tesoro ($14 billion market cap) has taken in about $31 billion in sales over the past 12 months and gets strong interest from my Peter Lynch-based model and high marks from several other strategies. To read more about it, check out the "Detailed Stock Analysis" section. Cal-Maine Foods (CALM): This egg producer sells its eggs in the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States. The $2.7-billion-market-capitalization firm has taken in about $1.8 billion in sales over the past 12 months. Cal-Maine gets strong interest from my Peter Lynch- and Joel Greenblatt-based models. See the "Detailed Stock Analysis" section below to read more about it. TrueBlue (TBI): This blue-collar staffing services firm operates about 700 branches in all 50 states, Puerto Rico, and Canada. It has taken more than $2.5 billion in revenues over the past year. TrueBlue ($1.2 billion market capitalization) gets strong interest from my Peter Lynch-based model, as well as my James O'Shaughnessy-based model. To read more about it, scroll down to the "Detailed Stock Analysis" section below. Banco Macro SA (BMA): This Argentina-based bank ($6 billion market cap) focuses on low- and mid-income individuals and small and mid-sized companies organized under the laws of Argentina. The company has taken in about $1.8 billion in sales over the past year, and has a nice combination of growth (39% long-term revenue growth), momentum (92 relative strength), and value (9.8 P/E ratio). BMA gets strong interest from my David Dreman-, Warren Buffett-, and Peter Lynch-based models. To read more about it, scroll down to the "Detailed Stock Analysis" section. Valero Energy Corp. (VLO): Valero makes transportation fuels, other petrochemical products, and power. Its refineries can produce everything from conventional and premium gasolines and diesel fuel, to jet fuel, to asphalt, petrochemicals and lubricants. It markets branded and unbranded refined products through approximately 7,400 outlets and owns 11 ethanol plants in the central plains region of the United States that primarily produce ethanol. VLO gets strong interest from my Peter Lynch-based model. For details about its impressive fundamentals, scroll down to the "Detailed Stock Analysis" section. Silicon Motion Technology Corporation (SIMO): Silicon Motion is a fabless semiconductor company that makes high-performance, low-power semiconductor solutions for the multimedia consumer electronics market. Its products include mobile storage, mobile communications, multimedia systems-on-a-chip (SoCs), and other products. Silicon Motion ($1.2 billion market cap) gets strong interest from my Peter Lynch-based model and high marks from several other strategies. To read more about it, check out the "Detailed Stock Analysis" section. News about Validea Hot List Stocks Universal Insurance Holdings (UVE): UVE shares plunged 34% on Nov. 17. According to the South Florida Business Journal, the decline occurred after a Lakewood Capital Management managing partner gave a presentation during which he allegedly identified UVE as a good short candidate. UVE fired back, saying in a release, "The Company believes that the statements made by Lakewood Capital Management are misleading and contain partial information, designed to negatively affect Universal's stock." Shares made up some ground on Nov. 18 before falling again on Nov. 19, and a decline in the firm's fundamentals is leading the Hot List to sell the holding today. 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 BMA BANCO MACRO SA (ADR) Money Center Banks 100 VLO VALERO ENERGY CORPORATION Oil & Gas Operations 85 SIMO SILICON MOTION TECHNOLOGY CORP. (ADR) Semiconductors 81 SAFM SANDERSON FARMS, INC. Food Processing 76 TBI TRUEBLUE INC Business Services 73 CALM CAL-MAINE FOODS INC Fish/Livestock 72 SYNT SYNTEL, INC. Computer Services 72 TSO TESORO CORPORATION Oil & Gas Operations 71 PII POLARIS INDUSTRIES INC. Recreational Products 56 AAPL APPLE INC. Communications Equipment 56 Ticker Market Cap Date Added Start Price Current Price Return BMA $5,855 11/20/2015 TBD $64.15 TBD VLO $34,254 11/20/2015 TBD $71.14 TBD SIMO $1,125 11/20/2015 TBD $32.79 TBD SAFM $1,591 1/16/2015 $80.96 $70.98 -12.3% TBI $1,211 11/20/2015 TBD $28.85 TBD CALM $2,696 11/20/2015 TBD $55.60 TBD SYNT $3,978 11/20/2015 TBD $47.42 TBD TSO $13,699 11/20/2015 TBD $113.79 TBD PII $6,886 10/23/2015 $110.33 $105.04 -4.8% AAPL $662,238 10/23/2015 $119.08 $118.78 -0.3%

