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Executive Summary	October 30, 2009

The Economy New data confirmed this week what many strategists had been saying for some time -- that the U.S. economy returned to growth in the third quarter, with gross domestic product rising for the first time in more than a year, and by the largest margin since the third quarter of 2007. The GDP gain was good news, with the figure coming in higher than many economists had expected. The increase was driven by consumers, as personal consumption expenditures jumped 3.4% in the period. Many have noted that a big chunk of the gains were the result of the government's now-completed "Cash for Clunkers" auto rebate plan, but other areas also showed improvement. Non-durable goods increased 2.0% for the quarter, services increased 1.2%, and gross private investment rose 11.5% -- all good signs. The figures also showed that core inflation -- which excludes volatile food and energy prices -- was mild, and less than it was in the second quarter. That's a good sign in terms of the Federal Reserve keeping interest rates at historically low levels. Good signs also continue to come in the industrial sector. Since our last newsletter, the Fed has reported that industrial production rose 0.7% in September, and also revised its August figure upward to a 1.2% gain. That's three straight months of growth in that sector, following about a year-and-a-half of declines (with the exception of one hurricane-rebound month last year). Just as importantly, capacity is increasing, rising for a third straight month. Capacity usage (70.5%) is still way off its historical average (80.9%), but it's up significantly from June's low of 68.3%. That's a sign of increasing demand, and increased demand -- not cost-cutting -- is what is needed to grow the economy over the long haul. The housing market is also showing signs of continued recovery. Existing home sales jumped 9.4% in September, the National Association of Realtors said last week, putting sales activity at its highest level in more than two years. That's also the fifth increase in six months, but where housing goes from here is quite unclear. The NAR said much of the home-buying momentum is a result of the government's first-time homebuyer tax credit, a program which is set to expire soon. And even housing guru and Yale economist Robert Shiller -- who called the housing bust -- seems unsure about what to expect. The S&P Case-Shiller home price index rose in August for the third straight month, but Shiller told Bloomberg this week that there's a good chance it will correct downward at some point soon. But, he also says the recent rebound has been broad enough that it must be due to more than just the tax credit, and he says "animal spirits" could continue to push prices higher. All in all, the economy is continuing to rebound, as demonstrated by several of the figures noted above. But it's important to remember where we're coming from -- that 3.5% gain in GDP came off a very low starting point, and GDP is still about 7.7% off its 2007 year-end level. Unemployment remains very high, and the housing market is a lingering question. Nevertheless, we seem headed in the right direction. The lingering economic issues helped drive stocks lower over the past fortnight, though Thursday's big gain erased a chunk of the losses seen in the previous week-and-a-half. The Hot List fared worse than the broader market, losing 7.1% compared to the S&P 500's 2.8% loss. For the year, however, the portfolio remains well ahead of the market, up 38.1% in 2009 vs. 18.0% for the S&P. And since its inception in July 2003, the Hot List has gained 126.4%, while the S&P is up just 6.6%. A Focused Approach The Hot List is making a pretty major shakeup this week, dropping six of its ten holdings and replacing them with six higher-rated stocks. Three of the six newcomers -- Oil States International, Tidewater, and National-Oilwell Varco -- come from the energy sector, meaning that half of the 10-stock portfolio is now comprised of energy stocks. These oil picks aren't the big integrated firms. In fact, the Hot List is this week selling its stake in Chevron, a pick that has gained almost 20% since the portfolio picked it up in mid-May. The energy firms in the Hot List are instead mostly smaller, more specialized oil equipment, services, or operations firms. Many of these companies were hit particularly hard right around the time that oil prices peaked in the summer of 2008; the SPDR S&P Oil & Gas Equipment Services exchange-traded fund plummeted about 70% from July 11 to Nov. 20 of last year, a much sharper decline than both the S&P 500 (which lost about 40%) and the broader energy sector SPDR (which fell about 50%). The oil services/operations firms have surged since then. But as a group, they remain well behind the big oil names since last summer, and my strategies are seeing exceptional fundamentals and a lot of value in them. Take National-Oilwell Varco, for example. Varco is currently the only stock out of the thousands in my database that gets approval from both my strict Benjamin Graham-based value