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Executive Summary	September 30, 2011

The Economy Nobel Prize-winning economist Paul Samuelson once quipped that the stock market has correctly predicted "nine of the last five recessions". Well, for a good two months now, many investors (and pundits and forecasters) have made it seem a foregone conclusion that another U.S. recession is imminent. And week after week, the data continues to show that -- to this point -- the recession they've been predicting appears to be one of those four non-recessions to which Samuelson referred. This week, for example, we got some positive news from the labor market, with new unemployment claims falling about 9% to reach their lowest level in nearly six months. They're still high by historical standards, but we're just not seeing the surge in unemployment that many were forecasting when the stock market was swooning in July and August. Decent news also came from the housing market. After falling in three of the past four months, existing-home sales jumped 7.7% in August, the National Association of Realtors reported. And both the 10-city and 20-city S&P/Case-Shiller Home Price Indices rose 0.9% in July, new data showed. When adjusting for seasonal factors, however, the indices were both about flat for the month. Pending home sales, a forward-looking indicator based on contract signings, declined slightly in August, falling 1.2%, NAR reported. Regional manufacturing reports, meanwhile, were disappointing. The New York Federal Reserve's manufacturing index indicated the sector contracted for the fourth straight month, falling at about the same pace (-8.8%) as the previous month (-7.7%). The Philadelphia Fed's mid-Atlantic manufacturing index also remained in negative territory, though it indicated that the sector contracted at a significantly slower pace than it did in August (the September reading was -17.5, vs. -30.7 in August). Businesses appear to think the recent downturn is temporary, however; the Philly Fed's report showed a big jump in companies' expectations for what business conditions will be like in six months, and the New York Fed's six-month forward-looking indicator also rose. It's also important to keep in mind that the New York and Philly numbers haven't exactly been an accurate bellwether for the nation in the past couple months -- broader national manufacturing figures have remained positive even as those two indices have been weak. Supporting the improving outlook for manufacturers was a new Commerce Department report that said new orders for non-defense capital goods (goods used to produce finished products and services) rose 5.2% in August, despite all the talk of a possible double-dip recession. Good news also came regarding the U.S. consumer. According to new Federal Reserve data, Americans' household debt service ratio (which compares debt payments to disposable income) fell in the April-June period for the ninth quarter in a row. In fact, it reached its lowest level since the fourth quarter of 1994. Of course, the market hasn't been too concerned with fundamental data of late. It's instead remained fixated on the European debt crisis. And the speculation on how that will turn out has improved recently, as more countries have agreed to participate in the European Financial Stability Facility, the Eurozone's bailout fund. Much remains to be done, however, and it's likely that investors will continue to fret over the unpredictable, day-to-day news that emerges from Europe until some resolution is reached. Investors have also been speculating about the impact of the Federal Reserve's new "Operation Twist" plan, through which the Fed will extend the average maturity of its securities holdings. The move is designed to keep downward pressure on long-term interest rates. With rates already extremely low -- 30-year mortgage rates fell to the lowest level in at least 40 years this week -- many are criticizing the move as unnecessary. We'll have to wait and see if it has the impact the Fed desires. Since our last newsletter, the S&P 500 returned -4.0%, while the Hot List returned -14.6%. So far in 2011, the portfolio has returned -22.3% vs. -7.7% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 109.7% vs. the S&P's 16.0% gain. Fear, Facts, and Fundamentals Europe, Europe Europe -- it's all anyone seems concerned with these days, and that can be a difficult environment for disciplined, bottom up, stick-to-the-facts investors like me. It's not that the impact of Europe's financial situation is overblown (though it may well be -- I've previously noted that only about 15% of sales of S&P 500 companies' sales come from Europe; given all the Europe fear, you'd think it would be more like 50%). The issue, rather, is that very, very few people -- perhaps not even policymakers who are involved -- have any idea how the Europe situation is going to play out. Seventeen countries need to approve the enhanced Eurozone bailout plan for it to go into effect, and each has its own unique set of internal politics. It's hard enough to predict what one country will do, let alone all 17. Yet every short-term event -- and the "events" are often mere statements by European officials -- is taken as a strong, clear signal that the debt crisis resolution will be "good" or "bad" for the world. Investors rush for the door on what they perceive as bad news, only to rush to get back in on what they view as good news. This process -- the process of jumping in and out of the market based on the tenor of comments that some European official makes on a particular day -- is nothing more than sheer speculation. It is the sort of thing that I believe would make Benjamin Graham, Warren Buffett, or any of the highly successful