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Executive Summary	December 23, 2010

The Economy The biggest economic news over the past couple weeks has come from Uncle Sam, with Congress giving a somewhat reluctant approval to the tax compromise forged by President Obama and Congressional Republicans. The deal has major implications for the economy and investors. While adding significantly to the U.S. deficit, it keeps more money in American workers' pockets, keeps the dividend tax rate at 15%, and significantly extends benefits for the nation's unemployed. There will certainly be issues down the road as the government tries to get its deficits and debt under control. But the tax deal should provide substantial stimulus -- or, perhaps more accurately, prevent a substantial drag that could have occurred had the tax breaks not been continued -- to help keep the economic recovery moving forward. And it is moving forward. While the government's moves have stolen most of the headlines, continued positive economic signs have popped up in the past two weeks. Manufacturing and industrial activity continues to improve, with industrial production rising 0.4% in November, new data from the Federal Reserve showed. A big chunk of the increase was driven by the utilities sector, as falling temperatures led to increased demand for heating, but the manufacturing sector also showed significant growth in the month. The overall gain in industrial production reversed a slight decline seen in October -- the only time in the past 17 months that production has declined. Early indicators also show that manufacturing growth has continued at a very strong pace in December. Manufacturing activity in the mid-Atlantic region jumped to its highest level since April 2005, according to the Philadelphia Federal Reserve Bank's business activity index. And the New York Federal Reserve Bank's manufacturing index made a sharp turnaround from November, jumping well into positive territory after having been well in negative territory. The U.S. consumer also continued to show that he isn't tapped out, as many have feared. Retail sales rose 0.8% in November, the Commerce Department reported, marking the fifth straight month of gains. Sales figures for October and September were also revised upward. The November figure was the highest level for retail sales since the start of the 2007-09 recession. With consumer spending making up about 70% of U.S. economic activity, that's great news. The Federal Reserve, meanwhile, is continuing its latest round of quantitative easing -- the so-called "QE2" plan. Somewhat surprisingly, the Fed's latest bond-buying binge has corresponded with a rise in interest rates -- the opposite of what the Fed was expecting. In the past month, the yield on the 10-Year Treasury Bond has jumped nearly 20%, though it has started to come back down in the last week. What's unclear is why the yields are moving upward. Part of it seems to be the improving economy, which has heartened investors and stemmed the fear-induced rush into the perceived safety of Treasury bonds. But part also may be the so-called "bond vigilantes", who, perturbed by the climbing U.S. deficit and debt, are selling off bonds and demanding higher yields. The reality is that both the improving economy and bond vigilante-type activity are likely impacting yields. Another big issue pertaining to the U.S. government's actions is the value of the dollar. The government's huge stimulus efforts and quantitative easing plans are expected to hurt the dollar in the long run, but, in recent weeks at least, the dollar has held its own against various foreign currencies. Part of that is likely because, while the U.S. is still recovering from the financial crisis and Great Recession, many other developed countries are experiencing greater troubles. And with fears about Europe's debt crisis again making headlines, the U.S., with its size and influence, is seen as a relative safe haven. What happens to the dollar over the longer term is a factor to keep an eye on, however. Finally, some good news came from the housing market this week, with the National Association of Realtors reporting that its existing-home sales index rose 5.6% in November. Inventories of homes fell for the fourth straight month. Still, the housing market remains questionable, and it's difficult to ascertain the true strength or weakness of the market as it continues to adjust to a post-government-tax-credit environment. Overall for the fortnight, the S&P returned 2.5%, while the Hot List returned 1.9%. For the year, the portfolio stands at 12.5% vs. 12.9% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 171.2% vs. the S&P's 25.8% gain. One Final Shakeup As we head into the final week of 2010, the Hot List today is performing its final scheduled rebalancing. And the theme seems to be, think "small". Two of the stocks the portfolio is adding (Cash America International and Tower Group) have market capitalizations of about $1.1 billion, while the third (Fossil, Inc.) has a market cap below $5 billion. The two financial small-caps are a particularly interesting pair. While financial firms have been pounded in recent years, both Cash America and Tower Group have managed to continuously increase both earnings and revenues. Tower upped earnings per share by 25.6% in 2008 and 12.7% in 2009, and sales by 17.5% in '08 and a whopping 103% in '09. Cash America, meanwhile, upped EPS by 3.4% in a very tough '08 and 17.4% in '09, and upped revenues by 11% and 8.6%, respectively, in those two years. A history of growth during both good times and bad is a characteristic that many other Hot List holdings share, and