strategy, and my James O'Shaughnessy-based growth model. To pass the Graham strategy, a stock needs to have a sterling balance sheet, and Varco does. Its current ratio is above 2.0 (it's 2.1), a sign of strong liquidity, and its net current assets ($5.4 billion) are far greater than its long-term debts ($875 million). In addition, it has the solid valuation ratios (11.7 price/earnings and 1.22 price/book) to get approval from the Graham model. At the same time, however, Varco has upped earnings per share in each year of the past five-year period, and it has a solid relative strength of 77, catching the eye of the O'Shaughnessy growth approach. The strong interest ratings from two approaches that are quite different means Varco is attractive on a number of levels. The Truth about Diversification Of course, going 50% into energy stocks in a 10-stock portfolio may seem risky, given that diversification has long been touted as a critical part of portfolio management. But a lot of research (and my own experience) has taught me that overdiversification can sometimes be a greater problem than a lack of diversification, leading to watered-down returns, and high fees. For example, take a study performed by investment research firm Morningstar earlier this year. The study examined the performance of "focused funds" -- those that hold no more than 40 stocks. (The average stock fund holds about 180 stocks, the group said.) "Among the findings:" wrote The Wall Street Journal's Larry Light. "As a group, these funds haven't consistently outperformed or underperformed funds with more diverse holdings. And based on recent performance and an earlier Morningstar study, concentrated funds aren't more volatile than more diversified funds, on average, and some are surprisingly steady, despite their small number of holdings." In my most recent book, The Guru Investor, I looked at some other data that has similar implications. A 2003 study performed by California State University-Chico Professor H. Christine Hsu and H. Jeffrey Wei found, for example, that "the benefit of risk diversification is somewhat limited when the number of stocks in the portfolio goes beyond 50." The Hot List has of course been somewhat riskier and more volatile than the broader market. But just how much more risk has it taken on? Consider these figures: From its inception date in July 2003 through July of this year, the Hot List has posted a monthly loss of 5% or more (using its 28-day rebalancing intervals) 11 times; the S&P 500 has lost 5% or more 7 times. The worst of those monthly intervals for the Hot List was a 22.89% decline last October; the worst for the S&P was a 16.83% decline in the same period. Given that the Hot List has returned about 28 times what the S&P has returned since its inception, those differences don't seem to represent an unreasonable amount of additional risk. In producing those returns, the Hot List has many times gone heavy into a particular sector or industry -- look no further than earlier this year. Back in March and April, the portfolio included four oil firms and three retail-type stocks. Five of those seven went on to major gains -- between 28% and 79% each. To be sure, there have been times when the Hot List has lost money while keying in on one or two particular industries. And, to be sure, you also need to have some limits on how concentrated a portfolio you should hold. (A six-stock portfolio that includes five retail stocks, for example, is probably not a good idea.) But over the long haul, I think the portfolio's ability to go heavy into certain sections of the market has been a key reason for its exceptional returns. Good values are good values, regardless of what sector they come from. And, if you're using rigorous fundamental-based strategies that do a good job of digging deep into a company's balance sheet, a 10- or 20-stock portfolio can give you all the diversification you need.		Editor-in-Chief: John Reese Since Inception   Hot List 126.4% S&P 500 6.6% Accuracy 56.6% Beta 1.2 YTD   Hot List 38.1% S&P 500 18.0% Since Last Issue   Hot List -7.1% S&P 500 -2.8% Avg. Fundamentals   Market Cap (mil) $5,416 PE Ratio 14.5 5 Yr EPS Growth 45.1% Yield 1.8% Rel. Strength 69 Portfolio Sectors Energy 4 Financial 1 Services 1 Technology 1 Transportation 1 Capital Goods 1 Consumer Cyclical 1
Hot List Editor John Reese Announces Publication of New Book The Guru Investor shows you how to implement the strategies of Wall Street legends like Warren Buffett, Peter Lynch and Benjamin Graham in your own portfolio. Buy Your Copy Now! The Fallen As we rebalance the Validea Hot List, 6 stocks leave our portfolio. These include: Reliance Steel & Aluminum (RS), Credicorp Ltd. (Usa) (BAP), Brasil Telecom Participacoes Sa (Adr) (BRP), Chevron Corporation (CVX), Aeropostale, Inc. (ARO) and Mercadolibre, Inc. (MELI). The Keepers 4 stocks remain in the portfolio. They are: Humana Inc. (HUM), Frontier Oil Corporation (FTO), World Fuel Services Corporation (INT) and Vanceinfo Technologies Inc. (VIT). The Newbies We are adding 6 stocks to the portfolio. These include: Itt Educational Services, Inc. (ESI), Tidewater