Executive Summary  |   Portfolio  |   Guru Analysis  |   Watch List

Executive Summary	April 27, 2012

The Economy It seems the economy remains plateaued following its impressive performance in the last two quarters, though the plateau on which it rests is a significantly higher perch than the one it sat on a year ago. One sign of the flattening of growth came from the industrial and manufacturing sector. A new Federal Reserve report showed that industrial production was flat in March on a seasonally adjusted basis (vs. February) for the second month in a row, with manufacturing production actually declining 0.2%. The overall March industrial production figure was 3.6% higher than it was in the year-ago period, however. (Here and below, all week-over-week and month-over-month economic figures are seasonally adjusted, while year-over-year figures use unadjusted data since they are comparing like periods). Also staying flat since our last newsletter were new claims for unemployment. Continuing claims, the data for which lags new claims by a week, have risen slightly. Still, new claims are more than 5% lower than they were last year at this time, while continuing claims are 10% lower, so the broader trend remains a good one. A bright spot for the economy has been the continued strength in retail sales. They rose again in March, according to the Commerce Department, increasing a solid 0.8% (vs. February). They now stand 7.4% higher than they were a year ago, a very healthy increase. Overall, the data continues to show that the U.S. consumer is not tapped out, which is critical for our consumer-driven economy. A good sign for consumers is that, while gas prices remain quite high, they have begun to fall. A gallon of regular unleaded averaged $3.84 as of April 25, according to AAA, down from $3.90 a month ago. The housing sector, meanwhile, brought mixed news. Housing starts fell 5.8% in March (vs. February), according to the Census Bureau, though they remained more than 9% above year-ago levels. The amount of privately owned housing units authorized by building permits rose 4.5%, however, a sign that building may pick up. Permit authorizations are now more than 25% higher than they were a year ago. The National Association of Realtors also reported that existing home sales declined 2.6% in March, though they remain 4% above their year ago level and the median sale price was 2.5% above the year ago level. Also, the realtor group said that it appeared in several markets across the country that a lack of inventory actually prevented more sales from being made. That's a very good sign -- since the housing bubble, the housing market has been working off some serious overcapacity. Until that happens, the homebuilding industry will struggle, and it's usually a big driver in economic expansions. Perhaps we're finally getting to the point where enough inventory has been worked off, and homebuilding will become a big driver in this expansion. Since our last newsletter, the S&P 500 returned 0.9%, while the Hot List returned 3.2%. So far in 2012, the portfolio has returned 20.6% vs. 11.3% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 172.7% vs. the S&P's 39.9% gain. Market Valuation Update It's been a few months since we've taken an in-depth look at the broader market's valuation. In that time, stocks have made some big gains, so I think it's time to check in again and see where things stand. For starters, the S&P 500 trades for about 14 times trailing 12-month operating earnings and 15 times as-reported earnings (both those figures include estimates for about two-thirds of companies for the first quarter), using Standard & Poor's data and the April 24 closing price. Back in December, the trailing P/Es were 13.1 for operating earnings and 14.3 for as-reported, so they've increased only slightly. Using projected earnings for the next year, the operating figure is about 12.6 and the as-reported is about 13.5. The index's price/sales ratio, meanwhile, is a reasonable 1.3 (slightly above its 1.2 level from December) and its price/book ratio is about 2. And, its dividend yield is a solid 2.44% (just 0.09 percentage points below its December level), still well above the yield on 10-year Treasury bonds -- a rarity. One figure that has increased significantly since I last looked in-depth at market valuation is the Stock Market/GDP ratio, which compares the market cap of the Wilshire Total Market Index to gross domestic product. It has risen to 95.6% (from 86.4% in December) according to GuruFocus.com, which puts it in "modestly overvalued" range (90% to 115%), basd on the site's analysis of historical data. The 10-year cyclically adjusted price/earnings ratio is also high. The ratio, which uses inflation-adjusted average earnings for the past decade to smooth out short-term fluctuations, is at 21.8 (through April 24), having risen slightly since mid-December when it was between 20 and 21. It's significantly higher than the 16.4 historical average (which dates back to 1871) but doesn't look as high when compared to the average of 18.2 since 1946 (which is a significant date because after World War II inflation became a permanent part of the U.S. economy; since inflation eats away so significantly at fixed-income assets, investors should be willing to pay higher multiples for stocks when inflation is a factor). Bargains Abound All in all, all of those metrics collectively indicate to me that the market is still pretty close to fair value. There are other issues that may be impacting the valuation picture, but it seems that for every negative the bears can point to, the bulls can point to an equally persuasive positive factor. For example, while bears have noted that profit margins are quite high compared to historical standards, which may be goosing earnings numbers, the bulls can point to the 10-year P/E ratio being skewed by the atrocious earnings of only a couple of big financial firms in 2008 and 2009 -- some of which aren't even in the S&P 500 index anymore. The fact that there are some persuasive