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Executive Summary	December 7, 2012

The Economy The economy has been offering some mixed signals recently, as concerns among businesses about the "fiscal cliff" seem to be slowing growth, for the short term at least. One example: After two months of expansion, the manufacturing sector contracted in November, though just barely, according to the Institute for Supply Management. The group's manufacturing index came in at 49.5, just short of the 50 mark that denotes the cutoff between expansion and contraction. The group's New Orders and Employment sub-indices also both fell. ISM's report said some survey respondents cited the "fiscal cliff" as a major factor right now, with some saying they are holding off on any expansion plans until the issue is resolved. ISM did say that the overall economy grew in November, for the 42nd straight month, however. ISM's service sector index rose, meanwhile, indicating the sector expanded for the 35th straight month. The service sector New Orders sub-index also increased. The employment sub-index dropped rather significantly, though, perhaps another sign that employers are leery of the cliff and its repercussions. The housing market continues to be a bright spot. Home prices rose 0.4% on average across 20 U.S. cities in September, according to the S&P/Case-Shiller Home Price Indices. It was the sixth straight month prices rose; prices in those 20 cities are now an average of 3.0% higher than they were a year ago. The National Association of Realtors also said that pending home sales rose in October to their highest level in more than five years. They were up 5.2% from September, and are now 18.0% above their year-ago level. Sales of new single-family houses dipped just slightly, by 0.3%, in October, meanwhile, the Commerce Department said. They remain about 16% above year-ago levels, however, and average sales prices were up about 8% from a year ago. Elsewhere, new government data showed consumers cut back somewhat in October. Real disposable income fell 0.1% in the month, the Commerce Department reported, while real personal consumption expenditures fell 0.3%, with purchases of motor vehicles and parts accounting for most of the dip. The personal savings rate edged up slightly, to 3.4% (from 3.3% in October), a good sign. Interestingly, consumers are getting more confident, however. Confidence hit its highest level in more than four years in October, according to separate reports from The Conference Board and the University of Michigan. Though it remains below levels associated with a healthy economy, confidence has been rising as Americans have been getting more optimistic about the jobs market, The Conference Board found. The Commerce Department also said that gross domestic product increased more than previously expected in the third quarter. It grew at 2.7%, the department said, up from the 2.0% figure cited in previous estimates. Since our last newsletter, the S&P 500 returned 1.6%, while the Hot List returned 2.6%. So far in 2012, the portfolio has returned 15.4% vs. 12.4% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 160.9% vs. the S&P's 41.3% gain. Evaluating Value In our last newsletter, I looked at the broader market's valuation, using a variety of metrics to get a sense of where the overall U.S. market stands. I also looked at some of the Hot List portfolio's newest holdings, and discussed their very attractive valuations. This week, I wanted to piggyback on that and highlight a new study that shows why value is so important. The study comes from The Brandes Institute, whose excellent research I've highlighted in previous newsletters, and is titled, "Value vs. Glamour: A Global Phenomenon". In it, Brandes updates past research on how value stocks (those with lower price/earnings, price/book, and/or price/cash flow ratios) have performed historically against "glamour stocks" (those with higher P/E, P/B, and/or P/CF ratios). The group looked not only at the U.S. market, but also at markets in the developed and emerging world. Their findings: "While the recent underperformance of value stocks is noteworthy, the long-term results confirm a historically persistent value premium measurable across global equity markets," the study states. "Generally, we identified a persistent value premium for the world's developed markets in aggregate and on an individual country basis, a value premium was evident or probable for the markets that offered enough robust data to provide reasonable conclusions." And, in emerging markets, the value premium was even greater than it was in non-U.S. developed countries. Brandes said that what may have been the most significant finding was how consistent the value premium was "across valuation metrics, such as P/B, P/CF, P/E and sales growth; across time, which in this study applies to the 1968-2012 period for U.S. stocks, and the 1980-2012 period for non-U.S. stocks; across regions, as the results indicated a value premium in developed markets in North America, Europe and Asia; across market capitalizations, as the relative outperformance of value stocks to glamour stocks was evident among both large- and small-cap stock universes." Value stocks didn't just produce better returns, the study found; they also have