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer BMA   |   VLO   |   SIMO   |   SAFM   |   TBI   |   CALM   |   SYNT   |   TSO   |   PII   |   AAPL   |   BANCO MACRO SA (ADR) Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool Banco Macro S.A. (the Bank) is a bank. The Bank offers traditional bank products and services to companies, including those operating in regional economies, as well as to individuals. The Bank offers savings and checking accounts, credit and debit cards, consumer finance loans (including personal loans), mortgage loans, automobile loans, overdrafts, credit-related services, home and car insurance coverage, tax collection, utility payments, automatic teller machines (ATMs) and money transfers. The Bank offers Plan Sueldo payroll services, lending, corporate credit cards, mortgage finance, transaction processing and foreign exchange. The Bank offers transaction services to its corporate customers, such as cash management, customer collections, payments to suppliers, payroll administration, foreign exchange transactions, foreign trade services, corporate credit cards and information services, such as its Datanet and Interpymes services. Analysis Guru Score: 76% 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. BMA's profit margin of 23.61% 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. BMA, with a relative strength of 91, 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 BMA (1,681.82% for EPS, and 41.37% for Sales) are good enough to pass. INSIDER HOLDINGS: [FAIL] BMA'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. BMA's free cash flow of $6.42 per share passes this test. PROFIT MARGIN CONSISTENCY: [FAIL] The profit margin in the past must be consistently increasing. The profit margin of BMA has been inconsistent in the past three years (Current year: 23.70%, Last year: 25.05%, Two years ago: 22.27%), which is unacceptable. This inconsistency will carryover directly to the company's bottom line, or earnings per share. 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 BMA's case. CASH AND CASH EQUIVALENTS: [FAIL] BMA does not have a sufficiently large amount of cash, $161.22 million, on hand relative to its size. Although this criteria does not apply to companies of this size, we defined anything greater than $500 million in cash as having 'a lot of cash' to allow analysis of these companies. BMA will have more of a difficult time paying off debt (if it has any) or acquiring other companies than a company that 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 (BMA's is 0.26), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. BMA passes this test. The following criteria for BMA are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] BMA has not been significantly increasing the number of shares outstanding within recent years which is a good sign. BMA currently has 58.0 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: [FAIL] 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. BMA's sales of $1,794.5 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years. DAILY DOLLAR VOLUME: [PASS] BMA passes the Daily Dollar Volume (DDV of $11.2 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. BMA with a price of $64.15 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] BMA's income tax paid expressed as a percentage of pretax income this year was (35.90%) and last year (35.13%) 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.   VALERO ENERGY CORPORATION Profile Strategy: Value Investor Based on: Benjamin Graham Valero Energy Corp (Valero) is an international manufacturer and marketer of transportation fuels, other petrochemical products and power. The Company's refineries can produce conventional gasolines, premium gasolines, gasoline, diesel fuel, low-sulfur diesel fuel, ultra-low-sulfur diesel fuel, CARB diesel fuel, other distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products. The Company markets branded and unbranded refined products through approximately 7,400 outlets. The Company also owns 11 ethanol plants in the central plains region of the United States that primarily produce ethanol. The Company operates through two segments. The refining segment includes refining operations, wholesale marketing, product supply and distribution, and transportation operations in the United States, Canada, the United Kingdom, Aruba and Ireland. Its ethanol segment primarily includes sale of internally produced ethanol and distillers grains. Analysis Guru Score: 86% SECTOR: [PASS] VLO is neither a technology nor financial Company, and therefore this methodology is applicable. SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. VLO's sales of $96,886.0 million, based on trailing 12 month sales, pass this test. CURRENT RATIO: [PASS] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. VLO's current ratio of 2.03 passes the test. LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for VLO is $7,252.0 million, while the net current assets are $8,538.0 million. VLO passes this test. LONG-TERM EPS GROWTH: [FAIL] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for VLO were negative within the last 5 years and therefore the company fails this criterion. P/E RATIO: [PASS] The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. VLO's P/E of 12.20 (using the 3 year PE) passes this test. PRICE/BOOK RATIO: [PASS] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. VLO's Price/Book ratio is 1.61, while the P/E is 12.20. VLO passes the Price/Book test.   