gurus I follow, shake their heads in disapproval. In his classic The Intelligent Investor, Graham said of speculation, "The people who persist in trying it are either (a) unintelligent, or (b) willing to lose money for the fun of the game, or (c) gifted with some uncommon and incommunicable talent. In any case, they are not investors." I agree. You and I, however, are investors. And as investors, we look at facts and data, and use them to make rational decisions about value. Given all of the fears surrounding stocks today, I thought it would be a good time to review some of the cold, hard facts and data about the current market's valuation, to try to give a comprehensive, rational picture of where we stand. For starters, let's look at price/earnings ratios, of which there are several. First we'll look at trailing 12-month P/E ratios, using both operating earnings and as-reported earnings (we'll use the S&P 500 as a proxy for "the market"). Using the S&P's Thursday afternoon price of 1162 or so, the index trades for about 12.8 times trailing 12-month operating earnings, and 13.9 times as-reported earnings, according to Standard & Poor's data. How does that compare to historical norms? Pretty well. The as-reported figure is below the 1872-2000 historical average for U.S. stocks, which is 14.5, according to SmartMoney. The operating figure is much lower than the historical average of 19.1, but that average is based on a relatively small sample -- S&P keeps historical data on operating earnings P/Es going back only to 1988. Now, on to projected earnings. They aren't my favorite way to gauge valuations, given how often analysts' projections are wrong. But, just for kicks, let's see how the market's forward-looking P/E looks. According to Standard & Poor's, the S&P 500 trades for about 11.2 times projected operating earnings for the next year, and about 12.4 times projected as-reported earnings. Again, a pretty good picture, for what it's worth. Beyond Earnings Of course, some say corporate earnings have been goosed by the Federal Reserve's money-printing binge. So let's look at some non-earnings-based metrics, like the stock market/GDP ratio. This compares the total market value of the stock market to the value of all the goods and services produced annually in the U.S. -- the gross domestic product. Warren Buffett has said the stock market/GNP (gross national product) is one of his favorite valuations metrics, and GDP and GNP tend to run quite close to each other. The website GuruFocus.com tracks the daily stock market/GDP ratio, and as of Sept. 29, the ratio was 79.9%. That sits toward the cheaper end of the "fair value" range (75% to 90%), which was derived by an analysis of historical data, the site says. (It uses the Wilshire Total Market Index, not the S&P 500, as a proxy for the market.) Another good sign. Then there's the price/sales ratio, which was pioneered by Kenneth Fisher, one of the gurus upon whose writings I base one of my top-performing strategies. Fisher developed the PSR in the 1980s as a way to value individual stocks. His logic: While earnings can fluctuate wildly from year to year because of factors that have nothing to do with a firm's underlying business (accounting changes, lawsuits won or lost, tax changes), sales are far more stable, and provide a better gauge of a company's position. My Fisher-based model finds PSRs below 0.75 to be tremendous values, and those between 0.75 and 1.5 to be good values. My James O'Shaughnessy-based model also uses the metric, looking for PSRs below 1.5. Currently, according to data from Morningstar, the S&P 500 has a PSR of 1.2. The Longer View Critics who say recent earnings have been boosted by the Fed also point to longer-term P/E ratios, like the 10-Year Price/Earnings Ratio. Graham was a pioneer of this metric, and Yale Economist Robert Shiller is now the tool's foremost proponent. His 10-Year Cyclically-Adjusted Price/Earnings Ratio (CAPE) looks at earnings over the past 10 years and factors in inflation. The benefit of this particular P/E is that it compensates for short-term anomalies in earnings results. At the end of the first quarter of 2009, for example, the S&P traded for 116 times TTM as-reported earnings, a figure that looks on the surface to indicate that the market was wildly overvalued. But that was due to the fact that a horrific short-term stretch had driven TTM earnings down to less than $7 -- a figure that surely underestimated the future earnings power of the companies in the index. The downside of the 10-year P/E is that the timeframe it examines is somewhat arbitrary. Typically, business cycles run significantly shorter than 10 years -- the average has been about six years in the post-World War II era, according to the National Bureau for Economic Research, the group charged with declaring the start and end points of recessions and expansions. Going back to the 1850s, the average is even lower, at about four-and-a-half years. So depending on when you look at the CAPE, the past decade of earnings can include a combination of recessionary and expansionary periods that is atypical. How does the 10-year P/E look now? It's hovered around 20 for the past couple months. That's significantly above its 140-year historical average of about 16, though far from the peaks hit in 1999 (44.2) and 2007 (about 27.5). The latest data on Shiller's web site uses the Sept. 26 close (which is almost identical to the S&P's price as of this writing on Sept. 29), and shows the 10-year P/E to be 19.8. That's an overvaluation of about 24%. There's some logic to using post-World War II data on any cyclically-adjusted P/E, however, since it was after World War II that policymakers began to make inflation a permanent part of the economy, and