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Executive Summary	December 6, 2013

The Economy For long time now, we've been hearing about the U.S.'s "anemic" economic recovery. But as 2013 draws to a close, there is some good evidence that the recovery is gathering strength. News on the jobs front, for example, has been quite positive. Private payroll processor ADP said the private sector added 215,000 jobs in November, the highest tally in a year. It also revised its October jobs-added figure to 184,000, up sharply from an original estimate of 130,000. The Labor Department's November jobs report is out today. We'll see how its data matches up vs. ADP's. New claims for unemployment fell in each of the past two weeks. They now stand a whopping 37.2% below where they were a year ago. That may be skewed, however, by the fact that Thanksgiving was nearly a week later this year than it was last year. If we compare the most recent claims number to the year-ago figure from one week earlier -- perhaps a more fair comparison -- claims were 12.5% lower last week, still a very healthy improvement. The good jobs data seems to be supported by data from the Institute for Supply Management. ISM said manufacturing activity increased in November for the 6th straight month, and did so at the fastest pace in two years. The group's manufacturing sub-indices for both new orders and employment rose significantly, with new orders remaining at a particularly high level. ISM also said the service sector expanded in November for the 47th straight month, though at a slightly slower pace than it did in October. The service sector employment sub-index declined but remained in expansion territory. New orders also increased at about the same strong rate they did in October. The housing market also provided solid data. After declining 6.6% in September (which put them 10% below year ago levels) new-home sales jumped 25.4% in October, according to a new government report. That put them more than 20% ahead of their year ago level. Permit issuance for new home construction rose 6.2% in October, meanwhile, according to another government report. That put them 16% above where they stood a year ago. Data on October housing starts still hasn't been released, thanks to delays caused by the partial government shutdown. The Commerce Department also said that third-quarter growth was significantly better than previously estimated. Gross domestic product grew at a 3.6% pace in the quarter, up from initial estimates of 2.8%. Third-quarter earnings also ended up pretty solid. With all but seven of the S&P 500 companies having reported, about 66% had beaten expectations, a figure in line with what we've seen throughout the recovery. Since our last newsletter, the S&P 500 returned -0.6%, while the Hot List returned -0.7%. So far in 2013, the portfolio has returned 32.6% vs. 25.2% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 259.6% vs. the S&P's 78.4% gain. Portfolio Update While the economic data has by and large been good, it's been an up-and-down fortnight for the stock market and the Hot List. Part of that is due to the strange, likely irrational mentality on Wall Street that sees good economic data as a bearish sign, because it means the Federal Reserve will be more likely to begin tapering its giant asset purchasing plan. As I noted in our last newsletter, I think there is a good deal of evidence suggesting that the taper fears are overblown and that the economy won't sink or swim just because the Fed starts to take the training wheels off. For now, however, the taper fears mean we could be in for some continued volatility. In terms of the Hot List holdings' performance, the top performer since our last newsletter was USANA Health Sciences, which was up nearly 7% (all performance data as of late afternoon trading on Dec. 5). Some of the stock's biggest up days recently came after the firm issued a press release guaranteeing that its labels match what's inside its products. The company said that a recent Canadian study found that many popular supplements contain fillers, such as soybeans, wheat, and even weeds, which were not listed on their labels. But the company assured the public that its products go through stringent testing processes. It wasn't clear whether that was the reason for the stock's strong performance, however; a valuation driven rebound also might have been in play, as shares continue to bounce back from some big declines in October. Overall, USANA has been a tremendous performer for the portfolio, having gained 123% since joining the Hot List late last December. Another good performer for the portfolio over the past couple weeks: Bridgepoint Education, which gained about 2%. On the negative side, Stamps.com has taken some lumps over the past two weeks, losing about 8%. There was no clear catalyst for the declines. The stock has had a great run throughout much of 2013, so perhaps investors were taking profits, or maybe it was just some of the short-term noise that smaller stocks are subject to. Whatever the case, we'll see if my models still think the stock is worthy of remaining in the Hot List in two weeks, when we perform our next scheduled rebalancing.		Editor-in-Chief: John Reese Since Inception   Hot List 259.6% S&P 500 78.4% Accuracy 56.9% Beta 1.2 YTD   Hot List 32.6% S&P 500 25.2% Since Last Issue   Hot List -0.7% S&P 500 -0.6% Avg. Fundamentals   Market Cap (mil) $30,711 PE Ratio 12.8 5 Yr EPS Growth 27.3% Yield 1.7% Rel. Strength 71 Portfolio Sectors Energy 3 Services 3 Financial 2 Conglomerates 1 Consumer Cyclical 1