SILICON MOTION TECHNOLOGY CORP. (ADR) Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Silicon Motion Technology Corporation (SMTC) is a fabless semiconductor company. The Company designs, develops and markets low-power semiconductor solutions to original equipment manufacturers (OEMs) and other customers in the mobile storage and mobile communications markets. For the mobile storage market, the Company's products are microcontrollers used in solid state storage devices, such as Solid State Drives (SSDs), Embedded Multimedia Cards (eMMCs) and other embedded flash applications, as well as removable storage products. For the mobile communications market, the Company's products are mobile communication transceivers and mobile television (TV) System on Chips (SoCs). The Company's products are used in smartphones, tablets, notebooks, desktop personal computers, and industrial and commercial applications. The Company markets its mobile storage products under the SMI brand and mobile communications products under the FCI brand. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider SIMO a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (18.76) relative to the growth rate (47.11%), 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 SIMO (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. SIMO, whose sales are $334.9 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. 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 SIMO was 14.94% last year, while for this year it is 15.24%. 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 (0.29%) is below 5%. 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 SIMO is 47.1%, based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for SIMO (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 SIMO (3.29%) 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 SIMO (16.98%) 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: Price/Sales Investor Based on: Kenneth Fisher 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: 100% 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. SAFM's P/S of 0.55 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. SAFM's Debt/Equity of 0.98% 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. SAFM 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 SAFM At this Point Is SAFM a "Super Stock"? YES 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.SAFM's P/S ratio of 0.55 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%. SAFM's inflation adjusted EPS growth rate of 16.60% 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. SAFM's free cash per share of 4.65 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. SAFM, whose three year net profit margin averages 5.37%, passes this evaluation.   TRUEBLUE INC Profile Strategy: P/E/Growth Investor Based on: Peter Lynch TrueBlue, Inc. (TrueBlue), is a provider of specialized workforce solutions, helping clients improve growth and performance. The Company provides staffing, recruitment process outsourcing, and managed service provider solutions. The Company operates through two reportable segments, Staffing Services and Managed Services. The Company offers on-premise temporary blue-collar staffing together with outsourced service offerings in recruitment process outsourcing (RPO) and managed services provider (MSP) solutions. On-premise staffing is sourcing, screening, recruiting and management of the contingent labor workforce at a customer's facility. RPO is high-volume sourcing, screening, and recruiting of permanent employees for all industries and jobs. MSP solutions manage its customer's overall contingent labor program including vendor selection, vendor performance management, vendor compliance monitoring and risk management, and reducing vendor costs. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider TBI a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (17.13) relative to the growth rate (39.23%), 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 TBI (0.44) 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. TBI, whose sales are $2,576.3 million, needs to have a P/E below 40 to pass this criterion. TBI's P/E of (17.13) is considered acceptable. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for TBI is 39.2%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for TBI (21.59%) 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 TBI (2.56%) 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 TBI (-7.47%) 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.   