done so with lower volatility. For example, from 1980-2012, Brandes looked at rolling five-year returns in over 23 markets across the globe (including the U.S.). It found that the most expensive decile of stocks based on P/B ratio posted annualized returns of 7.76%, with a standard deviation of 19.16%. The cheapest decile posted average annualized returns of 14.22%, with a standard deviation of 17.05%. That's nearly twice the returns, with less volatility. Of course, value will sometimes underperform, as it has in recent years. But it's rare -- very rare. In fact, from 1980-2012 (again using those rolling five-year returns), large-cap value stocks lost to large-cap glamour stocks just 6 times. And small-cap value stocks lost to small-cap glamour just four times. Unfortunately some of those losing periods have come since the financial crisis and Great Recession hit. There are probably several reasons for this, not the least of which is the fact that those events left investors feeling pretty fearful and quite risk-averse -- and value stocks tend to come with short-term problems that lead fearful investors to shun them. But Brandes' research indicates that such periods don't last; eventually, the market recognizes the value in value stocks. And over the long term, value investors win out. The value premium is what led great investors like Benjamin Graham, Warren Buffett, and Joel Greenblatt to key on unloved value plays. And it's why the Hot List portfolio usually has a significant value bias. Right now, for example, the average P/E ratio (using trailing 12-month earnings) of the portfolio's 10 holdings is just 10.8, far below the S&P 500 average. Seven of the ten have price/book ratios at or below the S&P average of 2.0, and seven of the ten have price/sales ratios at or below the S&P average of 1.3. Their price/cash flow average is a bit higher than the S&P average, but their average dividend yield (3.0%) is better than that of the index (2.3%), and their average P/E-to-Growth ratio is exceptional (0.49). And for those attractive valuations, you get a portfolio of companies that on average have generated a 27.4% return on equity and that (for the nine non-financials) average a very solid 2.1 current ratio. (Data as of Dec. 5; S&P averages from Morningstar.com.) These are the kind of stocks that the Hot List focuses on. They are the kind of stocks that have generated strong returns over decades and decades, from the time that Graham essentially created value investing in the first half of the 20th century, to the current era when gurus like Buffett and Greenblatt have used the same value-focused philosophy to beat the market over the long haul. That value-focused philosophy works because investors are people, and people are emotional. And because of that they overreact to the upside when valuing popular "glamour" stocks, and they overreact to the downside when valuing unloved value stocks. These periods of overreaction can last a reasonably long time -- longer than many investors are comfortable with, to be certain. But decades of history show that over the long haul, those who stick with value win out. That's what we've seen with the Hot List in its nearly ten years of existence, and I expect the same will be true another ten years from now.		Editor-in-Chief: John Reese Since Inception   Hot List 160.9% S&P 500 41.3% Accuracy 56.2% Beta 1.2 YTD   Hot List 15.4% S&P 500 12.4% Since Last Issue   Hot List 2.6% S&P 500 1.6% Avg. Fundamentals   Market Cap (mil) $22,177 PE Ratio 11.1 5 Yr EPS Growth 17.3% Yield 2.9% Rel. Strength 68 Portfolio Sectors Services 4 Energy 2 Financial 1 Basic Materials 1 Consumer Cyclical 1 Technology 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 67.0%, more than twice what the S&P 500 has gained (33.4%; figures through November). That's 5.9% annualized, vs. just 3.3% for the S&P. The portfolio has been a very strong performer over the last two years. While the broader market was flat in 2011, the Buffett-based portfolio jumped 10.2%. And in 2012, it's up more than 15%. 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) Monster Beverage Corp. (MNST) World Acceptance Corp. (WRLD) Coach, Inc. (COH) Ross Stores, Inc. (ROST) CNOOC Limited (CEO) Hibbett Sports, Inc. (HIBB) Fossil, Inc. (FOSL) AstraZeneca PLC (AZN) News about Validea Hot List Stocks Vale SA (VALE): Vale reported that its capital expenditures likely peaked in 2011 and 2012. The mining firm cut its estimated capital spending for next year by 24%, and is rethinking expansion plans after the global slowdown and iron ore price declines, Reuters said. The firm's CEO said growth would likely be slow in 2013, but resume in 2014. The TJX Companies (TJX): TJX's same-store sales rose 3% in November, according to the Associated Press. Fellow Hot List member Ross Stores' sales were up 2%, meanwhile. TJX shares rose slightly the day of the announcements, while Ross shares were about flat. 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 MAIN MAIN STREET CAPITAL CORPORATION Misc. Financial Services 100 LUKOY LUKOIL (ADR) Oil & Gas - Integrated 93 ROST ROSS STORES, INC. Retail (Apparel) 89 TJX THE TJX COMPANIES, INC. Retail (Apparel) 84 WDC WESTERN DIGITAL CORP. Computer Storage Devices 63 HFC HOLLYFRONTIER CORP Oil & Gas Operations 58 VALE VALE SA (ADR) Metal Mining 57 GES GUESS?, INC. Retail (Apparel) 40 ALV AUTOLIV INC. Auto & Truck Parts 39 HIBB HIBBETT SPORTS, INC. Retail (Specialty) 38 Ticker Market Cap Date Added Start Price Current Price Return MAIN $954 11/23/2012 $30.13 $30.12 -0.0% LUKOY $54,696 11/23/2012 $62.01 $63.85 3.0% ROST $12,280 10/26/2012 $60.92 $55.22 -9.4% TJX $31,752 10/26/2012 $40.73 $43.54 6.9% WDC $9,038 11/23/2012 $35.09 $37.10 5.7% HFC $8,829 8/31/2012 $40.29 $43.46 7.9% VALE $94,761 11/23/2012 $17.52 $17.88 2.1% GES $2,222 9/28/2012 $25.42 $26.08 2.6% ALV $5,856 10/26/2012 $55.99 $61.35 9.6% HIBB $1,385 11/23/2012 $54.87 $53.64 -2.2%

