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Executive Summary	August 16, 2013

The Economy Improvement in the service sector, declining jobless claims, a normal level of inflation, continued strength in the housing sector -- the U.S. economy has delivered some pretty good news over the past couple weeks. And, ironically, it's been bad for the market in the short term, with short-sighted investors fretting that a better economy means less support from the Federal Reserve. Of course, the long-term goal is for the economy to be able to stand on its own, and the past fortnight's data gave some signs that it's in position to do so. The service sector expanded for the 43rd straight month in July, for example, and it did so at its quickest pace since February, the Institute for Supply Management said. The group's new orders sub-index also made a big jump, indicating that production could be strong in coming months as well. The prices sub-index also made a big jump. Other data showed that prices have been rising, with inflation picking up from the near-zero pace we've seen in recent months. Still, prices are hardly surging. A government report showed that the personal consumption expenditure price index rose 0.4% in June, putting it 1.3% above year-ago levels. Both figures were the highest since February. The Labor Department, meanwhile, said that the Consumer Price Index rose 0.2% in July, putting it 2.0% ahead of its year-ago level. Wall Street seemed to be troubled by the news, since rising inflation makes the Federal Reserve more likely to taper its quantitative easing efforts. But in reality coming back to a reasonable inflation level is good news. Another piece of good news: New claims for unemployment fell since our last newsletter, reaching their lowest point since October 2007. They are 11.7% below their year-ago level. Continuing claims were more or less flat, and are more than 10% below where they were a year ago. Industrial production was flat for July, a new Federal Reserve report showed. Manufacturing output slipped 0.1%, while mining output rose 2.1%. Utility output, which is usually weather-dependent, fell 2.1%. The personal consumption expenditure report also showed that, while disposable personal income rose 0.3% in June, real DPI actually fell 0.1% because of price increases. Personal consumption expenditures rose 0.5%, but only 0.1% in real terms. The personal saving rate dipped slightly, to 4.4% from 4.6% a month earlier, but still remains at a healthy level. The Commerce Department, meanwhile, said that retail and food service sales increased by 0.2% in July, putting them a very solid 6.8% above their year-ago level. Finally, the housing sector keeps on supplying good news. The National Association of Home Builders/Wells Fargo index of builder confidence rose to its highest level since 2005 in August, the group said this week. Since our last newsletter, the S&P 500 returned -2.7%, while the Hot List returned -4.5%. So far in 2013, the portfolio has returned 25.9% vs. 16.5% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 241.5% vs. the S&P's 66.1% gain.		Editor-in-Chief: John Reese Since Inception   Hot List 241.5% S&P 500 66.1% Accuracy 56.6% Beta 1.2 YTD   Hot List 25.9% S&P 500 16.5% Since Last Issue   Hot List -4.5% S&P 500 -2.7% Avg. Fundamentals   Market Cap (mil) $4,677 PE Ratio 12.3 5 Yr EPS Growth 26.9% Yield 1.4% Rel. Strength 81 Portfolio Sectors Consumer Cyclical 2 Energy 2 Financial 2 Services 2 Consumer/Non-Cyclical 1 Conglomerates 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. Portfolio Update The Hot List and broader market have taken some hits in recent days, though the portfolio remains well ahead of the S&P 500 this year. As I noted above, a lot of the declines seem to be driven by fears that the Fed will begin tapering its QE efforts. It's thus a strange world we're living in -- one in which good economic data leads to trouble for the market because it means the Fed is more likely to taper. That probably had something to do with some of the down fortnights for some of the Hot List's holdings. But other factors also were involved. Inter Parfums, for example, had a disappointing second-quarter earnings report, a big reason why its shares were down 12.9% since our last newsletter (all figures as of afternoon trading on August 15). USANA Health Sciences, meanwhile, was apparently the victim of a trading error that caused a mini "flash crash" that briefly sent its stock tumbling on August 8. It made up that ground, but had nonetheless lost about 8% since our last newsletter, likely because of the QE and broader market fears. (The stock has still gained over 130% since joining the portfolio back in December.) Overstock.com also had a rough two weeks, with shares down nearly 11%. There was no clear catalyst for the decline, but the broader QE/economic fears may have been partly responsible for the declines. Investors also may have been taking profits on the stock, which had made some very good gains last month after a strong earnings report. There were some strong performers in the portfolio, however. Most notable was AmTrust Financial Services. In part because of a strong earnings report -- earnings about doubled from the year-ago quarter -- shares rose 5.5%. While most of the portfolio's holdings were in the red over the past couple weeks, the catalysts for the declines seem to be emotional and/or short-term. Looking forward, most of these stocks still have very good prospects, and there are plenty of other very attractive, reasonably priced stocks in the market. We'll see which holdings the Hot List holds onto when we rebalance the portfolio in two weeks. Guru Spotlight: David Dreman While all the gurus I follow have built their fame and fortunes using different investment approaches, there is at least one striking similarity that most -- if not all -- of them share: They are contrarians. When the rest of Wall Street is zigging, they are zagging; when Wall Street zags, they zig. By having the strength of conviction to march to their own drummers and not follow the crowd, they have been able to key in on the types of strong, undervalued stocks that have made them -- and their clients or shareholders -- very happy. But while most of these gurus are contrarians, one in particular is known for being, well, the most contrarian: David Dreman. Throughout his long career, Dreman has sifted through the market's dregs in order to find hidden gems, and he has been very good at it. His Kemper-Dreman High Return Fund was one of the best-performing mutual funds ever, ranking number one out of 255 funds in its peer groups from 1988 to 1998, according to Lipper Analytical Services. And when Dreman published Contrarian Investment Strategies: The Next Generation (the book on which I base my Dreman strategy) in 1998, the fund had been ranked number one in more time periods than any of the 3,175 funds in Lipper's database. Throughout his career, Dreman has keyed in on down-and-out diamonds in the rough, finding winners in such beaten-up stocks as Altria (after the tobacco stock plummeted amid lawsuit concerns) and Tyco (which had been hit hard by an embarrassing CEO fiasco). How -- and why -- did Dreman manage to pick winners from groups of stocks that few other investors would touch? Well, Dreman, perhaps more than any other guru I follow, is a student of investor psychology. And at the core of his research is the belief that investors tend to overvalue the "best" stocks -- those "hot" stocks everyone seems to be buying -- and undervalue the "worst" stocks -- those that people are avoiding like the plague, like Altria and Tyco. In addition, he also believed that the market was driven largely by how investors reacted to "surprises", frequent events that include earnings reports that exceed or fall short of expectations, government actions, or news about new products. And, he believed that analysts were more often than not wrong about their earnings forecasts, which leads to a lot of these surprises. When you put those factors together, you get the crux of Dreman's contrarian philosophy. Surprises happen often, and because the "best" stocks are often overvalued, good surprises can't increase their values that much more. Bad surprises, however, can have a very negative impact on them. The "worst" stocks, meanwhile, are so undervalued that they don't have much further down to go when bad surprises occur. But when good surprises occur, they have a lot of room to grow. By taking a "contrarian" approach -- i.e. targeting out-of-favor stocks and avoiding in-favor stocks -- Dreman found you could make a killing. Specifically, Dreman compared a stock's price to four fundamentals: earnings, cash flow, book value, and dividend yield. If a stock's price/earnings, price/cash flow, price/book value, or price/dividend ratio was in the bottom 20% of the market, it was a sign that investors weren't paying it much attention. And to Dreman, that was a sign that these stocks could end up becoming winners. (In my Dreman-based model, a firm is required to be in the bottom 20% of the market in at least two of those four categories to earn "contrarian" status.) But Dreman also realized that just because a stock was overlooked, it wasn't necessarily a good buy. After all, investors sometimes are right to avoid certain poorly performing companies. What Dreman wanted to find were good companies that were being ignored, often because of apathy or overblown fears about the stock or its industry. To find those good firms, he used a variety of fundamental tests. Among them were return on equity (he wanted a stock's ROE to be in the top third of the 1,500 largest stocks in the market); the current ratio (which he wanted to be greater than the stock's industry average, or greater than 2); pre-tax profit margins (which should be at least 8 percent), and the debt/equity ratio (which should be below the industry average, or below 20 percent). By using those and other fundamental tests in conjunction with his contrarian indicator tests (the low P/E, P/CF, P/B, and P/D criteria we reviewed before), he was able to have great success finding strong but unloved firms that had the potential to take off once investors caught on to their true strength. Because Dreman took advantage of the overreactions of others, he found that one of the best times to invest was during a crisis. "A