CAL-MAINE FOODS INC Profile Strategy: Contrarian Investor Based on: David Dreman Cal-Maine Foods, Inc. is a producer and marketer of shell eggs in the United States. The Company's primary business is the production, grading, packaging, marketing and distribution of shell eggs. The Company sells its shell eggs in the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States. The Company markets its shell eggs through its distribution network to a group of customers, including national and regional grocery store chains, club stores, foodservice distributors and egg product consumers. Some of its sales are completed through co-pack agreements. It has a total flock of approximately 33.7 million layers and 8.4 million pullets and breeders. The Company markets its specialty shell eggs under brands, such as Egg-Land's Best, Land O' Lakes, Farmhouse and 4-Grain. The Company also produces, markets and distributes private label specialty shell eggs to several customers. Analysis Guru Score: 86% 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. CALM has a market cap of $2,696 million, therefore passing the test. EARNINGS TREND: [PASS] A company should show a rising trend in the reported earnings for the most recent quarters. CALM's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.95, 2.95 have been increasing, and therefore the company passes this test. EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: [PASS] This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. CALM passes this test as its EPS growth rate over the past 6 months (180.95%) has beaten that of the S&P (1.73%). CALM's estimated EPS growth for the current year is (243.24%), which indicates the company is expected to experience positive earnings growth. As a result, CALM passes this test. This methodology would utilize four separate criteria to determine if CALM 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. CALM's P/E of 9.74, based on trailing 12 month earnings, meets the bottom 20% criterion (below 12.09), and therefore passes this test. PRICE/CASH FLOW (P/CF) RATIO: [FAIL] The P/CF of a company should be in the bottom 20% of the overall market. CALM's P/CF of 8.40 does not meet the bottom 20% criterion (below 6.33), and therefore fails this test. PRICE/BOOK (P/B) VALUE: [FAIL] The P/B value of a company should be in the bottom 20% of the overall market. CALM's P/B is currently 3.37, which does not meet the bottom 20% criterion (below 0.92), 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%). CALM's P/D of 26.60 does not meet the bottom 20% criterion (below 17.61), and it therefore fails this test. This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below. CURRENT RATIO: [PASS] A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [7.66] or greater than 2). This is one identifier of financially strong companies, according to this methodology. CALM's current ratio of 2.78 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 CALM is 33.35%, while its historical payout ratio has been 33.46%. Therefore, it passes the payout criterion. 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 16.74%, and would consider anything over 27% to be staggering. The ROE for CALM of 39.17% 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. CALM's pre-tax profit margin is 23.20%, thus passing this criterion. YIELD: [PASS] The company in question should have a yield that is high and that can be maintained or increased. CALM's current yield is 3.76%, while the market yield is 2.71%. CALM passes this test. LOOK AT THE TOTAL DEBT/EQUITY: [PASS] The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 28.63%. CALM's Total Debt/Equity of 5.32% is considered acceptable.   SYNTEL, INC. Profile Strategy: Patient Investor Based on: Warren Buffett Syntel, Inc. (Syntel) is a provider of digital transformation, information technology (IT) and knowledge process outsourcing (KPO) services. Syntel operates through five segments: Banking and Financial Services, Healthcare and Life Sciences, Insurance, Retail, Logistics and Telecom, and Manufacturing. The Banking and Financial Services segment serves financial institutions around the world. The Healthcare and Life Sciences segment serves various companies in the healthcare industry. The Insurance segment serves property and casualty insurers, insurance brokers, personal, commercial, life and retirement insurance service providers. The Retail, Logistics and Telecom segment serves a range of retailers and distributors, and clients in the logistics and telecom industry. The Manufacturing segment provides business consulting and technology services for industrial and automotive clients. The Company offers its products and services under the Syntel brand. Analysis Guru Score: 99% STAGE 1: "Is this a Buffett type company?" A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage. LOOK FOR EARNINGS PREDICTABILITY: [PASS] Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.37, 0.62, 0.76, 1.05, 1.43, 1.36, 1.47, 2.22, 2.62, 2.97. Buffett would consider SYNT's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 5 years ago. The dips have totaled 4.9%. SYNT's long term historical EPS growth rate is 19.3%, 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. SYNT has no long term debt and therefore would pass this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [PASS] Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for SYNT, over the last ten years, is 29.5%, 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 19.9%, 33.8%, 30.2%, 38.1%, 33.8%, 25.1%, 24.8%, 32.7%, 30.3%, 26.3%, and the average ROE over the last 3 years is 29.8%, 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 SYNT, over the last ten years, is 28.7% and the average ROTC over the past 3 years is 27.1%, 