arguments on both sides lends credence to the notion that we are somewhere in the fair value range. More importantly to me, a myriad of quality stocks are trading at very attractive prices, offering lots of opportunities for stockpicking systems like the Hot List. For example, The TJX Companies, which is the parent of discount retailers TJ Maxx and Marshalls, has a return on equity of 47%, and nearly thre times as much net current assets as long-term debt. The firm has increased earnings-per-share in every year of the past decade, and has been growing EPS at a 21.5% annual pace over the long-term (that's using an average of the 3, 4, and 5 year EPS growth rates). Yet it trades for about 1.3 times sales -- a very reasonable figure -- and has a P/E-to-growth ratio just under 1.0, a sign that it's a good value. Then there's Bridgepoint Education. Many investors have dumped for-profit education stocks as they've come under increased regulatory scrutiny over the past year or two. But Bridgepoint has kept on performing. It increased earnings-per-share by 41% last year, and revenue by 31%. The firm has a return on equity of 58%, no long-term debt, and a free cash flow yield of 15.4%. All of that, and it trades for just 7 times trailing 12 month earnings, about 1.2 times sales, and has a PEG ratio of about 0.2. Finally, consider the lone financial in the portfolio right now, Cash America International. While the past decade has been a rough one for many financial firms, this Texas-based pawn loan firm has excelled, increasing EPS every year, and posting long-term EPS and sales growth rates of about 15% (again, based on an average of the respective 3, 4, and 5 year rates). It has an equity/assets ratio of 54%, and a return on assets rate of 8.7%. To give you an idea of how good that is, my Peter Lynch-based method uses targets of 5% for the equity/assets ratio and 1% for return on assets. But despite all that, Cash America is very cheap. It trades for 10.1 times trailing 12 month earnings and 0.82 times sales. That's the sort of high-quality, bargain-priced stock that the Hot List loves. Overall, the 10 Hot List positions average a 32% return on equity and on average have increased earnings in all but two years of the past decade. The non-financials have a very solid 2.0 current ratio and very reasonable 21.9% debt/equity ratio, while the one financial has those stellar equity/assets and return on assets figures I mentioned above. Despite all that, these stocks are collectively quite cheap. On average, they have a trailing 12 month P/E ratio of 13.7; a PEG ratio of 0.59; and a price/sales ratio of 1.14. Bottom line: While the broader market seems to be reasonably valued, there are plenty of very attractive, bargain-priced individual stocks out there, and the Hot List should benefit greatly over the long haul by scooping them up now.		Editor-in-Chief: John Reese Since Inception   Hot List 172.7% S&P 500 39.9% Accuracy 57.5% Beta 1.2 YTD   Hot List 20.6% S&P 500 11.3% Since Last Issue   Hot List 3.2% S&P 500 0.9% Avg. Fundamentals   Market Cap (mil) $7,390 PE Ratio 13.9 5 Yr EPS Growth 13.7% Yield 0.6% Rel. Strength 75 Portfolio Sectors Services 7 Capital Goods 1 Financial 1 Healthcare 1
Advertisement Validea Capital Management - Private Portfolio Management Based on Strategies of Legends Are you looking for an alternative to your underperforming mutual funds or financial advisor? Click here to download Validea Capital's investment kit and learn more about the firm's guru-based portfolios. Get More Information on Validea Capital! ** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. Thre information above in not intended as personal investment advice and should not be interpreted as such. Guru Spotlight: Warren Buffett With his humble Midwest beginnings, plainspoken wisdom and wit, and incredible wealth, Warren Buffett has become the most-watched investor in the world. But as interesting a character as Buffett is, the more important piece of the Buffett puzzle for investors is this: How did he do it? My Buffett-based Guru Strategy attempts to answer that question. Based on the approach Buffett reportedly used to build his fortune, it tries to use the same conservative, stringent criteria to choose stocks that the "Oracle of Omaha" has used in evaluating businesses. Before we get into exactly how this strategy works, a couple notes about Buffett and my Buffett-based strategy: First, while most of my Guru Strategies are based on published writings of the gurus themselves, Buffett has not publicly disclosed his exact strategy (though he has hinted at pieces of it). My Buffett-inspired model is based on the book Buffettology, written by Mary Buffett, Warren's ex-daughter-in-law, and David Clark, a Buffett family friend, both of whom worked closely with Buffett. Second, while most of my Buffett-based method centers on a company's fundamentals, there are a few non-statistical criteria to keep in mind. For example, Buffett likes to invest in companies that have very recognizable brand names, to the point that it is difficult for competitors to take away their market share, no matter how much capital they have. One example of a current Berkshire holding that meets this criterion is Coca-Cola, whose name is engrained in the culture of America, as well as other parts of the world. In addition, Buffett also likes firms whose products are simple for an investor to understand -- food, diapers, razors, to name a few examples. In the end, however, for Buffett, it comes down to the numbers -- those on a company's balance sheet and those that represent the price of its stock. In terms of the numbers on the balance sheet, one theme of the Buffett approach is solid results over a long period of time. He likes companies that have a lengthy history of steady earnings growth, and, in most cases, the model I base on his philosophy requires companies to have posted increasing earnings per share each year for the past ten years. There are a few exceptions to this, one of which is that a company's EPS can be negative or