market crisis presents an outstanding opportunity to profit, because it lets loose overreaction at its wildest," he wrote in Contrarian Investment Strategies. "People no longer examine what a stock is worth; instead, they are fixated by prices cascading ever lower. Further, the event triggering the crisis is always considered to be something entirely new." Dreman's advice: "Buy during a panic, don't sell." This type of contrarian approach isn't for the faint-of-heart. You never know exactly when fear will subside and investors will wake up to a bargain they've been overlooking. And that means the stocks this model targets may very well keep falling in the short term after you buy them, which, for my Dreman-based portfolio, is what happened during the recent financial crisis and bear market. The portfolio, which had trounced the S&P from its inception through 2006, fell on tough times as fears about the economy grew, lagging the S&P by about 15 percentage points in both 2007 and 2008. But, as fears abated and the crisis passed, investors began to recognize the strong stocks they'd been shunning. And the Dreman portfolio reaped the benefits, returning more than 37% in 2009 (vs. 23.5% for the S&P) and 23.1% in 2010 (vs. 12.8% for the S&P). Since its July 2003 inception, the 10-stock Dreman-based portfolio is well ahead of the S&P 500, returning 100.8%, or 7.2% annualized, vs. 68.5%, or 5.3 %, for the S&P (through Aug. 14). As you might imagine, the portfolio will tread into areas of the market others ignore because of its contrarian bent. Right now, its holdings include some very unloved firms, including several financials, emerging market stocks, and much-maligned BP. Here's the full list of its current holdings: Canadian Imperial Bank of Commerce (CM) BP Plc (BP) Telecom Argentina SA (TEO) American Capital Agency Corp. (AGNC) China Mobile Limited (CHL) Vale SA (VALE) Annaly Capital Management, Inc.(NLY) Petroleo Brasileiro SA (PBR) American Capital, Ltd. (ACAS) Royal Dutch Shell Plc (RDS.A) News about Validea Hot List Stocks Inter Parfums (IPAR): On Aug. 7, Inter reported second-quarter net income of $3.8 million, or $0.12 per share, down from $6.0 million, or $0.20 per share, a year ago. Net sales of ongoing brands (excluding Burberry, with whom it terminated its agreement last year) increased 17% to $96.8 million from $82.7 million. Net sales including Burberry brand sales were down 19.3% to $117.5 million, compared to $145.6 million. Investors didn't take the news well, with shares dropping more than 10% over the next two days. AmTrust Financial Services (AFSI): On Aug. 6, AmTrust reported second-quarter net income of $80.1 million or $1.14 per share, up sharply from $40.4 million or 59 cents a share in the year-ago quarter. Growth was primarily driven by significant improvement in top line and agency acquisitions implemented in the past one year, Zack's Equity Research said. Total revenue rose 66.4% to $716.5 million from $430.6 billion in the year-ago period. Earnings and revenue results both beat expectations, and the company announced that it will be paying a 10% stock dividend. Shares rose slightly the day of the announcement, and have continued to rise since then. They are up nearly 7% since before the announcement (as of early afternoon trading on August 15). The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will rebalance the portfolio. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score HCI HCI GROUP INC Insurance (Prop. & Casualty) 85 WSM WILLIAMS-SONOMA, INC. Furniture & Fixtures 84 AFSI AMTRUST FINANCIAL SERVICES, INC. Insurance (Prop. & Casualty) 81 OSTK OVERSTOCK.COM, INC. Retail (Catalog & Mail Order) 79 LEA LEAR CORPORATION Auto & Truck Parts 79 USNA USANA HEALTH SCIENCES, INC. Conglomerates 74 HFC HOLLYFRONTIER CORP Oil & Gas Operations 74 BPI BRIDGEPOINT EDUCATION INC Schools 72 VLO VALERO ENERGY CORPORATION Oil & Gas Operations 62 IPAR INTER PARFUMS, INC. Personal & Household Prods. 28 Ticker Market Cap Date Added Start Price Current Price Return HCI $380 6/7/2013 $34.20 $33.23 -2.8% WSM $5,651 5/10/2013 $56.93 $58.15 2.1% AFSI $2,989 7/5/2013 $39.36 $44.17 12.2% OSTK $725 8/2/2013 $33.70 $30.52 -9.4% LEA $5,709 5/10/2013 $60.48 $70.80 17.1% USNA $1,072 12/21/2012 $33.83 $77.75 129.8% HFC $8,982 4/12/2013 $46.83 $44.94 -4.0% BPI $892 8/2/2013 $16.59 $16.47 -0.7% VLO $19,479 8/2/2013 $35.09 $35.93 2.4% IPAR $889 8/2/2013 $33.66 $28.87 -14.2%