that's a good position to be in as we head into 2011. I expect the economy to continue what has become a solid recovery, particularly with confidence starting to rise and the government continuing to do all in its power to stimulate the economy, both in terms of quantitative easing and the new tax deal. But in terms of how the recovery progresses, there are a number of big questions. Will the government's spending binge yield the inflation that many have been expecting for some time now? Or will continued deleveraging and cautiousness by consumers and businesses make for a period of low inflation? Will the dollar tumble, or will its status as a "safe haven" currency continue to bolster its value? And how will that impact U.S. exports and imports? At what point will the Federal Reserve start to tighten monetary conditions? With all those questions in play, it makes sense to have a portfolio filled with stocks of companies that have excelled in a variety of different environments. Financials like Cash America and Tower Group that have fared well during a major financial crisis; retailers like Aeropostale that have kept on boosting profits and sales in a period in which the consumer was declared "dead"; healthcare firms like Sanofi-Aventis that have held up well despite concerns about the impending healthcare overhaul -- these are the types of strong, proven companies that should be able to deal with whatever 2011 deals us. Opportunistic Thinking One thing I found interesting about this rebalancing is that the Hot List is adding three relatively small stocks while selling three other smaller stocks (lululemon athletica, China MediaExpress, and L&L Energy). The portfolio's movement within the small-cap sector comes at a time when that area of the market has had more "cross-sectional volatility" than other areas. Cross-sectional volatility measures how differently stocks in a particular area of the market are performing, and Russell Investments and Parametric Portfolio Associates have developed indices that measure this type of volatility, The Wall Street Journalrecently noted. The Journal reported that "overall cross-sectional volatility is fairly low right now, but market segments such as U.S. small-cap growth stocks and emerging-market small caps look like better hunting grounds for active managers". The key underlying idea here is that, while investors tend to dislike volatility, it is volatility that presents us with opportunity. More volatility usually makes for more chances that a stock will become mispriced. And investors who can identify those mispricings can may a lot of hay. That's particularly important to remember when times get rough and the market is making you want to jump ship. The broader point of the Journal article was also interesting, and very relevant to the Hot List. The piece focused on a new study on "closet indexers" -- mutual funds that purport to have the goal of beating their benchmarks, but which really act merely as mirrors of those benchmarks. The study, performed by Antti Petajisto, a visiting assistant finance professor at New York University's Stern School of Business, found that about one-third of U.S. stock fund assets are managed by "closet indexers", meaning that investors are paying mutual fund fees and getting index-fund performance. One metric Petajisto's study used was "active share", which measures how much of a particular fund's assets are invested in different holdings than the fund's benchmark. Many funds with active share between 20% and 60% "generally purport to be 'actively managed' but are actually closet indexing, according to Prof. Petajisto's study," the Journal states. (Funds with active share below 20% tend to be pure index funds.) Closet indexing has been on the rise, Petajisto's study found. Back in 2006, about 19% of U.S. stock fund assets were in funds that had active share rates between 20% and 60%. By 2009, it had grown to 31%. What's interesting is that Petajisto found that the most active stock-picking fund managers tend to beat their benchmarks by an average of 1.26% annually after fees. Those with low active share rates tend to lag their benchmarks. The message is that you can't beat the market by owning it -- or by owning something very close to it. And the goal of the Hot List is to beat the market -- not to mirror it. That's why the portfolio often diverges significantly from its benchmark (the S&P 500). Currently, for example, only two of the portfolio's ten holdings (Raytheon and GameStop) are members of the S&P 500. At this time in 2009, the portfolio included just two S&P 500 members, and at this time in '08 it included just one. The lack of correlation between the Hot List and its benchmark isn't simply an effort to be contrarian. It's really an indication, and reminder, that "the market" is much more than the "S&P 500". While the signature S&P index is very often used as a proxy for "the market", there are thousands of other stocks trading on U.S. exchanges; our Validea.com database includes about 7,700 U.S.-traded stocks. If you stick closely to the 500 stocks in the S&P, you're thus ignoring literally thousands of other opportunities. And, because the stocks in the S&P tend to be the most visible and popular, you're ignoring numerous quality stocks that may be flying under the radar. Over the years, the ability of our guru-inspired models to scan through thousands of different stocks -- some well-known, many little-known -- has allowed the Hot List to find attractive stocks of excellent companies, even while the S&P 500 has struggled. By keeping the portfolio open to such a wide array of opportunities, I expect that it will continue to find more winners than losers over the long haul, and continue to post strong performance numbers regardless of what the S&P does. Finally, since this is our last newsletter until 2011, I'd like to wish you all a happy and healthy holiday and New Year.		Editor-in-Chief: John Reese Since Inception   Hot List 171.2% S&P 500 25.8% Accuracy 56.8% Beta 1.2 YTD   Hot List 12.5% S&P 500 12.9% Since Last Issue   Hot List 1.9% S&P 500 2.5% Avg. Fundamentals   Market Cap (mil) $23,540 PE Ratio 11.4 5 Yr EPS Growth 28.1% Yield 3.4% Rel. Strength 50 Portfolio Sectors Services 5 Financial 2 Healthcare 1 Capital Goods 1 Consumer Cyclical 1