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 MAIN   |   LUKOY   |   ROST   |   TJX   |   WDC   |   HFC   |   VALE   |   GES   |   ALV   |   HIBB   |   MAIN STREET CAPITAL CORPORATION Profile Strategy: Growth Investor Based on: Martin Zweig Main Street Capital Corporation is a United States-based principal investment firm that primarily provides long-term debt and equity capital to lower middle market companies. The Firm targets investments associated with ownership transitions, recapitalizations, strategic acquisitions, business expansion and other growth initiatives for later stage businesses. In addition to providing companies with necessary capital, Main Street provides management with expertise in corporate finance, operations and growth strategy implementation. 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. MAIN's P/E is 8.43, 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. MAIN's revenue growth is 51.40%, while it's earnings growth rate is 38.83%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, MAIN 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 (34.3%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (29.3%) of the current year. Sales growth for the prior must be greater than the latter. For MAIN 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. MAIN's EPS ($1.01) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. MAIN's EPS for this quarter last year ($0.62) 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. MAIN's growth rate of 62.90% 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 MAIN is 19.42%. This should be less than the growth rates for the 3 previous quarters which are 50.94%, 62.96% and 6.02%. MAIN 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, 34.74%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 62.90%, (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, 62.90% must be greater than or equal to the historical growth which is 38.83%. MAIN 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. MAIN, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.30, 1.20, 1.19, 2.38, and 2.76, 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. MAIN's long-term growth rate of 38.83%, 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 MAIN, this criterion has not been met (insider sell transactions are 26, while insiders buying number 508). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.   LUKOIL (ADR) Profile Strategy: Book/Market Investor Based on: Joseph Piotroski NK Lukoil OAO (Neftyanaya Kompaniya LUKOIL OAO or NK LUKOIL OJSC) is a Russia-based integrated oil and gas company. The Company is engaged in the business of oil exploration, production, refining, marketing and distribution. It is an owner of refineries, gas processing, petrochemical plants and gas stations network located in Russia, Eastern and Western Europe. The Company's petroleum products are sold in the Russian Federation, the Commonwealth of Independent States (CIS) countries, Eastern and Western Europe, Asia and the United States. NK Lukoil OAO operates through numerous subsidiaries and affiliated companies. As of December 31, 2011, the Company's major shareholder was ING Bank (Eurasia) ZAO with a stake of 75.93%. Analysis Guru Score: 90% BOOK/MARKET RATIO: [PASS] The first criteria of this strategy requires that a company be in the top 20% of the market based on the Book/Market ratio (which is the inverse of the Price/Book ratio). LUKOY, which has a book to market ratio of 1.49, meets this criterion and thus this strategy will use the following rules to determine if it is a financially distressed firm or is unfairly trading at a discount to its book value. The study conducted by Piotroski found that excess returns can be earned by holding a portfolio of high Book/Market stocks. He also found, however, that it is very important to separate companies that trade at a discount because they are financially distressed from companies that are unfairly trading at a discount. The following criteria are used to help provide this distinction. RETURN ON ASSETS: [PASS] As a first step to determining whether a firm is not financially distressed, this methodology requires that the return on assets for the most recent fiscal year be positive. LUKOY's return on assets was 11.07% in the most recent year, therefore it passes this test. CHANGE IN RETURN ON ASSETS: [PASS] The next requirement is that the return on assets for the most recent fiscal year must be greater than the return on assets for the previous fiscal year. LUKOY's return on assets was 11.07% in the most recent year and 10.18% in the previous year, therefore it passes this test. CASH FLOW FROM OPERATIONS: [PASS] In addition