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer HCI   |   WSM   |   AFSI   |   OSTK   |   LEA   |   USNA   |   HFC   |   BPI   |   VLO   |   IPAR   |   HCI GROUP INC Profile Strategy: Growth Investor Based on: Martin Zweig HCI Group Inc, formerly Homeowners Choice, Inc., is a holding company. The Company, through its subsidiaries, is engaged in the property and casualty insurance business. Through Homeowners Choice Property & Casualty Insurance Company, Inc. (HCPC) and subsidiaries, primarily Homeowners Choice Managers, Inc. (HCM), Southern Administration, Inc., Claddaugh Casualty Insurance Company, Ltd., and its subsidiary, HCPCI Holdings LLC, it provides property and casualty homeowners' insurance, condominium-owners' insurance and tenants' insurance to individuals owning property in Florida. Its subsidiaries also include TV Investment Holdings LLC, which owns and operates a marina facility located in Florida; Unthink Technologies Private Limited. During the year ended December 31, 2011, it organized TV Investment Holdings LLC, HCI Holdings LLC and HCI Technical Resources, Inc. Analysis Guru Score: 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. HCI's P/E is 8.17, 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. HCI's revenue growth is 50.75%, while it's earnings growth rate is 31.66%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, HCI 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 (48.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (39.7%) of the current year. Sales growth for the prior must be greater than the latter. For HCI 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. HCI's EPS ($1.81) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. HCI's EPS for this quarter last year ($0.88) 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. HCI's growth rate of 105.68% 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 HCI is 15.83%. This should be less than the growth rates for the 3 previous quarters which are 166.67%, 0.00% and 91.94%. HCI 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, 89.92%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 105.68%, (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, 105.68% must be greater than or equal to the historical growth which is 31.66%. HCI 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. HCI, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.08, 1.52, 0.81, 1.34, and 3.02, 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. HCI's long-term growth rate of 31.66%, based on the average of the 3, 4 and 5 year historical eps growth rates, 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 HCI, this criterion has not been met (insider sell transactions are 135, while insiders buying number 26). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.   WILLIAMS-SONOMA, INC. Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Williams-Sonoma, Inc. is a multi-channel specialty retailer of products for the home. The direct-to-customer segment of the Company's business sells its products through its six e-commerce Websites (williams-sonoma.com, potterybarn.com, potterybarnkids.com, pbteen.com, westelm.com and rejuvenation.com) and seven direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed and Bath, PBteen, West Elm and Rejuvenation). Its e-commerce platform is available to customers in more than 75 countries, while its catalogs reach customers throughout the United States. The retail segment of its business sells products through its five retail store concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation). As of January 29, 2012, it operated 576 stores in 44 states, Washington, D.C., Canada and Puerto Rico. On November 1, 2011, the Company acquired Rejuvenation Inc. 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. WSM's P/S ratio of 1.37 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. WSM's Debt/Equity of 0.42% 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. WSM 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 WSM At this Point Is WSM 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, WSM, who has a P/S of 1.37, 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%. WSM's inflation adjusted EPS growth rate of 41.93% 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. WSM's free cash per share of 0.70 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. WSM, whose three year net profit margin averages 6.14%, passes this evaluation.   AMTRUST FINANCIAL SERVICES, INC. Profile Strategy: Growth Investor Based on: Martin Zweig Amtrust Financial Services, Inc. is a holding company. The Company is a multinational specialty property and casualty insurer focused on generating consistent underwriting profits. The Company operates in four segments: small commercial business, specialty program and personal lines reinsurance. In January 2013, the Company acquired First Nonprofit Companies, Inc. In February 2013, its subsidiary acquired Car Care Plan (Holdings) Limited from Ally Insurance Holdings, Inc. In April 2013, it acquired Sequoia Insurance Company and its subsidiaries, Sequoia Indemnity Company and Personal Express Insurance Company. In May 2013, the Company acquired Mutual Insurers Holding Company (MIHC) and MIHC's subsidiary, First Nonprofit Insurance Company. 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. AFSI's P/E is 11.63, 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. AFSI's revenue growth is 32.07%, while it's earnings growth rate is 14.36%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, AFSI 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 (66.