Inc. (TDW), National-oilwell Varco, Inc. (NOV), Raytheon Company (RTN), Oil States International, Inc. (OIS) and Fuqi International, Inc. (FUQI). Portfolio Changes Additions   ITT EDUCATIONAL SERVICES, INC. ESI TIDEWATER INC. TDW NATIONAL-OILWELL VARCO, INC. NOV RAYTHEON COMPANY RTN OIL STATES INTERNATIONAL, INC. OIS FUQI INTERNATIONAL, INC. FUQI Deletions   RELIANCE STEEL & ALUMINUM RS CREDICORP LTD. (USA) BAP BRASIL TELECOM PARTICIPACOES SA (ADR) BRP CHEVRON CORPORATION CVX AEROPOSTALE, INC. ARO MERCADOLIBRE, INC. MELI Newcomers to the Validea Hot List Fuqi International (FUQI): Based in Shenzhen, China, Fuqi designs and sells a range of high-quality jewelry. The firm, which has about a thousand employees, makes products from gold, diamonds, platinum, and other gemstones. It has increased earnings per share in seven straight years, including 2008, and has a market cap of about $530 million. Fuqi was a standout in the Hot List portfolio earlier this year, gaining 64% from mid-June through early September. Now it's back, with two of my models -- those I base on the writings of Peter Lynch and James O'Shaughnessy -- giving it approval. Check out the "Detailed Stock Analysis" section below to find out why. ITT Educational Services, Inc. (ESI): This private education firm offers a variety of post-secondary degree programs, most of which focus on technology-related fields. Based in Indiana, it operates more than 100 technical institutes in 37 states, teaching more than 60,000 students. ITT has taken in more than $1.2 billion in sales in the past 12 months, and has a market cap of about $3.4 billion. ITT gets approval from my Warren Buffett-, Peter Lynch-, and Joel Greenblatt-based models. The "Detailed Stock Analysis" section below explains why. Oil States International (OIS): Based in Houston, this $1.7-billion-market-cap oil services company makes products used in deepwater oil production facilities and sub-sea pipelines. It also provides several types of services and products to the oil and gas industry, including production-related rental tools, work force accommodations and logistics, and land drilling services. It gets approval from three of my models, those I base on the writings of Peter Lynch, Kenneth Fisher, and James O'Shaughnessy. To see why, scroll down to the "Detailed Stock Analysis" section below. Tidewater Inc. (TDW): This New Orleans-based firm provides a variety of services to oil companies. It has close to 400 vessels that work all over the world, transporting crews and supplies, towing and anchoring mobile rigs, and assisting in offshore construction. The firm has a market cap of about $2.2 billion, and it has taken in $1.38 billion in sales over the past 12 months. Tidewater gets approval from the strategy I base on the writings of Benjamin Graham, as well as my Peter Lynch-based strategy. To see why, check out the "Detailed Stock Analysis" section below. National-Oilwell Varco, Inc. (NOV): Based in Houston, Varco designs, manufactures and sells equipment, components, and services used in oil and gas drilling and production. More than 160 years old, the company's products include major mechanical components for land and offshore drilling rigs, complete land drilling and well servicing rigs, extensive lifting and handling equipment, and downhole drilling motors, bits and tools. It has a market cap of about $17.3 billion, and has raked in more than $13 billion in sales in the past 12 months. Varco gets approval from two of my models, those I base on the writings of Benjamin Graham and James O'Shaughnessy. Scroll down to the "Detailed Stock Analysis" section below to find out why. Raytheon Company (RTN): This Massachusetts-based aerospace & defense firm provides state-of-the-art electronics, products, and services in a variety of areas, including integrated defense systems, missile systems, space and airborne systems, and intelligence and information systems. It also provides a variety of mission support services. It has a market cap of about $17.8 billion, and has taken in more than $24 billion in sales in the past year. Raytheon gets approval from my Joel Greenblatt-, Peter Lynch- and Kenneth Fisher-based models. The "Detailed Stock Analysis" section below explains why. News about Validea Hot List Stocks Humana Inc. (HUM): The U.S. Government Accountability Office upheld Humana Military Healthcare Services' protest about a government contract it lost that could be worth as much as $21.8 billion, according to Business First of Louisville. The contract involved providing health benefits for soldiers and their families under the U.S. Defense Department's TRICARE program. It is still unclear whether the contract will be rebid or awarded to a specific group, however. In an SEC filing Thursday, Louisville-based Humana said that "neither the grounds for the decision nor the nature of the relief recommended by the GAO have yet been disclosed to Humana", according to Business First. Tidewater Inc. (TDW): Tidewater on Thursday announced fiscal-second-quarter (ending Sept. 30) profit of $98.2 million, or $1.90 per share, up from $95.4 million, or $1.85 per share, a year earlier. The results