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Executive Summary	January 3, 2014

The Economy While uncertainty reigned for the economy at the start of 2013, the year ended on what seemed to be much more stable footing. After starting the year with an almost imperceptible expansion, for example, manufacturing activity was very strong in December, remaining right around its impressive November pace, according to the Institute for Supply Management. New orders, which were contracting slightly when the year started, edged higher in December and remain at an extremely strong level -- the highest in nearly four years -- a very good sign going forward. The housing market, meanwhile, showed some signs of leveling off, in the short term at least. New home sales fell slightly in November (by 2.1%), but remain up about 18% this year, according to the Census Bureau. The median sales price jumped about 5% to hit its highest level since April. Pending home sales inched up 0.2% in November, according to the National Association of Realtors. They were about 4% lower than they were in the same period a year earlier, however, in part a reflection of increasingly difficult-to-match year-ago comps as the housing recovery stretches on. The index is still well above where it stood in 2011 and 2010. Existing home sales fell 4.3% during the month, the Realtor group said, as rising mortgage rates and inventory constraints squeezed the market. They are 3.6% below year-ago levels. The mean sales price was 9.4% above November 2012's pace, however, and the amount of sales remains well above 2010 and 2011 levels. Personal income rose 0.2% in November after having fallen in October, the Commerce Department said. In real, after-inflation terms, disposable income inched higher by 0.1%. Consumers increased their spending more sharply than that though, as real personal consumption expenditures jumped 0.5%. After several months in which disposable income gains outpaced consumer spending increases, November marked the second straight month in which that trend reversed. Still, the personal savings rate was a healthy 4.2%. Overseas, Chinese manufacturing growth slowed slightly in December, according to a couple new reports. The sector did grow a bit, however; as it was throughout 2013, the growth (or lack thereof) in the Asian giant will be a big story in 2014. Since our last newsletter, the S&P 500 returned 1.2%, while the Hot List returned 2.1%. So far in a very young 2014, the portfolio has returned -1.2% vs. -0.9% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 259.5% vs. the S&P's 83.1% gain. Portfolio Update Following our final rebalancing of the year, the Hot List closed out 2013 in good form. Since our last newsletter, eight of the portfolio's 10 holdings were in the black (all performance figures as of about 1 p.m. on Thursday), and the solid recent performance helped the Hot List finish up 2013 with a 34.2% return, outpacing the S&P 500 (29.6% return) by a solid margin. It was the eighth time in 11 years that the portfolio has beaten the index, and its since-inception return through 2013 of 263.8% (13.1% annualized) more than tripled the S&P's 84.8% return (6.0% annualized) over that time. Since our last newsletter, the top performer has been HollyFrontier Corp., which gained nearly 5%. Alliance Fiber Optic Products, meanwhile, was up about 3.7%, and HCI Group was up about 2.7%. There frankly did not seem to be a lot of stock-specific catalysts for the portfolio over the past two weeks. It seemed, rather, that stocks were moving along with the broader market or their industries. These three gainers may have reaped more benefits than the broader market since all three have been bouncing back from some short-term dips. The fortnight's laggards were Lear Corporation and CNOOC, which were down 0.49% and 0.15%, respectively -- hardly alarming declines. As we head into 2014, the Hot List is finding a lot of value in the energy sector, with four of its holdings -- Lukoil, HollyFrontier, Chevron, and CNOOC -- coming from that part of the market. But it's also finding value in a number of other places, with its other six holdings each coming from a different sector. Overall, the portfolio's fundamentals are extremely strong. Its holdings on average have a trailing 12 month P/E ratio of 11.0; five-year earnings-per-share growth of nearly 24%; a decent 2.0% dividend yield, and a solid relative strength of 63. With those types of stocks, the portfolio should be well-positioned to continue to produce strong gains over the long term.		Editor-in-Chief: John Reese Since Inception   Hot List 259.5% S&P 500 83.1% Accuracy 56.9% Beta 1.2 YTD   Hot List -1.2% S&P 500 -0.9% Since Last Issue   Hot List 2.1% S&P 500 1.2% Avg. Fundamentals   Market Cap (mil) $44,384 PE Ratio 10.9 5 Yr EPS Growth 23.8% Yield 2.0% Rel. Strength 63 Portfolio Sectors Energy 4 Financial 1 Services 1 Technology 1 Capital Goods 1 Conglomerates 1 Consumer Cyclical 1