Have Your Portfolio Managed Using Validea's Investing System Many users know about our research services but are unaware that money management services based on our system are also offered through a separate registered investment advisory firm, Validea Capital Management. If you are thinking about switching advisors or no longer have the time or inclination to manage your investments yourself, find out more about Validea Capital, its portfolio offerings, and its performance below. Request an Investment Consultation Today! ** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. The information above is not intended as personal investment advice and should not be interpreted as such. Guru Spotlight: Joel Greenblatt Anyone who has ever put cash in the market knows that making money in stocks is hard. But what a lot of investors don't realize is that while it is difficult, it doesn't have to be complicated. You don't need incomprehensible, esoteric formulas and you don't need to spend every waking hour analyzing stocks -- Joel Greenblatt has proved that. Back in 2005, Greenblatt created a stir in the investment world with the publication of The Little Book that Beats The Market, a concise, easy-to-understand bestseller that showed how investors could produce outstanding long-term returns using his "Magic Formula" -- a purely quantitative approach had just two variables: return on capital and earnings yield. Greenblatt's back-testing found that focusing on stocks that rated highly in those areas would have produced a remarkable 30.8 percent return from 1988 through 2004, more than doubling the S&P 500's 12.4 percent return during that period. Greenblatt also posted impressive numbers in his money management experience, with his hedge fund, Gotham Capital, producing returns of 40 percent per year over a span of more than two decades. Written in an extremely layperson-friendly manner, Greenblatt's "Little Book" -- it's only 176 pages long and small enough to fit in your jacket pocket -- broke investing down into terms even an elementary schooler could understand. In fact, Greenblatt said he wrote the book as a way to teach his five children how to make money for themselves. Using several simple analogies, he explains a variety of stock market principles. One of these he often returns to involves Jason, a sixth-grade classmate of Greenblatt's youngest son who makes a bundle selling gum to fellow students. Greenblatt uses Jason's business as a jumping off point to explain issues like supply, demand, taxation, and rates of return. In reality, the "Magic Formula" is less about magic than it is about simple, common sense investment theory. As Greenblatt explains, the two-step formula is designed to buy stock in good companies at bargain prices -- something that other great value investors, like Warren Buffett, Benjamin Graham, and John Neff also did. The return on capital variable accomplishes the first part of that goal (buying good companies), because it looks at how much profit a firm is generating using its capital. The earnings yield variable, meanwhile, accomplishes the second part of the task -- buying those good companies' stocks on the cheap. The earnings yield is similar to the inverse of the price/earnings ratio; stocks with high earnings yields are taking in a relatively high amount of earnings compared to the price of their stock. The Details To choose stocks, Greenblatt simply ranked all stocks by return on capital, with the best being number 1, the second number 2, and so forth. Then, he ranked them in the same way by earnings yield. He then added up the two rankings, and invested in the stocks with the lowest combined numerical ranking. The slightly unconventional ways in which Greenblatt calculates earnings yield and return on capital also involve some good common sense -- and are particularly interesting given the recent credit crisis. For example, in figuring out the capital part of the return on capital variable and the earnings part of the earnings yield variable, he doesn't use simple earnings; instead, he uses earnings before interest and taxation. The reason: These parts of the equations should see