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Executive Summary	July 20, 2012

The Economy The economy continues to offer a very mixed bag, with a sluggish job market and consumer pullback being offset by signs of strength in a couple other key areas. One of the bright spots comes from the industrial sector. Industrial production increased 0.7% in June (vs. May), according to a new report from the Federal Reserve (here and below all comparisons of successive weeks/months are seasonally adjusted; comparisons to year-ago periods are unadjusted). The gain came despite a decline of nearly 2% in utility output, which tends to be the most volatile of the three industry groups that make up the sector. The other two groups did more than pick up the slack, however, with manufacturing output increasing 0.7% -- reversing a 0.7% decline from the previous month -- and mining output also increasing 0.7%. The other area of the economy offering good news was the housing market. Housing starts rose nearly 7% in June versus May, according to new data from the Commerce Department. The annualized figure of 760,000 starts represented the highest level seen since the fall of 2008. Housing starts are now about 25% above their year-ago level. Permit issuance for new housing fell, however, by 3.7% versus May, but is about 15% above year-ago levels. That, combined with the latest U.S. home price data, which showed that prices moved upward in April for the first time in several months, means we're continuing to see signs that the housing sector may at long last be ready to take part in the economic recovery that began in mid-2009. If that is indeed what is happening, it comes at a good time. That's because U.S. consumers continue to pull back. Retail and food service sales declined in June, falling 0.5% vs. May, according to the Commerce Department. It was the third straight month that the figure has dropped, after nearly a year straight of monthly gains. Sales remain about 3.6% above their year-ago level, though the year-over-year increases have been shrinking rather rapidly in recent months. The consumer pullback very likely has a lot to do with the jobs market, which remains soft. Since our last newsletter, new claims for unemployment have risen by about 2.7%, while continuing claims have stayed pretty much flat%. What's interesting to note, however, is that using unadjusted numbers, new claims were just 3.6% lower in the most recent week than they were in the corresponding week a year ago, a much lower spread than we've seen in recent months. That could just be an aberration. But given some of the questions that have arisen recently regarding the way the government makes seasonal adjustments to its data, most notably those raised by the highly regarded Economic Cycle Research Institute, it's something to keep an eye on. On the macro front, the debt crisis news coming out of Europe has slowed over the past couple weeks, as policymakers try to hammer out the details of some of their recent compromises. Hopefully the relative quiet is a sign of the most contentious and potentially dangerous phase of the crisis has ended, though, to be sure, much work still needs to be done. Taking center stage in Europe's absence has been Ben Bernanke and talk of another round of quantitative easing by the Federal Reserve. So far, the Fed has seemed hesitant to implement such a plan, and frankly that may be a good thing, considering the diminishing returns we've seen on the Fed's previous easing efforts. Since our last newsletter, the S&P 500 returned 0.6%, while the Hot List returned -4.0%. So far in 2012, the portfolio has returned 9.5% vs. 9.4% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 147.6% vs. the S&P's 37.6% gain. Are We in a Recession? As job growth, retail sales, and even (according to some reports) manufacturing activity have slowed in recent months, some notable strategists, including Lakshman Achuthan, who heads the ECRI, and fund manager John Hussman, have suggested that we have entered a new recession. To be sure, the economy has slowed since the first quarter. But have we entered a new recession? Morningstar Director of Economic Analysis Robert Johnson recently provided some interesting data indicating that, while growth isn't gangbusters, we haven't fallen into recession. Johnson notes that, while many people think of a recession as simply being two quarters of negative growth, the official determination is made based on four factors: industrial production, retail sales adjusted for inflation, personal income less transfer payments (unemployment, disability, Social Security) adjusted for inflation, and employment. For each of the past 13 months, he looked at how the three-month average in each of those four categories compared to the same period a year earlier -- and how it compared to the levels in December 2007, when the U.S. entered the Great Recession. What did the data show? Well, Johnson found that industrial production is actually increasing at a more rapid pace than it was a year ago, posting 4.9% growth as of June 1 vs. 3.6% a year earlier. (You should be aware that the June data uses Morningstar's estimates.) That 4.9% pace is nearly twice the 2.5% growth we were seeing heading into the Great Recession. As for job growth, it was increasing at a 1.4% pace through June 1, ahead of the 1.0% rate from a year earlier. In December 2007, it was at 0.9%. Retail sales, meanwhile, have been trending downward and were increasing at a 3.4% pace as of June 1, vs. 4.5% a year earlier. But they are well ahead of the December 2007 start-of-recession pace, which was a meager 0.2%. Only personal income is very close to the Great Recession starting level; it was at 