included a $34.3 million benefit from a tax settlement that increased per-share earnings 66 cents, according to the Associated Press. Excluding the benefit, earnings were $1.24 per share, which was short of analysts' $1.37 per share forecast. Revenue fell about 15% to $295.5 million, AP reported, adding that analysts had expected $308.9 million. ITT Educational Services (ESI): ITT said on Oct. 22 that third quarter profit was $75.4 million, or $2 per share, up from $50.2 million, or $1.28 per share, in the same period last year, the Associated Press reported. Analysts expected net income of $1.97 per share, on average. Sales jumped 33% to $339.6 million, beating analysts' expectations of $335.3 million as new student enrollment rose 27%, AP stated. Bad debt expenses did rise to 6.8% of sales, however, up from 5% a year ago. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will examine one of my individual Guru Strategies in greater depth. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score FUQI FUQI INTERNATIONAL, INC. Jewelry & Silverware 84 INT WORLD FUEL SERVICES CORPORATION Oil & Gas Operations 76 VIT VANCEINFO TECHNOLOGIES INC. Software & Programming 73 FTO FRONTIER OIL CORPORATION Oil & Gas Operations 72 OIS OIL STATES INTERNATIONAL, INC. Oil Well Services & Equipment 63 NOV NATIONAL-OILWELL VARCO, INC. Oil Well Services & Equipment 63 ESI ITT EDUCATIONAL SERVICES, INC. Schools 49 HUM HUMANA INC. Insurance (Accident & Health) 49 RTN RAYTHEON COMPANY Aerospace & Defense 44 TDW TIDEWATER INC. Water Transportation 43 Ticker Market Cap Date Added Start Price Current Price Return FUQI $612 10/30/2009 TBD $22.16 TBD INT $1,529 9/4/2009 $45.32 $51.60 13.9% VIT $619 9/4/2009 $13.07 $15.69 20.0% FTO $1,533 6/12/2009 $14.67 $14.65 -0.1% OIS $1,825 10/30/2009 TBD $36.76 TBD NOV $17,953 10/30/2009 TBD $42.92 TBD ESI $3,416 10/30/2009 TBD $92.46 TBD HUM $6,571 10/2/2009 $36.68 $38.73 5.6% RTN $17,861 10/30/2009 TBD $45.87 TBD TDW $2,241 10/30/2009 TBD $43.35 TBD

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer FUQI   |   INT   |   VIT   |   FTO   |   OIS   |   NOV   |   ESI   |   HUM   |   RTN   |   TDW   |   FUQI INTERNATIONAL, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Fuqi International, Inc. (Fuqi) is a designer of precious metal jewelry in China, developing, promoting, and selling a range of products in the Chinese luxury goods market. The Company's products consist of a range of styles and designs made from gold and other precious metals, such as platinum and Karat gold (K-gold). The Company also produce jewelry items that contain diamonds and other precious stones on a custom-order basis. Its design database contains over 30,000 products. The Company operates through its wholly owned subsidiary Fuqi International Holdings Co., Ltd. (Fuqi BVI) and its wholly owned subsidiary, Shenzhen Fuqi Jewelry Co., Ltd. (Fuqi China). As of December 31, 2008, the Company had 69 jewelry retail counters and stores in China. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider FUQI a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (13.32) relative to the growth rate (42.99%), 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 FUQI (0.31) 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. FUQI, whose sales are $433.4 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. INVENTORY TO SALES: [PASS] When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for FUQI was 20.36% last year, while for this year it is 12.08%. Since inventory to sales has decreased from last year by -8.28%, FUQI passes this test. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for FUQI is 43.0%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for FUQI (20.56%) 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 FUQI (-1.90%) 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 FUQI (11.90%) 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.   WORLD FUEL SERVICES CORPORATION Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher World Fuel Services Corporation is engaged in the marketing and sale of marine, aviation and land fuel products and related services on a worldwide basis. The Company operates in three segments: marine, aviation and land. In its marine segment it offers fuel and related services to maritime customers, including international container and tanker fleets, commercial cruise lines and time-charter operators. In its aviation segment, it offers fuel and related services to major commercial airlines, second and third-tier airlines, cargo carriers, regional and low-cost carriers, corporate fleets, fractional operators, private aircraft, military fleets. In its land segment, it offers fuel and related services to petroleum distributors operating in the land transportation market. In June 2008, it acquired certain assets of Texor Petroleum Company, Inc. In April 2009, the Company acquired the Henty Oil Group of Companies. 