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Executive Summary	March 19, 2010

The Economy The economy keeps plugging along, continuing to show signs that the recovery is for real and that the Great Recession is in the rearview mirror. Over the past fortnight, we've even seen some signs that the job market -- perhaps the most significant piece of the recovery puzzle yet to begin to fall into place -- is finally coming around. New claims for unemployment fell for the third straight week, according to a government report, and the Philadelphia Federal Reserve reported that its manufacturing index rose for the seventh straight month, largely due to improvements in its employment indicators. The group said the number of firms adding jobs outpaced the number of firms cutting jobs for the fourth straight month. Overall, unemployment remains high, with the most recent figures showing that the unemployment rate held steady at 9.7% in February. But Gray & Christmas CEO John Challenger, whose firm conducts one of the more well known employment surveys, recently pointed out evidence indicating that that figure may be on the verge of substantial improvement. Challenger told Yahoo! TechTicker that we've had five straight months of "very light" layoffs, during a period (the fourth and first quarters) when layoffs are usually at higher levels. And employers have been steadily increasing the number of temporary employees they're hiring since September, he says; such increases are usually a leading indicator for permanent job growth. Challenger thinks we'll see more consistent job growth, and decreases in the unemployment rate, in the second half of 2010. Elsewhere, data continues to show that the economy is stabilizing. The Commerce Department announced last week that retail sales -- which analysts had expected to decrease -- increased 0.3% in February. It was the second straight month they've risen, a sign that consumers aren't being as tight with their wallets as some had expected. Industrial production also increased once again in February, though at a pace of just 0.1%, the Federal Reserve reported. That's a minor increase, but it still marked the eighth straight monthly increase -- and the gain came despite the fact that winter storms in the northeast likely held down production, according to the Fed. Capacity usage also rose for the eighth straight month. Two of the big economic issues still involve the government. First, there's the issue of interest rates, which the Federal Reserve has been keeping extremely low, something that has likely been a major factor in the big stock market rally over the past year. What will happen when the Fed does raise rates remains to be seen, but inflation data released this week indicates that it may yet be a while before we find out. According to the Labor Department, the Consumer Price Index remained steady in February, and increased just 0.1% when food and energy prices, which tend to be volatile, were excluded. Wholesale prices fell 0.6%, meanwhile, as gas prices dropped. All of that means that inflation isn't yet rearing its head, which means the Fed will likely continue its low interest rate policy for some time. The other key government-related issue involves the stimulus and bailout plans -- more specifically, what will happen when those training wheels are fully removed from the economy. No one knows for sure what the answer to that question is, but the continued growth in manufacturing, productivity, and other areas of the economy are good signs. With the economic news continuing to lean to the positive side, the market has climbed over the past two weeks. The S&P 500 rose 3.8% since our last newsletter, while the Hot List is up 3.5%. The portfolio is now up 8.0% for the year vs. 4.5% for the S&P. Since its inception in July 2003, the Hot List has gained 160.3%, while the S&P is up 16.5%. Shine Wears off of a Jeweler While the Hot List had another strong fortnight and remains well ahead of the S&P for the year, one of its holdings had a dreadful performance this week that bears mentioning. Chinese jeweler FUQI International saw its stock plunge more than 37% Wednesday, after it announced that accounting mistakes had resulted in it overstating earnings for the first three quarters of 2009. (It also announced disappointing fourth-quarter results, which didn't help.) The sharp decline triggered the Hot List's stop-loss rule, something that has happened very rarely throughout the portfolio's history. The stop-loss isn't set at one specific number, but instead is a function of the performance of a stock relative to the S&P 500. In periods where the market is up, like the period we are in now, our stop losses are tightened. During periods when the market is down, they are eased. We do this to ensure that stocks are removed due to their own individual problems and not something that is affecting the market as a whole. When a stock hits the stop-loss threshold, it is removed from the portfolio the next rebalancing, which is the case with FUQI today. While such losses are never enjoyable, they do present a good opportunity to stress proper diversification. As you probably know, the Hot List is a fairly concentrated portfolio, but it still has enough holdings to cope with a big loss in one position, like the one FUQI sustained this week. Indeed, despite the FUQI loss, the Hot List still gained ground for the fortnight because FUQI's loss was dispersed over the broader portfolio, whose other holdings fared well. It's also worth noting that the Hot List notched a 64.1% gain on