inflation is a dagger for stocks' biggest competitor, bonds. I thought it would be interesting to look at the post-World War II era, and tweak Shiller's data to use the average post-World War II business cycle of 70 months worth of earnings (rather than ten years). On that basis, the cyclically adjusted P/E ratio has averaged 17.3. The current level: 18.3. Still elevated, but only by about 6.1%. Finally, let's look at one last measure of market value -- dividend yield. In what has been a rarity in recent decades, the S&P 500's dividend yield is well above the 10-year Treasury yield. As of Sept. 28, the S&P's dividend yield was 2.64%, while the 10-year Treasury yield was 2.03%. The Facts While most investors seem to be focusing on fear-filled headlines, smart investors will keep their focus on the facts. And right now, when it comes to assessing market valuation, the broader market seems reasonably priced. By all of the one-year earnings metrics, it looks cheap. And if you don't trust recent and projected earnings, the market is also trading at a reasonable price compared to sales and GDP. Plus, its dividend yield is some 30% higher than that of the 10-year Treasury bill. The lone metric we examined that shows an overpriced market is the 10-year P/E. That's cause for some concern. But when we adjust the metric to more accurately reflect normal business cycle time periods, the gap between the current P/E and the average post-World War II P/E shrinks to about 6% -- indicating only a slight overvaluation. In the short term, of course, the market will continue to move based on the macroeconomic headlines. But over the longer term, valuation will matter. And, looking at the totality of the information, stocks appear to be priced at levels from which solid long-term returns typically follow -- returns that are much better than those of bonds or bills or even gold. And, more importantly, many individual stocks are trading at exceptionally low valuations, despite having strong track records of earnings and sales growth. For stock-pickers like the Hot List, that's very good news. Does that mean the market is guaranteed to surge in the next month, or quarter, or year? Of course not. There are never any guarantees in the stock market. But at some point, I believe the Europe fears will pass, and the market will recognize the many bargains that investors have been ignoring amid the fear-filled headlines -- and those who have stayed disciplined will be rewarded.		Editor-in-Chief: John Reese Since Inception   Hot List 109.7% S&P 500 16.0% Accuracy 55.3% Beta 1.2 YTD   Hot List -22.3% S&P 500 -7.7% Since Last Issue   Hot List -14.6% S&P 500 -4.0% Avg. Fundamentals   Market Cap (mil) $16,457 PE Ratio 8.1 5 Yr EPS Growth 22.0% Yield 3.2% Rel. Strength 44 Portfolio Sectors Services 5 Healthcare 2 Technology 1 Basic Materials 1 Energy 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. The Fallen As we rebalance the Validea Hot List, 3 stocks leave our portfolio. These include: Micron Technology, Inc. (MU), Gt Advanced Technologies Inc (GTAT) and Marketaxess Holdings Inc. (MKTX). The Keepers 7 stocks remain in the portfolio. They are: Forest Laboratories, Inc. (FRX), Devry Inc. (DV), Career Education Corp. (CECO), Asiainfo-linkage, Inc. (ASIA), Ternium S.a. (Adr) (TX), Capella Education Company (CPLA) and Bridgepoint Education, Inc. (BPI). The Newbies We are adding 3 stocks to the portfolio. These include: Hi-tech Pharmacal Co. (HITK), Jos. A. Bank Clothiers, Inc. (JOSB) and Petroleo Brasileiro Sa (Adr) (PBR). Portfolio Changes Additions   HI-TECH PHARMACAL CO. HITK JOS. A. BANK CLOTHIERS, INC. JOSB PETROLEO BRASILEIRO SA (ADR) PBR Deletions   MICRON TECHNOLOGY, INC. MU GT ADVANCED TECHNOLOGIES INC GTAT MARKETAXESS HOLDINGS INC. MKTX Newcomers to the Validea Hot List Hi-Tech Pharmacal Co. (HITK): This three-decade-old specialty pharma firm focuses on difficult-to-manufacture liquid and semi-solid dosage forms, and manufactures a range of sterile ophthalmic, otic and inhalation products. It's also a leader in over-the-counter and nutritional products targeted at diabetics. Amityville, N.Y.-based Hi-Tech ($422 million market cap) gets high marks from four of my models -- my Joel Greenblatt- and Peter Lynch-based models, the model I base on the writings of Motley Fool creators Tom and David Gardner, and my Momentum Investor approach. To read more about its fundamentals, see the "Detailed Stock Analysis" section below. Jos. A. Bank Clothiers (JOSB): Based in Hampstead, Maryland, this prior Hot List favorite is back. The 100-plus-year-old retailer sells a variety of men's tailored, casual, and sports clothing, as well as shoes and accessories such as hats and belts. The small-cap ($1.4 billion), has about 500 stores across the U.S. Bank, which has had several previous stints in the Hot List -- including one in which it gained 78.2% from Feb. 20 to Oct. 2 of 2009 -- gets strong interest from my James O'Shaughnessy growth model and my Warren Buffett-based strategy. To find out more about the stock's fundamentals, see the "Detailed Stock Analysis" section below. Petroleo Brasileiro SA (PBR): Brazil-based "Petrobras" is active in 28 countries, and is one of the world's largest integrated oil and gas companies ($146 billion market cap). It gets high marks from several of my strategies, including my Peter Lynch-, John Neff-, and James O'Shaughnessy-based models. To read more about it, scroll down to the "Detailed Stock Analysis" section below. News about Validea Hot List Stocks AsiaInfo-Linkage, Inc. (ASIA): AsiaInfo's shares tumbled last week after the stock was downgraded from "positive" to "neutral" by an analyst, who cited industry concerns. Through Sept. 28, the stock was down about 23% since the Hot List acquired it on Sept. 2. The firm's fundamentals remain intact, however, and the Hot List is holding onto the stock. GT Advanced Technologies (GTAT): Like those of many solar industry firms, GT's shares have fallen sharply since our last newsletter. A few reasons seem to be behind the decline, including the controversy surrounding solar firm Solyndra, a glut of solar panels, and falling prices for the panels, according to Forbes. My strategies remain fairly high on GTAT, but not high enough. Other options have passed it by, and it's being sold from the portfolio this week. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will take a closer look at my strategies and investment approach. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score BPI BRIDGEPOINT EDUCATION, INC. Schools 83 FRX FOREST LABORATORIES, INC. Biotechnology & Drugs 74 TX TERNIUM S.A. (ADR) Iron & Steel 68 CPLA CAPELLA EDUCATION COMPANY Schools 67 PBR PETROLEO BRASILEIRO SA (ADR) Oil & Gas - Integrated 60 DV DEVRY INC. Schools 58 ASIA ASIAINFO-LINKAGE, INC. Software & Programming 57 CECO CAREER EDUCATION CORP. Schools 55 JOSB JOS. A. BANK CLOTHIERS, INC. Retail (Apparel) 53 HITK HI-TECH PHARMACAL CO. Biotechnology & Drugs 51 Ticker Market Cap Date Added Start Price Return BPI $995 3/18/2011 $18.02 $18.94 5.1% FRX $8,530 9/2/2011 $33.10 $31.07 -6.1% TX $4,276 9/2/2011 $24.48 $21.33 -12.9% CPLA $455 9/2/2011 $30.42 $29.95 -1.5% PBR $144,294 9/30/2011 TBD $23.30 TBD DV $2,619 9/2/2011 $40.74 $38.27 -6.1% ASIA $586 9/2/2011 $11.00 $8.14 -26.0% CECO $1,046 9/2/2011 $15.36 $13.72 -10.7% JOSB $1,344 9/30/2011 TBD $48.29 TBD HITK $421 9/30/2011 TBD $33.00 TBD

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer BPI   |   FRX   |   TX   |   CPLA   |   PBR   |   DV   |   ASIA   |   CECO   |   JOSB   |   HITK   |   BRIDGEPOINT EDUCATION, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool Bridgepoint Education, Inc. (Bridgepoint) is a provider of postsecondary education services. The Company's wholly owned subsidiaries, Ashford University and the University of the Rockies, are regionally accredited academic institutions that offer associate's, bachelor's, master's and doctoral programs in the disciplines of business, education, psychology, social sciences and health sciences. These institutions deliver programs online, as well as at its traditional campuses located in Clinton, Iowa, and Colorado Springs, Colorado. As of December 31, 2010, it offered approximately 1,345 courses, 71 degree programs and 134 specializations. As of December 31, 2010, it had 77,892 students enrolled in its institutions, 99% of whom were attending classes online. Analysis Guru Score: 83% PROFIT MARGIN: [PASS] This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. BPI's profit margin of 19.77% passes this test. RELATIVE STRENGTH: [FAIL] The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. Although BPI's relative strength of 87 is below the acceptable level, yet it is very close. Keep an eye on the stock as it could move into the acceptable range. COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: [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 BPI (55.17% for EPS, and 37.99% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] BPI's insiders should own at least 10% (they own 66.22% ) of the company's outstanding shares which is extremely attractive since the minimum requirement is 10%. A high percentage indicates that the insiders are confident that the company will do well. CASH FLOW FROM OPERATIONS: [PASS] A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. BPI's free cash flow of $2.74 per share passes this test. PROFIT MARGIN CONSISTENCY: [FAIL] The profit margin in the past must be consistently increasing. The profit margin of BPI has been inconsistent in the past three years (Current year: 17.89%, Last year: 10.37%, Two years ago: 12.11%), which is unacceptable. This inconsistency will carryover directly to the company's bottom line, or earnings per share. R&D AS A PERCENTAGE OF SALES: [NEUTRAL] This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in BPI's case. CASH AND CASH EQUIVALENTS: [PASS] BPI's level of cash $279.1 million passes this criteria. If a company is a cash generator, like BPI, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. ACCOUNT RECEIVABLE TO SALES: [PASS] This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for BPI was 9.52% last year, while for this year it is 8.19%. Since the AR to sales is decreasing by -1.32% the stock passes this criterion. LONG TERM DEBT/EQUITY RATIO: [PASS] BPI's trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don't need to borrow money in order to grow. "THE FOOL RATIO" (P/E TO GROWTH): [PASS] The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (BPI's is 0.20), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. BPI passes this test. The following criteria for BPI are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] BPI has not been significantly increasing the number of shares outstanding within recent years which is a good sign. BPI currently has 58.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock. SALES: [FAIL] Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. BPI's sales of $852.6 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: [PASS] BPI passes the Daily Dollar Volume (DDV of $11.7 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf." PRICE: [PASS] This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. BPI with a price of $18.94 passes the price test. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions. INCOME TAX PERCENTAGE: [PASS] BPI's income tax paid expressed as a percentage of pretax income this year was (41.42%) and last year (42.73%) 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.   