1.7% entering the Great Recession, and was at 1.8% as of June 1 (vs. 2.7% a year earlier). But it has also been rising for three straight months since falling to 1.0% earlier this year. A key part of the analysis for a couple of those categories seems to involve inflation, something that many pundits don't look at when examining such numbers. That's something to keep in mind when looking at the consumer-related figures -- it's about real purchasing power, not a simple headline number. "Most of the metrics are currently improving after hitting lower growth rates earlier in 2012. Only retail sales are in a clear downward trend, and that is largely because of falling gasoline prices, which is actually a good thing for the economy," Johnson writes. "It certainly doesn't seem like we are about to fall into a recession, especially with falling prices and an improving housing market. In addition, at the end of 2007, inflation peaked at 4.6%, helping to push us into a recession; it is now a much more subdued 2.2% and still improving." "Cliff" Notes Of course, this certainly doesn't mean all's well with the economy. As I noted above, retail sales growth has been falling fairly quickly, and personal income and job growth are far from stellar. But a big factor behind the consumer pullback and tough labor market seems to be the uncertainty surrounding the U.S.'s "fiscal cliff" -- that is, the fact that a number of tax cuts are set to expire at the end of 2012, and a number of major automatic budget cuts are set to go into effect as a result of Congress' inability to reach a deficit deal last year. The "cliff" seems to be having a big impact on businesses -- or, perhaps more accurately, the uncertainty surrounding what will happen is having a big impact. A recent Investment News article titled "Uncertainty Scarier than Precipice Itself" looked at how the uncertainty is leading to a sort of paralysis among many companies, and investors. Unsure whether Congress will finally do something to extend the tax breaks -- which include taxing dividend income at just 15% rather than as normal income -- many are choosing to stand pat and wait for the ground rules to be laid out. In fact, Charles Schwab's Liz Ann Sonders, whose economic calls over the past several years have been very good (she was one of the few who called both the start and end of the Great Recession), told Investment News that the uncertainty over the fiscal cliff is holding back both hiring and the stock market. "It is probably having the biggest impact on business psychology right now," she said. "We're seeing that the business is there, but business leaders are hesitant. That's been one of the main reasons for the slowdown in hiring." She added, "The market's poised for rallies, but you'd be crazy to play them aggressively at this point. We're in kind of a dead zone for the near term." The key phrase there, I think, is "the business is there". Sure, it's disturbing that Congress has allowed partisan bickering to get in the way of real deficit solutions. But it seems that a big part of the hiring slowdown and accompanying consumer pullback is due to the lack of a plan -- any plan -- from Congress on how to address the deficit and tax cut issues. And that, believe it or not, is probably a better problem to have than a lack of demand. We don't necessarily need a plan that will miraculously solve all of our budgetary problems -- it's highly doubtful that such a plan exists. What is needed is simply clarity as to what the rules of the game are. Once those are known, we may well see a hiring pick-up as businesses are able to better plan for the future. And while a chunk of the labor market and consumer slowdown are related to the short-term lack or clarity, signs continue to emerge that a big long-term driver of growth is waking from its long slumber: the housing market. As I noted earlier, housing starts reached a nearly-four-year high last month, though the pace remains relatively slow. Prices have also started to move upward a bit, and homebuilder confidence is at five-year highs, according to the National Association of Home Builders/Wells Fargo Housing Market Index. In addition, while existing-home sales fell in June, according to the National Association of Realtors, inventory also fell, continuing a recent trend. Total housing inventory for existing homes fell to a 6.6-month supply, NAR said, down sharply from a 9.1-month supply at the same time last year. The group said the number of seriously delinquent mortgages has been falling, too, and short sales and foreclosures are down some 30% from a year ago. All of this is helping boost home prices, and indicating that the glut of homes creating during the housing bubble is getting worked off. The housing sector has been largely absent from the economic recovery, but the stage may well be getting set for it to begin adding significantly to growth. So, getting back to the original question, given all of this, are we in a new recession? A slowing expansion? A standstill economy? In the end, it doesn't really matter how you spin the semantics. The bottom line is that the economy has cooled in recent months, but that a decent amount of the cooling is the result of the lack of short-term regulatory clarity. There are no doubt a myriad of issues the U.S. and world economies have to work through. But with just a bit of help from legisRobotors -- again, clarity (not a perfect plan) is what is needed -- we may find that economically things aren't as bad as many are making them out to be. From an investment point of view, that makes this an intriguing time. Short-term fears about the fiscal cliff are having sort of a double-impact on equities: Not only are they creating a general climate of fear that keeps prices of many stocks down, but they are also creating uncertainty among businesses that seems to be impacting hiring and growth numbers -- and many investors may be mistaking those weak numbers for broader, deeper problems, further depressesing stock prices. At the same time, some positive longer-term forces like housing are improving. To me, this combination of short-term fear, low expectations, and fundamentals that may not be as bad as they seem make this an attractive climate to be investing in stocks.		