Advertisement Validea Capital Management - Private Portfolio Management Based on Strategies of Legends Are you looking for an alternative to your underperforming mutual funds or financial advisor? Click here to download Validea Capital's investment kit and learn more about the firm's guru-based portfolios. Get More Information on Validea Capital! ** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. Thre information above in not intended as personal investment advice and should not be interpreted as such. The Fallen As we rebalance the Validea Hot List, 3 stocks leave our portfolio. These include: Lululemon Athletica Inc. (LULU), China Mediaexpress Holdings Inc (CCME) and L&l Energy, Inc. (LLEN). The Keepers 7 stocks remain in the portfolio. They are: Telefonica S.a. (Adr) (TEF), Millicom International Cellular Sa (Usa) (MICC), Raytheon Company (RTN), Aeropostale, Inc. (ARO), Sanofi-aventis Sa (Adr) (SNY), Gamestop Corp. (GME) and Dollar Tree, Inc. (DLTR). The Newbies We are adding 3 stocks to the portfolio. These include: Cash America International, Inc. (CSH), Fossil, Inc. (FOSL) and Tower Group, Inc. (TWGP). Portfolio Changes Additions   CASH AMERICA INTERNATIONAL, INC. CSH FOSSIL, INC. FOSL TOWER GROUP, INC. TWGP Deletions   LULULEMON ATHLETICA INC. LULU CHINA MEDIAEXPRESS HOLDINGS INC CCME L&L ENERGY, INC. LLEN Newcomers to the Validea Hot List Cash America International, Inc. (CSH): Based in Texas, Cash America operates in more than 1,000 locations in the U.S. and Mexico, providing secured non-recourse loans -- pawn loans. It also offers short-term cash advances and check cashing services. The firm has a market cap of about $1.1 billion. Cash America, which gained 8.7% while in the Hot List from Aug. 6-Oct. 1, gets approval from my James O'Shaughnessy-based strategy. To read more about its fundamentals, see the "Detailed Stock Analysis" section below. Tower Group, Inc. (TWGP): Based in New York City, this small-cap ($1.1 billion) offers specialized property and casualty insurance to businesses and individuals. It's upped EPS in eight straight years, and over the past year has taken in more than $1.3 billion in sales. Tower gets approval from my Peter Lynch- and James O'Shaughnessy-based strategies. The "Detailed Stock Analysis" section below has more on the stock. Fossil, Inc. (FOSL): Fossil designs and sells a variety of fashion accessories that are sold in more than 90 countries across the world. Its most notable product line is probably its extensive collection of watches, but the firm also makes small leather goods, belts, handbags, sunglasses, jewelry and apparel. Fossil's market cap is about $4.8 billion, and it has taken in almost $1.9 billion in sales over the past year. The Hot List previously picked up Fossil in mid-March of 2009, when fear of retail stocks was very high, and the stock delivered, jumping 34% in a two-month stint in the portfolio. Now, two of my growth strategies -- those I base on the writings of Martin Zweig and Motley Fool creators Tom and David Gardner -- are again keen on the firm. See the "Detailed Stock Analysis" section below for more on Fossil's fundamentals. News about Validea Hot List Stocks Millicom International Cellular (MICC): Millicom announced this week that its subsidiary in the Democratic Republic of the Congo has reached a deal to sell 729 towers to Helios Towers, for at least $45 million of cash up front. Company officials said the move is expected to create savings in both capital and operating expenditures for the subsidiary. Millicom has outsourced other towers to Helios in Africa, as part of an effort to allow wireless operators to focus capital and management resources on higher quality service and be more cost-effective, Reuters reported. L&L Energy (LLEN): Shares of L&L fell about 9% on Dec. 21 after CNBC reported that the Securities and Exchange Commission is investigating Chinese "reverse merger" companies that are trading in the U.S. L&L is not a reverse merger, but has "similar attributes", according to the report. There was no indication that L&L was part of the investigation, but the negative attention nonetheless drove shares lower. L&L's overall score on my Guru Strategies had been falling prior to the news, however, and because of that, the portfolio is selling the stock today for a nice profit. (Even with Tuesday's decline, shares were up over 20% since the Hot List picked up the stock on Oct. 1.) Another Hot List holding that does appear to have been a reverse merger, China MediaExpress (CCME), was impacted far less than L&L, losing 2.5% on Tuesday amid the news. As is the case with L&L, the portfolio today is selling its CCME shares because of deterioration in fundamentals. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will take a closer look at my strategies and investment approach. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score ARO AEROPOSTALE, INC. Retail (Apparel) 100 MICC MILLICOM INTERNATIONAL CELLULAR SA (USA) Communications Services 83 TEF TELEFONICA S.A. (ADR) Communications Services 82 RTN RAYTHEON COMPANY Aerospace & Defense 81 TWGP TOWER GROUP, INC. Insurance (Prop. & Casualty) 67 CSH CASH AMERICA INTERNATIONAL, INC. Misc. Financial Services 67 FOSL FOSSIL, INC. Jewelry & Silverware 67 SNY SANOFI-AVENTIS SA (ADR) Biotechnology & Drugs 58 GME GAMESTOP CORP. Retail (Technology) 57 DLTR DOLLAR TREE, INC. Retail (Department & Discount) 57 Ticker Market Cap Date Added Start Price Current Price Return ARO $2,146 11/26/2010 $26.90 $24.39 -9.3% MICC $10,082 11/26/2010 $91.58 $93.43 2.0% TEF $104,501 11/26/2010 $67.16 $68.69 2.3% RTN $16,623 11/26/2010 $46.48 $45.60 -1.9% TWGP $1,072 12/23/2010 TBD $25.82 TBD CSH $1,107 12/23/2010 TBD $37.43 TBD FOSL $4,676 12/23/2010 TBD $71.89 TBD SNY $84,860 9/3/2010 $30.20 $32.52 7.7% GME $3,285 9/3/2010 $19.01 $21.70 14.2% DLTR $7,049 9/3/2010 $46.03 $56.29 22.3%