be a sharp loss in the most recent year, because that could signal a good buying opportunity (if the rest of the company's long-term earnings history is solid). Another part of Buffett's conservative approach: targeting companies with manageable debt. My model calls for companies to have the ability to pay off their debt within five years, based on their current earnings. It really likes stocks that could pay off their debts in less than two years. Smart Management, and an Advantage Two qualities Buffett is known to look for in his buys are strong management and a "durable competitive advantage". Both of those are qualitative things, but Buffett has used certain quantitative measures to get an idea of whether a firm has those qualities. Two of those measures are return on equity and return on total capital. The model I base on Buffett's approach likes firms to have posted an average ROE of at least 15% over the past 10 years and the past three years, and an ROTC of at least 12% over those time frames. Another way Buffett examines a firm's management is by looking at how the it spends the company's retained earnings -- that is, the earnings a company keeps rather than paying out in dividends. My Buffett-based model takes the amount a company's earnings per share have increased in the past decade and divides it by the total amount of retained earnings over that time. The result shows how much profit the company has generated using the money it has reinvested in itself -- in other words, how well management is using retained earnings to increase shareholders' wealth. The Buffett method requires a firm to have generated a return of 12% or more on its retained earnings over the past decade. The Price Is Right? The criteria we've covered so far all are used to identify "Buffett-type" stocks. But there's a second critical part to Buffett's analysis: price -- can he get the stock of a quality company at a good price? One way my Buffett-based model answers this question is by comparing a company's initial expected yield to the long-term treasury yield. (If it's not going to earn you more than a nice, safe T-Bill, why take the risk involved in a stock?) To predict where a stock will be in the future, Buffett uses not just one, but two different methods to estimate what the company's earnings and stock's rate of return will be 10 years from now. One method involves using the firm's historical return on equity figures, while another uses earnings per share data. (You can find details on these methods by viewing an individual stock's scores on the Buffett model on Validea.com, or in my latest book, The Guru Investor.) This notion of predicting what a company's earnings will be in 10 years may seem to run counter to Buffett's nonspeculative ways. But while using these methods to predict a company's earnings for the next 10 years in her book, Mary Buffett notes: "In most situations this would be an act of insanity. However, as Warren has found, if the company is one of sufficient earning power and earns high rates of return on shareholders' equity, created by some kind of consumer monopoly, chances are good that accurate long-term projections of earnings can be made." Solid Performer My Buffett-based 10-stock portfolio wasn't one of my original portfolios, instead coming online in late 2003. Since then, it's returned 62.1%, more than twice what the S&P 500 has gained (28.8%; all figures through April 23). The portfolio has been a very strong performer over the past few years. In 2009, it had a banner year, gaining 50.3% and more than doubling the S&P. It lagged the index in 2010, gaining just 6.3%, but bounced back strong in 2011, gaining 10.2% while the broader market was flat. This year, it's outperforming again, having gained 11.7% thus far vs. 8.7% for the S&P. In the end, Buffett-type stocks are not the kind of sexy, flavor-of-the-month picks that catch most investors' eyes; instead, they are proven businesses selling at good prices. That approach, combined with a long-term perspective, tremendous discipline, and an ability to keep emotions at bay (allowing him to buy when others are fearful), is how Buffett has become the world's greatest investor. Whatever the size of your portfolio, those qualities are worth emulating. Now, here's a look at my Buffett portfolio's current holdings. It's an interesting group, and some of the holdings might not seem like "Buffett-type" plays on the surface. But they have the fundamental characteristics that make them the type of stocks Buffett has focused on while building his empire. The TJX Companies, Inc. (TJX) Oracle Corporation (ORCL) PetMed Express, Inc. (PETS) Monster Beverage Corp. (MNST) Raven Industries (RAVN) Bio-Reference Laboratories Inc. (BRLI) Rollins Inc. (ROL) World Acceptance Corp. (WRLD) Coach, Inc. (COH) Infosys Ltd (INFY) News about Validea Hot List Stocks Northrop Grumman (NOC): Grumman reported first-quarter income from continuing operations of $506 million, or $1.96 per diluted share, up from $496 million, or $1.67 a share, a year ago. The firm cited company-wide cost-cutting and a buyback of 4.4 million shares as reasons for the increase, according to Reuters. Grumman also raised its guidance for the full year nearly 30 cents, to $6.70-$6.95 per diluted share. Apollo Group (APOL): Apollo said last week that the Securities and Exchange Commission was probing share sales by company insiders, Reuters reported. The SEC contacted Apollo seeking information about the stock sales and a Feb. 28 regulatory filing that disclosed the company's second-quarter outlook, the firm said in a regulatory filing, according to Reuters. An analyst noted that given the recent scrutiny of for-profit education firms, however, Apollo has "relatively robust insider trading controls," Reuters stated. Shares were down about 3.4% since our last newsletter (through April 26). 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 CSTR COINSTAR, INC. Recreational Activities 68 APOL APOLLO GROUP INC Schools 65 AAP ADVANCE AUTO PARTS, INC. Retail (Specialty) 63 FINL FINISH LINE INC Retail (Apparel) 62 TJX THE TJX COMPANIES, INC. Retail (Department & Discount) 61 BPI BRIDGEPOINT EDUCATION INC Schools 60 NOC NORTHROP GRUMMAN CORPORATION Aerospace & Defense 52 CSH CASH AMERICA INTERNATIONAL, INC. Misc. Financial Services 43 FRX FOREST LABORATORIES, INC. Biotechnology & Drugs 36 BODY BODY CENTRAL CORP Retail (Apparel) 33 Ticker Market Cap Date Added Start Price Current Price Return CSTR $2,113 2/17/2012 $56.23 $67.51 20.1% APOL $4,334 4/13/2012 $36.70 $35.92 -2.1% AAP $6,696 3/16/2012 $88.05 $91.43 3.8% FINL $1,153 4/13/2012 $21.07 $22.19 5.3% TJX $31,506 3/16/2012 $37.91 $41.77 10.2% BPI $1,127 3/18/2011 $18.02 $21.59 19.8% NOC $15,955 2/17/2012 $60.08 $63.44 5.6% CSH $1,351 3/16/2012 $47.05 $45.97 -2.3% FRX $9,201 9/2/2011 $33.10 $34.65 4.7% BODY $468 3/16/2012 $26.76 $28.98 8.3%