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 19.9%, 33.8%, 30.2%, 38.1%, 33.8%, 25.1%, 24.8%, 32.7%, 25.4%, 23.1%, thus passing this criterion. LOOK AT CAPITAL EXPENDITURES: [PASS] Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. SYNT's free cash flow per share of $2.55 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 $12.30 and compares it to the gain in EPS over the same period of $2.60. SYNT's management has proven it can earn shareholders a 21.1% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work. HAS THE COMPANY BEEN BUYING BACK SHARES: [NEUTRAL] Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. SYNT's shares outstanding have not fallen in either the current year or the last 3 or 5 years and so it fails this criterion. This is a bonus criterion and will not adversely affect the ability of a stock to pass the strategy as a whole if it is failed. The preceding concludes Buffett's qualitative analysis. If and when he gets positive responses to all the above criteria, he would then proceed with a price analysis. The price analysis will determine whether or not the stock should be bought. The following is how he would evaluate SYNT quantitatively. STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return. CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail] Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $2.96 and divide it by the current market price of $47.42. An investor, purchasing SYNT, could expect to receive a 6.24% 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 SYNT's initial yield of 6.24%, 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] SYNT currently has a book value of $13.03. It is safe to say that if SYNT can preserve its average rate of return on equity of 29.5% and continues to retain 78.32% of its earnings, it will be able to sustain an earnings growth rate of 23.1% and it will have a book value of $104.16 in ten years. If it can still earn 29.5% on equity in ten years, then expected EPS will be $30.73. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $30.73 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (16.0) (5 year average P/E in this case), which is 15.5 and you get SYNT's projected future stock price of $474.77. 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 $14.98. This gives you a total dollar amount of $489.75. These numbers indicate that one could expect to make a 26.3% average annual return on SYNT'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 $11.97. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (16.0) (5 year average P/E in this case), which is 15.5. This equals the future stock price of $185.01. Add in the total expected dividend pool of $14.98 to get a total dollar amount of $199.99. CALCULATE THE EXPECTED RETURN USING THE AVERAGE EPS GROWTH METHOD: [No Pass/Fail] Now you can figure out your expected return based on a current price of $47.42 and the future expected stock price, including the dividend pool, of $199.99. If you were to invest in SYNT at this time, you could expect a 15.48% 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 15.5% and 26.3%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 20.9% on SYNT stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   TESORO CORPORATION Profile Strategy: Contrarian Investor Based on: David Dreman Tesoro Corporation is an independent petroleum refining and marketing company. Through its subsidiaries, the Company primarily transports crude oil and manufactures, transports and sells transportation fuels. The Company operates through three business segments: Refining operating segment, which owns and perates six petroleum refineries with a combined crude oil capacity of 850 thousand barrels per day (Mbpd) located in the western United States and sells transportation fuels to a variety of customers; TLLP, a publicly traded limited partnership, which includes certain crude oil and natural gas gathering assets, natural gas processing and crude oil and refined products terminalling, transportation and storage assets, and Retail operating segment, which sells transportation fuels in approximately 16 states through a network of approximately 2,267 retail stations under the ARCO, Shell, Exxon, Mobil, USA Gasoline and Tesoro brands. Analysis Guru Score: 83% 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. TSO has a market cap of $13,699 million, therefore passing the test. EARNINGS TREND: [PASS] A company should show a rising trend in the reported earnings for the most recent quarters. TSO's EPS for the past 2 quarters, (from earliest to most recent quarter) 4.64, 6.13 have been increasing, and therefore the company passes this test. EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: [PASS] This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. TSO passes this test as its EPS growth rate over the past 6 months (437.71%) has beaten that of the S&P (1.73%). TSO's estimated EPS growth for the current year is (106.90%), which indicates the company is expected to experience positive earnings growth. As a result, TSO passes this