Editor-in-Chief: John Reese Since Inception   Hot List 147.6% S&P 500 37.6% Accuracy 56.2% Beta 1.2 YTD   Hot List 9.5% S&P 500 9.4% Since Last Issue   Hot List -4.0% S&P 500 0.6% Avg. Fundamentals   Market Cap (mil) $7,272 PE Ratio 20.4 5 Yr EPS Growth 27.5% Yield 0.5% Rel. Strength 80 Portfolio Sectors Services 5 Technology 1 Capital Goods 1 Consumer Cyclical 1 Financial 1 Healthcare 1
Advertisement Validea Capital Management - Private Portfolio Management Based on Strategies of Legends Are you looking for an alternative to your underperforming mutual funds or financial advisor? Click here to download Validea Capital's investment kit and learn more about the firm's guru-based portfolios. Get More Information on Validea Capital! ** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. Thre information above in not intended as personal investment advice and should not be interpreted as such. Guru Spotlight: Benjamin Graham Today, many investors look to Warren Buffett for advice about the stock market and the economy. But before he became one of the world's richest men and greatest investors, there was someone whose investment advice Buffett himself cherished: Benjamin Graham. And Buffett was far from alone. Known as "The Father of Value Investing", Graham inspired a number of famous "sons" -- Mario Gabelli, John Neff, John Templeton, and, most famously, Buffett, are all Graham disciples who went on to their own stock market greatness. So, just who was Graham? Born in England in 1894 as Benjamin Grossbaum (his family later changed its surname to Graham during World War I, when German names were viewed with suspicion), Graham built his reputation -- and fortune -- by using an extremely conservative, low-risk approach to investing. To him, preserving one's original capital was every bit as important as netting big gains, and two factors from his early years may show why. The first was Graham's own family's fall from financial comfort to poverty not long after his father died when he was nine. The second involved his first major business venture, an investment firm he founded with Jerome Newman. Just three years after opening, the stock market crash of 1929 and the Great Depression arrived. Graham's clients, like just about everyone else, were hit hard, according to Graham biographer Janet Lowe, and Graham worked without compensation for five years until his clients' fortunes were fully restored. Having lived through both his own family's financial troubles and the market crash, it's no surprise that the strategy Graham laid out in his classic book The Intelligent Investor was a conservative, loss-averse approach. To Graham, an investment wasn't something that could be turned into quick, easy profits; anything that offers such "easy" rewards also comes with substantial risk, and Graham abhorred risk. True "investment", he wrote, deals with the future "more as a hazard to be guarded against than as a source of profit through prophecy." In terms of specifics, Graham's "Defensive Investor" approach limited risk in a number of ways, and my Graham-based model lays out several of those methods. For example, one key criterion is that a firm's current ratio -- that is, the ratio of its current assets to its current liabilities -- is at least two, showing that the firm is in good financial shape. The approach also targets financially sound firms by requiring that long-term debt not exceed net current assets. Two other criteria the Graham method uses to find low-risk plays: the price/earnings ratio and the price/book ratio. Graham wanted P/E ratios to be no greater than 15 (and, as another signal of his conservative style, he looked not only at trailing 12-month earnings but also at three-year average earnings, to ensure that one-year anomalies didn't skew the P/E ratio). For the price/book ratio, he used a more unusual standard: He believed that the P/E ratio multiplied by the P/B ratio should be no greater than 22. My Graham-inspired strategy tends to find bargains across a variety of areas of the market. Here are the current holdings of the 10-stock Graham portfolio: Forest Laboratories, Inc. (FRX) Curtiss-Wright Corp. (CW) Helmerich & Payne, Inc. (HP) NTT DoCoMo, Inc. (DCM) United Stationers Inc. (USTR) GameStop Corp. (GME) General Dynamics Corporation (GD) USANA Health Sciences, Inc. (USNA) DeVry, Inc. (DV) Walgreen Company (WAG) Two types of stocks that you won't find in the Graham portfolio are technology and financial firms. Graham excluded tech stocks from his holdings because they were too risky, and, while they're not as risky today, I do the same. Financial stocks, meanwhile, aren't explicitly excluded from my Graham model. But because of the low-debt requirements in this strategy, it's nearly impossible for a financial firm to garner approval. Since I started tracking my Guru Strategies more than nine years ago, the performance of my Graham-based model has been rather remarkable. Even though the strategy Graham outlined is now more than 60 years old, it just keeps on working. Through July17, the 10-stock Graham-based portfolio was up 179.2% since its July 2003 inception, making it my second-best performer. That's