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer ARO   |   MICC   |   TEF   |   RTN   |   TWGP   |   CSH   |   FOSL   |   SNY   |   GME   |   DLTR   |   AEROPOSTALE, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Aeropostale, Inc. is a mall-based specialty retailer of casual apparel and accessories. The Company designs, markets and sells its own brand of merchandise principally targeting 14 to 17 year-old young women and young men. The Company also sells Aropostale merchandise through its e-commerce Website, www.aeropostale.com. During the fiscal year ended January 30, 2010 (fiscal 2009), the Company launched P.S. from Aeropostale, which offers casual clothing and accessories focused on elementary school children between the ages of 7 and 12. During fiscal 2009, the Company completed the closure of its 14 store Jimmy'Z concept. Jimmy'Z Surf Co., Inc., a wholly owned subsidiary of Aeropostale, Inc., was a contemporary lifestyle brand targeting young women and men aged 18 to 25. 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. ARO, with a market cap of $2,146 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. ARO, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.67, 0.88, 1.15, 1.47 and 2.27, 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. ARO's Price/Sales ratio of 0.91, 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. ARO, whose relative strength is 49, is in the top 50 and would pass this last criterion.   MILLICOM INTERNATIONAL CELLULAR SA (USA) Profile Strategy: Growth Investor Based on: Martin Zweig Millicom International Cellular S.A. (Millicom) is a global mobile telecommunications operator. The Company also operates fixed telephony, cable and broadband businesses in five countries in Central America. As of December 31, 2009, the Company had 14 mobile operations in 14 countries focusing on emerging markets in Central America, South America, Africa and Asia. Millicom operates its mobile businesses in El Salvador, Guatemala and Honduras in Central America; in Bolivia, Colombia and Paraguay in South America; in Chad, the Democratic Republic of Congo, Ghana, Mauritius, Rwanda, Senegal and Tanzania in Africa; and in Laos in Asia. In November 2009, the Company announced that it has completed the sale of its Cambodian operations to The Royal Group. In October 2009, the Company announced the sale of Tigo (Private) Limited, its Sri Lanka operation, to Etisalat. Analysis Guru Score: 77% 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. MICC's P/E is 6.23, based on trailing 12 month earnings, while the current market PE is 16.00. 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. MICC's revenue growth is 35.10%, while it's earnings growth rate is 33.39%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, MICC 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 (12.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-39.9%) of the current year. Sales growth for the prior must be greater than the latter. For MICC 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. MICC's EPS ($11.07) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. MICC's EPS for this quarter last year ($1.34) 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. MICC's growth rate of 726.12% 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 MICC is 16.69%. This should be less than the growth rates for the 3 previous quarters which are 82.19%, 9.38% and -49.79%. MICC 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, -10.68%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 726.12%, (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, 726.12% must be greater than or equal to the historical growth which is 33.39%. MICC 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. MICC, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.09, 2.52, 4.07, 4.75 and 5.06, 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. MICC's long-term growth rate of 33.39%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. TOTAL DEBT/EQUITY RATIO: [FAIL] 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. MICC's Debt/Equity (95.17%) is considered high relative to its industry (83.55%) and fails this test.   