how well a company's underlying business is doing, and taxes and debt payments can obscure that picture. In addition, in figuring earnings yield, Greenblatt divides EBIT not by the total price of a company's stock, but instead by enterprise value -- which includes not only the total price of the firm's stock, but also its debt. This give the investor an idea of what kind of yield they could expect if buying the entire firm -- including both its assets and its debts. In the past few months, we've seen how misleading conventionally derived P/E ratios and earnings yields could be, since earnings had been propped up by the use of huge amounts of debt. Greenblatt's earnings yield calculation is a way to find stocks that are producing a good earnings yield that isn't contingent on a high debt load. In my Greenblatt model, I calculate return on capital and earnings yield in the same ways that Greenblatt lays out in his book. We added the Greenblatt portfolio to our site in January of 2009, but have been tracking its performance internally for several years, and its underlying model has factored into our Hot List selections for the past five years or so. So far, the model has been a strong performer, with some big ups and downs. Since we began tracking our 10-stock Greenblatt-based portfolio in late 2005, the S&P 500 has gained just 41.7%; the Greenblatt-based portfolio has gained 114.9% -- that's 10.0% annualized, vs. 4.4% annualized for the S&P (all performance data through Dec. 4). The portfolio beat the market in 2006 and 2007, and then did what few funds have done: limit losses in what for stocks was a terrible 2008, and handily beat the market in the 2009 rebound. It fell 26.3% in '08 -- not good, but much better than the S&P 500's 38.5% loss -- and surged 63.1% in 2009, vs. 23.5% for the S&P. After beating the market again in 2010, it struggled in 2011 and 2012, however. But Greenblatt stresses that the strategy won't beat the market every month or even every year, which is important to remember. In fact, during that stellar 17-year period he covered in his book, there were even times when it lagged the market for three straight years. But that, he says, is why it works over the long haul: Undisciplined investors bail on the strategy, allowing those who stick with it to pick up the exceptional bargains they leave behind. Indeed, in 2013, the Greenblatt-based portfolio has bounced back strong, returning more than 50%. Below is a look at its current holdings. One note: Because of the way financial and utility companies are financed (i.e. with large amounts of debt), Greenblatt excludes them from his screening process, so I do the same. He also doesn't include foreign stocks, so I exclude those from my model as well. EBIX Inc. (EBIX) Western Refining, Inc. (WNR) DirecTV (DTV) ITT Educational Services (ESI) Science Applications International Corporation (SAIC) Weight Watchers International, Inc. (WTW) ConocoPhillips (COP) AmSurg Corp (AMSG) PDL BioPharma, Inc. (PDLI) AFC Enterprises Inc. (AFCE) News about Validea Hot List Stocks Chevron Corporation (CVX): Chevron said its Rosebank oil project north of Scotland may be too costly to be viable, MarketWatch reported. The firm cited rising production costs as the key reason for re-evaluating the project, estimated at $10 billion. It said Rosebank "does not currently offer an economic value proposition that justifies proceeding with an investment of this magnitude". Chevron expects a final investment decision is next year, the company said. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will rebalance the portfolio. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score HCI HCI GROUP INC Insurance (Prop. & Casualty) 100 USNA USANA HEALTH SCIENCES, INC. Conglomerates 64 LUKOY LUKOIL (ADR) Oil & Gas - Integrated 62 HFC HOLLYFRONTIER CORP Oil & Gas Operations 61 LEA LEAR CORPORATION Auto & Truck Parts 58 CVX CHEVRON CORPORATION Oil & Gas - Integrated 48 AFSI AMTRUST FINANCIAL SERVICES, INC. Insurance (Prop. & Casualty) 33 BPI BRIDGEPOINT EDUCATION INC Schools 27 STMP STAMPS.COM INC. Retail (Catalog & Mail Order) 8 PZZA PAPA JOHN'S INT'L, INC. Restaurants 7 Ticker Market Cap Date Added Start Price Current Price Return HCI $552 6/7/2013 $34.20 $48.05 40.5% USNA $1,046 12/21/2012 $33.83 $75.42 122.9% LUKOY $50,390 9/27/2013 $64.52 $59.41 -7.9% HFC $9,081 4/12/2013 $46.83 $45.63 -2.6% LEA $6,578 5/10/2013 $60.48 $81.52 34.8% CVX $232,896 11/22/2013 $124.03 $121.10 -2.4% AFSI $3,018 7/5/2013 $35.78 $40.43 13.0% BPI $993 8/2/2013 $16.59 $18.19 9.6% STMP $711 8/30/2013 $41.88 $44.19 5.5% PZZA $1,840 11/22/2013 $86.06 $85.41 -0.8%