FOREST LABORATORIES, INC. Profile Strategy: Value Investor Based on: Benjamin Graham Forest Laboratories, Inc. (Forest) develops, manufactures and sells branded forms of ethical drug products, most of which requires a physician's prescription. The Company also focuses on the development and introduction of new products, including products developed in collaboration with licensing partners. Its products include those developed by the Company and those acquired from other pharmaceutical companies and integrated into its marketing and distribution systems. The Company's principal products include Lexapro, Namenda, Bystolic, Savella and Teflaro. On April 13, 2011, the Company acquired Clinical Data Inc. (Clinical Data), a specialty pharmaceutical company. Analysis Guru Score: 100% SECTOR: [PASS] FRX 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. FRX's sales of $4,504.7 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. FRX's current ratio of 3.53 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 FRX is $0.0 million, while the net current assets are $2,746.8 million. FRX 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. FRX's EPS growth over that period of 164.9% 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. FRX's P/E of 11.10 (using the 3 year PE) passes this test. PRICE/BOOK RATIO: [PASS] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. FRX's Price/Book ratio is 1.61, while the P/E is 11.10. FRX passes the Price/Book test.   TERNIUM S.A. (ADR) Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Ternium SA is a steel company in Latin America that manufactures and processes flat and long steel products for the construction, home appliances, capital goods, container, food, energy and automotive industries. The Company operates in three segments: Flat Steel Products, comprising the manufacturing and marketing of hot rolled coils and sheets, cold rolled coils and sheets, tin plate, welded pipes, hot dipped galvanized and electro-galvanized sheets and pre-painted sheets; Long Steel Products, comprising the manufacturing and marketing of billets (steel in its basic, semi-finished state), wire rod and bars; Others, comprising mainly pig iron, pellets and pre-engineered metal buildings. During the year ended December 31, 2010, Flat Steel Products accounted to 86% of the Company's overall revenues. Approximately 57% of Ternium's sales were generated in North America and 41% in South and Central America. Analysis Guru Score: 100% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Smokestack (cyclical) companies with a Price/Sales ratio between .4 and .8 represent good values according to this methodology. TXpasses this test as its P/S of 0.52 based on trailing 12 month sales, falls within the "good values" range for cyclical companies. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. TX's Debt/Equity of 33.06% is acceptable, thus passing the test. PRICE/RESEARCH RATIO: [PASS] This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. TX 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 TX At this Point Is TX a "Super Stock"? YES PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-Smokestack(non-cyclical) companies with a Price/Sales ratio between .75 and 1.5 are good values. Otherwise, Smokestack(cyclical) companies with a Price/Sales ratio between .4 and .8 represent good values. TX's P/S ratio of 0.52 falls within the "good values " range for cyclical industries and is considered attractive. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. TX's inflation adjusted EPS growth rate of 27.59% 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. TX's free cash per share of 1.78 passes this criterion. THREE YEAR AVERAGE NET PROFIT MARGIN: [PASS] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. TX, whose three year net profit margin averages 10.45%, passes this evaluation.   CAPELLA EDUCATION COMPANY Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Capella Education Company is an online postsecondary education services company. Through its wholly owned subsidiary, Capella University, the Company offers a range of doctoral, master's and bachelor's programs. As December 31, 2010, it offered over 1,250 online courses and 43 academic programs with 136 specializations to over 39,000 learners. It also offers certificate programs, which consist of a series of courses focused on a particular area of study. In addition, Capella Education Company also offers academic services, such as new learner orientation, technical support, academic advising, research services (particularly for doctoral degree candidates), writing services and online tutoring. It also provides appropriate educational accommodations to learners with documented disabilities through its disability support services team. During the year ended December 31, 2010, it formed the joint-venture Sophia Learning, LLC, as majority owner. Analysis Guru Score: 75% MARKET CAP: [PASS] The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. CPLA, with a market cap of $455 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. CPLA, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.06, 1.33, 1.66, 2.51 and 3.64, 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. CPLA's Price/Sales ratio of 1.04, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [FAIL] The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. CPLA has a relative strength of 11. This does not pass the final criterion. As a result, this methodology would not consider the stock even though it passed the previous three criteria.   