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer CSTR   |   APOL   |   AAP   |   FINL   |   TJX   |   BPI   |   NOC   |   CSH   |   FRX   |   BODY   |   COINSTAR, INC. Profile Strategy: Growth Investor Based on: Martin Zweig Coinstar, Inc. (Coinstar) is a provider of automated retail solutions, which offers convenient products and services. the Company's offerings in automated retail include its Redbox business, where consumers can rent or purchase movies and video games from self-service kiosks (Redbox segment), and its Coin business, where consumers can convert their coin to cash or stored value products at self-service coin counting kiosks (Coin segment). Its New Ventures business (New Ventures segment) is focused on identifying, evaluating, building, and developing self-service concepts in the marketplace. On June 9, 2011, the Company completed the sale transaction of the Money Transfer Business to Sigue Corporation (Sigue). Analysis Guru Score: 92% 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. CSTR's P/E is 18.69, based on trailing 12 month earnings, while the current market PE is 19.00. 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. CSTR's revenue growth is 41.92%, while it's earnings growth rate is 44.45%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, CSTR 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 (33.2%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (22.5%) of the current year. Sales growth for the prior must be greater than the latter. For CSTR 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. CSTR's EPS ($1.00) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. CSTR's EPS for this quarter last year ($0.68) 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. CSTR's growth rate of 47.06% 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 CSTR is 22.22%. This should be less than the growth rates for the 3 previous quarters, which are 53.33%, 151.28%, and 78.79%. CSTR 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, 94.07%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 47.06%, (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 CSTR is 47.1%, 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, 47.06% must be greater than or equal to the historical growth which is 44.45%. CSTR 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. CSTR, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.82, 1.10, 1.31, 2.03 and 3.61, passes this test. LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. CSTR's long-term growth rate of 44.45%, 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. CSTR's Debt/Equity (74.78%) is not considered high relative to its industry (168.04%) 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 CSTR, this criterion has not been met (insider sell transactions are 65, while insiders buying number 36). 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.   APOLLO GROUP INC Profile Strategy: Patient Investor Based on: Warren Buffett Apollo Group, Inc. (Apollo Group) is a private education provider. The Company offers educational programs and services both online and on-campus at the undergraduate, master's and doctoral levels through its wholly owned subsidiaries, The University of Phoenix, Inc. (University of Phoenix); Institute for Professional Development (IPD); The College for Financial Planning Institutes Corporation (CFFP), and Meritus University, Inc. (Meritus). Apollo Group also formed a joint venture with The Carlyle Group (Carlyle), called Apollo Global, Inc. (Apollo Global), to pursue investments primarily in the international education services industry. As of August 31, 2011, Apollo Group owned 85.6% of Apollo Global, with Carlyle owning the remaining 14.4%. During the year ended December 31, 2011, the Other Schools segment includes IPD and CFFP, as well as Meritus University, Inc. (Meritus), which ceased operations. Analysis Guru Score: 86% STAGE 1: "Is this a Buffett type company?" A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage. LOOK FOR EARNINGS PREDICTABILITY: [PASS] Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.87, 1.30, 0.79, 2.30, 2.35, 2.38, 2.94, 3.85, 3.72, 4.02. Buffett would consider APOL's earnings predictable, although earnings have declined 2 time(s) in the past seven years, with the most recent decline 2 years ago. The dips have totaled 42.6%. APOL's long term historical EPS growth rate is 12.1%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 5.5% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers. LOOK AT THE ABILITY TO PAY OFF DEBT [PASS] Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. APOL has a debt of 93.8 million and earnings of 570.8 million, which could be used to pay off the debt in less than two years, which is considered exceptional. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [PASS] Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for APOL, over the last ten years, is 28.2%, 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 21.1%, 22.0%, 15.5%, 65.0%, 67.2%, 62.2%, 55.8%, 51.3%, 40.4%, 42.1%, and the average ROE over the last 3 years is 44.6%, thus passing this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: [PASS] Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for APOL, over the last ten years, is 42.7% and the average ROTC over the past 3 years is 39.6%, 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 21.1%, 22.0%, 15.5%, 65.0%, 67.2%, 62.2%, 54.8%, 46.2%, 35.9%, 36.8%, thus passing this criterion. LOOK AT CAPITAL EXPENDITURES: [PASS] Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. APOL's free cash flow per share of $5.18 is positive, indicating that the company is generating more cash that it is consuming. This is a favorable sign, and so the company passes this criterion. LOOK AT MANAGEMENT'S USE OF RETAINED EARNINGS: [PASS] Buffett likes to see if management has spent retained earnings in a way that benefits shareholders. To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $24.52 and compares it to the gain in EPS over the same period of $3.15. APOL's management has proven it can earn shareholders a 12.8% return on the earnings they kept. This return is acceptable to Buffett, but he would prefer to see a return > 15%. Essentially, management is is doing a good job putting the retained earnings to work. HAS THE COMPANY BEEN BUYING BACK SHARES: [BONUS PASS] Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. APOL's shares outstanding have fallen over the past five years from 165,839,996 to 126,000,000, thus passing this criterion. This is a bonus criterion and will not adversely affect the ability of a stock to pass the strategy as a whole if it is failed. The preceding concludes Buffett's qualitative analysis. If and when he gets positive responses to all the above criteria, he would then proceed with a price analysis. The price analysis will determine whether or not the stock should be bought. The following is how he would evaluate APOL quantitatively. STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return. CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail] Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $4.53 and divide it by the current market price of $35.92. An investor, purchasing APOL, could expect to receive a 12.61% initial rate of return. Furthermore, he or she could expect the rate to increase 5.5% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 2.20%. Compare this with APOL's initial yield of 12.61%, which will expand at an annual rate of 5.5%, based on the analysts' consensus estimated long term growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding. CALCULATE THE FUTURE EPS: [No Pass/Fail] APOL currently has a book value of $9.00. It is safe to say that if APOL can preserve its average rate of return on equity of 28.2% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 28.2% and it will have a book value of $108.14 in ten years. If it can still earn 28.2% on equity in ten years, then expected EPS will be $30.52. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $30.52 and multiply them by the lower of the 5 year average P/E ratio (16.4) or current P/E ratio (current P/E in this case), which is 7.9 and you get APOL's projected future stock price of $242.02. 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 $242.02. These numbers indicate that one could expect to make a 21.0% average annual return on APOL's stock at the present time. Buffett would consider this a great return. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 5.5%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $7.77. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (16.4) or current P/E ratio (current P/E in this case), which is 7.9. This equals the future stock price of $61.59. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $61.59. 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 $35.92 and the future expected stock price, including the dividend pool, of $61.59. If you were to invest in APOL at this time, you could expect a 5.5% average annual return on your money. Buffett likes to see a 15% return, and would even go down to 12%. LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [PASS] Based on the two different methods, you could expect an annual compounding rate of return somewhere between 5.5% and 21.0%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 13.3% on APOL stock for the next ten years, based on the current fundamentals. Buffett likes to see a 15% return, but nonetheless would accept this return, thus passing the criterion.   ADVANCE AUTO PARTS, INC. Profile Strategy: Growth Investor Based on: Martin Zweig Advance Auto Parts, Inc. (Advance) is a specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items primarily operating within the United States. The Company operates in two segments: Advance Auto Parts (AAP), and Autopart International (AI). Its stores carry an extensive product line for cars, vans, sport utility vehicles and light trucks. The Company serves both do-it-yourself (DIY), and do-it-for-me (Commercial), customers. Its Commercial customers consist primarily of delivery customers for whom the Company delivers product from its store locations to it Commercial customers' places of business, including independent garages, service stations and auto dealers. 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. AAP's P/E is 17.91, based on trailing 12 month earnings, while the current market PE is 19.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [FAIL] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. AAP's revenue growth is 6.13%, while it's earnings growth rate is 22.64%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, AAP fails this criterion. SALES GROWTH RATE: [PASS] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (4.5%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (4.2%) of the current year. Sales growth for the prior must be greater than the latter. For AAP 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. AAP's EPS ($0.90) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. AAP's EPS for this quarter last year ($0.57) 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. AAP's growth rate of 57.89% 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 AAP is 11.32%. This should be less than the growth rates for the 3 previous quarters, which are 13.56%, 25.86%, and 36.89%. AAP 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, 24.93%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 57.89%, (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, 57.89% must be greater than or equal to the historical growth which is 22.64%. AAP 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. AAP, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.28, 2.49, 2.83, 3.95 and 5.11, passes this test. LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. AAP's long-term growth rate of 22.64%, 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. AAP's Debt/Equity (49.06%) is not considered high relative to its industry (66.64%) 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 AAP, this criterion has not been met (insider sell transactions are 117, while insiders buying number 116). 