Have Your Portfolio Managed Using Validea's Investing System Many users know about our research services but are unaware that money management services based on our system are also offered through a separate registered investment advisory firm, Validea Capital Management. If you are thinking about switching advisors or no longer have the time or inclination to manage your investments yourself, find out more about Validea Capital, its portfolio offerings, and its performance below. Request an Investment Consultation Today! ** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. The information above is not intended as personal investment advice and should not be interpreted as such. Guru Spotlight: Joseph Piotroski If you haven't heard of Joseph Piotroski, you're not alone. He's probably the least well-known of the investment "gurus" who inspired my strategies. Actually, he's not even a professional investor, but instead an accountant and college professor. In 2000, however, Piotroski showed that you don't need to be a smooth-talking Wall Street hotshot to make it big in the market. While teaching at the University of Chicago, he authored a research paper that showed how assessing stocks with simple accounting-based methods could produce excellent returns over the long haul. No fancy formulas, no insider knowledge -- just a straightforward assessment of a company's balance sheet. His study turned quite a few heads on Wall Street. It focused on companies that had high book/market ratios -- i.e. the type of unpopular stocks whose book values (total assets minus total liabilities) were high compared to the value investors ascribed to them (their share price multiplied by their number of shares). These are stocks that have very low expectations. Quite often, such firms have low book/market ratios because they are in financial distress, and investors wisely stay away from them. On certain occasions, however, high book/market firms may be good companies that are being overlooked by investors for one reason or another. These firms can be great investment opportunities, because their stock prices will likely jump once Wall Street realizes it's been shunning a winner. Through his research, Piotroski developed a methodology to separate the solid but overlooked high book/market firms from high book/market ratio firms that were in financial distress. He found that this method, which included a number of balance-sheet-based criteria, increased the return of a high book/market investor's portfolio by at least 7.5 percentage points annually. In addition, he found that buying the high book/market firms that passed his strategy and shorting those that didn't would have produced an impressive 23% average annual return from 1976 and 1996. Since I started tracking it in late February 2004, a 10-stock portfolio picked using my Piotroski-based model has been my most volatile strategy. It has a beta of 1.35, meaning it has been 35% more volatile than the broader market. At times, it has been far ahead of the S&P 500, but right now it's coming off a tough stretch and is almost exactly in line with the index over the long haul. Since inception, it has returned 60.9% versus 61.2% for the S&P. It has lagged the index in each of the last three years, but I don't think that means it's time to quit on the strategy. Back in 2010, after a couple of mediocre years, the deep value approach roared back, gaining more than 55% -- quadrupling the S&P and more than doubling the gains of my next best individual guru portfolio. Volatility is to be expected from a deep value strategy that often focuses on small caps, so I really wouldn't be surprised if the Piotroski model puts up some big bounce-back numbers over the next couple years. Let's take a look at how Piotroski's approach, and the model I base on it, work. Diving into The Balance Sheet Piotroski wasn't the first to study high book/market stocks. But his research took things a step further than many past studies. He noted that the majority of high book/market stocks ended up being losers, and that the success of high book/market portfolios was usually dependent on the big gains of a small number of winners. Much as low price/earnings ratio investors like John Neff used a variety of tests to make sure low P/E stocks weren't rightfully being overlooked because of poor financials, Piotroski sought to separate the high book/market winners from the high book/market losers. The first step in this approach is, of course, to find high book/market ratio stocks. In his study, Piotroski focused on the stocks whose book/market ratios were in the top 20 percent of the market, so that's the figure I use. That's the easy part. The harder part is determining whether investors are avoiding a low-B/M stock because it is in financial trouble, or whether the company is a solid one that is simply being overlooked. The Piotroski-based model looks at a variety of factors to determine this, including return on assets and cash flow from operations, both of which should be positive. Piotroski also thought that good companies had cash from operations that was greater than net income. Such companies are making money because of their business -- not because of accounting changes, lawsuits, or other one-time gains. Several of Piotroski's other financial criteria don't necessarily look for fundamental excellence, but instead for improvement. This makes a lot of sense; a company whose return on assets had declined from 10 percent to 1 percent and whose cash flow from operations had dwindled from $10 million to $10,000 would pass the above ROA and cash flow tests, for example, but it certainly wouldn't be the type of strong performer Piotroski was targeting. Looking at how a company's fundamentals had been changing allowed him to not only get an idea of the firm's financial position, but also of whether that position was improving or declining. Among the other "change" criteria Piotroski examined were the long-term debt/assets ratio, which he wanted to be steady or declining; the current ratio (current assets/current liabilities), which he wanted to be steady or increasing; gross margin, which should be steady or rising; and asset turnover, which measures productivity by comparing how much sales a company is making in relation to the amount of assets it owns (That should be steady or increasing). As you can see, the Piotroski-based approach is a stringent one. Here are the stocks currently in its 10-stock portfolio. Keep in