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer HCI   |   USNA   |   LUKOY   |   HFC   |   LEA   |   CVX   |   AFSI   |   BPI   |   STMP   |   PZZA   |   HCI GROUP INC Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool HCI Group Inc, formerly Homeowners Choice, Inc., is a holding company. The Company, through its subsidiaries, is engaged in the property and casualty insurance business. Through Homeowners Choice Property & Casualty Insurance Company, Inc. (HCPC) and subsidiaries, primarily Homeowners Choice Managers, Inc. (HCM), Southern Administration, Inc., Claddaugh Casualty Insurance Company, Ltd., and its subsidiary, HCPCI Holdings LLC, it provides property and casualty homeowners' insurance, condominium-owners' insurance and tenants' insurance to individuals owning property in Florida. Its subsidiaries also include TV Investment Holdings LLC, which owns and operates a marina facility located in Florida; Unthink Technologies Private Limited. During the year ended December 31, 2011, it organized TV Investment Holdings LLC, HCI Holdings LLC and HCI Technical Resources, Inc. Analysis Guru Score: 100% 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. HCI's profit margin of 27.81% 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. HCI, with a relative strength of 91, satisfies this test. COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: [PASS] 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 HCI (318.52% for EPS, and 73.73% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] HCI's insiders should own at least 10% (they own 10.64% ) of the company's outstanding shares which is the minimum required. A high percentage typically 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. HCI's free cash flow of $9.84 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] HCI's profit margin has been consistent or even increasing over the past three years (Current year: 18.50%, Last year: 10.62%, Two years ago: 7.90%), 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 HCI's case. CASH AND CASH EQUIVALENTS: [PASS] HCI's level of cash $230.2 million passes this criteria. If a company is a cash generator, like HCI, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. "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 (HCI's is 0.28), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. HCI passes this test. The following criteria for HCI are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] HCI has not been significantly increasing the number of shares outstanding within recent years which is a good sign. HCI currently has 11.0 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: [PASS] 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. HCI's sales of $226.9 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". HCI passes the sales test. DAILY DOLLAR VOLUME: [PASS] HCI passes the Daily Dollar Volume (DDV of $9.5 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. HCI with a price of $48.05 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] HCI's income tax paid expressed as a percentage of pretax income this year was (39.17%) and last year (39.27%) 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.   USANA HEALTH SCIENCES, INC. Profile Strategy: Patient Investor Based on: Warren Buffett USANA Health Sciences, Inc. develops and manufactures science-based nutritional and personal care products. The Company has operations in 15 markets worldwide, where it distributes and sells its products by way of direct selling. The Company reports operations in two geographic regions: North America and Asia Pacific, which is further divided into three sub-regions; Southeast Asia/Pacific, Greater China, and North Asia. North America includes the United States, Canada, Mexico, and direct sales from the United States to the United Kingdom and the Netherlands. Southeast Asia/Pacific includes Australia, New Zealand, Singapore, Malaysia, and the Philippines; Greater China includes Hong Kong, Taiwan and China; and North Asia includes Japan and South Korea. The Company's customer base consists of two types of customers: Associates and Preferred Customers. As of December 31, 2011, the Company had 222,000 active Associates and 64,000 active Preferred Customers worldwide. Analysis Guru Score: 93% 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 0.98, 1.50, 2.03, 2.20, 2.65, 1.85, 2.17, 2.86, 3.26, 4.45. Buffett would consider USNA'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 30.2%. USNA's long term historical EPS growth rate is 20.7%, based on the average of the 3, 4 and 5 year historical eps growth rates. 