a 12.1% annualized return in a period in which the S&P 500 has gained just 3.5% per year. The model's strict balance sheet criteria helped it avoid big losers in 2008, as the portfolio lost less than half of what the broader market lost, and it rebounded big in 2009 and 2010, gaining 31.4% in '09 and 22.6% in '10. In 2011, it had its worst year, however, falling 19.0% while the broader market was flat. It's rebounded nicely in 2012, though, having risen 10.7% vs. 8.4% for the S&P, indicating that last year was an aberration. It's also worth noting that the 20-stock Graham-based portfolio I track has been even better. In fact, it's the best performer of any of my 10- or 20-stock portfolios, having returned 259.7% since its July 2003 inception -- that's 15.3% per year. The Graham portfolios' long-term results are a great demonstration of how successful stock investing doesn't need to be incredibly complex or cutting-edge. You don't need fancy theories or gimmicks; you just need to focus on good companies whose stocks are selling at good values. Do that, and you should produce some strong results of your own. News about Validea Hot List Stocks Apollo Group Inc. (APOL): Apollo Group agreed to sell U.K.-based college prep school Mander Portman Woodward Ltd. to MPW Holdco Ltd. for $85.3 million, according to the Phoenix Business Journal. Apollo said the sale reflects its strategy to focus on the post-secondary education market, and said it expects the deal will add a gain of about $25 million during its fourth quarter of 2012. Northrop Grumman Corp. (NOC): Grumman has been awarded a $782 million sole source contract from the Air Force to continue operating an airborne communications relay system in Afghanistan through September 2015, Nextgov.com recently reported. The move lifts the project's total value to $1.7 billion. 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 TJX THE TJX COMPANIES, INC. Retail (Apparel) 93 CSTR COINSTAR, INC. Recreational Activities 70 SWI SOLARWINDS INC Software & Programming 65 LKQ LKQ CORPORATION Auto & Truck Parts 65 ASPS ALTISOURCE PORTFOLIO SOLUTIONS S.A. Consumer Financial Services 64 APOL APOLLO GROUP INC Schools 63 TSCO TRACTOR SUPPLY COMPANY Retail (Home Improvement) 42 STMP STAMPS.COM INC. Retail (Catalog & Mail Order) 38 NOC NORTHROP GRUMMAN CORPORATION Aerospace & Defense 29 MWIV MWI VETERINARY SUPPLY, INC. Medical Equipment & Supplies 9 Ticker Market Cap Date Added Start Price Current Price Return TJX $33,328 3/16/2012 $37.91 $44.98 18.6% CSTR $1,909 2/17/2012 $56.23 $61.00 8.5% SWI $3,151 5/11/2012 $44.75 $42.61 -4.8% LKQ $5,194 5/11/2012 $35.54 $35.23 -0.9% ASPS $1,769 6/8/2012 $64.94 $75.87 16.8% APOL $3,424 7/6/2012 $36.55 $30.20 -17.4% TSCO $5,858 7/6/2012 $83.94 $81.30 -3.1% STMP $413 5/11/2012 $26.60 $25.07 -5.8% NOC $16,378 7/6/2012 $63.47 $65.12 2.6% MWIV $1,294 5/11/2012 $92.38 $101.68 10.1%

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 TJX   |   CSTR   |   SWI   |   LKQ   |   ASPS   |   APOL   |   TSCO   |   STMP   |   NOC   |   MWIV   |   THE TJX COMPANIES, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch 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. Analysis Guru Score: 87% DETERMINE THE CLASSIFICATION: This methodology would consider TJX a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (20.85) relative to the growth rate (20.81%), 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 TJX (1.00) is on the high side, but is acceptable if all the other tests are met. 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. TJX, whose sales are $23,769.3 million, needs to have a P/E below 40 to pass this criterion. TJX's P/E of (20.85) is considered acceptable. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for TJX is 20.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for TJX (23.62%) 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 TJX (2.40%) 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 TJX (2.41%) 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.   COINSTAR, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Coinstar, Inc. (Coinstar) is a provider of automated retail solutions, which offers convenient products and services. the Company's offerings in automated retail include its Redbox business, where consumers can rent or purchase movies and video games from self-service kiosks (Redbox segment), and its Coin business, where consumers can convert their coin to cash or stored value products at self-service coin counting kiosks (Coin segment). Its New Ventures business (New Ventures segment) is focused on identifying, evaluating, building, and developing self-service concepts in the marketplace. On June 9, 2011, the Company completed the sale transaction of the Money Transfer Business to Sigue Corporation (Sigue). In June 2012, the Company's wholly owned subsidiary, Redbox Automated Retail, LLC, acquired certain assets of NCR Corp's self-service entertainment DVD kiosk business. 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. CSTR, with a market cap of $1,909 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. CSTR, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.66, 0.82, 1.10, 1.31 and 2.03, 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. CSTR's Price/Sales ratio of 0.96, 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. CSTR, whose relative strength is 69, is in the top 50 and would pass this last criterion.   