Fuqi in 2009, so while FUQI's earnings revisions hurt the portfolio, the initially reported earnings had given the portfolio a big boost. Overall, last year's big gain and the big loss from earlier this week just about bring the stock's impact on the portfolio to zero since the start of 2009. A (Re-)Balancing Act This week, in addition to selling FUQI, the Hot List is cutting ties with five of its other holdings. Most have enjoyed solid performance, with Dresser-Rand, Oil States International, and NewMarket Corporation all up in the 15%-25% range (as of yesterday afternoon), GameStop in positive territory, and Telefonica slightly in the red. The six newcomers come from a variety of industries, including Aerospace & Defense (Raytheon); Retail Apparel (Jos. A. Bank Clothiers); Healthcare Facilities (Amedisys); Drugs (Sanofi-Aventis); Financial Services (Ares Capital); and Security Systems & Services (Brink's). Because the portfolio is changing more than half of its holdings, I thought it would be a good time to touch on the importance of rebalancing. In a recent Hot List, I talked about some studies that showed the virtues of rebalancing in terms of asset allocation -- i.e., periodically returning the amount of stocks, bonds, or any other asset you hold back to pre-determined target weights within a multi-asset portfolio. For the Hot List, the rebalancing is of a different sort, since the portfolio is composed of only one asset. In this case, we're talking about rebalancing stocks to 1.) ensure that the portfolio includes only the stocks that best meet an underlying quantitative strategy, and 2.) bring them back to target weights in an all-equity portfolio. As you might imagine, there's not a lot of research on this type of rebalancing, since the results can vary depending on the underlying strategy you are using. But we've compiled a good amount of our own research on the topic after nearly seven years of running our model portfolios. What we've found is that, generally, a monthly rebalancing works best for our portfolios, particularly for the consensus-based Hot List. Using simple averages, the 14 ten-stock portfolios we track on Validea.com (12 individual guru portfolios, the Hot List, and our Top 5 Gurus portfolio) have returned an average of 9.79% per year since inception when rebalanced monthly (note: our "monthly" rebalancings are actually every 28 days). When rebalanced quarterly, the returns have been slightly lower, averaging 9.16% per year. And when rebalanced annually, the difference is much larger, with the average return being 6.04% per year. (All those figures, and those that follow, are through Wednesday.) For our 20-stock portfolios, it's been a similar story. The monthly rebalanced portfolios have averaged 9.17% per year; the quarterly rebalanced versions have returned 9.06%; and the annually rebalanced portfolios have returned 5.19%. For the Hot List, a 10-stock, monthly rebalancing approach -- what we use for our newsletter tracking -- has been particularly kind. It's resulted in 15.4% annualized returns for the portfolio since inception, compared to 11.9% for a quarterly rebalancing approach, and 9.7% for an annual rebalancing. For the 20-stock version of the Hot List, the monthly rebalancing has led to 13.4% annualized returns, while the quarterly and annual figures have been 10.7% and 9.1%, respectively. Interestingly, the other consensus-based portfolio we track, the Top 5 Gurus portfolio (which picks an equal number of stocks using the five individual Guru Strategies with the best track records) has also had the most success with a monthly, 10-stock approach. That's resulted in an annualized return of 14.2%, doubling its quarterly rebalanced cousin and easily beating its annually rebalanced version (11.7%). The results for the Top 5 Gurus 20-stock portfolio, meanwhile, ranged from 5.6% to 9.9% for the different rebalancing periods. Pick It -- and Stick with It Now, the important question: What do all of those numbers mean for your portfolio? Do they mean you should definitely use a monthly rebalancing period? Not necessarily. While I think there's value in examining the numbers I laid out above, it's important to realize that they cover a period of about six-and-a-half years, so there's certainly the chance that they could shift over longer periods. In addition, different strategies may fare better with different rebalancing periods, and some of the gurus I follow even use different rebalancing periods. (Joel Greenblatt, for example, recommends an annual approach.) Even within my models, there's wide variation in terms of what has been most successful. For example, while the Hot List clearly has performed best with a 10-stock, monthly rebalancing approach, my Joseph Piotroski-inspired model has generated annualized returns of more than 10% using an annual rebalancing and 20-stock portfolio, but only 3.7% per year when using a 10-stock, monthly rebalancing approach. Some of these types of differences may be due to chance; some may be due to the specifics of the strategy. There are other factors to consider, too. Transaction costs, tax implications, and even the simple issue of the time you have available to put into your rebalancing efforts can be key issues. So, what's the bottom line, then? To me, the key is picking a rebalancing period -- whatever it may be -- and sticking with it. A regularly scheduled rebalancing period of any length (within reason) helps you do something that most investors can't do if left to their own devices: keep emotion out of buy and sell decisions. We humans