to the return on assets, the cash flow from operations for the most recent fiscal year must also be positive. This eliminates companies that are burning cash and therefore are more likely to be financially distressed. LUKOY's cash flow from operations was $15,514.00 million in the most recent year, therefore it passes this test. CASH COMPARED TO NET INCOME: [PASS] This methodology requires that cash from operations for the most current fiscal year must be greater than net income for the most current fiscal year. LUKOY's cash from operations was $15,514.00 million in the most recent year, while its net income was $10,098.96 million, therefore it passes this test. CHANGE IN LONG TERM DEBT/ASSETS: [PASS] The long term debt to assets ratio for the most recent fiscal year must be less than or equal to the previous fiscal year. LUKOY's LTD/Assets was 0.08 in the most recent year and 0.11 in the previous year, therefore it passes this test. CHANGE IN CURRENT RATIO: [PASS] As an additional test of firm solvency, the current ratio for the most recent fiscal year must be greater than the current ratio for the previous fiscal year. LUKOY's current ratio was 2.12 in the most recent year and 1.91 in the previous year, therefore it passes this test. CHANGE IN SHARES OUTSTANDING: [PASS] The issuance of new stock is considered by this methodology to be a sign that a company is not able to generate enough internal cash to fund its business. Therefore, shares outstanding for the most recent fiscal year must be less than or equal to shares outstanding for the previous fiscal year. LUKOY's shares outstanding was 774.5 million in the most recent year and 781.4 million in the previous year, therefore it passes this test. CHANGE IN GROSS MARGIN: [FAIL] As a sign that a company is expanding its profitability, this strategy requires that gross margin for the most recent fiscal year be greater than gross margin for the previous fiscal year. LUKOY's gross margin was 39.00% in the most recent year and 41.00% in the previous year, therefore it fails this test. CHANGE IN ASSET TURNOVER: [PASS] The final criterion of this strategy requires that asset turnover for the most recent fiscal year be greater than asset turnover for the previous fiscal year. LUKOY's asset turnover was 1.47 in the most recent year and 1.25 in the previous year, therefore it passes this test.   ROSS STORES, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Ross Stores, Inc., along with its subsidiaries, operates two brands of off-price retail apparel and home fashion stores. As of January 28, 2012, the Company operated a total of 1,125 stores, of which 1,037 were Ross Dress for Less (Ross) locations in 29 states, the District of Columbia, and Guam, and 88 were dd's DISCOUNTS stores in seven states: 48 in California, 19 in Texas, 12 in Florida, four in Arizona, two in Georgia, two in Nevada, and one in Maryland. Ross focuses on customers primarily from middle income households, while dd's DISCOUNTS focuses on customers from more moderate income households. During the fiscal year ended January 28, 2012 (fiscal 2012), it opened 59 new Ross stores and closed ten existing stores. During fiscal 2011, it opened 21 new dd's DISCOUNTS stores. The average approximate dd's DISCOUNTS store size is 23,900 square feet. In April 2011, it purchased a 449,000 square foot warehouse for packaway storage in Riverside, California. 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. ROST, with a market cap of $12,280 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. ROST, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.95, 1.16, 1.77, 2.31 and 2.86, 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. ROST's Price/Sales ratio of 1.31, 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. ROST, whose relative strength is 72, is in the top 50 and would pass this last criterion.   THE TJX COMPANIES, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch The TJX Companies, Inc. (TJX) is the off-price apparel and home fashions retailer in the United States and worldwide. As of January 28, 2012, the Company operated in four business segments. It has two segments in the United States, Marmaxx (T.J. Maxx and Marshalls) and HomeGoods; one in Canada, TJX Canada (Winners, Marshalls and HomeSense) and one in Europe, TJX Europe (T.K. Maxx and HomeSense). As a result of the consolidation of the A.J. Wright chain, all A.J. Wright stores ceased operations by the end of February 2011. It completed the consolidation of A.J. Wright, converting 90 of the A.J. Wright stores to T.J. Maxx, Marshalls or HomeGoods banners and closed the remaining 72 stores, two distribution centers and home office. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider TJX a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (18.47) relative to the growth rate (21.47%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for TJX (0.86) makes it favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. TJX, whose sales are $24,864.3 million, needs to have a P/E below 40 to pass this criterion. TJX's P/E of (18.47) is considered acceptable. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for TJX is 21.