TELEFONICA S.A. (ADR) Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Telefonica SA (Telefonica) together with its subsidiaries and investees operates in the telecommunications, media and contact center industries. Telefonica basic purpose is the provision of all manner of public or private telecommunications services, including ancillary or complementary telecommunications services or related services. The Company operates in three business areas: Telefonica Spain, Telefonica Latin America and Telefonica Europe. During the year ended December 31, 2009, Telefonica Moviles Espana, SAU, a wholly owned subsidiary of the Company completed the sale of its 32.18% stake in Medi Telecom, SA. In January 2010, the Telefonica Group, through its wholly owned subsidiary, Telefonica Europe plc completed the acquisition of JAJAH. Analysis Guru Score: 100% MARKET CAP: [PASS] The Cornerstone Value Strategy looks for large, well known companies whose market cap is greater than $1 billion. These companies exhibit solid and stable earnings. TEF's market cap of $104,501 million passes this test. CASH FLOW PER SHARE: [PASS] The second criterion requires that the company exhibit strong cash flows. Companies with strong cash flow are typically the value oriented investments that this strategy looks for. The company's cash flow per share must be greater than the mean of the market cash flow per share ($1.21). TEF's cash flow per share of $17.48 passes this test. SHARES OUTSTANDING: [PASS] This particular strategy looks for companies whose total number of outstanding shares are in excess of the market average (670 million shares). These are the more well known and highly traded companies. TEF, who has 1,505 million shares outstanding, passes this test. TRAILING 12 MONTH SALES: [PASS] A company's trailing 12 month sales ($77,662 million) are required to be 1.5 times greater than the mean of the market's trailing 12 month sales ($17,913 million). TEF passes this test. DIVIDEND: [PASS] The final step in the Cornerstone Value strategy is to select the 50 companies from the market leaders group (those that have passed the previous four criteria) that have the highest dividend yield. TEF, with a dividend yield of 7.51%, is one of the 50 companies that satisfy this last criterion.   RAYTHEON COMPANY Profile Strategy: Growth Investor Based on: Martin Zweig Raytheon Company, together with its subsidiaries, develops products, services and solutions in defense markets; sensing, effects, command, control, communications and intelligence (C3I), and mission support, as well as the cybersecurity and homeland security markets. The Company serves both domestic and international customers, principally as a prime contractor on a portfolio of defense and related programs for government customers. It operates in six business segments Integrated Defense Systems (IDS), Intelligence and Information Systems (IIS), Missile Systems (MS), Network Centric Systems (NCS), Space and Airborne Systems (SAS) and Technical Services (TS). In October 2009, the Company acquired BBN Technologies Corp. and related entities. In November 2010, the Company acquired Trusted Computer Solutions, a company that delivers a portfolio of cross-domain, operating system and network security solutions. Analysis Guru Score: 77% 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. RTN's P/E is 9.62, based on trailing 12 month earnings, while the current market PE is 16.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [FAIL] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. RTN's revenue growth is 7.53%, while it's earnings growth rate is 29.99%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, RTN fails 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 (1.1%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-2.5%) of the current year. Sales growth for the prior must be greater than the latter. For RTN 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. RTN's EPS ($1.71) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. RTN's EPS for this quarter last year ($1.25) 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. RTN's growth rate of 36.80% 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 RTN is 14.99%. This should be less than the growth rates for the 3 previous quarters which are 28.71%, 6.31% and -55.65%. RTN 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, -9.82%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 36.80%, (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, 36.80% must be greater than or equal to the historical growth which is 29.99%. RTN 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. RTN, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.98, 2.63, 3.78, 3.92 and 4.89, 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. RTN's long-term growth rate of 29.99%, 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. RTN's Debt/Equity (23.03%) is not considered high relative to its industry (83.90%) 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 RTN, this criterion has not been met (insider sell transactions are 12, while insiders buying number 20). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.   TOWER GROUP, INC. Profile Strategy: Patient Investor Based on: Warren Buffett Tower Group, Inc. (Tower), through its subsidiaries, offers a range of commercial, personal and specialty property and casualty insurance products and services to businesses in various industries and to individuals. The Company operates in three segments: Brokerage Insurance, Specialty Business and Insurance Services. On February 5, 2009, Tower acquired CastlePoint Holdings, Ltd. (CastlePoint). On February 27, 2009, the Company and its subsidiary, CastlePoint, completed the acquisition of HIG, Inc. (Hermitage), a property and casualty insurance holding company. On October 14, 2009, the Company completed the acquisition of the renewal rights to the workers compensation business of AequiCap Program Administrators, Inc. (AequiCap), an underwriting agency. On November 13, 2009, it acquired Specialty Underwriters Alliance, Inc. (SUA). In July 2010, Tower Group, Inc. acquired the Personal Lines Division of OneBeacon Insurance Group, Ltd. Analysis Guru Score: 72% 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 0.42, 0.00, 0.28, 0.32, 0.47, 1.03, 1.81, 1.95, 2.45, 2.76. Buffett would consider TWGP's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 9 years ago. The dips have totaled 0.0%. TWGP's long term historical EPS growth rate is 23.3%, based on the 9 year average EPS growth rate, and it is expected to grow earnings 21.3% 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 FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [FAIL] 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 TWGP, over the last ten years, is 18.7%. 