PETROLEO BRASILEIRO SA (ADR) Profile Strategy: Contrarian Investor Based on: David Dreman Petroleo Brasileiro SA Petrobras (Petrobras) is a Brazilian integrated oil and gas company. It operates in five segments: exploration and production; refining, commercialization and transport of oil and natural gas; petrochemicals; distribution of derivatives, electrical energy, biofuels and other renewable energy sources. Directly or through its subsidiaries, Petrobras is engaged in the research, extraction, refining, processing, commercialization and transport of oil from wells, shales and other rocks, its derivatives, natural gas and other liquid hydrocarbons, as well as in activities related to energy, promoting research, development, production, transport, distribution and commercialization of all forms of energy. As of December 31, 2010, it had 132 production platforms, 16 refineries, 291 vessels, 29,398 kilometers of pipelines, six biofuel plants, 16 thermoelectric plants, one pilot wind farm, 8,477 service stations and two fertilizer plants, as well as presence in 30 countries. Analysis Guru Score: 86% MARKET CAP: [PASS] Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. PBR has a market cap of $144,294 million, therefore passing the test. EARNINGS TREND: [PASS] A company should show a rising trend in the reported earnings for the most recent quarters. PBR's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.51, 1.02 have been increasing, and therefore the company passes this test. EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: [PASS] This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. PBR passes this test as its EPS growth rate over the past 6 months (104.00%) has beaten that of the S&P (9.26%). PBR's estimated EPS growth for the current year is (86.08%), which indicates the company is expected to experience positive earnings growth. As a result, PBR passes this test. This methodology would utilize four separate criteria to determine if PBR is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest". P/E RATIO: [PASS] The P/E of a company should be in the bottom 20% of the overall market. PBR's P/E of 5.84, based on trailing 12 month earnings, meets the bottom 20% criterion (below 7.46), and therefore passes this test. PRICE/CASH FLOW (P/CF) RATIO: [FAIL] The P/CF of a company should be in the bottom 20% of the overall market. PBR's P/CF of 4.30 does not meet the bottom 20% criterion (below 4.28), and therefore fails this test. PRICE/BOOK (P/B) VALUE: [FAIL] The P/B value of a company should be in the bottom 20% of the overall market. PBR's P/B is currently 0.96, which does not meet the bottom 20% criterion (below 0.63), and it therefore fails this test. PRICE/DIVIDEND (P/D) RATIO: [FAIL] The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). PBR's P/D of 18.80 does not meet the bottom 20% criterion (below 17.51 or yield above 3.7%), and it therefore fails this test. This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below. CURRENT RATIO: [PASS] A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.37] or greater than 2). This is one identifier of financially strong companies, according to this methodology. PBR's current ratio of 2.02 passes the test. PAYOUT RATIO: [PASS] A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for PBR is 28.50%, while its historical payout ratio has been 29.48%. Therefore, it passes the payout criterion. RETURN ON EQUITY: [PASS] The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 18.27%, and would consider anything over 27% to be staggering. The ROE for PBR of 19.97% is high enough to pass this criterion. PRE-TAX PROFIT MARGINS: [PASS] This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. PBR's pre-tax profit margin is 23.89%, thus passing this criterion. YIELD: [PASS] The company in question should have a yield that is high and that can be maintained or increased. PBR's current yield is 5.32%, while the market yield is 3.00%. PBR passes this test. LOOK AT THE TOTAL DEBT/EQUITY: [FAIL] The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20%. PBR's Total Debt/Equity of 39.72% is not acceptable.   DEVRY INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy DeVry Inc. (DeVry) is a provider of educational services and the parent organization of Advanced Academics, Becker Professional Education, Carrington College and Carrington College California, Chamberlain College of Nursing, DeVry Brasil, DeVry University, and Ross University. These institutions offer a range of programs in business, healthcare and technology and serve students in middle school through postsecondary education, as well as accounting and finance professionals. In August 2011, the Company acquired he business operations of privately held American University of the Caribbean. Analysis Guru Score: 75% MARKET CAP: [PASS] The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. DV, with a market cap of $2,619 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. DV, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.07, 1.73, 2.28, 3.87 and 4.68, 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. DV's Price/Sales ratio of 1.20, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [FAIL] The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. DV has a relative strength of 35. This does not pass the final criterion. As a result, this methodology would not consider the stock even though it passed the previous three criteria.   