test. This methodology would utilize four separate criteria to determine if TSO 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. TSO's P/E of 8.58, based on trailing 12 month earnings, meets the bottom 20% criterion (below 12.09), 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. TSO's P/CF of 5.53 meets the bottom 20% criterion (below 6.33) 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. TSO's P/B is currently 2.56, which does not meet the bottom 20% criterion (below 0.92), 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%). TSO's P/D of 56.82 does not meet the bottom 20% criterion (below 17.61), and it therefore fails this test. This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below. CURRENT RATIO: [PASS] A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.34] or greater than 2). This is one identifier of financially strong companies, according to this methodology. TSO's current ratio of 1.63 passes the test. PAYOUT RATIO: [FAIL] A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for TSO is 12.40%, while its historical payout ratio has been 10.27%. Therefore, it fails the payout criterion. 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 16.74%, and would consider anything over 27% to be staggering. The ROE for TSO of 33.33% 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. TSO's pre-tax profit margin is 8.96%, thus passing this criterion. YIELD: [FAIL] The company in question should have a yield that is high and that can be maintained or increased. TSO's current yield is 1.76%, while the market yield is 2.71%. TSO fails this test. LOOK AT THE TOTAL DEBT/EQUITY: [FAIL] The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20%. TSO's Total Debt/Equity of 70.60% is not acceptable.   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 14.0% 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 $105.04. An investor, purchasing PII, could expect to receive a 6.73% initial rate of return. Furthermore, he or she could expect the rate to increase 14.0% 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 6.73%, which will expand at an annual rate of 14.0%, 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 $14.29. 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 $174.12 in ten years. If it can still earn 42.1% on equity in ten years, then expected EPS will be $73.33. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $73.33 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 14.9 and you get PII's projected future stock price of $1,089.72. 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 $50.74. This gives you a total dollar amount of $1,140.46. These numbers indicate that one could expect to make a 26.9% 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 14.0%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $26.21. 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 14.9. This equals the future stock price of $389.48. Add in the total expected dividend pool of $50.74 to get a total dollar amount of $440.22. 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 $105.04 and the future expected stock price, including the dividend pool, of $440.22. If you were to invest in PII at this time, you could expect a 15.41% 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 15.4% and 26.9%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 21.2% on 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: P/E/Growth Investor Based on: Peter Lynch 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: 91% DETERMINE THE CLASSIFICATION: This methodology would consider AAPL a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (12.92) relative to the growth rate (23.54%), 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 AAPL (0.55) makes it 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. AAPL, whose sales are $233,715.0 million, needs to have a P/E below 40 to pass this criterion. AAPL's P/E of (12.92) 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 AAPL was 1.15% last year, while for this year it is 1.01%. Since inventory to sales has decreased from last year by -0.15%, AAPL passes this test. 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 AAPL is 23.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for AAPL (54.01%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for AAPL should be good enough to compensate. 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 AAPL (8.46%) 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 AAPL (-1.76%) 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 MPC MARATHON PETROLEUM CORP Oil & Gas Operations 71 FNBC FIRST NBC BANK HOLDING COMPANY Regional Banks 63 OUTR OUTERWALL INC Recreational Activities 63 FL FOOT LOCKER, INC. Retail (Apparel) 60 PLUS EPLUS INC. Software & Programming 56 VSI VITAMIN SHOPPE INC Retail (Grocery) 56 NSR NEUSTAR INC Communications Services 54 TREE LENDINGTREE INC Consumer Financial Services 54 WAL WESTERN ALLIANCE BANCORPORATION Regional Banks 52 HOMB HOME BANCSHARES INC Regional Banks 52

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