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 4.8%, N/A%, 44.1%, 38.1%, 7.2%, 14.1%, 16.2%, 14.6%, 17.0%, 11.8%, and the average ROE over the last 3 years is 14.5%, thus failing this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON ASSETS: [FAIL] Buffett also requires, for financial companies, that the average Return On Assets (ROA) be at least 1% and consistent. Return On Assets is defined as the net earnings of the business divided by the total assets of the business. The average ROA for TWGP, over the last ten years, is 2.5%, which is high enough to pass. It is not enough that the average be at least 1%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROA must be at least 1% for Buffett to feel comfortable that the ROA is consistent. The ROA for the last 10 years, from earliest to latest, is 0.5%, N/A%, 2.9%, 2.1%, 1.9%, 3.1%, 3.8%, 3.3%, 3.7%, 3.8%, thus failing 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. TWGP's free cash flow per share of $4.49 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 $10.55 and compares it to the gain in EPS over the same period of $2.34. TWGP's management has proven it can earn shareholders a 22.2% 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. TWGP's shares outstanding have fallen in the current year from 44,980,000 to 43,000,000, 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 TWGP 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 $2.52 and divide it by the current market price of $25.82. An investor, purchasing TWGP, could expect to receive a 9.76% initial rate of return. Furthermore, he or she could expect the rate to increase 21.3% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 3.47%. Compare this with TWGP's initial yield of 9.76%, which will expand at an annual rate of 21.3%, 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] TWGP currently has a book value of $26.35. It is safe to say that if TWGP can preserve its average rate of return on equity of 14.5% and continues to retain -33.91% of its earnings, it will be able to sustain an earnings growth rate of -4.9% and it will have a book value of $15.92 in ten years. If it can still earn 14.5% on equity in ten years, then expected EPS will be $2.31. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $2.31 and multiply them by the lower of the 5 year average P/E ratio (13.8) or current P/E ratio (current P/E in this case), which is 10.3 and you get TWGP's projected future stock price of $23.65. 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 $112.98. This gives you a total dollar amount of $136.63. These numbers indicate that one could expect to make a 18.1% average annual return on TWGP'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 21.3%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $17.31. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (13.8) or current P/E ratio (current P/E in this case), which is 10.3. This equals the future stock price of $177.40. Add in the total expected dividend pool of $112.98 to get a total dollar amount of $290.38. 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 $25.82 and the future expected stock price, including the dividend pool, of $290.38. If you were to invest in TWGP at this time, you could expect a 27.4% average annual return on your money. Buffett would consider this an exceptional return. LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [PASS] Based on the two different methods, you could expect an annual compounding rate of return somewhere between 18.1% and 27.4%. 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 22.8% on TWGP stock for the next ten years, based on the current fundamentals. Buffett would consider this an exceptional return, thus passing the criterion.   CASH AMERICA INTERNATIONAL, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Cash America International, Inc. provides specialty financial services to individuals through its Company-owned and franchised lending locations, and check cashing centers and via the Internet. These services include secured non-recourse loans (pawn loans), short-term unsecured cash advances and related financial services. It operates in three segments. As of December 31, 2009, the pawn lending segment offered pawn loans through 676 total pawn lending locations operating under the names of Cash America Pawn, SuperPawn and Prenda Facil. As of December 31, 2009, the cash advance operating segment included 246 cash advance storefront locations in six states in the United States operating under the names Cash America Payday Advance and Cashland. As of December 31, 2009, the check cashing operating segment consisted of 120 unconsolidated franchised and six consolidated Company-owned check cashing locations operating in 16 states in the United States under the name Mr. Payroll. Analysis Guru Score: 72% DETERMINE THE CLASSIFICATION: CSH is considered a "Stalwart", according to this methodology, for its earnings growth of 19.75%. This is based on based on the average of the 3, 4 and 5 year historical eps growth rates, which lies within a moderate 10%-19% range. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. However, CSH is not considered a "True Stalwart" for its sales of $1,248 million are less than the multi-billion dollar level. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for CSH (0.51), based on the average of the 3, 4 and 5 year historical eps growth rates, is O.K. EARNINGS PER SHARE: [PASS] The EPS for a stalwart company must be positive. CSH's EPS ($3.65) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] CSH 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. CSH's Equity/Assets ratio (55.00%) 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. CSH's ROA (8.84%) 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 CSH (19.24%) 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 CSH (-30.96%) 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.   FOSSIL, INC. Profile Strategy: Patient Investor Based on: Warren Buffett Fossil, Inc. is a global designer, marketer and distributer company that specializes in consumer fashion accessories. Its offerings include a line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, footwear, cold weather accessories and apparel. Its products are distributed globally through a range of distribution channels, including wholesale in countries where it has a physical presence, direct to the consumer through its retail stores and commercial Websites and through third-party distributors in countries, where it does not maintain a physical presence. Fossil, Inc. sells its products through a diversified distribution network that includes department stores, specialty retail locations, specialty watch and jewelry stores, owned retail and factory outlet stores, mass market stores, owned and affiliate Internet sites and through its FOSSIL catalogs. Analysis Guru Score: 72% 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 0.76, 0.62, 0.81, 0.93, 1.23, 1.04, 1.13, 1.75, 2.02, 2.07. Buffett would consider FOSL's earnings predictable, although earnings have declined 2 time(s) in the past seven years, with the most recent decline 5 years ago. The dips have totaled 33.9%. FOSL's long term historical EPS growth rate is 11.6%, based on the 10 year average EPS growth rate. 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. FOSL has a debt of 4.5 million and earnings of 228.5 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 FOSL, over the last ten years, is 16.1%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 23.4%, 16.0%, 16.6%, 15.4%, 16.7%, 13.6%, 12.7%, 15.8%, 16.8%, 14.4%, and the average ROE over the last 3 years is 15.7%, 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 FOSL, over the last ten years, is 16.1% and the average ROTC over the past 3 years is 15.6%, 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 23.4%, 16.0%, 16.6%, 15.4%, 16.6%, 13.6%, 12.7%, 15.8%, 16.7%, 14.3%, 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. FOSL's free cash flow per share of $3.40 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: [FAIL] Buffett likes to see if management has spent retained earnings in a way that benefits shareholders. To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $12.36 and compares it to the gain in EPS over the same period of $1.31. FOSL's management has earned shareholders a 10.6% return on the earnings they kept. This is unacceptable to Buffett, as management is not profitably allocating retained earnings. Essentially, investors would be better off if the company paid all earnings out to shareholders and let them invest the earnings on their own. 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. FOSL's shares outstanding have fallen over the past five years from 68,320,000 to 68,000,000, 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 FOSL 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 $3.36 and divide it by the current market price of $71.89. An investor, purchasing FOSL, could expect to receive a 4.67% initial rate of return. Furthermore, he or she could expect the rate to increase 11.6% per year, based on the 10 year average EPS growth rate, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 3.47%. Compare this with FOSL's initial yield of 4.67%, which will expand at an annual rate of 11.6%, based on the 10 year average EPS 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] FOSL currently has a book value of $16.05. It is safe to say that if FOSL can preserve its average rate of return on equity of 15.7% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 15.7% and it will have a book value of $68.78 in ten years. If it can still earn 15.7% on equity in ten years, then expected EPS will be $10.78. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $10.78 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (21.4) (5 year average P/E in this case), which is 16.4 and you get FOSL's projected future stock price of $176.18. 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 $176.18. These numbers indicate that one could expect to make a 9.4% average annual return on FOSL's stock at the present time. The return is unacceptable to Buffett. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 11.6%, based on the 10 year average EPS growth rate, you can project EPS in ten years to be $10.08. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (21.4) (5 year average P/E in this case), which is 16.4. This equals the future stock price of $164.81. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $164.81. 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 $71.89 and the future expected stock price, including the dividend pool, of $164.81. If you were to invest in FOSL at this time, you could expect a 8.7% 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 8.7% and 9.4%. 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 9.0% on FOSL 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.   