mind that some of these companies could see changes in their ratings soon because they haven't yet reported full-year 2013 results. LG Display Co. Ltd. (LPL) Benchmark Electronics (BHE) Xinyuan Real Estate Co. (XIN) Nam Tai Electronics (NTE) Fresh Del Monte Produce (FDP) Republic Airways Holdings (RJET) Dominion Diamond Corp. (DDC) Sears Hometown and Outlet Stores (SHOS) Companhia Paranaense de Energia (ELP) Orthofix International N.V. (OFIX) News about Validea Hot List Stocks HollyFrontier Corp. (HFC): A well being drilled at the firm's Cheyenne refinery will assess whether HollyFrontier will be able to dispose of selenium-tainted wastewater by injecting it deep underground, the Associated Press reported. HollyFrontier has been discharging wastewater into a small stream that flows into Colorado, but selenium levels have been measured to be several times higher than the state standard for surface water, AP reports. The selenium concentrations are below the level considered hazardous but too high for the creek. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will rebalance the portfolio. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score HCI HCI GROUP INC Insurance (Prop. & Casualty) 100 LUKOY LUKOIL (ADR) Oil & Gas - Integrated 90 LEA LEAR CORPORATION Auto & Truck Parts 58 HFC HOLLYFRONTIER CORP Oil & Gas Operations 58 AFOP ALLIANCE FIBER OPTIC PRODUCTS INC Semiconductors 55 CEO CNOOC LIMITED (ADR) Oil & Gas Operations 55 TJX THE TJX COMPANIES, INC. Retail (Apparel) 50 CVX CHEVRON CORPORATION Oil & Gas - Integrated 50 AGCO AGCO CORPORATION Constr. & Agric. Machinery 49 USNA USANA HEALTH SCIENCES, INC. Conglomerates 34 Ticker Market Cap Date Added Start Price Current Price Return HCI $595 6/7/2013 $34.20 $51.76 51.3% LUKOY $53,222 9/27/2013 $64.52 $62.10 -3.8% LEA $6,418 5/10/2013 $60.48 $79.53 31.5% HFC $9,901 4/12/2013 $46.83 $49.75 6.2% AFOP $274 12/20/2013 $15.10 $14.93 -1.1% CEO $82,856 12/20/2013 $185.20 $182.92 -1.2% TJX $45,147 12/20/2013 $62.49 $63.48 1.6% CVX $238,743 11/22/2013 $124.03 $124.14 0.1% AGCO $5,617 12/20/2013 $57.62 $57.69 0.1% USNA $1,067 12/21/2012 $33.83 $76.94 127.4%

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 HCI   |   LUKOY   |   LEA   |   HFC   |   AFOP   |   CEO   |   TJX   |   CVX   |   AGCO   |   USNA   |   HCI GROUP INC Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool HCI Group Inc, formerly Homeowners Choice, Inc., is a holding company. The Company, through its subsidiaries, is engaged in the property and casualty insurance business. Through Homeowners Choice Property & Casualty Insurance Company, Inc. (HCPC) and subsidiaries, primarily Homeowners Choice Managers, Inc. (HCM), Southern Administration, Inc., Claddaugh Casualty Insurance Company, Ltd., and its subsidiary, HCPCI Holdings LLC, it provides property and casualty homeowners' insurance, condominium-owners' insurance and tenants' insurance to individuals owning property in Florida. Its subsidiaries also include TV Investment Holdings LLC, which owns and operates a marina facility located in Florida; Unthink Technologies Private Limited. During the year ended December 31, 2011, it organized TV Investment Holdings LLC, HCI Holdings LLC and HCI Technical Resources, Inc. Analysis Guru Score: 100% 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. HCI's profit margin of 27.81% 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. HCI, with a relative strength of 90, satisfies this test. COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: [PASS] Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for HCI (318.52% for EPS, and 73.73% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] HCI's insiders should own at least 10% (they own 10.64% ) of the company's outstanding shares which is the minimum required. A high percentage typically indicates that the insiders are confident that the company will do well. CASH FLOW FROM OPERATIONS: [PASS] A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. HCI's free cash flow of $9.84 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] HCI's profit margin has been consistent or even increasing over the past three years (Current year: 18.50%, Last year: 10.62%, Two years ago: 7.90%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. R&D AS A PERCENTAGE OF SALES: [NEUTRAL] This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in HCI's case. CASH AND CASH EQUIVALENTS: [PASS] HCI's level of cash $230.2 million passes this criteria. If a company is a cash generator, like HCI, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. "THE FOOL RATIO" (P/E TO GROWTH): [PASS] The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (HCI's is 0.30), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. HCI passes this test. The following criteria for HCI are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] HCI has not been significantly increasing the number of shares outstanding within recent years which is a good sign. HCI currently has 11.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock. SALES: [PASS] Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. HCI's sales of $226.9 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". HCI passes the sales test. DAILY DOLLAR VOLUME: [PASS] HCI passes the Daily Dollar Volume (DDV of $10.4 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf." PRICE: [PASS] This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. HCI with a price of $51.76 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] HCI's income tax paid expressed as a percentage of pretax income this year was (39.17%) and last year (39.27%) 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.   