are emotional creatures, and as such we're prone to a number of cognitive biases when it comes to stock investing. I've mentioned many of them -- hindsight bias, anchoring, over-optimism -- in past Hot Lists, and they will wreak havoc on your portfolio. By following a disciplined rebalancing system of whatever length you choose, however, you keep those biases and your emotions at bay -- and as an investor, there may be no more important task. You buy and sell when your approach says it's time to buy or sell -- not when you read about a hot stock, or when your neighbor gives you a tip on a "sure thing", or when you get a feeling that the broader market is about to turn up or down. I believe that that sort of disciplined buying and selling at regular intervals has been a big reason that the Hot List has performed so well over the long haul, and I think it's an attribute of our system that will help us continue to outperform in years to come.		Editor-in-Chief: John Reese Since Inception   Hot List 160.3% S&P 500 16.5% Accuracy 57.1% Beta 1.2 YTD   Hot List 8.0% S&P 500 4.5% Since Last Issue   Hot List 3.5% S&P 500 3.8% Avg. Fundamentals   Market Cap (mil) $13,908 PE Ratio 11.6 5 Yr EPS Growth 33.4% Yield 3.6% Rel. Strength 52 Portfolio Sectors Services 4 Capital Goods 3 Healthcare 2 Financial 1
Advertisement Validea Capital Management - Private Portfolio Management Based on Strategies of Legends Are you looking for an alternative to your underperforming mutual funds or financial advisor? Click here to download Validea Capital's investment kit and learn more about the firm's guru-based portfolios. Get More Information on Validea Capital! ** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. Thre information above in not intended as personal investment advice and should not be interpreted as such. The Fallen As we rebalance the Validea Hot List, 6 stocks leave our portfolio. These include: Telefonica S.a. (Adr) (TEF), Oil States International, Inc. (OIS), Newmarket Corporation (NEU), Dresser-rand Group Inc. (DRC), Gamestop Corp. (GME) and Fuqi International, Inc. (FUQI). The Keepers 4 stocks remain in the portfolio. They are: Itt Educational Services, Inc. (ESI), Triumph Group, Inc. (TGI), Emcor Group, Inc. (EME) and Aeropostale, Inc. (ARO). The Newbies We are adding 6 stocks to the portfolio. These include: Amedisys, Inc. (AMED), Jos. A. Bank Clothiers, Inc. (JOSB), Raytheon Company (RTN), Sanofi-aventis Sa (Adr) (SNY), The Brink's Company (BCO) and Ares Capital Corporation (ARCC). Portfolio Changes Additions   AMEDISYS, INC. AMED JOS. A. BANK CLOTHIERS, INC. JOSB RAYTHEON COMPANY RTN SANOFI-AVENTIS SA (ADR) SNY THE BRINK'S COMPANY BCO ARES CAPITAL CORPORATION ARCC Deletions   TELEFONICA S.A. (ADR) TEF OIL STATES INTERNATIONAL, INC. OIS NEWMARKET CORPORATION NEU DRESSER-RAND GROUP INC. DRC GAMESTOP CORP. GME FUQI INTERNATIONAL, INC. FUQI Newcomers to the Validea Hot List Ares Capital Corporation (ARCC): Based in New York, Ares is a closed-end, non-diversified specialty finance company that focuses on underserved financing needs of private middle market companies across a variety industries. Its portfolio was valued at about $2.2 billion at the end of 2009, and was invested in 95 companies and backed by 67 private equity sponsors. About a third of its portfolio involves first lien senior debt, and substantial portions are invested in mezzanine and high-yield areas, second lien senior debt, and equity holdings. Ares, which has a $1.85 billion market cap, currently gets some interest from an interesting trio of my strategies: my Martin Zweig-based Growth Investor model, my David Dreman-inspired Contrarian Investor approach, and my Peter Lynch-based P/E/Growth Investor model. To see why, check out the "Detailed Stock Analysis" section below. Jos. A. Bank Clothiers (JOSB): Based in Hampstead, Maryland, this prior Hot List favorite is once again catching the portfolio's eye. The 100-plus-year-old retailer sells a variety of men's tailored, casual, and sports clothing, as well as shoes and accessories such as hats and belts. The small-cap ($900 million market cap), has more than 475 stores across the U.S. Bank, which gained 78.2% while in the Hot List from Feb. 20 to Oct. 2 of 2009, gets strong interest from my James O'Shaughnessy growth model and my Peter Lynch-based strategy. To see why they like Bank, see the "Detailed Stock Analysis" section below. Amedisys, Inc. (AMED): This Baton Rouge-based home healthcare and hospice services provider owned and operated 521 Medicare-certified home health agencies and 65 Medicare-certified hospice agencies as of the end of 2009, with operations in 40 states, the District of Columbia and Puerto Rico. It has a $1.7 billion market cap. Amedisys is a favorite of my Joel Greenblatt- and James O'Shaughnessy-based models. The "Detailed Stock Analysis" section below explains why. Raytheon Company (RTN): This Massachusetts-based aerospace & defense firm provides state-of-the-art electronics, products, and services in a variety of areas, including integrated defense systems, missile systems, space and airborne systems, and intelligence and information systems. It also provides a variety of mission support services. It has a market cap of about $21.5 billion, and has taken in more than $24 billion in sales in the past year. Raytheon, which gained 14% while in the Hot List for a one-month stint last fall, gets approval from my Joel Greenblatt-, Peter Lynch- and James O'Shaughnessy-based models. The "Detailed Stock Analysis" section below explains why. Sanofi-Aventis SA (SNY): Headquartered