SANOFI-AVENTIS SA (ADR) Profile Strategy: Value Investor Based on: Benjamin Graham Sanofi-Aventis is a pharmaceutical group engaged in the research, development, manufacture and marketing of healthcare products. The Company's business includes two main activities: pharmaceuticals and human vaccines through sanofi pasteur. The Company is also present in animal health products through Merial Limited (Merial). In its pharmaceutical activity, the Company specializes in six therapeutic areas: diabetes, oncology, thrombosis and cardiovascular, central nervous system (CNS), and internal medicine. The global portfolio of sanofi-aventis also consists of a range of other pharmaceutical products in Consumer Health Care (CHC) and other prescription drugs, including generics. It offers vaccines in five areas: pediatric combination vaccines, influenza vaccines, adult and adolescent booster vaccines, meningitis vaccines and travel and endemic vaccines. In October 2010, Siegfried Holding AG sold its PulmoJet Inhalation Project to the Company. Analysis Guru Score: 100% SECTOR: [PASS] SNY is neither a technology nor financial Company, and therefore this methodology is applicable. SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. SNY's sales of $41,856.4 million, based on trailing 12 month sales, pass this test. CURRENT RATIO: [PASS] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. SNY's current ratio of 2.40 passes the test. LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for SNY is $9,720.2 million, while the net current assets are $19,152.9 million. SNY passes this test. LONG-TERM EPS GROWTH: [PASS] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. SNY's EPS growth over that period of 104.4% passes the EPS growth test. P/E RATIO: [PASS] The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. SNY's P/E of 10.41 (using the current PE) passes this test. PRICE/BOOK RATIO: [PASS] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. SNY's Price/Book ratio is 1.34, while the P/E is 10.41. SNY passes the Price/Book test.   GAMESTOP CORP. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch GameStop Corp. (GameStop) is a retailer of video game products and personal computer (PC) entertainment software. The Company sells new and used video game hardware, video game software and accessories, as well as PC entertainment software, and related accessories and other merchandise. As of January 30, 2010, the Company operated 6,450 stores in the United States, Australia, Canada and Europe, primarily under the names GameStop and EB Games. GameStop also operates the electronic commerce Website www.gamestop.com and publish Game Informer, a multi-platform video game magazine in the United States based on circulation, with approximately 4 million subscribers. During the fiscal year ended January 30, 2010 (fiscal 2009), GameStop operated its business in four segments: United States, Canada, Australia and Europe. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider GME a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (9.09) relative to the growth rate (31.10%), 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 GME (0.29) 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. GME, whose sales are $9,305.0 million, needs to have a P/E below 40 to pass this criterion. GME's P/E of (9.09) 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 GME is 31.1%, 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 GME (8.98%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for GME (13.18%) 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 GME (19.77%) 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.   DOLLAR TREE, INC. Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Dollar Tree, Inc. (Dollar Tree) is an operator of discount variety stores offering merchandise at the fixed price of one dollar. At January 30, 2010, the Company operated 3,806 discount variety retail stores. Approximately 3,650 of these stores sell substantially all items for one dollar or less. The remaining stores, operating as Deal$, sell items for one dollar or less but also sell items for more than one dollar. Dollar Tree's stores operate under the names of Dollar Tree, Deal$ and Dollar Bills. Analysis Guru Score: 90% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratio between .75 and 1.5 are good values. DLTR's P/S ratio of 1.23 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. DLTR's Debt/Equity of 18.87% 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. DLTR 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 DLTR At this Point Is DLTR 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, DLTR, who has a P/S of 1.23, 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%. DLTR's inflation adjusted EPS growth rate of 18.88% 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. DLTR's free cash per share of 3.08 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. DLTR, whose three year net profit margin averages 5.27%, passes this evaluation.   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 T AT&T INC. Communications Services 58 CVVT CHINA VALVES TECHNOLOGY, INC. Misc. Fabricated Products 54 ATW ATWOOD OCEANICS, INC. Oil Well Services & Equipment 53 WDC WESTERN DIGITAL CORP. Computer Storage Devices 53 HS HEALTHSPRING, INC Insurance (Accident & Health) 51 WRLD WORLD ACCEPTANCE CORP. Consumer Financial Services 51 ESV ENSCO PLC Oil Well Services & Equipment 50 CHSI CATALYST HEALTH SOLUTIONS, INC. Insurance (Accident & Health) 50 BMA BANCO MACRO SA (ADR) Money Center Banks 49 AGP AMERIGROUP CORPORATION Healthcare Facilities 49

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