LUKOIL (ADR) Profile Strategy: Patient Investor Based on: Warren Buffett NK Lukoil OAO (Neftyanaya Kompaniya LUKOIL OAO or NK LUKOIL OJSC) is a Russia-based integrated oil and gas company. The Company is engaged in the business of oil exploration, production, refining, marketing and distribution. It is an owner of refineries, gas processing, petrochemical plants and gas stations network located in Russia, Eastern and Western Europe, as well as Africa. The Company's petroleum products are sold in the Russian Federation, the Commonwealth of Independent States (CIS) countries, Eastern and Western Europe, Asia and the United States. NK Lukoil OAO operates through numerous subsidiaries and affiliated companies. In April 2013, the Company acquired a 100% of Samara-Nafta ZAO and completed acquisition of CJSC Kama-Oil. In June 2013, it sold a 99.57% stake in Lukoil Odes'kyi NPZ PAT. The Company's major shareholder is NKO ZAO NRD with a stake of 91.60%. Analysis Guru Score: 86% 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 0.02, 5.12, 7.79, 9.04, 11.48, 10.88, 8.28, 10.94, 13.04, 14.17. Buffett would consider LUKOY's earnings predictable, although earnings have declined 2 time(s) in the past seven years, with the most recent decline 4 years ago. The dips have totaled 29.1%. LUKOY's long term historical EPS growth rate is 10.2%, based on the average of the 3, 4 and 5 year historical eps growth rates. 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. LUKOY has a debt of 8,819.0 million and earnings of 10,530.3 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 LUKOY, over the last ten years, is 18.4%. Although he prefers ROE to be 15% or higher, this level is acceptable to Buffett. 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 20.0%, 20.0%, 24.0%, 22.7%, 23.0%, 18.3%, 12.5%, 14.4%, 14.9%, 14.6%, and the average ROE over the last 3 years is 14.7%, 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 LUKOY, over the last ten years, is 16.5% and the average ROTC over the past 3 years is 13.2%, 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 20.0%, 17.8%, 20.8%, 19.8%, 20.6%, 16.2%, 10.7%, 12.5%, 13.5%, 13.5%, 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. LUKOY's free cash flow per share of $4.65 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 $77.88 and compares it to the gain in EPS over the same period of $14.15. LUKOY's management has proven it can earn shareholders a 18.2% 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. LUKOY's shares outstanding have fallen over the past five years from 846,640,015 to 776,000,000, 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 LUKOY 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 $13.57 and divide it by the current market price of $62.10. An investor, purchasing LUKOY, could expect to receive a 21.85% initial rate of return. Furthermore, he or she could expect the rate to increase 10.2% per year, based on the average of the 3, 4 and 5 year historical eps growth rates, 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 2.75%. Compare this with LUKOY's initial yield of 21.85%, which will expand at an annual rate of 10.2%, based on the average of the 3, 4 and 5 year historical eps growth rates. 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] LUKOY currently has a book value of $103.50. It is safe to say that if LUKOY can preserve its average rate of return on equity of 14.7% and continues to retain 88.97% of its earnings, it will be able to sustain an earnings growth rate of 13.0% and it will have a book value of $352.70 in ten years. If it can still earn 14.7% on equity in ten years, then expected EPS will be $51.71. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $51.71 and multiply them by the lower of the 5 year average P/E ratio (4.7) or current P/E ratio (current P/E in this case), which is 4.6 and you get LUKOY's projected future stock price of $236.81. 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 $26.50. This gives you a total dollar amount of $263.31. These numbers indicate that one could expect to make a 15.5% average annual return on LUKOY'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 10.2%, based on the average of the 3, 4 and 5 year historical eps growth rates, you can project EPS in ten years to be $35.77. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (4.7) or current P/E ratio (current P/E in this case), which is 4.6. This equals the future stock price of $163.81. Add in the total expected dividend pool of $26.50 to get a total dollar amount of $190.31. 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 $62.10 and the future expected stock price, including the dividend pool, of $190.31. If you were to invest in LUKOY at this time, you could expect a 11.85% average annual return on your money. Buffett likes to see a 15% return, and would even go down to 12%. 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 11.9% and 15.5%. 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 13.7% on LUKOY stock for the next ten years, based on the current fundamentals. Buffett likes to see a 15% return, but nonetheless would accept this return, thus passing the criterion.   LEAR CORPORATION Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Lear Corporation is a tier 1 supplier to the global automotive industry. The Company supplies its products to automotive manufacturers with automotive seat systems and related components, as well as electrical distribution systems and related components. The Company has two segments: seating and electrical power management systems (EPMS). The seating segment includes seat systems and related components, such as seat frames, recliner mechanisms, seat tracks, seat trim covers, headrests and seat foam. The EPMS segment includes electrical distribution systems for traditional powertrain vehicles, as well as for hybrid and electric vehicles. As of December 31, 2011, it had 20 joint ventures located throughout Asia, as well as five in North America, two in Europe and Africa and one with operations in all three regions. 