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 ratios below 0.75 are tremendous values and should be sought. INT's P/S of 0.12 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. INT's Debt/Equity of 9.49% 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. INT 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 INT At this Point Is INT 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.INT's P/S ratio of 0.12 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. INT's inflation adjusted EPS growth rate of 28.54% 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. INT's free cash per share of 13.17 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. INT, whose three year net profit margin averages 0.54%, fails this evaluation.   VANCEINFO TECHNOLOGIES INC. Profile Strategy: Growth Investor Based on: Martin Zweig VanceInfo Technologies Inc. is an information technology (IT) service provider and one of the offshore software development companies in China. The Company's range of IT services includes research and development services (R&D services), enterprise solutions, application development and maintenance (ADM), quality assurance and testing, as well as globalization and localization. It provides these services primarily to corporations headquartered in the United States, Europe, Japan and China, targeting industries, such as technology, telecommunications, financial services, manufacturing, retail and distribution. The Company operates a range of offshore development centers in China (CDCs). Its major clients include Microsoft, IBM, Huawei, TIBCO, and a European mobile handset manufacturer. In July 2009, the Company acquired the operating subsidiaries of TP Corporation Limited (TP), a provider of customer relationship management (CRM) solutions and call center services. 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. VIT's P/E is 34.09, based on trailing 12 month earnings, while the current market PE is 18.00. 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. VIT's revenue growth is 64.41%, while it's earnings growth rate is 34.29%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, VIT 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 (41.5%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (46.8%) of the current year. Sales growth for the prior must be greater than the latter. For VIT 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. VIT's EPS ($0.13) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. VIT's EPS for this quarter last year ($0.09) 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. VIT's growth rate of 44.44% 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 VIT is 17.15%. This should be less than the growth rates for the 3 previous quarters, which are 83.33%, 160.00%, and 25.00%. VIT 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, 78.95%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 44.44%, (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 VIT is 44.4%, 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, 44.44% must be greater than or equal to the historical growth which is 34.29%. VIT 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. VIT, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.05, 0.13, 0.07, 0.19, and 0.40, fails 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. VIT's long-term growth rate of 34.29%, 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. VIT's Debt/Equity (0.00%) is not considered high relative to its industry (20.80%) 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 VIT, this criterion has not been met (insider sell transactions are 0, while insiders buying number 0). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.   FRONTIER OIL CORPORATION Profile Strategy: Value Investor Based on: Benjamin Graham Frontier Oil Corporation (Frontier) is an independent energy company engaged in crude oil refining and the wholesale marketing of refined petroleum products. The Company operates refineries (the Refineries) in Cheyenne, Wyoming and El Dorado, Kansas with a total annual average crude oil capacity of approximately 182,000 barrels per day (bpd). Frontier's Cheyenne Refinery has a permitted crude oil capacity of 52,000 bpd on a 12-month average. The Company markets its refined products primarily in the eastern slope of the Rocky Mountain region, which encompasses eastern Colorado (including the Denver metropolitan area), eastern Wyoming and western Nebraska (the Eastern Slope). The Cheyenne Refinery has a coking unit, which allows the refinery to process amounts of heavy crude oil for use as a feedstock. During the year ended December 31, 2008, heavy crude oil constituted approximately 76% of the Cheyenne Refinery's total crude oil charge. Analysis Guru Score: 86% SECTOR: [PASS] FTO 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. FTO's sales of $5,494.5 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. FTO's current ratio of 2.38 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 FTO is $350.7 million, while the net current assets are $745.1 million. FTO 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. FTO's EPS growth over that period of 2,476.5% passes the EPS growth test. P/E RATIO: [FAIL] 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. FTO's P/E of 15.72 (using the current PE) fails 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. FTO's Price/Book ratio is 1.31, while the P/E is 15.72. FTO passes the Price/Book test.   