ASIAINFO-LINKAGE, INC. Profile Strategy: Value Investor Based on: Benjamin Graham AsiaInfo-Linkage, Inc. (AsiaInfo-Linkage), formerly AsiaInfo Holdings, Inc., is a provider of telecommunications software solutions and information technology products and services in China. The Company's software and services enables its customers to build, maintain, operate, manage and improve their communications infrastructure. It's products and services in telecom business include business operation support systems, including billing and partnership relationship management applications; business intelligence systems, including data warehousing platforms and data mining applications; operating support systems (OSS) package, including protocol adaptor, service fulfilment, process management and service activation; service and data applications, such as mail centers, mobile device management and mobile e-commerce platforms, and network infrastructure services, including network design and implementation, integrated network management and professional maintenance and support. Analysis Guru Score: 71% SECTOR: [FAIL] ASIA is in the Technology sector, which is one sector that this methodology avoids. Technology and financial stocks were considered too risky to invest in when this methodology was published. At that time they were not the driving force of the market as they are today. Although this methodology would avoid ASIA, we will provide the rest of the analysis, as we feel times have changed. SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. ASIA's sales of $455.5 million, based on trailing 12 month sales, pass this test. CURRENT RATIO: [PASS] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. ASIA's current ratio of 2.40 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 ASIA is $0.0 million, while the net current assets are $332.1 million. ASIA passes this test. LONG-TERM EPS GROWTH: [FAIL] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for ASIA were negative within the last 5 years and therefore the company fails this criterion. P/E RATIO: [PASS] The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. ASIA's P/E of 12.40 (using the 3 year PE) passes this test. PRICE/BOOK RATIO: [PASS] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. ASIA's Price/Book ratio is 0.62, while the P/E is 12.40. ASIA passes the Price/Book test.   CAREER EDUCATION CORP. Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Career Education Corporation (CEC), through colleges, schools and universities that are part of the CEC family, offers education to a diverse student population of over 116,000 students in a variety of career-oriented disciplines. The Company has more than 90 campuses that serve these students are located throughout the United States and in France, Italy and the United Kingdom and Monaco. Its institutions includes American InterContinental University (AIU), Brooks Institute; Colorado Technical University (CTU), Harrington College of Design, INSEEC Group (INSEEC) Schools, International University of Monaco (IUM), International Academy of Design & Technology (IADT), Istituto Marangoni, Le Cordon Bleu North America (LCB), and Sanford-Brown Institutes and Colleges. CEC organized its businesses across four segments: University, Health Education, Culinary Arts and International. On April 15, 2010, the Company acquired IUM, an international business university. Analysis Guru Score: 90% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. CECO's P/S of 0.50 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. CECO's Debt/Equity of 0.14% is acceptable, thus passing the test. PRICE/RESEARCH RATIO: [PASS] This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. CECO 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 CECO At this Point Is CECO a "Super Stock"? NO PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.CECO's P/S ratio of 0.50 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors. LONG-TERM EPS GROWTH RATE: [FAIL] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. CECO's inflation adjusted EPS growth rate of 10.19% fails 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. CECO's free cash per share of 1.58 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. CECO, whose three year net profit margin averages 5.17%, passes this evaluation.   JOS. A. BANK CLOTHIERS, INC. Profile Strategy: Growth Investor Based on: Martin Zweig Jos. A. Bank Clothiers, Inc. (Jos. A. Bank) is a designer, manufacturer, retailer and direct marketer of men's tailored and casual clothing and accessories and is a retailer of tuxedo rental products. It sells substantially all of its products exclusively under the Jos. A. Bank label through its 506 retail stores (as of January 29, 2011, which includes 12 outlet and factory stores and 14 franchise stores) located throughout 42 states and the District of Columbia in the United States, as well as through the Company's nationwide catalog and Internet (www.josbank.com) operations. It sources substantially all of its merchandise from suppliers and manufacturers or through buying agents using Jos. A. Bank designs and specifications. The Company operates in two segments: Stores and Direct Marketing. The Stores segment consists of all Company-owned stores, excluding outlet and factory stores (full-line stores). The Direct Marketing segment consists of its Internet and catalog operations. 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. JOSB's P/E is 14.67, based on trailing 12 month earnings, while the current market PE is 14.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [FAIL] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. JOSB's revenue growth is 12.43%, while it's earnings growth rate is 18.71%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, JOSB fails this criterion. SALES GROWTH RATE: [PASS] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (22.