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (37.1%) of the current year. Sales growth for the prior must be greater than the latter. For AFSI 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. AFSI's EPS ($1.14) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. AFSI's EPS for this quarter last year ($0.59) 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. AFSI's growth rate of 93.22% 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 AFSI is 7.18%. This should be less than the growth rates for the 3 previous quarters, which are 13.79%, 41.07%, and 110.53%. AFSI 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, 54.97%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 93.22%, (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, 93.22% must be greater than or equal to the historical growth which is 14.36%. AFSI 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. AFSI, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.37, 1.72, 2.14, 2.52 and 2.58, passes this test. LONG-TERM EPS GROWTH: [FAIL] The final important criterion in this approach is that Earnings Growth be at least 15% per year. AFSI's long-term growth rate of 14.36%, based on the average of the 3, 4 and 5 year historical eps growth rates, fails the minimum required.   OVERSTOCK.COM, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Overstock.com, Inc. (Overstock) is an online retailer offering discount brand name, non-brand name and closeout merchandise, including bed-and-bath goods, home decor, kitchenware, furniture, watches and jewelry, apparel, electronics and computers, sporting goods, and designer accessories, among other products. The Company is also a channel through, which customers can purchase cars, insurance and travel products and services. Overstock sells advertising. The Company also sells books, magazines, compact discs (CDs), digital versatile discs (DVDs) and video games (BMMG). Overstock sells these products through its Internet Websites located at www.overstock.com, www.o.co and www.o.biz. Overstock operates in two segments: direct business and fulfillment partner business. As of December 31, 2011, the Company offered approximately 251,000 non-BMMG products and approximately 637,000 BMMG products. Analysis Guru Score: 87% DETERMINE THE CLASSIFICATION: This methodology would consider OSTK a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (32.08) relative to the growth rate (24.75%), based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, 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 OSTK (1.30) is on the high side, but is acceptable if all the other tests are met. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. OSTK, whose sales are $1,202.6 million, needs to have a P/E below 40 to pass this criterion. OSTK's P/E of (32.08) 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 OSTK is 24.8%, based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, which is considered very good. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for OSTK (0.00%) to be wonderfully 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 OSTK (2.16%) 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 OSTK (13.19%) 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.   LEAR CORPORATION Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Lear Corporation is a tier 1 supplier to the global automotive industry. The Company supplies its products to automotive manufacturers with automotive seat systems and related components, as well as electrical distribution systems and related components. The Company has two segments: seating and electrical power management systems (EPMS). The seating segment includes seat systems and related components, such as seat frames, recliner mechanisms, seat tracks, seat trim covers, headrests and seat foam. The EPMS segment includes electrical distribution systems for traditional powertrain vehicles, as well as for hybrid and electric vehicles. As of December 31, 2011, it had 20 joint ventures located throughout Asia, as well as five in North America, two in Europe and Africa and one with operations in all three regions. Analysis Guru Score: 100% 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. LEA, with a market cap of $5,709 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. LEA, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were -4.47, -2.66, 4.05, 5.08 and 12.85, 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. LEA's Price/Sales ratio of 0.37, 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. LEA, whose relative strength is 86, is in the top 50 and would pass this last criterion.   USANA HEALTH SCIENCES, INC. Profile Strategy: Value Investor Based on: Benjamin Graham USANA Health Sciences, Inc. develops and manufactures science-based nutritional and personal care products. The Company has operations in 15 markets worldwide, where it distributes and sells its products by way of direct selling. The Company reports operations in two geographic regions: North America and Asia Pacific, which is further divided into three sub-regions; Southeast Asia/Pacific, Greater China, and North Asia. North America includes the United States, Canada, Mexico, and direct sales from the United States to the United Kingdom and the Netherlands. Southeast Asia/Pacific includes Australia, New Zealand, Singapore, Malaysia, and the Philippines; Greater China includes Hong Kong, Taiwan and China; and North Asia includes Japan and South Korea. The Company's customer base consists of two types of customers: Associates and Preferred Customers. As of December 