OIL STATES INTERNATIONAL, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Oil States International, Inc. (Oil States) through its subsidiaries, is a provider of specialty products and services to oil and gas drilling and production companies worldwide. The Company operates in a number of oil and gas producing regions, including the Gulf of Mexico, United States onshore, West Africa, the North Sea, Canada, South America and Southeast and Central Asia. Its customers include many of the national oil companies, major and independent oil and gas companies and other oilfield service companies. Oil States operates in three principal business segments: offshore products, tubular services and well site services. The Company's well site services segment includes the accommodations, rental tools and drilling services businesses. On February 1, 2008, Oil States purchased all of Christina Lake Enterprises Ltd., the owners of an accommodations lodge (Christina Lake Lodge) in the Conklin area of Alberta, Canada. 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. OIS, with a market cap of $1,825 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. OIS, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.19, 2.41, 3.89, 4.00 and 4.33, 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. OIS's Price/Sales ratio of 0.64, 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. OIS, whose relative strength is 85, is in the top 50 and would pass this last criterion.   NATIONAL-OILWELL VARCO, INC. Profile Strategy: Value Investor Based on: Benjamin Graham National Oilwell Varco, Inc. (NOV) is a provider of equipment and components used in oil and gas drilling and production operations, oilfield services, and supply chain integration services to the upstream oil and gas industry. The Company operates in three segments. The Rig Technology segment designs, manufactures, sells and services systems for the drilling, completion and servicing of oil and gas wells. The Petroleum Services & Supplies segment provides a variety of consumable goods and services used to drill, complete, remediate and workover oil and gas wells, service pipelines, flowlines and other oilfield tubular goods. The Distribution Services segment provides maintenance, repair and operating (MRO) supplies, and spare parts to drill site and production locations worldwide.On April 21, 2008, NOV acquired Grant Prideco, Inc. In December 2008, it acquired Sakhalin Outfitters LLC and Mid-South Machine, Inc. In April 2009, NOV acquired ASEP Group Holding B.V. and Anson Limited. Analysis Guru Score: 100% SECTOR: [PASS] NOV 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. NOV's sales of $13,388.2 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. NOV's current ratio of 2.09 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 NOV is $875.0 million, while the net current assets are $5,418.0 million. NOV 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. NOV's EPS growth over that period of 1,608.1% 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. NOV's P/E of 12.20 (using the 3 year PE) passes this test. PRICE/BOOK RATIO: [PASS] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. NOV's Price/Book ratio is 1.27, while the P/E is 12.20. NOV passes the Price/Book test.   ITT EDUCATIONAL SERVICES, INC. Profile Strategy: Patient Investor Based on: Warren Buffett ITT Educational Services, Inc. (ITT/ESI), is a provider of postsecondary degree programs in the United States based on revenue and student enrollment. As of December 31, 2008, the Company offered master, bachelor and associate degree programs to approximately 62,000 students. As of December 31, 2008, it had 105 institutes and nine learning sites located in 37 states. All of its institutes are authorized by the applicable education authorities of the states, in which they operate, and are accredited by an accrediting commission recognized by the United States Department of Education (ED). During the year ended December 31, 2008, the Company began its operations at eight new institutes. As of December 31, 2008, the Company offered 33 degree programs in various fields schools of study: information technology (IT); electronics technology; drafting and design; business; criminal justice, and health sciences. Analysis Guru Score: 100% STAGE 1: "Is this a Buffett type company?" A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage. LOOK FOR EARNINGS PREDICTABILITY: [PASS] Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.48, 0.57, 0.70, 0.94, 1.27, 1.61, 2.33, 2.72, 3.71, 5.17. Buffett would consider ESI's earnings predictable. In fact EPS have increased every year. ESI's long term historical EPS growth rate is 32.1%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 16.9% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers. LOOK AT THE ABILITY TO PAY OFF DEBT [PASS] Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. ESI has no long term debt and therefore would pass this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [PASS] Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for ESI, over