in Paris with operations in more than 100 countries, Sanofi makes a wide array of drugs, including Allegra (allergies), Ambien CR (a prescription sleeping aid), and Plavix (used to prevent blood clots). The $103 billion market cap firm has taken in more than $42 billion in sales in the past year. Sanofi-Aventis gets strong interest from my Benjamin Graham-, Peter Lynch-, and James O'Shaughnessy-based models. To see why, check out the "Detailed Stock Analysis" section below. The Brink's Company (BCO): This Virginia-based security firm operates in over 50 countries around the globe. Known for its armored car transportation services, it also provides ATM servicing, currency and coin processing, and other value-added services to banks, retailers and other businesses and governmental agencies. Brink's, which has a $1.3 billion market cap and has taken in more than twice that in sales in the past year, gets approval from my Peter Lynch- and Kenneth Fisher-based models. The "Detailed Stock Analysis" section below explains why. News about Validea Hot List Stocks EMCOR Group, Inc. (EME): Fortune magazine has named EMCOR the 2009 World's Most Admired Company in the Engineering and Construction Industry, the second straight year EMCOR has been given the honor. The rankings are based on survey scores involving factors like Innovation, People Management, Use of Corporate Assets, Social Responsibility, Quality of Management, Long-Term Investment, and Quality of Service. Fuqi International, Inc. (FUQI): On March 16, Fuqi announced that it had found accounting errors that caused it to overstate profit for the first nine months of 2009, and that revenue and profit came in below the company's expectations in the fourth quarter. The firm said an internal investigation found that its cost of sales was understated in 2009's first three quarters, causing the company to overstate the $1.66 in earnings per share it had reported for that period by an estimated $0.15 to $0.19, the Associated Press reported. FUQI is delaying the filing of its annual report because of the mistakes. The worse-than-expected fourth-quarter results were due to customers buying cheaper products, the company said. Profit was between $0.24 and $0.28 per share for the quarter, as opposed to the previous forecast of $0.55 to $0.60, AP reported. Shares of FUQI fell more than 37% Tuesday. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will take an in-depth look at one of my individual guru-based strategies. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score RTN RAYTHEON COMPANY Aerospace & Defense 76 ARO AEROPOSTALE, INC. Retail (Apparel) 71 JOSB JOS. A. BANK CLOTHIERS, INC. Retail (Apparel) 69 EME EMCOR GROUP, INC. Construction Services 63 AMED AMEDISYS, INC. Healthcare Facilities 56 SNY SANOFI-AVENTIS SA (ADR) Biotechnology & Drugs 52 TGI TRIUMPH GROUP, INC. Aerospace & Defense 51 ARCC ARES CAPITAL CORPORATION Misc. Financial Services 50 ESI ITT EDUCATIONAL SERVICES, INC. Schools 49 BCO THE BRINK'S COMPANY Security Systems & Services 48 Ticker Market Cap Date Added Start Price Current Price Return RTN $21,547 3/19/2010 TBD $56.84 TBD ARO $2,831 11/27/2009 $20.99 $28.57 36.1% JOSB $904 3/19/2010 TBD $49.39 TBD EME $1,721 1/22/2010 $24.55 $25.99 5.9% AMED $1,704 3/19/2010 TBD $60.27 TBD SNY $102,077 3/19/2010 TBD $38.71 TBD TGI $1,009 2/19/2010 $51.74 $60.56 17.0% ARCC $1,843 3/19/2010 TBD $13.87 TBD ESI $4,124 10/30/2009 $90.35 $116.31 28.7% BCO $1,322 3/19/2010 TBD $27.61 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 RTN   |   ARO   |   JOSB   |   EME   |   AMED   |   SNY   |   TGI   |   ARCC   |   ESI   |   BCO   |   RAYTHEON COMPANY Profile Strategy: Value Investor Based on: Benjamin Graham Raytheon Company, together with its subsidiaries, develops products, services and solutions in defense markets; sensing, effects, command, control, communications and intelligence (C3I), and mission support, as well as the cybersecurity and homeland security markets. The Company serves both domestic and international customers, principally as a prime contractor on a portfolio of defense and related programs for government customers. It operates in six business segments Integrated Defense Systems (IDS), Intelligence and Information Systems (IIS), Missile Systems (MS), Network Centric Systems (NCS), Space and Airborne Systems (SAS) and Technical Services (TS). In October 2009, the Company acquired BBN Technologies Corp. and related entities. Analysis Guru Score: 71% SECTOR: [PASS] RTN 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. RTN's sales of $24,881.0 million, based on trailing 12 month sales, pass this test. CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. RTN's current ratio of 1.42 fails 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 RTN is $2,329.0 million, while the net current assets are $2,345.0 million. RTN passes this test. LONG-TERM EPS GROWTH: [PASS] 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. Companies with this type of growth tend to be financially secure and have proven themselves over time. RTN's EPS growth over that period of 337.2% passes the EPS growth test. 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. RTN's P/E of 13.50 (using the 3 year PE) passes this test. PRICE/BOOK RATIO: [FAIL] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. RTN's Price/Book ratio is 2.19, while the P/E is 13.50. RTN fails the Price/Book test.   AEROPOSTALE, INC. Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Aeropostale, Inc. is a mall-based specialty retailer of casual apparel and accessories. The Company designs, markets and sells its own brand of merchandise principally targeting 14 to 17 year-old young women and young men. The Company also sells Aeropostale merchandise through its e-commerce Website, www.aeropostale.com. As of January 31, 2009, it operated 914 stores, consisting of 874 Aeropostale stores in 48 states and Puerto Rico, 29 Aeropostale stores in Canada, and 11 Jimmy'Z stores in 10 states. The Company locates its stores primarily in shopping malls, outlet centers and, to a much lesser degree, lifestyle and off-mall shopping centers. The Company has developed a new retail store concept called P.S. from Aeropostale, which will offer casual clothing and accessories focusing on elementary school children between the ages of seven and 12. It offers a focused collection of apparel, including graphic t-shirts, tops, bottoms, sweaters, jeans, outerwear and accessories. Analysis Guru Score: 80% 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. ARO's P/S ratio of 1.27 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. ARO's Debt/Equity of 0.00% is exceptional, 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. ARO 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 ARO At this Point Is ARO 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, ARO, who has a P/S of 1.27, 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%. ARO's inflation adjusted EPS growth rate of 31.28% passes the test. FREE CASH PER SHARE: [FAIL] 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. ARO's free cash per share of -504,565.31 fails 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. ARO, whose three year net profit margin averages 8.78%, passes this evaluation.   JOS. A. BANK CLOTHIERS, INC. Profile Strategy: Growth Investor Based on: Martin Zweig Jos. A. Bank Clothiers, Inc. (Jos. A. Bank) is a designer, retailer and direct marketer (through stores, catalog and Internet) of men's tailored and casual clothing and accessories. It sells all of its products exclusively under the Jos. A. Bank label through its 460 retail stores (as of January 31, 2009, which includes seven outlet stores and 12 franchise stores) located throughout 42 states and the District of Columbia in the United States, as well as through the Company's nationwide catalog and Internet (www.josbank.com) operations. Its products are targeted at the male career professional and emphasize the Jos. A. Bank brand of tailored and casual clothing and accessories. The Company's products, which range from the original Jos. A. Bank Executive collection to the more luxurious Jos. A. Bank Signature collection to the exclusive Jos. A. Bank Signature Gold collection. Jos. A. Bank operates through two segments: Stores and Direct Marketing. Analysis Guru Score: 85% P/E RATIO: [PASS] The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. JOSB's P/E is 13.82, based on trailing 12 month earnings, while the current market PE is 22.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [FAIL] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. JOSB's revenue growth is 16.51%, while it's earnings growth rate is 22.61%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, JOSB fails this criterion. SALES GROWTH RATE: [FAIL] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (8.1%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (9.8%) of the current year. Sales growth for the prior must be greater than the latter. For JOSB this criterion has not been met and fails this test. The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria. CURRENT QUARTER EARNINGS: [PASS] The first of these criteria is that the current EPS be positive. JOSB's EPS ($0.63) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. JOSB's EPS for this quarter last year ($0.50) pass this test. POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: [PASS] The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. JOSB's growth rate of 26.00% passes this test. EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: [PASS] Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for JOSB is 11.30%. This should be less than the growth rates for the 3 previous quarters, which are 14.58%, 16.98%, and 41.67%. JOSB passes this test, which means that it has good, reasonably steady earnings. This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: [PASS] If the growth rate of the prior three quarter's earnings, 20.41%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 26.00%, (versus the same quarter one year ago) then the stock passes. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: [PASS] The EPS growth rate for the current quarter, 26.00% must be greater than or equal to the historical growth which is 22.61%. JOSB would therefore pass this test. EARNINGS PERSISTENCE: [PASS] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. JOSB, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.38, 1.96, 2.36, 2.72 and 3.17, passes this test. LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. JOSB's long-term growth rate of 22.61%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. TOTAL DEBT/EQUITY RATIO: [PASS] A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. JOSB's Debt/Equity (0.00%) is not considered high relative to its industry (36.84%) and passes this test. INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For JOSB, this criterion has not been met (insider sell transactions are 1, while insiders buying number 0). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.   