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. LEA's P/S of 0.41 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. LEA's Debt/Equity of 37.57% 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. LEA 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 LEA At this Point Is LEA 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.LEA's P/S ratio of 0.41 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%. LEA's inflation adjusted EPS growth rate of 23.39% 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. LEA's free cash per share of 2.17 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. LEA, whose three year net profit margin averages 5.43%, passes this evaluation.   HOLLYFRONTIER CORP Profile Strategy: P/E/Growth Investor Based on: Peter Lynch HollyFrontier Corporation (HollyFrontier), formerly Holly Corporation, is a petroleum refiner, which produces light products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. HollyFrontier operates in two segments: Refining and Holly Energy Partners, L.P. (HEP). The Refining segment includes the operations of its El Dorado, Tulsa, Navajo, Cheyenne and Woods Cross Refineries and NK Asphalt. The HEP segment involves all of the operations of HEP. As of December 31, 2011, it operated five refineries having a combined crude oil processing capacity of 443,000 barrels per day that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain regions of the United States. The Company merged with Frontier Oil Corporation (Frontier), on July 1, 2011. On November 9, 2011, HEP acquired from the Company certain tankage, loading rack and crude receiving assets located at its El Dorado and Cheyenne Refineries. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: This methodology would consider HFC a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (9.51) relative to the growth rate (209.46%), 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 HFC (0.05) 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. HFC, whose sales are $20,481.3 million, needs to have a P/E below 40 to pass this criterion. HFC's P/E of (9.51) 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 HFC was 7.22% last year, while for this year it is 6.57%. Since inventory to sales has decreased from last year by -0.65%, HFC passes this test. EPS GROWTH RATE: [FAIL] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for HFC is 209.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered too fast. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for HFC (16.20%) 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 HFC (6.53%) 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 HFC (13.95%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.   ALLIANCE FIBER OPTIC PRODUCTS INC Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool Alliance Fiber Optic Products Inc. (AFOP) designs, manufactures and markets a range of fiber optic components, and integrated modules incorporating these components, for communications equipment manufacturers and service providers. The Company offers a range of products, including interconnect devices that are used to connect optical fibers and components, couplers and splitters that are used to divide and combine optical power, and dense wavelength division multiplexing (DWDM) devices that separate and combine multiple specific wavelengths. The Company's optical passive products include wavelength division multiplexing (WDM), coarse wavelength division multiplexers (CWDM) and DWDM components and modules that utilize thin film filter technologies to separate optical signals, variable attenuators, optical switches and other optical devices utilizing micro optic lensing technology including integrated electro-optical modules incorporating these products. 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. AFOP's profit margin of 26.12% 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. AFOP, 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 AFOP (200.00% for EPS, and 86.20% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] AFOP's insiders should own at least 10% (they own 34.12% ) of the company's outstanding shares which is the minimum required. A high percentage typically indicates that the insiders are confident that the company will do well. CASH FLOW FROM OPERATIONS: [FAIL] 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. AFOP's free cash flow of $-0.17 per share fails this test. PROFIT MARGIN CONSISTENCY: [FAIL] The profit margin in the past must be consistently increasing. The profit margin of AFOP has been inconsistent in the past three years (Current year: 20.68%, Last year: 10.54%, Two years ago: 13.23%), 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: [FAIL] AFOP has reduced their R&D expenditures(currently $3.3 million) over the past two years which is unacceptable. AFOP is jeopardizing the future in order to boost current EPS numbers. This criterion is particularly important for high-tech and medical stocks because they are so R&D dependant. CASH AND CASH EQUIVALENTS: [PASS] AFOP's level of cash $33.3 million passes this criteria. If a company is a cash generator, like AFOP, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. INVENTORY TO SALES: [PASS] This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for AFOP was 16.09% last year, while for this year it is 14.87%. Since the inventory to sales is decreasing by -1.22% the stock passes this criterion. ACCOUNT RECEIVABLE TO SALES: [PASS] This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for AFOP was 15.78% last year, while for this year it is 17.27%. Although the AR to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive. LONG TERM DEBT/EQUITY RATIO: [PASS] AFOP's trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don't need to borrow money in order to grow. "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 (AFOP's is 0.35), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. AFOP passes this test. The following criteria for AFOP are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] AFOP has not been significantly increasing the number of shares outstanding within recent years which is a good sign. AFOP currently has 19.