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.   FINISH LINE INC Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy The Finish Line, Inc. (Finish Line) is a mall-based specialty retailer in the United States. Finish Line is a retailer of athletic shoes, apparel and accessories. As of April 15, 2011, the Company operated 660 Finish Line stores averaging approximately 5,400 square feet in 47 states. The Company's stores are primarily located in enclosed shopping malls. The typical Finish Line store format has a sales floor, which includes a try-on area, and a display area where each style of footwear carried in the store is displayed by category In addition, the Company operates an e-commerce site, www.finishline.com, as well as mobile commerce via m.finishline.com. Finish Line stores generally carry a selection of men's, women's and kids' performance and athletic casual shoes, as well as an assortment of apparel and accessories. Brand names offered by Finish Line include Nike, Brand Jordan, Reebok, Puma, adidas, Under Armour, Asics, Brooks, New Balance, Mizuno, Lacoste, The North Face and others. 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. FINL, with a market cap of $1,153 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. FINL, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were -0.89, 0.55, 0.92, 1.26 and 1.61, 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. FINL's Price/Sales ratio of 0.84, 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. FINL, whose relative strength is 67, is in the top 50 and would pass this last criterion.   THE TJX COMPANIES, INC. Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher The TJX Companies, Inc. (TJX) is the off-price apparel and home fashions retailer in the United States and worldwide. As of January 28, 2012, the Company operated in four business segments. It has two segments in the United States, Marmaxx (T.J. Maxx and Marshalls) and HomeGoods; one in Canada, TJX Canada (Winners, Marshalls and HomeSense) and one in Europe, TJX Europe (T.K. Maxx and HomeSense). As a result of the consolidation of the A.J. Wright chain, all A.J. Wright stores ceased operations by the end of February 2011. It completed the consolidation of A.J. Wright, converting 90 of the A.J. Wright stores to T.J. Maxx, Marshalls or HomeGoods banners and closed the remaining 72 stores, two distribution centers and home office. Analysis Guru Score: 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. TJX's P/S ratio of 1.36 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. TJX's Debt/Equity of 24.54% 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. TJX 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 TJX At this Point Is TJX 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, TJX, who has a P/S of 1.36, 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%. TJX's inflation adjusted EPS growth rate of 19.15% 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. TJX's free cash per share of 1.08 passes this criterion. THREE YEAR AVERAGE NET PROFIT MARGIN: [PASS] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. TJX, whose three year net profit margin averages 6.18%, passes this evaluation.   BRIDGEPOINT EDUCATION INC Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool 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: 83% PROFIT MARGIN: [PASS] This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. BPI's profit margin of 18.51% passes this test. RELATIVE STRENGTH: [FAIL] The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. Although BPI's relative strength of 87 is below the acceptable level, yet it is very close. Keep an eye on the stock as it could move into the acceptable range. COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: [FAIL] Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for BPI (-8.89% for EPS, and 14.99% for Sales) are not good enough to pass. INSIDER HOLDINGS: [PASS] BPI's insiders should own at least 10% (they own 66.22% ) of the company's outstanding shares which is extremely attractive since the minimum requirement is 10%. A high percentage indicates that the insiders are confident that the company will do well. CASH FLOW FROM OPERATIONS: [PASS] A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. BPI's free cash flow of $3.26 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] BPI's profit margin has been consistent or even increasing over the past three years (Current year: 18.51%, Last year: 17.89%, Two years ago: 10.37%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. R&D AS A PERCENTAGE OF SALES: [NEUTRAL] This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in BPI's case. CASH AND CASH EQUIVALENTS: [PASS] BPI's level of cash $287.7 million passes this criteria. If a company is a cash generator, like BPI, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. ACCOUNT RECEIVABLE TO SALES: [PASS] This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for BPI was 8.19% last year, while for this year it is 6.66%. Since the AR to sales is decreasing by -1.53% the stock passes this criterion. LONG TERM DEBT/EQUITY RATIO: [PASS] BPI's trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don't need to borrow money in order to grow. "THE FOOL RATIO" (P/E TO GROWTH): [PASS] The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (BPI's is 0.19), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. BPI passes this test. The following criteria for BPI are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] BPI has not been significantly increasing the number of shares outstanding within recent years which is a good sign. BPI currently has 56.