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. USNA 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 USNA, over the last ten years, is 36.0%, 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 42.8%, 59.4%, 81.4%, 65.4%, 130.4%, 89.3%, 44.8%, 31.2%, 28.0%, 33.2%, and the average ROE over the last 3 years is 30.8%, 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 USNA, over the last ten years, is 49.5% and the average ROTC over the past 3 years is 30.8%, 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 42.8%, 59.4%, 81.4%, 65.4%, 70.5%, 42.6%, 40.9%, 31.2%, 28.0%, 33.2%, 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. USNA's free cash flow per share of $5.65 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 $23.95 and compares it to the gain in EPS over the same period of $3.47. USNA's management has proven it can earn shareholders a 14.5% 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. USNA's shares outstanding have fallen over the past five years from 15,350,000 to 14,000,000, 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 USNA 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 $5.44 and divide it by the current market price of $75.42. An investor, purchasing USNA, could expect to receive a 7.21% initial rate of return. Furthermore, he or she could expect the rate to increase 20.7% per year, based on the average of the 3, 4 and 5 year historical eps growth rates, 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 2.75%. Compare this with USNA's initial yield of 7.21%, which will expand at an annual rate of 20.7%, based on the average of the 3, 4 and 5 year historical eps growth rates. 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] USNA currently has a book value of $17.22. It is safe to say that if USNA can preserve its average rate of return on equity of 30.8% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 30.8% and it will have a book value of $252.08 in ten years. If it can still earn 30.8% on equity in ten years, then expected EPS will be $77.60. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $77.60 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (13.9) (5 year average P/E in this case), which is 11.7 and you get USNA's projected future stock price of $907.12. 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 $907.12. These numbers indicate that one could expect to make a 28.2% average annual return on USNA's stock at the present time. Buffett would consider this an absolutely fantastic expected return. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 20.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, you can project EPS in ten years to be $35.80. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (13.9) (5 year average P/E in this case), which is 11.7. This equals the future stock price of $418.49. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $418.49. 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 $75.42 and the future expected stock price, including the dividend pool, of $418.49. If you were to invest in USNA at this time, you could expect a 18.69% 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 18.7% and 28.2%. 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 23.5% on USNA stock for the next ten years, based on the current fundamentals. Buffett would consider this an exceptional return, thus passing the criterion.   LUKOIL (ADR) Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy 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, as well as Africa. 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. In April 2013, the Company acquired a 100% of Samara-Nafta ZAO and completed acquisition of CJSC Kama-Oil. In June 2013, it sold a 99.57% stake in Lukoil Odes'kyi NPZ PAT. The Company's major shareholder is NKO ZAO NRD with a stake of 91.60%. Analysis Guru Score: 100% MARKET CAP: [PASS] The Cornerstone Value Strategy looks for large, well known companies whose market cap is greater than $1 billion. These companies exhibit solid and stable earnings. LUKOY's market cap of $50,390 million passes this test. CASH FLOW PER SHARE: [PASS] The second criterion requires that the company exhibit strong cash flows. Companies with strong cash flow are typically the value oriented investments that this strategy looks for. The company's cash flow per share must be greater than the mean of the market cash flow per share ($1.59). LUKOY's cash flow per share of $21.45 passes this test. SHARES OUTSTANDING: [PASS] This particular strategy looks for companies whose total number of outstanding shares are in excess of the market average (614 million shares). These are the more well known and highly traded companies. LUKOY, who has 776 million shares outstanding, passes this test. TRAILING 12 MONTH SALES: [PASS] A company's trailing 12 month sales ($140,336 million) are required to be 1.5 times greater than the mean of the market's trailing 12 month sales ($21,000 million). LUKOY passes this test. DIVIDEND: [PASS] The final step in the Cornerstone Value strategy is to select the 50 companies from the market leaders group (those that have passed the previous four criteria) that have the highest dividend yield. LUKOY, with a dividend yield of 5.16%, is one of the 50 companies that satisfy this last criterion.   