the last ten years, is 39.5%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 40.9%, 41.3%, 41.4%, 47.5%, 39.6%, 31.5%, 34.5%, 107.2%, 208.6%, 106.6%, and the average ROE over the last 3 years is 140.8%, thus passing this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: [PASS] Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for ESI, over the last ten years, is 44.6% and the average ROTC over the past 3 years is 56.6%, 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 40.9%, 41.3%, 41.4%, 47.5%, 39.6%, 31.5%, 34.5%, 43.9%, 66.7%, 59.3%, 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. ESI's free cash flow per share of $3.50 is positive, indicating that the company is generating more cash that it is consuming. This is a favorable sign, and so the company passes this criterion. LOOK AT MANAGEMENT'S USE OF RETAINED EARNINGS: [PASS] Buffett likes to see if management has spent retained earnings in a way that benefits shareholders. To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $19.50 and compares it to the gain in EPS over the same period of $4.69. ESI's management has proven it can earn shareholders a 24.1% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work. HAS THE COMPANY BEEN BUYING BACK SHARES: [BONUS PASS] Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. ESI's shares outstanding have fallen over the past five years from 45,990,002 to 38,000,000, thus passing this criterion. This is a bonus criterion and will not adversely affect the ability of a stock to pass the strategy as a whole if it is failed. The preceding concludes Buffett's qualitative analysis. If and when he gets positive responses to all the above criteria, he would then proceed with a price analysis. The price analysis will determine whether or not the stock should be bought. The following is how he would evaluate ESI quantitatively. STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return. CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail] Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $7.06 and divide it by the current market price of $92.46. An investor, purchasing ESI, could expect to receive a 7.64% initial rate of return. Furthermore, he or she could expect the rate to increase 16.9% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 4.60%. Compare this with ESI's initial yield of 7.64%, which will expand at an annual rate of 16.9%, based on the analysts' consensus estimated long term growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding. CALCULATE THE FUTURE EPS: [No Pass/Fail] ESI currently has a book value of $5.78. It is safe to say that if ESI can preserve its average rate of return on equity of 39.5% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 39.5% and it will have a book value of $161.29 in ten years. If it can still earn 39.5% on equity in ten years, then expected EPS will be $63.71. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $63.71 and multiply them by the lower of the 5 year average P/E ratio (22.7) or current P/E ratio (current P/E in this case), which is 13.1 and you get ESI's projected future stock price of $834.01. 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 $834.01. These numbers indicate that one could expect to make a 24.6% average annual return on ESI's stock at the present time. Buffett would consider this an absolutely fantastic expected return. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 16.9%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $33.50. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (22.7) or current P/E ratio (current P/E in this case), which is 13.1. This equals the future stock price of $438.56. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $438.56. 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 $92.46 and the future expected stock price, including the dividend pool, of $438.56. If you were to invest in ESI at this time, you could expect a 16.8% average annual return on your money. Buffett would consider this a great return. LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [PASS] Based on the two different methods, you could expect an annual compounding rate of return somewhere between 16.8% and 24.6%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 20.7% on ESI stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   HUMANA INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Humana Inc. (Humana) is a health and supplemental benefits company. The Company is a full-service benefits solutions company, offering an array of health and supplemental benefit plans for employer groups, government benefit programs and individuals. The Company operates in two segments: Government and Commercial. The Government segment consists of beneficiaries of government benefit programs, and includes three lines of business: Medicare, Military and Medicaid. The Commercial segment consists of members enrolled in its medical and specialty products marketed to employer groups and individuals. On October 31, 2008, the Company acquired PHP Companies, Inc. (doing business as Cariten Healthcare). On August 29, 2008, the Company acquired Metcare Health Plans, Inc. On May 