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock. SALES: [PASS] Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. AFOP's sales of $66.4 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". AFOP passes the sales test. DAILY DOLLAR VOLUME: [PASS] AFOP passes the Daily Dollar Volume (DDV of $11.6 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. AFOP with a price of $14.93 passes the price test. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions. INCOME TAX PERCENTAGE: [FAIL] AFOP's income tax paid expressed as a percentage of pretax income either this year (-49.23%) or last year (-1.37%) is below 20% which is cause for concern. Because the tax rate is below 20% this could mean that the earnings that were reported are unrealistically inflated due to the lower level of income tax paid. However, we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%).   CNOOC LIMITED (ADR) Profile Strategy: P/E/Growth Investor Based on: Peter Lynch CNOOC Limited is an investment holding company. The Company, along with its subsidiaries, is a producer of offshore crude oil and natural gas and an independent oil and gas exploration and production company. Its subsidiaries are engaged in exploration, development, production and sales of oil and natural gas. It has three segments: independent operations, operations under joint arrangement and trading business. The Company has four producing areas in offshore China, which include the Bohai Bay, Western South China Sea, Eastern South China Sea and East China Sea. It also has oil and gas assets in Indonesia, Iraq, Australia, Africa, North America and South America. As of December 31, 2012, its subsidiaries included CNOOC China Limited, CNOOC International Limited, China Offshore Oil (Singapore) International Pte Ltd and others. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: CEO is considered a "True Stalwart", according to this methodology, as its earnings growth of 16.99% lies within a moderate 10%-19% range and its annual sales of $44,358 million are greater than the multi billion dollar level. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. CEO is attractive if CEO can hold its own during a recession. INVENTORY TO SALES: [PASS] When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for CEO was 1.82% last year, while for this year it is 2.12%. 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 (0.30%) is below 5%. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for CEO (0.36), 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. CEO's EPS ($24.43) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for CEO (39.47%) to be normal (equity is approximately twice debt). 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 CEO (4.56%) 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 CEO (-12.51%) 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.   THE TJX COMPANIES, INC. Profile Strategy: Patient Investor Based on: Warren Buffett The TJX Companies, Inc. (TJX) is the off-price apparel and home fashions retailer in the United States and worldwide. As of January 28, 2012, the Company operated in four business segments. It has two segments in the United States, Marmaxx (T.J. Maxx and Marshalls) and HomeGoods; one in Canada, TJX Canada (Winners, Marshalls and HomeSense) and one in Europe, TJX Europe (T.K. Maxx and HomeSense). As a result of the consolidation of the A.J. Wright chain, all A.J. Wright stores ceased operations by the end of February 2011. It completed the consolidation of A.J. Wright, converting 90 of the A.J. Wright stores to T.J. Maxx, Marshalls or HomeGoods banners and closed the remaining 72 stores, two distribution centers and home office. In December 2012, the Company acquired Sierra Trading Post, an off-price Internet retailer. 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, 0.60, 0.71, 0.82, 0.84, 1.04, 1.42, 1.65, 1.93, 2.55. Buffett would consider TJX's earnings predictable. In fact EPS have increased every year. TJX's long term historical EPS growth rate is 17.0%, based on the 10 year average EPS growth rate, and it is expected to grow earnings 11.1% 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. TJX has a debt of 1,274.2 million and earnings of 2,143.0 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 TJX, over the last ten years, is 37.5%, 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 36.9%, 33.2%, 34.4%, 32.7%, 33.8%, 40.2%, 40.2%, 41.4%, 45.0%, 50.4%, and the average ROE over the last 3 years is 45.6%, 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 TJX, over the last ten years, is 29.9% and the average ROTC over the past 3 years is 36.9%, which is high enough to pass. It is not enough that the average be at least 12%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROTC must be at least 9% for Buffett to feel comfortable that the ROTC is consistent. The ROTC for the last 10 years, from earliest to latest, is 25.5%, 24.7%, 24.1%, 24.2%, 24.1%, 34.1%, 31.6%, 33.0%, 36.2%, 41.6%, thus passing this criterion. LOOK AT CAPITAL