HOLLYFRONTIER CORP Profile Strategy: Value Investor Based on: Benjamin Graham 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: 100% SECTOR: [PASS] HFC 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. HFC's sales of $20,481.3 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. HFC's current ratio of 2.33 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 HFC is $999.9 million, while the net current assets are $2,516.2 million. HFC 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. HFC's EPS growth over that period of 1,416.3% 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. HFC's P/E of 8.72 (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. HFC's Price/Book ratio is 1.47, while the P/E is 8.72. HFC passes the Price/Book test.   LEAR CORPORATION Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Lear Corporation is a tier 1 supplier to the global automotive industry. The Company supplies its products to automotive manufacturers with automotive seat systems and related components, as well as electrical distribution systems and related components. The Company has two segments: seating and electrical power management systems (EPMS). The seating segment includes seat systems and related components, such as seat frames, recliner mechanisms, seat tracks, seat trim covers, headrests and seat foam. The EPMS segment includes electrical distribution systems for traditional powertrain vehicles, as well as for hybrid and electric vehicles. As of December 31, 2011, it had 20 joint ventures located throughout Asia, as well as five in North America, two in Europe and Africa and one with operations in all three regions. Analysis Guru Score: 100% MARKET CAP: [PASS] The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. LEA, with a market cap of $6,578 million, passes this criterion. EARNINGS PER SHARE PERSISTENCE: [PASS] The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. LEA, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were -4.47, -2.66, 4.05, 5.08 and 12.85, passes this test. PRICE/SALES RATIO: [PASS] The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. LEA's Price/Sales ratio of 0.42, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [PASS] The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. LEA, whose relative strength is 85, is in the top 50 and would pass this last criterion.   CHEVRON CORPORATION Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Chevron Corporation (Chevron) manages its investments in subsidiaries and affiliates and provides administrative, financial, management and technology support to the United States and international subsidiaries that engage in fully integrated petroleum operations, chemicals operations, mining activities, power generation and energy services. Upstream operations consist primarily of exploring for, developing and producing crude oil and natural gas; processing, transportation and regasification associated with liquefied natural gas; transporting crude oil by international oil export pipelines; transporting, storage and marketing of natural gas, and a gas-to-liquids project. Downstream operations consist primarily of refining crude oil into petroleum products; transporting crude oil and refined products by pipeline, marine vessel, motor equipment and rail car, and manufacturing and marketing of commodity petrochemicals, plastics for industrial uses and fuel and lubricant additives. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: CVX is considered a "True Stalwart", according to this methodology, as its earnings growth of 16.05% lies within a moderate 10%-19% range and its annual sales of $227,359 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. CVX is attractive if CVX 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 CVX was 2.18% last year, while for this year it is 2.61%. 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 (0.43%) is below 5%. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for CVX (0.51), based on the average of the 3, 4 and 5 year historical eps growth rates, is O.K. EARNINGS PER SHARE: [PASS] The EPS for a stalwart company must be positive. CVX's EPS ($12.22) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for CVX (12.83%) 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 CVX (0.43%) 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 CVX (1.65%) 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.   