SOLARWINDS INC Profile Strategy: Growth Investor Based on: Martin Zweig SolarWinds, Inc. (SolarWinds) designs, develops, markets, sells and supports enterprise information technology (IT), infrastructure management software to IT professionals in organizations of all sizes. The Company's product offerings range from individual software tools to more comprehensive software products that solve problems encountered by IT professionals. Its products are designed to help management of their infrastructure, including networks, applications, storage and physical and virtual servers, as well as products for log and event management. It offers a portfolio of products for IT infrastructure management. Its products operate in three categories: Free Tools, Transactional Products and Core Products. In January 2011, it acquired Hyper9, Inc. (Hyper9). In July 2011, it acquired TriGeo Network Security, Inc. (TriGeo). In October 2011, it acquired DNS Enterprise, Inc. (DNS). In December 2011, it acquired certain assets of DameWare Development LLC (DameWare). Analysis Guru Score: 85% P/E RATIO: [FAIL] The P/E of a company must be greater than 5 to eliminate weak companies, not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. SWI's P/E is 46.95, based on trailing 12 month earnings, while the current market P/E is 17.00. Therefore, it fails the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [PASS] 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. SWI's revenue growth is 38.82%, while it's earnings growth rate is 27.44%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, SWI passes this criterion. SALES GROWTH RATE: [PASS] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (38.8%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (34.3%) of the current year. Sales growth for the prior must be greater than the latter. For SWI this criterion has been met. The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria. CURRENT QUARTER EARNINGS: [PASS] The first of these criteria is that the current EPS be positive. SWI's EPS ($0.23) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. SWI's EPS for this quarter last year ($0.16) 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. SWI's growth rate of 43.75% passes this test. EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: [FAIL] 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 SWI is 13.72%. This should be less than the growth rates for the 3 previous quarters which are 63.64%, 64.71% and 4.76%. SWI does not pass this test, which means that it does not have 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, 38.78%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 43.75%, (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, 43.75% must be greater than or equal to the historical growth which is 27.44%. SWI 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. SWI, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.18, 0.25, 0.35, 0.52 and 0.61, 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. SWI's long-term growth rate of 27.44%, 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. SWI's Debt/Equity (0.00%) is not considered high relative to its industry (15.96%) 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 SWI, this criterion has not been met (insider sell transactions are 102, while insiders buying number 64). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.   LKQ CORPORATION Profile Strategy: Growth Investor Based on: Martin Zweig LKQ Corporation (LKQ) provides replacement parts, components and systems needed to repair vehicles (cars and trucks). The Company operates in four segments: Wholesale-North America Wholesale-Europe, Self Service and Heavy-Duty Truck. Buyers of vehicle replacement products have the option to purchase from primarily five sources: new products produced by original equipment manufacturers (OEMs), which are known as OEM products; new products produced by companies other than the OEMs, which are sometimes referred to as aftermarket products; recycled products originally produced by OEMs, which it refers to as recycled products; used products that have been refurbished; and used products that have been remanufactured. October 1, 2011, it acquired Euro Car Parts Holdings Limited (ECP). On May 27, 2011, it acquired AkzoNobel Coatings Inc.'s paint distribution business. In February 2012, the Company announced that it had acquired Pieces Automobiles Lecavalier Inc. 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. LKQ's P/E is 22.51, based on trailing 12 month earnings, while the current market PE is 17.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [PASS] 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. LKQ's revenue growth is 32.76%, while it's earnings growth rate is 29.50%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, LKQ passes 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 (31.2%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (39.4%) of the current year. Sales growth for the prior must be greater than the latter. For LKQ 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. LKQ's EPS ($0.54) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. LKQ's EPS for this quarter last year ($0.39) 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. LKQ's growth rate of 38.46% 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 LKQ is 14.75%. This should be less than the growth rates for the 3 previous quarters, which are 23.08%, 32.00%, and 35.71%. LKQ 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, 30.38%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 38.46%, (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, 38.46% must be greater than or equal to the historical growth which is 29.50%. LKQ 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. LKQ, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.40, 0.53, 0.69, 0.88 and 1.15, 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. LKQ's long-term growth rate of 29.50%, 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. LKQ's Debt/Equity (51.38%) is not considered high relative to its industry (54.02%) 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 LKQ, this criterion has not been met (insider sell transactions are 90, while insiders buying number 61). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.   ALTISOURCE PORTFOLIO SOLUTIONS S.A. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Altisource Portfolio Solutions S.A.( Altisource), together with its subsidiaries, is a provider of services focused on technology-enabled, knowledge-based functions related to real estate and mortgage portfolio management, asset recovery and customer relationship management. The Company operates in three segments: Mortgage Services, Financial Services and Technology Services. In April 2011, the Company acquired Springhouse, LLC (Springhouse). In July 2011, the Company acquired the assembled workforce of a sub-contractor (Tracmail) in India. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: This methodology would consider ASPS a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (23.48) relative to the growth rate (79.22%), based on the average of the 3 and 4 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 ASPS (0.30) is very favorable. SALES AND P/E RATIO: [NEUTRAL] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. ASPS, whose sales are $474.1 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. EPS GROWTH RATE: [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 ASPS is 79.2%, based on the average of the 3 and 4 year historical eps growth rates, which is considered too fast. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] ASPS 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. ASPS's Equity/Assets ratio (72.00%) 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. ASPS's ROA (40.72%) 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 ASPS (4.88%) 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 ASPS (1.69%) 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.   APOLLO GROUP INC Profile Strategy: Patient Investor Based on: Warren Buffett Apollo Group, Inc. (Apollo Group) is a private education provider. The Company offers educational programs and services both online and on-campus at the undergraduate, master's and doctoral levels through its wholly owned subsidiaries, The University of Phoenix, Inc. (University of Phoenix); Institute for Professional Development (IPD); The College for Financial Planning Institutes Corporation (CFFP), and Meritus University, Inc. (Meritus). Apollo Group also formed a joint venture with The Carlyle Group (Carlyle), called Apollo Global, Inc. (Apollo Global), to pursue investments primarily in the international education services industry. As of August 31, 2011, Apollo Group owned 85.6% of Apollo Global, with Carlyle owning the remaining 14.4%. During the year ended December 31, 2011, the Other Schools segment includes IPD and CFFP, as well as Meritus University, Inc. (Meritus), which ceased operations. Analysis Guru Score: 79% 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 0.60, 0.87, 1.30, 0.79, 2.30, 2.35, 2.38, 2.94, 3.85, 3.72. Buffett would consider APOL's earnings predictable, although earnings have declined 2 time(s) in the past seven years, with the most recent decline 1 years ago. The dips have totaled 42.6%. APOL's long term historical EPS growth rate is 12.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 8.8% 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. APOL has a debt of 90.2 million and earnings of 493.9 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 APOL, over the last ten years, is 23.9%, 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 20.7%, 21.1%, 22.0%, 15.5%, 65.0%, 67.2%, 62.2%, 55.8%, 51.3%, 40.4%, and the average ROE over the last 3 years is 49.1%, 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 APOL, over the last ten years, is 41.1% and the average ROTC over the past 3 years is 45.6%, which is high enough to pass. It is not enough that the average be at least 12%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROTC must be at least 9% for Buffett to feel comfortable that the ROTC is consistent. The ROTC for the last 10 years, from earliest to latest, is 20.7%, 21.1%, 22.0%, 15.5%, 65.0%, 67.2%, 62.2%, 54.8%, 46.2%, 35.9%, 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. APOL's free cash flow per share of $5.18 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 $21.10 and compares it to the gain in EPS over the same period of $3.12. APOL's management has proven it can earn shareholders a 14.8% return on the earnings they kept. This return is acceptable to Buffett, but he would prefer to see a return > 15%. Essentially, management is is doing a good 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. APOL's shares outstanding have fallen over the past five years from 172,559,998 to 119,000,000, 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 APOL 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 $4.15 and divide it by the current market price of $30.20. An investor, purchasing APOL, could expect to receive a 13.74% initial rate of return. Furthermore, he or she could expect the rate to increase 8.8% 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 2.20%. Compare this with APOL's initial yield of 13.74%, which will expand at an annual rate of 8.8%, 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] APOL currently has a book value of $7.49. It is safe to say that if APOL can preserve its average rate of return on equity of 23.9% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 23.9% and it will have a book value of $64.01 in ten years. If it can still earn 23.9% on equity in ten years, then expected EPS will be $15.31. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $15.31 and multiply them by the lower of the 5 year average P/E ratio (16.4) or current P/E ratio (current P/E in this case), which is 7.3 and you get APOL's projected future stock price of $111.49. 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 $111.49. These numbers indicate that one could expect to make a 14.0% average annual return on APOL's stock at the present time. Although, the return is slightly below the liking of Buffett, the return would still be somewhat acceptable. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 8.8%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $9.67. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (16.4) or current P/E ratio (current P/E in this case), which is 7.3. This equals the future stock price of $70.42. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $70.42. 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 $30.20 and the future expected stock price, including the dividend pool, of $70.42. If you were to invest in APOL at this time, you could expect a 8.8% 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: [FAIL] Based on the two different methods, you could expect an annual compounding rate of return somewhere between 8.8% and 14.0%. 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 11.4% on APOL stock for the next ten years, based on the current fundamentals. Buffett accepts a 12% return, although 15% is preferable. This return is unacceptable to Buffett, thus failing the criterion.   TRACTOR SUPPLY COMPANY Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Tractor Supply Company is an operator of retail farm and ranch stores in the United States. The Company operates retail stores under the names Tractor Supply Company and Del's Farm Supply and operate a Website under the name TractorSupply.com. The Company's stores are located in towns outlying metropolitan markets and in rural communities, and offer a selection of merchandise, which include equine, pet and small animal products, including items necessary for their health, care, growth and containment; hardware, truck, towing and tool products; seasonal products, including lawn and garden items, power equipment, gifts and toys; maintenance products for agricultural and rural use, and work/recreational clothing and footwear. The Company operates at farm and ranch retail sales segment, both at its retail locations and online. 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. TSCO's P/S ratio of 1.33 based on trailing 12 month sales, falls within the "good values" range for non-cyclical companies and is considered attractive. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. TSCO's Debt/Equity of 0.12% is acceptable, thus passing the test. PRICE/RESEARCH RATIO: [PASS] This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. TSCO 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 TSCO At this Point Is TSCO 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, TSCO, who has a P/S of 1.33, does not fall within the "Super Stock" range. It does fall between 0.75 and 1.5, which is considered the "good values" range for non-cyclical companies. Nonetheless, it does not pass this "Super Stock" criterion. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. TSCO's inflation adjusted EPS growth rate of 16.58% 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. TSCO's free cash per share of 0.77 passes this criterion. THREE YEAR AVERAGE NET PROFIT MARGIN: [FAIL] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. TSCO, whose three year net profit margin averages 3.98%, fails this evaluation.   STAMPS.COM INC. Profile Strategy: Growth Investor Based on: Martin Zweig Stamps.com Inc. is a provider of Internet-based postage solutions. The Company's customers use its service to mail and ship a variety of mail pieces, including postcards, envelopes, flats and packages, using a range of United States Postal Service (the USPS) mail classes, including First Class Mail, Priority Mail, Express Mail, Media Mail, Parcel Post, and others. Its customers include individuals, small businesses, home offices, medium-size businesses and enterprises. 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. STMP's P/E is 10.21, based on trailing 12 month earnings, while the current market PE is 17.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [PASS] 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. STMP's revenue growth is 2.29%, while it's earnings growth rate is -6.51%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, STMP passes this criterion. SALES GROWTH RATE: [PASS] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (24%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (20%) of the current year. Sales growth for the prior must be greater than the latter. For STMP this criterion has been met. The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria. CURRENT QUARTER EARNINGS: [PASS] The first of these criteria is that the current EPS be positive. STMP's EPS ($0.95) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. STMP's EPS for this quarter last year ($0.18) 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. STMP's growth rate of 427.78% 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 STMP is -3.25%. This should be less than the growth rates for the 3 previous quarters, which are 550.00%, 57.89%, and 4,150.00%. STMP 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, 552.17%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 427.78%, (versus the same quarter one year ago) then the stock fails, with one exception: if the growth rate in earnings between the current quarter and the same quarter one year ago is greater than 30%, then the stock would pass. The growth rate over this period for STMP is 427.8%, and it would therefore pass this test. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: [PASS] The EPS growth rate for the current quarter, 427.78% must be greater than or equal to the historical growth which is -6.51%. STMP would therefore pass this test. EARNINGS PERSISTENCE: [FAIL] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. STMP, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.68, 0.50, 0.52, 0.38, and 0.38, fails this test. LONG-TERM EPS GROWTH: [FAIL] The final important criterion in this approach is that Earnings Growth be at least 15% per year. STMP's long-term growth rate of -6.51%, based on the average of the 3, 4 and 5 year historical eps growth rates, fails the minimum required. 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. STMP's Debt/Equity (0.00%) is not considered high relative to its industry (15.05%) 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 STMP, this criterion has not been met (insider sell transactions are 96, while insiders buying number 126). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.   NORTHROP GRUMMAN CORPORATION Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Northrop Grumman Corporation (Northrop Grumman) provides products, services, and integrated solutions in aerospace, electronics, information and services to its global customers. As of December 31, 2011, the Company operated in four segments: Aerospace Systems, Electronic Systems, Information Systems and Technical Services. The Company conducts most of its business with the United States Government, principally the Department of Defense (DoD) and intelligence community. It also conducts business with local, state, and foreign Governments and domestic and international commercial customers. Effective as of March 31, 2011, the company completed the spin-off of Huntington Ingalls Industries, Inc. (HII). HII operates the Company's former shipbuilding business. 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 ratios below 0.75 are tremendous values and should be sought. NOC's P/S of 0.63 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. NOC's Debt/Equity of 37.31% 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. NOC 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 NOC At this Point Is NOC a "Super Stock"? NO PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.NOC's P/S ratio of 0.63 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: [FAIL] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. NOC's inflation adjusted EPS growth rate of 7.16% 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. NOC's free cash per share of 3.85 passes this criterion. THREE YEAR AVERAGE NET PROFIT MARGIN: [FAIL] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. NOC, whose three year net profit margin averages 2.86%, fails this evaluation.   MWI VETERINARY SUPPLY, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch MWI Veterinary Supply, Inc. (MWI) is a distributor animal health products to veterinarians across the United States and United Kingdom. The Company's products include pharmaceuticals, vaccines, parasiticides, diagnostics, capital equipment, supplies, specialty products, veterinary pet food and nutritional products. MWI markets the products to veterinarians in both the companion animal and production animal markets. The Company also offers its customers a variety of value-added services, including e-commerce platform, pharmacy fulfillment, inventory management system, equipment procurement consultation, special order fulfillment, educational seminars and pet cremation. On March 21, 2011, The Company acquired Nelson Laboratories Limited Partnership (Nelson). On October 31, 2011, the Company acquired substantially all of the assets of Micro Beef Technologies, Ltd. (Micro). Analysis Guru Score: 87% DETERMINE THE CLASSIFICATION: This methodology would consider MWIV a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (26.77) relative to the growth rate (25.73%), 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 MWIV (1.04) is on the high side, but is acceptable if all the other tests are met. 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. MWIV, whose sales are $1,801.1 million, needs to have a P/E below 40 to pass this criterion. MWIV's P/E of (26.77) 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 MWIV was 12.34% last year, while for this year it is 14.26%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (1.92%) 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 MWIV is 25.7%, 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 MWIV (19.92%) 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 MWIV (1.56%) 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 MWIV (0.02%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.   Watch List The Watch List contains the highest scoring stocks according to our guru consensus system that are not currently in the Hot List portfolio. We provide this list both for informational purposes and for investors who are not comfortable with a portfolio of ten stocks. Ticker Company Name Industry Guru Score ARO AEROPOSTALE, INC. Retail (Apparel) 78 BPI BRIDGEPOINT EDUCATION INC Schools 75 MNST MONSTER BEVERAGE CORP Beverages (Non-Alcoholic) 70 CJES C&J ENERGY SERVICES INC Oil Well Services & Equipment 63 AZN ASTRAZENECA PLC (ADR) Biotechnology & Drugs 57 GME GAMESTOP CORP. Retail (Technology) 57 MAIN MAIN STREET CAPITAL CORPORATION Misc. Financial Services 49 BIG BIG LOTS, INC. Retail (Specialty) 48 PLCE CHILDREN'S PLACE RETAIL STORES, INC. Retail (Apparel) 46 TX TERNIUM S.A. (ADR) Iron & Steel 46

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