EXPENDITURES: [PASS] Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. TJX's free cash flow per share of $2.33 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 $9.98 and compares it to the gain in EPS over the same period of $1.98. TJX's management has proven it can earn shareholders a 19.8% 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. TJX's shares outstanding have fallen over the past five years from 825,640,015 to 724,000,000, 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 TJX 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 $63.48. An investor, purchasing TJX, could expect to receive a 4.66% initial rate of return. Furthermore, he or she could expect the rate to increase 11.1% 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 2.75%. Compare this with TJX's initial yield of 4.66%, which will expand at an annual rate of 11.1%, 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] TJX currently has a book value of $5.80. It is safe to say that if TJX can preserve its average rate of return on equity of 37.5% and continues to retain 82.52% of its earnings, it will be able to sustain an earnings growth rate of 31.0% and it will have a book value of $86.13 in ten years. If it can still earn 37.5% on equity in ten years, then expected EPS will be $32.33. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $32.33 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (21.5) (5 year average P/E in this case), which is 15.3 and you get TJX's projected future stock price of $494.99. 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 $9.66. This gives you a total dollar amount of $504.65. These numbers indicate that one could expect to make a 23.0% average annual return on TJX'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 11.1%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $8.49. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (21.5) (5 year average P/E in this case), which is 15.3. This equals the future stock price of $129.96. Add in the total expected dividend pool of $9.66 to get a total dollar amount of $139.62. 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 $63.48 and the future expected stock price, including the dividend pool, of $139.62. If you were to invest in TJX at this time, you could expect a 8.20% average annual return on your money. Buffett likes to see a 15% return, and would even go down to 12%. 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 8.2% and 23.0%. 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 15.6% on TJX stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   CHEVRON CORPORATION Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Chevron Corporation (Chevron) manages its investments in subsidiaries and affiliates and provides administrative, financial, management and technology support to the United States and international subsidiaries that engage in fully integrated petroleum operations, chemicals operations, mining activities, power generation and energy services. Upstream operations consist primarily of exploring for, developing and producing crude oil and natural gas; processing, transportation and regasification associated with liquefied natural gas; transporting crude oil by international oil export pipelines; transporting, storage and marketing of natural gas, and a gas-to-liquids project. Downstream operations consist primarily of refining crude oil into petroleum products; transporting crude oil and refined products by pipeline, marine vessel, motor equipment and rail car, and manufacturing and marketing of commodity petrochemicals, plastics for industrial uses and fuel and lubricant additives. 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. CVX's P/S ratio of 1.05 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. CVX's Debt/Equity of 12.83% 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. CVX 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 CVX At this Point Is CVX 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, CVX, who has a P/S of 1.05, 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: [FAIL] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. CVX's inflation adjusted EPS growth rate of 13.73% fails 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. CVX's free cash per share of 0.52 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. CVX, whose three year net profit margin averages 10.34%, passes this evaluation.   AGCO CORPORATION Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher AGCO Corporation (AGCO) is a manufacturer and distributor of agricultural equipment and related replacement parts globally. The Company sells a range of agricultural equipment, including tractors, combines, self-propelled sprayers, hay tools, forage equipment and implements. It also manufactures and distributes grain storage and handling equipment systems, as well as protein production systems. Its products are recognized in the agricultural equipment industry and are marketed under a range of brands, including Challenger, Fendt, Massey Ferguson and Valtra. The Company distributes its products through a combination of approximately 3,100 independent dealers and distributors in more than 140 countries. In September 2013, Grain Systems, Inc. (GSI), a global brand of the Company announced that it has purchased Johnson System Inc. (JSI), manufacturer of catwalks, towers and support structures based in Marshall, Michigan. Analysis Guru Score: 100% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Smokestack (cyclical) companies with a Price/Sales ratio between .4 and .8 represent good values according to this methodology. AGCOpasses this test as its P/S of 0.53 based on trailing 12 month sales, falls within the "good values" range for cyclical companies. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. AGCO's Debt/Equity of 33.69% 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. AGCO 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 AGCO At this Point Is AGCO a "Super Stock"? YES PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-Smokestack(non-cyclical) companies with a Price/Sales ratio between .75 and 1.5 are good values. Otherwise, Smokestack(cyclical) companies with a Price/Sales ratio between .4 and .8 represent good values. AGCO's P/S ratio of 0.53 falls within the "good values " range for cyclical industries and is considered attractive. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. AGCO's inflation adjusted EPS growth rate of 23.82% 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. AGCO's free cash per share of 3.30 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. AGCO, whose three year net profit margin averages 5.03%, passes this evaluation.   USANA HEALTH SCIENCES, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool USANA Health Sciences, Inc. develops and manufactures science-based nutritional and personal care products. The Company has operations in 15 markets worldwide, where it distributes and sells its products by way of direct selling. The Company reports operations in two geographic regions: North America and Asia Pacific, which is further divided into three sub-regions; Southeast Asia/Pacific, Greater China, and North Asia. North America includes the United States, Canada, Mexico, and direct sales from the United States to the United Kingdom and the Netherlands. Southeast Asia/Pacific includes Australia, New Zealand, Singapore, Malaysia, and the Philippines; Greater China includes Hong Kong, Taiwan and China; and North Asia includes Japan and South Korea. The Company's customer base consists of two types of customers: Associates and Preferred Customers. As of December 31, 2011, the Company had 222,000 active Associates and 64,000 active Preferred Customers worldwide. 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. USNA's profit margin of 11.02% 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. USNA, with a relative strength of 90, satisfies this test. COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: [FAIL] 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 USNA (-1.69% for EPS, and 5.15% for Sales) are not good enough to pass. INSIDER HOLDINGS: [PASS] USNA's insiders should own at least 10% (they own 52.77% ) of the company's outstanding shares which is extremely attractive since the minimum requirement is 10%. A high percentage indicates that the insiders are confident that the company will do well. CASH FLOW FROM OPERATIONS: [PASS] A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. USNA's free cash flow of $5.65 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] USNA's profit margin has been consistent or even increasing over the past three years (Current year: 10.24%, Last year: 8.72%, Two years ago: 8.82%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. R&D AS A PERCENTAGE OF SALES: [NEUTRAL] This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in USNA's case. CASH AND CASH EQUIVALENTS: [FAIL] USNA's level of cash and cash equivalents per sales, 10.11 %, does not pass this criteria of roughly 20%(a number we determined to be appropriate based on various examples). USNA will have a more difficult time paying off debt (if it has any) or acquiring other companies than a company that passes this criteria. INVENTORY TO SALES: [PASS] This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for USNA was 6.35% last year, while for this year it is 5.62%. Since the inventory to sales is decreasing by -0.73% the stock passes this criterion. ACCOUNT RECEIVABLE TO SALES: [PASS] This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for USNA was 1.65% last year, while for this year it is 2.17%. Although the AR to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive. LONG TERM DEBT/EQUITY RATIO: [PASS] USNA's trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don't need to borrow money in order to grow. "THE FOOL RATIO" (P/E TO GROWTH): [FAIL] The "Fool Ratio" is an extremely important aspect of this analysis. The methodology says consider holding the shares when the company's Fool Ratio is greater than 0.65 (USNA's is 0.68), but initial purchases in this range are unfavorable. The following criteria for USNA are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] USNA has not been significantly increasing the number of shares outstanding within recent years which is a good sign. USNA currently has 14.0 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. USNA's sales of $700.4 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] USNA passes the Daily Dollar Volume (DDV of $6.2 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. USNA with a price of $76.94 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] USNA's income tax paid expressed as a percentage of pretax income this year was (32.50%) and last year (34.50%) 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.   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 BBBY BED BATH & BEYOND INC. Retail (Specialty) 59 VFC VF CORP Apparel/Accessories 56 WRLD WORLD ACCEPTANCE CORP. Consumer Financial Services 52 BOFI BOFI HOLDING, INC. S&Ls/Savings Banks 52 WDR WADDELL & REED FINANCIAL, INC. Investment Services 46 BVN COMPANIA DE MINAS BUENAVENTURA SAA Gold & Silver 45 NUS NU SKIN ENTERPRISES, INC. Personal & Household Prods. 43 SAVE SPIRIT AIRLINES INCORPORATED Airline 42 HIBB HIBBETT SPORTS, INC. Retail (Specialty) 41 BPI BRIDGEPOINT EDUCATION INC Schools 41

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