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for TJX (22.34%) to be acceptable (equity is three to ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for TJX (2.48%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for TJX (2.55%) 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.   WESTERN DIGITAL CORP. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Western Digital Corporation (WD) is a provider of solutions for the collection, storage, management, protection and use of digital content, including audio and video. Its principal products are hard drives, which are devices that use one or more rotating magnetic disks (magnetic media) to store and allow access to data. Its hard drives are used in desktop and notebook computers, corporate and cloud computing data centers, home entertainment equipment and stand-alone consumer storage devices. In addition to hard drives, its other products include solid-state drives and home entertainment and networking products. Effective March 8, 2012, it acquired Viviti Technologies Ltd. In May 2012, the Company completed the divestiture of certain 3.5-inch hard drive assets to Toshiba Corporation. As part of its deal with Toshiba, WD also completed its purchase of Toshiba Storage Device (Thailand) Company Limited (TSDT), which manufactured hard drives. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider WDC a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (4.95) relative to the growth rate (27.33%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for WDC (0.18) is very favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. WDC, whose sales are $13,819.0 million, needs to have a P/E below 40 to pass this criterion. WDC's P/E of (4.95) is considered acceptable. INVENTORY TO SALES: [PASS] When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for WDC was 6.06% last year, while for this year it is 9.70%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (3.64%) is below 5%. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for WDC is 27.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for WDC (26.48%) to be acceptable (equity is three to ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for WDC (25.85%) 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 WDC (14.01%) 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.   HOLLYFRONTIER CORP Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool 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: 72% 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. HFC's profit margin of 8.01% passes this test. RELATIVE STRENGTH: [PASS] 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. HFC, with a relative strength of 92, satisfies this test. 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 HFC (18.55% for EPS, and 0.61% for Sales) are not good enough to pass. INSIDER HOLDINGS: [FAIL] HFC's insiders should own at least 10% (they own 0.90%) of the company's outstanding shares. This does not satisfy the minimum requirement, and companies that do not pass this criteria are less attractive. 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. HFC's free cash flow of $4.47 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] HFC's profit margin has been consistent or even increasing over the past three years (Current year: 6.63%, Last year: 1.25%, Two years ago: 0.40%), 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 HFC's case. CASH AND CASH EQUIVALENTS: [PASS] HFC's level of cash $1,790.5 million passes this criteria. If a company is a cash generator, like HFC, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. INVENTORY TO SALES: [PASS] This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for HFC was 4.81% last year, while for this year it is 7.22%. Although the inventory to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive. 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 HFC was 12.55% last year, while for this year it is 9.94%. Since the AR to sales is decreasing by -2.61% the stock passes this criterion. LONG TERM DEBT/EQUITY RATIO: [FAIL] HFC's trailing twelve-month Debt/Equity ratio (23.36%) is too high, according to this methodology. You can find other more superior companies that do not have 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 (HFC's is 0.14), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. HFC passes this test. The following criteria for HFC are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] HFC has not been significantly increasing the number of shares outstanding within recent years which is a good sign. HFC currently has 204.0 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. HFC's sales of $19,915.6 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: [FAIL] HFC does not pass the Daily Dollar Volume (DDV of $121.2 million) test. It exceeds the maximum requirement of $25 million. Stocks that fail the test are too liquid for a small individual investor and many institutions have already discovered it. 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. HFC with a price of $43.46 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] HFC's income tax paid expressed as a percentage of pretax income this year was (35.45%) and last year (30.83%) 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.   