22, 2008, it acquired OSF Health Plans, Inc. On April 30, 2008, the Company acquired UnitedHealth Group's Las Vegas, Nevada individual SecureHorizons Medicare Advantage health maintenance organization (HMO) business. Analysis Guru Score: 100% DETERMINE THE CLASSIFICATION: This methodology would consider HUM a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (7.73) relative to the growth rate (24.55%), 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 HUM (0.31) 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. HUM, whose sales are $30,246.4 million, needs to have a P/E below 40 to pass this criterion. HUM's P/E of (7.73) 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 HUM is 24.6%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] HUM 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. HUM's Equity/Assets ratio (37.00%) 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. HUM's ROA (6.34%) 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 HUM (11.00%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [BONUS PASS] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for HUM (68.62%) is considered very favorable.   RAYTHEON COMPANY Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Raytheon Company designs, develops, manufactures, integrates, supports and provides a range of products, services and solutions for principally governmental customers in the United States and worldwide. The Company operates in six business segments: Integrated Defense Systems (IDS), Intelligence and Information Systems (ibis'), Missile Systems (MS), Network Centric Systems (NCS), Space and Airborne Systems (SAS) and Technical Services (TS). In April 2008, the Company acquired SI Government Solutions. In July 2008, Raytheon Company acquired Telemus Solutions, Inc., a provider of information security, intelligence and technical services to defense, intelligence and other federal customers.In October 2009, the Company acquired BBN Technologies. Analysis Guru Score: 100% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. RTN's P/S of 0.74 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. RTN's Debt/Equity of 24.05% 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. RTN 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 RTN At this Point Is RTN a "Super Stock"? YES PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.RTN's P/S ratio of 0.74 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. RTN's inflation adjusted EPS growth rate of 30.18% 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. RTN's free cash per share of 2.78 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. RTN, whose three year net profit margin averages 8.61%, passes this evaluation.   TIDEWATER INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Tidewater Inc. provides offshore supply vessels and marine support services to the offshore energy industry through the operation of offshore marine service vessels. As of March 31, 2008, the Company had a total of 430 vessels, of which 10 were operated through joint ventures, 61 were stacked and 11 vessels withdrawn from service. The Company provides services supporting all phases of offshore exploration, development and production, including towing of and anchor handling of mobile drilling rigs and equipment; transporting supplies and personnel necessary to sustain drilling, workover and production activities; assisting in offshore construction activities, and a variety of specialized services, including pipe laying, cable laying and three-dimensional (3-D) seismic work. The Company operates in two segments: United States and International. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider TDW a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (6.08) relative to the growth rate (43.35%), 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 TDW (0.14) 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. TDW, whose sales are $1,377.4 million, needs to have a P/E below 40 to pass this criterion. TDW's P/E of (6.08) 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 TDW was 3.65% last year, while for this year it is 3.50%. Since inventory to sales has decreased from last year by -0.15%, TDW passes this test. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for TDW is 43.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for TDW (13.16%) 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 TDW (0.05%) 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 TDW (-2.18%) 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 MELI MERCADOLIBRE, INC. Computer Services 61 EME EMCOR GROUP, INC. Construction Services 61 BRP BRASIL TELECOM PARTICIPACOES SA (ADR) Communications Services 51 SII SMITH INTERNATIONAL, INC. Oil Well Services & Equipment 45 ARO AEROPOSTALE, INC. Retail (Apparel) 42 JOSB JOS. A. BANK CLOTHIERS, INC. Retail (Apparel) 41 ASIA ASIAINFO HOLDINGS, INC. Software & Programming 39 ADM ARCHER DANIELS MIDLAND COMPANY Food Processing 38 ESV ENSCO INTERNATIONAL INCORPORATED Oil Well Services & Equipment 38 CYCL CENTENNIAL COMMUNICATIONS CORP. Communications Services 38

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