31, 2011, the Company had 222,000 active Associates and 64,000 active Preferred Customers worldwide. Analysis Guru Score: 71% SECTOR: [PASS] USNA 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. USNA's sales of $691.9 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. USNA's current ratio of 2.22 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 USNA is $0.0 million, while the net current assets are $91.4 million. USNA 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. USNA's EPS growth over that period of 265.7% 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. USNA's P/E of 22.10 (using the 3 year PE) fails this test. PRICE/BOOK RATIO: [FAIL] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. USNA's Price/Book ratio is 4.94, while the P/E is 22.10. USNA fails the Price/Book test.   HOLLYFRONTIER CORP Profile Strategy: Contrarian Investor Based on: David Dreman HollyFrontier Corporation (HollyFrontier), formerly Holly Corporation, is a petroleum refiner, which produces light products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. HollyFrontier operates in two segments: Refining and Holly Energy Partners, L.P. (HEP). The Refining segment includes the operations of its El Dorado, Tulsa, Navajo, Cheyenne and Woods Cross Refineries and NK Asphalt. The HEP segment involves all of the operations of HEP. As of December 31, 2011, it operated five refineries having a combined crude oil processing capacity of 443,000 barrels per day that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain regions of the United States. The Company merged with Frontier Oil Corporation (Frontier), on July 1, 2011. On November 9, 2011, HEP acquired from the Company certain tankage, loading rack and crude receiving assets located at its El Dorado and Cheyenne Refineries. Analysis Guru Score: 76% MARKET CAP: [PASS] Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. HFC has a market cap of $8,982 million, therefore passing the test. EARNINGS TREND: [FAIL] A company should show a rising trend in the reported earnings for the most recent quarters. HFC's EPS for the latest quarter is not greater than the prior quarter, (from earliest to most recent quarter) 1.63, 1.27. Hence the stock fails this test, but the investor should evaluate this company qualitatively to see if it qualifies under this methodology's "exception rule". EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: [FAIL] This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. HFC fails this test as its EPS growth rate for the past 6 months (-33.85%) does not beat that of the S&P (15.83%). This methodology would utilize four separate criteria to determine if HFC is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest". P/E RATIO: [PASS] The P/E of a company should be in the bottom 20% of the overall market. HFC's P/E of 5.79, based on trailing 12 month earnings, meets the bottom 20% criterion (below 11.28), and therefore passes this test. PRICE/CASH FLOW (P/CF) RATIO: [PASS] The P/CF of a company should be in the bottom 20% of the overall market. HFC's P/CF of 4.75 meets the bottom 20% criterion (below 6.35) and therefore passes this test. PRICE/BOOK (P/B) VALUE: [FAIL] The P/B value of a company should be in the bottom 20% of the overall market. HFC's P/B is currently 1.44, which does not meet the bottom 20% criterion (below 0.93), and it therefore fails this test. PRICE/DIVIDEND (P/D) RATIO: [FAIL] The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). HFC's P/D of 37.45 does not meet the bottom 20% criterion (below 20.41 or yield above 3.7%), and it therefore fails this test. This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below. CURRENT RATIO: [PASS] A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.18] or greater than 2). This is one identifier of financially strong companies, according to this methodology. HFC's current ratio of 2.37 passes the test. PAYOUT RATIO: [PASS] A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for HFC is 30.79%, while its historical payout ratio has been 44.31%. Therefore, it passes the payout criterion. RETURN ON EQUITY: [PASS] The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 16.36%, and would consider anything over 27% to be staggering. The ROE for HFC of 27.30% is high enough to pass this criterion. PRE-TAX PROFIT MARGINS: [PASS] This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. HFC's pre-tax profit margin is 12.57%, thus passing this criterion. YIELD: [FAIL] The company in question should have a yield that is high and that can be maintained or increased. HFC's current yield is 2.67%, while the market yield is 2.65%. HFC fails this test. LOOK AT THE TOTAL DEBT/EQUITY: [PASS] The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 37.08%. HFC's Total Debt/Equity of 15.80% is considered acceptable.   