EMCOR GROUP, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch EMCOR Group, Inc. is an electrical and mechanical construction and facilities services company. It has six segments: United States electrical construction and facilities services, which involves systems for electrical power transmission and distribution, premises electrical and lighting systems, low-voltage systems, such as fire alarm, security and process control, voice and data communication, and fiber optic lines); United States mechanical construction and facilities services, which involves systems for heating, ventilation, air conditioning, refrigeration and clean-room process ventilation, fire protection, plumbing, process and high-purity piping, water and wastewater treatment, and central plant heating and cooling; United States facilities services; Canada construction and facilities services; United Kingdom construction and facilities services, and other international construction and facilities services. In February 2010, the Company acquired Scalise Industries. Analysis Guru Score: 100% DETERMINE THE CLASSIFICATION: This methodology would consider EME a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (10.90) relative to the growth rate (27.87%), 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 EME (0.39) 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. EME, whose sales are $5,547.9 million, needs to have a P/E below 40 to pass this criterion. EME's P/E of (10.90) 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 EME was 2.36% last year, while for this year it is 2.24%. Since inventory to sales has decreased from last year by -0.11%, EME 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 EME is 27.9%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for EME (16.04%) 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 EME (19.12%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [BONUS PASS] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for EME (32.63%) is high enough to add to the attractiveness of this company.   AMEDISYS, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Amedisys, Inc. (Amedisys) is a provider of home health services to the chronic, co-morbid, aging American population. The Company operates in two segments: home health and hospice segments. The Company's home health agencies deliver a range of services in the homes of individuals who may be recovering from surgery, have a chronic disease or disability or terminal illness and need assistance with the essential activities of daily living. Its typical home health patient is Medicare eligible, approximately 83 years old, takes approximately 12 different medications on a daily basis and has co-morbidities. Its hospice agencies provide palliative care and comfort to terminally ill patients and their families. As of December 31, 2009, it owned and operated 521 Medicare-certified home health agencies and 65 Medicare-certified hospice agencies in 40 states within the United States, the District of Columbia and Puerto Rico. Analysis Guru Score: 100% MARKET CAP: [PASS] The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. AMED, with a market cap of $1,704 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. AMED, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.41, 1.72, 2.48, 3.22 and 4.89, passes this test. PRICE/SALES RATIO: [PASS] The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. AMED's Price/Sales ratio of 1.13, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [PASS] The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. AMED, whose relative strength is 70, is in the top 50 and would pass this last criterion.   SANOFI-AVENTIS SA (ADR) Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Sanofi-Aventis is a pharmaceutical group engaged in the research, development, manufacture and marketing of healthcare products. The Company's business includes two main activities: pharmaceuticals and human vaccines through sanofi pasteur. The Company is also present in animal health products through Merial Limited (Merial). In its pharmaceutical activity, the Company specializes in six therapeutic areas: diabetes, oncology, thrombosis and cardiovascular, central nervous system (CNS), and internal medicine. The global portfolio of sanofi-aventis also consists of a range of other pharmaceutical products in Consumer Health Care (CHC) and other prescription drugs, including generics. It offers vaccines in five areas: pediatric combination vaccines, influenza vaccines, adult and adolescent booster vaccines, meningitis vaccines and travel and endemic vaccines. Analysis Guru Score: 100% MARKET CAP: [PASS] The Cornerstone Value Strategy looks for large, well known companies whose market cap is greater than $1 billion. These companies exhibit solid and stable earnings. SNY's market cap of $102,077 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 ($0.81). SNY's cash flow per share of $4.24 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 (647 million shares). These are the more well known and highly traded companies. SNY, who has 2,614 million shares outstanding, passes this test. TRAILING 12 MONTH SALES: [PASS] A company's trailing 12 month sales ($41,825 million) are required to be 1.5 times greater than the mean of the market's trailing 12 month sales ($16,329 million). SNY passes this test. DIVIDEND: [PASS] The final step in the Cornerstone Value strategy is to select the 50 companies from the market leaders group (those that have passed the previous four criteria) that have the highest dividend yield. SNY, with a dividend yield of 4.20%, is one of the 50 companies that satisfy this last criterion.   