VALE SA (ADR) Profile Strategy: Value Investor Based on: Benjamin Graham Vale SA (Vale) is a Brazil-based metals and mining company. The Company services are divided into four segments: Bulk Material, including the extraction of iron ore, manganese and ferroalloys, as well as pellet production; Basic metals, comprising the production of non-ferrous minerals, including nickel, copper and aluminum; Fertilizers, including the production of potash, phosphate and nitrogen; and Logistic services, including cargo transportation for third parties divided into rail transport, port and shipping services. Additionally, Vale is active in investments in joint ventures and associate in other businesses. The Company operates in more than 38 countries, including mineral exploration activities in 21 countries. As of December 31, 2011, the Company operated through 18 subsidiaries and three jointly-controlled entities, incorporated in Brazil, Peru, Indonesia, Chile, Australia, Austria, Canada, Colombia, Switzerland, Mozambique, New Caledonia, Oman, Singapore and the USA. Analysis Guru Score: 86% SECTOR: [PASS] VALE 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. VALE's sales of $48,099.0 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. VALE's current ratio of 2.45 passes the test. LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for VALE is $28,694.0 million, while the net current assets are $14,971.0 million. VALE fails 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. VALE's EPS growth over that period of 1,014.3% 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. VALE's P/E of 7.25 (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. VALE's Price/Book ratio is 1.12, while the P/E is 7.25. VALE passes the Price/Book test.   GUESS?, INC. Profile Strategy: Value Investor Based on: Benjamin Graham Guess?, Inc. (GUESS?) designs, markets, distributes and licenses apparel and accessories for men, women and children. The Company operates in five: Europe, North American Retail, Asia, North American Wholesale and Licensing. Its products are sold through retail, wholesale, e-commerce and licensing distribution channels. The lines include full collections of clothing, including jeans, pants, skirts, dresses, shorts, blouses, shirts, jackets, knitwear and intimate apparel. It also grant licenses to manufactures and distributes a range of products, including eyewear, watches, handbags, footwear, kids' and infants' apparel, leather apparel, swimwear, fragrance, jewelry and other fashion accessories. In fiscal 2012, it, along with its distributors and licensees, opened 224 stores in all concepts combined outside of the United Sates and Canada, which consisted of 120 stores in Europe and the Middle East, 89 stores in Asia and 15 stores in the combined area of Central and South America. Analysis Guru Score: 86% SECTOR: [PASS] GES 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. GES's sales of $2,619.3 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. GES's current ratio of 2.84 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 GES is $8.7 million, while the net current assets are $729.3 million. GES 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. GES's EPS growth over that period of 2,964.3% 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. GES's P/E of 11.61 (using the current 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. GES's Price/Book ratio is 2.02, while the P/E is 11.61. GES fails the Price/Book test.   AUTOLIV INC. Profile Strategy: Value Investor Based on: Benjamin Graham Autoliv, Inc. (Autoliv) is a holding company. Autoliv is the supplier of automotive safety systems, with a range of product offerings, including modules and components for passenger and driver-side airbags, side-impact airbag protection systems, seatbelts, steering wheels, safety electronics, whiplash protection systems and child seats, as well as night vision systems, radar and other active safety systems. Autoliv has two main operating segments: airbags/seatbelt (including restraint electronics) products and active safety electronics products. In addition, in April 2010, Autoliv Inc.'s Automotive Holding AS increased its stake in Norma AS from 51% to 93.74%. Additionally, Skandinaviska Enskilda Banken AB and ING Luxembourg SA sold their 6.67% and 10% stake, respectively, held in Norma AS. In November 2011, the Company acquired the airbag cushion cut&sew assets from Milliken. In June 2012, the Company sold its subsidiary Autoliv Mekan AB to Verktygs Allians i Hassleholm AB. Analysis Guru Score: 71% SECTOR: [PASS] ALV 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. ALV's sales of $8,259.5 million, based on trailing 12 month sales, pass this test. CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. ALV's current ratio of 1.68 fails 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 ALV is $497.4 million, while the net current assets are $1,330.3 million. ALV 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. ALV's EPS growth over that period of 156.0% 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. ALV'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. ALV's Price/Book ratio is 1.59, while the P/E is 14.00. ALV fails the Price/Book test.   