BRIDGEPOINT EDUCATION INC Profile Strategy: Value Investor Based on: Benjamin Graham Bridgepoint Education, Inc. (Bridgepoint) is a provider of postsecondary education services. The Company's academic institutions include Ashford University and University of the Rockies. Its institutions deliver programs primarily online, as well as at their traditional campuses. As of December 31, 2011, the Company had 86,642 total students enrolled in its institutions. Bridgepoint's institutions conduct ongoing faculty and student assessment processes and provide a range of student services. The Company is also focused on developing new technologies, such as through Waypoint Outcomes, Constellation, and the development of its institutions' mobile learning platforms. The Company has developed Constellation to replace third party textbooks with digital course materials. Constellation materials are displayed in a browser-based platform. In January 2012, Bridgepoint introduced Thuze. Analysis Guru Score: 86% SECTOR: [PASS] BPI 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. BPI's sales of $881.0 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. BPI's current ratio of 2.88 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 BPI is $0.0 million, while the net current assets are $353.4 million. BPI passes this test. LONG-TERM EPS GROWTH: [FAIL] 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. EPS for BPI were negative within the last 5 years and therefore the company fails this criterion. 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. BPI's P/E of 10.77 (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. BPI's Price/Book ratio is 1.66, while the P/E is 10.77. BPI passes the Price/Book test.   VALERO ENERGY CORPORATION Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Valero Energy Corporation (Valero) is an independent petroleum refining and marketing company. Valero's refineries can produce conventional gasoline's, distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products, as well as a slate of premium products, including conventional blendstock for oxygenate blending and reformulated gasoline blendstock for oxygenate blending, gasoline meeting the specifications of the California Air Resources Board, a diesel fuel, and low-sulfur and ultra-low-sulfur diesel fuel. It also owns 10 ethanol plants in the central plains region of the United States with a combined ethanol nameplate production capacity of about 1.1 billion gallons per year. It operates in three business segments: refining, ethanol, and retail. In May 2013, CST Brands Inc announced that the Company which includes Corner Store and Depanneur du Coin, spun off from Valero Energy Corporation. Analysis Guru Score: 75% MARKET CAP: [PASS] The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. VLO, with a market cap of $19,479 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. VLO, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were -2.20, -0.51, 1.62, 3.68 and 3.74, 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. VLO's Price/Sales ratio of 0.14, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [FAIL] The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. VLO has a relative strength of 73. This does not pass the final criterion. As a result, this methodology would not consider the stock even though it passed the previous three criteria.   INTER PARFUMS, INC. Profile Strategy: Value Investor Based on: Benjamin Graham Inter Parfums, Inc. operates in the fragrance business, and manufactures, markets and distributes an array of fragrances and fragrance related products. The Company operates in two segments: European based operations and United States based operations. Its prestige fragrance products are produced and marketed by its European operations through its 74% owned subsidiary in Paris, Interparfums SA. The Company's specialty retail and mass market fragrance and fragrance related products are marketed through its United States operations These fragrance products are sold under trademarks owned by the Company or pursuant to license or other agreements with the owners of brands which include the Gap, Banana Republic, Anna Sui, Brooks Brothers, bebe, Betsey Johnson, Nine West, Lane Bryant and Jordache. Analysis Guru Score: 86% SECTOR: [PASS] IPAR 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. IPAR's sales of $674.5 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. IPAR's current ratio of 4.52 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 IPAR is $0.0 million, while the net current assets are $399.7 million. IPAR 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. IPAR's EPS growth over that period of 382.8% 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. IPAR's P/E of 14.00 (using the 3 year PE) passes this test. PRICE/BOOK RATIO: [FAIL] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. IPAR's Price/Book ratio is 2.18, while the P/E is 14.00. IPAR fails the Price/Book test.   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 STMP STAMPS.COM INC. Retail (Catalog & Mail Order) 69 ROST ROSS STORES, INC. Retail (Apparel) 66 RGR STURM, RUGER & COMPANY Recreational Products 63 AGCO AGCO CORPORATION Constr. & Agric. Machinery 57 SIG SIGNET JEWELERS LTD. Retail (Specialty) 57 PBR PETROLEO BRASILEIRO PETROBRAS SA (ADR) Oil & Gas - Integrated 56 CVX CHEVRON CORPORATION Oil & Gas - Integrated 56 DORM DORMAN PRODUCTS INC. Auto & Truck Parts 55 HIBB HIBBETT SPORTS, INC. Retail (Specialty) 53 MGLN MAGELLAN HEALTH SERVICES INC Healthcare Facilities 50

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