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock. SALES: [FAIL] Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. BPI's sales of $933.4 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years. DAILY DOLLAR VOLUME: [PASS] BPI passes the Daily Dollar Volume (DDV of $8.5 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf." PRICE: [PASS] This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. BPI with a price of $21.59 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions. INCOME TAX PERCENTAGE: [PASS] BPI's income tax paid expressed as a percentage of pretax income this year was (37.52%) and last year (41.42%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.   NORTHROP GRUMMAN CORPORATION Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Northrop Grumman Corporation (Northrop Grumman) provides products, services, and integrated solutions in aerospace, electronics, information and services to its global customers. As of December 31, 2011, the Company operated in four segments: Aerospace Systems, Electronic Systems, Information Systems and Technical Services. The Company conducts most of its business with the United States Government, principally the Department of Defense (DoD) and intelligence community. It also conducts business with local, state, and foreign Governments and domestic and international commercial customers. Effective as of March 31, 2011, the company completed the spin-off of Huntington Ingalls Industries, Inc. (HII). HII operates the Company's former shipbuilding business. Analysis Guru Score: 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. NOC's P/S of 0.62 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. NOC's Debt/Equity of 37.31% is acceptable, thus passing the test. PRICE/RESEARCH RATIO: [PASS] This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. NOC is neither a Technology nor Medical company. Therefore the Price/Research ratio is not available and, hence, not much emphasis should be placed on this particular variable. PRELIMINARY GRADE: Some Interest in NOC At this Point Is NOC a "Super Stock"? 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.NOC's P/S ratio of 0.62 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%. NOC's inflation adjusted EPS growth rate of 16.28% 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. NOC's free cash per share of 3.85 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. NOC, whose three year net profit margin averages 7.14%, passes this evaluation.   CASH AMERICA INTERNATIONAL, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Cash America International, Inc. provides specialty financial services to individuals through retail services locations and through electronic distribution platforms known as e-commerce activities. The Company offers secured non-recourse loans, commonly referred to as pawn loans. The Company also offers unsecured consumer loans. Its consumer loan portfolio includes short-term loans, which include single payment loans (that are commonly referred to as payday loans) and line of credit products; longer-term multi-payment installment loans; and credit services and participation interests in receivables acquired from a third-party lender through the micro line of credit (MLOC) channel. It operates in two segments: retail services and e-commerce. Through the credit services organization programs (the CSO programs), it provides a third-party lender's consumer loan product in some markets by acting as a credit services organization or credit access business on behalf of consumers. 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. CSH, with a market cap of $1,351 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. CSH, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 2.61, 2.70, 3.17, 3.66 and 4.25, 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. CSH's Price/Sales ratio of 0.82, 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. CSH, whose relative strength is 60, is in the top 50 and would pass this last criterion.   FOREST LABORATORIES, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Forest Laboratories, Inc. (Forest) develops, manufactures and sells branded forms of ethical drug products, most of which requires a physician's prescription. The Company also focuses on the development and introduction of new products, including products developed in collaboration with licensing partners. Its products include those developed by the Company and those acquired from other pharmaceutical companies and integrated into its marketing and distribution systems. The Company's principal products include Lexapro, Namenda, Bystolic, Savella and Teflaro. On April 13, 2011, the Company acquired Clinical Data Inc. (Clinical Data), a specialty pharmaceutical company. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: FRX is considered a "True Stalwart", according to this methodology, as its earnings growth of 12.18% lies within a moderate 10%-19% range and its annual sales of $4,586 million are greater than the multi billion dollar level. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. FRX is attractive if FRX can hold its own during a recession. INVENTORY TO SALES: [PASS] When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for FRX was 10.58% last year, while for this year it is 9.84%. Since inventory to sales has decreased from last year by -0.74%, FRX passes this test. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for FRX (0.80), based on the average of the 3, 4 and 5 year historical eps growth rates, is O.K. EARNINGS PER SHARE: [PASS] The EPS for a stalwart company must be positive. FRX's EPS ($3.57) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for FRX (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 FRX (7.97%) 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 FRX (0.02%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.   BODY CENTRAL CORP Profile Strategy: Growth Investor Based on: Martin Zweig Body Central Corp. is a specialty retailer of young women's apparel and accessories operating retail stores in the South, Mid-Atlantic and Midwest regions of the United States. In addition, the Company operates a direct business through its e-commerce Website, www.bodyc.com, and Body Central catalog. It operates specialty apparel stores under the Body Central and Body Shop banners. It targets women in their late teens and twenties from diverse cultural backgrounds who seek the latest fashions and a flattering fit. Its stores feature a variety of tops, dresses, bottoms, jewellery, accessories and shoes sold primarily under Body Central and Lipstick labels. As of January 1, 2011, it had 209 stores located in fashion retail venues across 23 states in the South, Mid-Atlantic and Midwest. Its average store size is 4,300 square feet. During the fiscal year ended January 2, 2010 (fiscal 2010), the Company opened 27 stores. From fiscal year 2009 through January 1, 2011, it closed 13 stores. 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. BODY's P/E is 23.86, based on trailing 12 month earnings, while the current market PE is 19.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [FAIL] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. BODY's revenue growth is 15.83%, while it's earnings growth rate is 47.54%, based on the average of the 2 and 5 year historical and the current year eps growth rates. Therefore, BODY fails this criterion. SALES GROWTH RATE: [PASS] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (20.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (17.9%) of the current year. Sales growth for the prior must be greater than the latter. For BODY 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. BODY's EPS ($0.37) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. BODY's EPS for this quarter last year ($0.18) pass this test. POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: [PASS] The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. BODY's growth rate of 105.56% 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 BODY is 23.77%. This should be less than the growth rates for the 3 previous quarters which are 25.93%, -26.67% and 80.00%. BODY 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, 3.66%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 105.56%, (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, 105.56% must be greater than or equal to the historical growth which is 47.54%. BODY 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. BODY, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were -193.52, -5.42, 0.23, 0.73 and 1.22, passes this test. LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. BODY's long-term growth rate of 47.54%, based on the average of the 2 and 5 year historical and the current year 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. BODY's Debt/Equity (0.00%) is not considered high relative to its industry (285.01%) 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 BODY, this criterion has not been met (insider sell transactions are 238, while insiders buying number 97). 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.   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 CACI CACI INTERNATIONAL INC Software & Programming 67 STMP STAMPS.COM INC. Retail (Catalog & Mail Order) 60 LKQX LKQ CORPORATION Auto & Truck Parts 58 SWI SOLARWINDS INC Software & Programming 57 ASPS ALTISOURCE PORTFOLIO SOLUTIONS S.A. Consumer Financial Services 57 DFS DISCOVER FINANCIAL SERVICES Consumer Financial Services 55 GTAT GT ADVANCED TECHNOLOGIES INC Semiconductors 54 ZAGG ZAGG INC Containers & Packaging 51 UFS DOMTAR CORP. (USA) Paper & Paper Products 50 MNST MONSTER BEVERAGE CORP Beverages (Non-Alcoholic) 50

Disclaimer

The names of individuals (i.e., the 'gurus') appearing in this report are for identification purposes of his methodology only, as derived by Validea.com from published sources, and are not intended to suggest or imply any affiliation with or endorsement or even agreement with this report personally by such gurus, or any knowledge or approval by such persons of the content of this report. All trademarks, service marks and tradenames appearing in this report are the property of their respective owners, and are likewise used for identification purposes only. Validea is not registered as a securities broker-dealer or investment advisor either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. Validea is not responsible for trades executed by users of this site based on the information included herein. The information presented on this website does not represent a recommendation to buy or sell stocks or any financial instrument nor is it intended as an endorsement of any security or investment. The information on this website is generic by nature and is not personalized to the specific situation of any individual. The user therefore bears complete responsibility for their own investment research and should seek the advice of a qualified investment professional prior to making any investment decisions. Performance results are based on model portfolios and do not reflect actual trading. Actual performance will vary based on a variety of factors, including market conditions and trading costs. Past performance is not necessarily indicative of future results. Individual stocks mentioned throughout this web site may be holdings in the managed portfolios of Validea Capital Management, a separate asset management firm founded by Validea.com founder John Reese. Validea Capital Management, which is a separate legal entity and an SEC registered investment advisory firm, uses, in part, the strategies on the web site to select stocks for its clients.