AMTRUST FINANCIAL SERVICES, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Amtrust Financial Services, Inc. is a holding company. The Company is a multinational specialty property and casualty insurer focused on generating consistent underwriting profits. The Company operates in four segments: small commercial business, specialty program and personal lines reinsurance. In January 2013, the Company acquired First Nonprofit Companies, Inc. In February 2013, its subsidiary acquired Car Care Plan (Holdings) Limited from Ally Insurance Holdings, Inc. In April 2013, it acquired Sequoia Insurance Company and its subsidiaries, Sequoia Indemnity Company and Personal Express Insurance Company. In May 2013, the Company acquired Mutual Insurers Holding Company (MIHC) and MIHC's subsidiary, First Nonprofit Insurance Company. Analysis Guru Score: 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. AFSI, with a market cap of $3,018 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. AFSI, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.24, 1.56, 1.95, 2.29 and 2.34, 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. AFSI's Price/Sales ratio of 1.16, 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. AFSI, whose relative strength is 76, is in the top 50 and would pass this last criterion.   BRIDGEPOINT EDUCATION INC Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher 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: 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. BPI's P/S ratio of 1.22 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. BPI's Debt/Equity of 0.00% is exceptional, 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. BPI 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 BPI At this Point Is BPI 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, BPI, who has a P/S of 1.22, 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%. BPI's inflation adjusted EPS growth rate of 26.74% 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. BPI's free cash per share of 2.11 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. BPI, whose three year net profit margin averages 16.54%, passes this evaluation.   STAMPS.COM INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Stamps.com Inc. is a provider of Internet-based postage solutions. The Company's customers use its service to mail and ship a variety of mail pieces, including postcards, envelopes, flats and packages, using a range of United States Postal Service (the USPS) mail classes, including First Class Mail, Priority Mail, Express Mail, Media Mail, Parcel Post, and others. Its customers include individuals, small businesses, home offices, medium-size businesses and enterprises. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: This methodology would consider STMP a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (20.71) relative to the growth rate (53.95%), 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 STMP (0.38) is very favorable. SALES AND P/E RATIO: [NEUTRAL] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. STMP, whose sales are $125.5 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. EPS GROWTH RATE: [FAIL] 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 STMP is 54.0%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered too fast. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for STMP (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 STMP (0.11%) 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 STMP (5.08%) 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.   PAPA JOHN'S INT'L, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Papa John's International, Inc. (Papa John's) operates and franchises pizza delivery and carryout restaurants and, in certain international markets, dine-in and restaurant-based delivery restaurants under the trademark Papa John's. The Company operates in six segments: domestic Company-owned restaurants, domestic commissaries (Quality Control Centers), North America franchising, international operations, variable interest entities (VIEs) and all other business units. Its Company owned restaurants includes 182 restaurants operated under four joint venture arrangements. The Company also owns and operates restaurants in Beijing and North China. In April 2012, it acquired 56 franchised Papa John's restaurants in the Denver and Minneapolis markets. 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. PZZA, with a market cap of $1,840 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. PZZA, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.30, 1.93, 1.99, 2.16 and 2.58, 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. PZZA's Price/Sales ratio of 1.30, 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. PZZA, whose relative strength is 79, is in the top 50 and would pass this last 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 HIBB HIBBETT SPORTS, INC. Retail (Specialty) 61 PAG PENSKE AUTOMOTIVE GROUP, INC. Retail (Specialty) 52 TJX THE TJX COMPANIES, INC. Retail (Apparel) 50 JOY JOY GLOBAL INC. Constr. & Agric. Machinery 50 AGCO AGCO CORPORATION Constr. & Agric. Machinery 49 BOFI BOFI HOLDING, INC. S&Ls/Savings Banks 49 AFOP ALLIANCE FIBER OPTIC PRODUCTS INC Semiconductors 47 WOR WORTHINGTON INDUSTRIES, INC. Iron & Steel 45 BBBY BED BATH & BEYOND INC. Retail (Specialty) 44 QCOR QUESTCOR PHARMACEUTICALS INC Biotechnology & Drugs 44

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