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (8.5%) of the current year. Sales growth for the prior must be greater than the latter. For JOSB 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. JOSB's EPS ($0.74) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. JOSB's EPS for this quarter last year ($0.59) pass this test. POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: [PASS] The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. JOSB's growth rate of 25.42% 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 JOSB is 9.36%. This should be less than the growth rates for the 3 previous quarters which are 7.14%, 15.75% and 12.28%. JOSB 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, 13.27%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 25.42%, (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, 25.42% must be greater than or equal to the historical growth which is 18.71%. JOSB would therefore pass this test. EARNINGS PERSISTENCE: [PASS] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. JOSB, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.57, 1.82, 2.11, 2.56 and 3.08, passes this test. LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. JOSB's long-term growth rate of 18.71%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. TOTAL DEBT/EQUITY RATIO: [PASS] A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. JOSB's Debt/Equity (0.00%) is not considered high relative to its industry (77.75%) and passes this test. INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For JOSB, this criterion has not been met (insider sell transactions are 30, while insiders buying number 14). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.   HI-TECH PHARMACAL CO. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool Hi-Tech Pharmacal Co., Inc. (Hi-Tech) is a specialty manufacturer and marketer of prescription, over-the-counter (OTC) and nutritional products. Hi-Tech develops, manufactures and markets products in three categories: generics, prescription brands and OTC brands. The Company produces a range of products for various disease states, including glaucoma, asthma, bronchial disorders, dermatological disorders, allergies, pain, stomach, oral care and other conditions. Its generic products are primarily prescription items and include oral solutions and suspensions, topical creams and ointments, as well as nasal sprays. It also specializes in the manufacture of products in its sterile facility capable of producing liquid ophthalmic, otic and inhalation products. The generic product category includes a small amount of contract manufacturing sales for both the prescription and OTC markets. On May 9, 2011, the Company divested the Midlothian Laboratories division. 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. HITK's profit margin of 23.57% 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. HITK, with a relative strength of 94, 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 HITK (59.09% for EPS, and 42.99% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] HITK's insiders should own at least 10% (they own 18.17% ) 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. HITK's free cash flow of $2.88 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] HITK's profit margin has been consistent or even increasing over the past three years (Current year: 21.72%, Last year: 19.53%, Two years ago: 9.65%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. R&D AS A PERCENTAGE OF SALES: [PASS] HITK is either maintaining the same levels of R&D expenditures(currently $9.4 million) or increasing these levels which is a good sign. This allows the company to develop the superior technology and new products that will put everyone else out of business. This criterion is particularly important for high-tech and medical stocks because they are so R&D dependant. CASH AND CASH EQUIVALENTS: [PASS] HITK's level of cash $62.3 million passes this criteria. If a company is a cash generator, like HITK, 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 HITK was 12.30% last year, while for this year it is 12.46%. 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 HITK was 24.85% last year, while for this year it is 30.20%. Although the AR 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. LONG TERM DEBT/EQUITY RATIO: [PASS] HITK's trailing twelve-month Debt/Equity ratio (0.32%) is a little higher than what this methodology is looking for, but is still at an acceptable level. The superior companies that you are looking for don't need to borrow money in order to grow. This company has borrowed very little which is still OK. "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 (HITK's is 0.20), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. HITK passes this test. The following criteria for HITK are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] HITK has not been significantly increasing the number of shares outstanding within recent years which is a good sign. HITK currently has 13.0 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. HITK's sales of $207.8 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". HITK passes the sales test. DAILY DOLLAR VOLUME: [PASS] HITK passes the Daily Dollar Volume (DDV of $6.8 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. HITK with a price of $33.00 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] HITK's income tax paid expressed as a percentage of pretax income this year was (32.53%) and last year (31.42%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.   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 MU MICRON TECHNOLOGY, INC. Semiconductors 58 OZRK BANK OF THE OZARKS, INC. Regional Banks 57 MKTX MARKETAXESS HOLDINGS INC. Investment Services 51 FCX FREEPORT-MCMORAN COPPER & GOLD INC. Metal Mining 49 CW CURTISS-WRIGHT CORP. Misc. Fabricated Products 48 AFSI AMTRUST FINANCIAL SERVICES, INC. Insurance (Prop. & Casualty) 47 LULU LULULEMON ATHLETICA INC. Retail (Apparel) 47 KLIC KULICKE AND SOFFA INDUSTRIES INC. Semiconductors 45 QSII QUALITY SYSTEMS, INC. Software & Programming 44 OVTI OMNIVISION TECHNOLOGIES, INC. Semiconductors 43

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