TRIUMPH GROUP, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Triumph Group, Inc. (Triumph) designs, engineers, manufactures, repairs, overhauls and distributes aircraft components, such as hydraulic, mechanical and electromechanical control systems, aircraft and engine accessories, structural components and assemblies, non-structural composite components, auxiliary power units (APUs), avionics and aircraft instruments. The Company offers a variety of products and services to the aerospace industry through two groups of operating businesses: Triumph Aerospace Systems Group and Triumph Aftermarket Services Group. In March 2009, it acquired Merritt Tool Company, Inc., Saygrove Defence & Aerospace Group Limited, the aviation segment of Kongsberg Automotive Holdings ASA and The Mexmil Company, LLC. In March 2010, the Company announced the acquisition of Fabritech, Inc., a component manufacturer and repair station for critical military rotary-wing platforms. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider TGI a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (11.98) relative to the growth rate (39.86%), 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 TGI (0.30) 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. TGI, whose sales are $1,254.0 million, needs to have a P/E below 40 to pass this criterion. TGI's P/E of (11.98) 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 TGI was 30.49% last year, while for this year it is 31.39%. 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 (0.90%) 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 TGI is 39.9%, 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 TGI (60.68%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for TGI 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 TGI (8.65%) 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 TGI (-38.89%) 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.   ARES CAPITAL CORPORATION Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Ares Capital Corporation (Ares Capital) is a specialty finance company, which is a closed-end, non-diversified management investment company. Ares Capital's investment objective is to generate both current income and capital appreciation through debt and equity investments. It invests in United States middle-market companies. It invests primarily in first and second lien senior loans and mezzanine debt, which in some cases includes an equity component like warrants. First and second lien senior loans generally are senior debt instruments that rank ahead of subordinated debt of a given portfolio company. Its investments have ranged between $10 million and $100 million each, although the investment sizes may be more or less than the targeted range. The Company's investment adviser is Ares Capital Management LLC. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: ARCC is considered a "Stalwart", according to this methodology, for its earnings growth of 19.24%. This is based on based on the average of the 3, 4 and 5 year historical eps growth rates, which lies within a moderate 10%-19% range. 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. However, ARCC is not considered a "True Stalwart" for its sales of $245 million are less than the multi-billion dollar level. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for ARCC (0.24), based on the average of the 3, 4 and 5 year historical eps growth rates, is excellent. EARNINGS PER SHARE: [PASS] The EPS for a stalwart company must be positive. ARCC's EPS ($2.00) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] ARCC 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. ARCC's Equity/Assets ratio (54.00%) 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. ARCC's ROA (9.20%) is above the minimum 1% that this methodology looks for, thus passing the criterion. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for ARCC (-12.55%) 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 ARCC (6.69%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.   ITT EDUCATIONAL SERVICES, INC. Profile Strategy: Patient Investor Based on: Warren Buffett ITT Educational Services, Inc. (ITT/ESI) is a provider of postsecondary degree programs in the United States. As of December 31, 2009, the Company offered master, bachelor and associate degree programs to approximately 80,000 students. As of December 31, 2009, it had 125 locations (including 121 campuses and four learning sites) in 38 states. All of its institutions are authorized by the applicable education authorities of the states, in which they operate, and are accredited by an accrediting commission recognized by the United States Department of Education (ED). It designs its education programs, after consultation with employers and other constituents, to help graduates prepare for careers in various fields involving their areas of study. On June 10, 2009, it acquired Daniel Webster College (DWC). DWC offers programs of study at the master, bachelor and associate degree levels both in residence and through distance education. Analysis Guru Score: 100% STAGE 1: "Is this a Buffett type company?" A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage. LOOK FOR EARNINGS PREDICTABILITY: [PASS] Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.57, 0.70, 0.94, 1.27, 1.61, 2.33, 2.72, 3.72, 5.14, 7.91. Buffett would consider ESI's earnings predictable. In fact EPS have increased every year. ESI's long term historical EPS growth rate is 32.3%, based on the 10 year average EPS growth rate, and it is expected to grow earnings 17.1% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers. LOOK