HIBBETT SPORTS, INC. Profile Strategy: Patient Investor Based on: Warren Buffett Hibbett Sports, Inc. owns and operates sporting goods stores in small to mid-sized markets predominantly in the Southeast, Southwest, Mid- Atlantic and the Midwest. The companys stores provide footwear, athletic equipment, and apparel products to individual customers as well as for school, athletic, and youth programs through educational institutions and youth associations. Analysis Guru Score: 100% STAGE 1: "Is this a Buffett type company?" A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage. LOOK FOR EARNINGS PREDICTABILITY: [PASS] Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.41, 0.56, 0.70, 0.98, 1.17, 0.96, 1.02, 1.12, 1.60, 2.15. Buffett would consider HIBB's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 5 years ago. The dips have totaled 17.9%. HIBB's long term historical EPS growth rate is 20.3%, based on the 10 year average EPS growth rate, and it is expected to grow earnings 15.7% 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. HIBB has no long term debt and therefore would pass this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [PASS] Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for HIBB, over the last ten years, is 21.5%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 14.4%, 16.1%, 18.4%, 25.6%, 27.1%, 23.8%, 21.3%, 18.3%, 22.3%, 27.8%, and the average ROE over the last 3 years is 22.8%, thus passing this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: [PASS] Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for HIBB, over the last ten years, is 21.4% and the average ROTC over the past 3 years is 22.6%, 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 14.4%, 16.1%, 18.4%, 25.6%, 27.1%, 23.8%, 21.3%, 18.3%, 22.0%, 27.5%, 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. HIBB's free cash flow per share of $1.52 is positive, indicating that the company is generating more cash that it is consuming. This is a favorable sign, and so the company passes this criterion. LOOK AT MANAGEMENT'S USE OF RETAINED EARNINGS: [PASS] Buffett likes to see if management has spent retained earnings in a way that benefits shareholders. To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $10.67 and compares it to the gain in EPS over the same period of $1.74. HIBB's management has proven it can earn shareholders a 16.3% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work. HAS THE COMPANY BEEN BUYING BACK SHARES: [BONUS PASS] Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. HIBB's shares outstanding have fallen over the past five years from 29,440,001 to 27,000,000, 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 HIBB quantitatively. STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return. CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail] Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $2.58 and divide it by the current market price of $53.64. An investor, purchasing HIBB, could expect to receive a 4.81% initial rate of return. Furthermore, he or she could expect the rate to increase 15.7% 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 HIBB's initial yield of 4.81%, which will expand at an annual rate of 15.7%, 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] HIBB currently has a book value of $8.82. It is safe to say that if HIBB can preserve its average rate of return on equity of 21.5% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 21.5% and it will have a book value of $61.85 in ten years. If it can still earn 21.5% on equity in ten years, then expected EPS will be $13.30. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $13.30 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (20.8) (5 year average P/E in this case), which is 19.8 and you get HIBB's projected future stock price of $262.90. 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 $262.90. These numbers indicate that one could expect to make a 17.2% average annual return on HIBB'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 15.7%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $11.06. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (20.8) (5 year average P/E in this case), which is 19.8. This equals the future stock price of $218.69. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $218.69. 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 $53.64 and the future expected stock price, including the dividend pool, of $218.69. If you were to invest in HIBB at this time, you could expect a 15.1% average annual return on your money. Buffett would consider this a great return. LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [PASS] Based on the two different methods, you could expect an annual compounding rate of return somewhere between 15.1% and 17.2%. 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 16.2% on HIBB stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the 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 ECPG ENCORE CAPITAL GROUP, INC. Misc. Financial Services 94 EPHC EPOCH HOLDING CORP Investment Services 75 GD GENERAL DYNAMICS CORPORATION Aerospace & Defense 73 JOSB JOS. A. BANK CLOTHIERS INC Retail (Apparel) 60 NUS NU SKIN ENTERPRISES, INC. Personal & Household Prods. 57 NOC NORTHROP GRUMMAN CORPORATION Aerospace & Defense 56 RUE RUE21, INC. Retail (Apparel) 54 TGI TRIUMPH GROUP INC Aerospace & Defense 53 CVX CHEVRON CORPORATION Oil & Gas - Integrated 53 DCM NTT DOCOMO INC (ADR) Communications Services 53

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