AT THE ABILITY TO PAY OFF DEBT [PASS] Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. ESI has a debt of 150.0 million and earnings of 289.3 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 ESI, over the last ten years, is 39.3%, 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 41.3%, 41.4%, 47.5%, 39.6%, 31.5%, 34.5%, 107.2%, 209.5%, 114.4%, 179.2%, and the average ROE over the last 3 years is 167.7%, 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 ESI, over the last ten years, is 49.9% and the average ROTC over the past 3 years is 73.3%, 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 41.3%, 41.4%, 47.5%, 39.6%, 31.5%, 34.5%, 43.9%, 67.0%, 61.4%, 91.5%, 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. ESI's free cash flow per share of $7.20 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 $26.91 and compares it to the gain in EPS over the same period of $7.34. ESI's management has proven it can earn shareholders a 27.3% 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. ESI's shares outstanding have fallen over the past five years from 45,689,999 to 37,000,000, 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 ESI 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 $7.82 and divide it by the current market price of $116.31. An investor, purchasing ESI, could expect to receive a 6.72% initial rate of return. Furthermore, he or she could expect the rate to increase 17.1% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 4.60%. Compare this with ESI's initial yield of 6.72%, which will expand at an annual rate of 17.1%, based on the analysts' consensus estimated long term growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding. CALCULATE THE FUTURE EPS: [No Pass/Fail] ESI currently has a book value of $4.42. It is safe to say that if ESI can preserve its average rate of return on equity of 39.3% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 39.3% and it will have a book value of $121.25 in ten years. If it can still earn 39.3% on equity in ten years, then expected EPS will be $47.61. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $47.61 and multiply them by the lower of the 5 year average P/E ratio (18.4) or current P/E ratio (current P/E in this case), which is 14.9 and you get ESI's projected future stock price of $708.49. CALCULATE THE EXPECTED RATE OF RETURN BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now add in the total expected dividend pool to be paid over the next ten years, which is $0.00. This gives you a total dollar amount of $708.49. These numbers indicate that one could expect to make a 19.8% average annual return on ESI's stock at the present time. Buffett would consider this a great return. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 17.1%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $37.85. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (18.4) or current P/E ratio (current P/E in this case), which is 14.9. This equals the future stock price of $563.17. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $563.17. 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 $116.31 and the future expected stock price, including the dividend pool, of $563.17. If you were to invest in ESI at this time, you could expect a 17.1% 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 17.1% and 19.8%. 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 18.4% on ESI stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   THE BRINK'S COMPANY Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy The Brink's Company (Brink's) is a provider of secure transportation, cash logistics and other security-related services to banks and financial institutions, retailers, government agencies, mints, jewelers and other commercial operations worldwide. The Company's international network serves customers in more than 50 countries and employs approximately 59,400 people. Its operations include approximately 875 facilities and 10,500 vehicles. 71% of its revenues are from outside North America. The Company has two segments: International and North America. International operations has three regions: Europe, Middle East and Africa (EMEA); Latin America, and Asia Pacific. North American operations include 181 branches in the United States and 52 branches in Canada. Brink's EMEA operates 258 branches in 22 countries. Its main operations are in France, the Netherlands and Germany. The Company's other security services include security and guarding. 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. BCO, with a market cap of $1,322 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. BCO, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.90, 1.05, 1.67, 2.82 and 4.12, 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. BCO's Price/Sales ratio of 0.42, 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. BCO has a relative strength of 25. 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.   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 GRMN GARMIN LTD. Communications Equipment 58 ESV ENSCO INTERNATIONAL PLC Oil Well Services & Equipment 51 NOV NATIONAL-OILWELL VARCO, INC. Oil Well Services & Equipment 51 TDW TIDEWATER INC. Water Transportation 51 LLY ELI LILLY & CO. Major Drugs 49 APOL APOLLO GROUP, INC. Schools 49 FSYS FUEL SYSTEMS SOLUTIONS, INC. Auto & Truck Parts 47 PHH PHH CORPORATION Consumer Financial Services 44 GME GAMESTOP CORP. Retail (Technology) 44 CBI CHICAGO BRIDGE & IRON COMPANY N.V. Construction Services 43

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