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Executive Summary	February 5, 2010

The Economy The economy is continuing to offer a mixed bag, though in general the stabilization process that began in mid-2009 seems to have continued through the end of the year and into 2010. New data released last week, for example, showed that the U.S. economy grew at a 5.7% annual rate in the fourth quarter, the second straight quarter of growth following four straight quarters of contraction. The 5.7% figure was the third-highest of the 2000s decade, trailing only the third quarter of 2003 (6.9%) and the second quarter of 2000 (8.0%). The growth was driven largely by inventory replenishment, which accounted for 3.4 of the 5.7 percentage points -- not a big surprise given how much companies cut inventories during the financial crisis and its immediate aftermath. Of course, inventories can grow only so long before demand needs to drive growth. And we're seeing some signs that the American consumer may not be as tapped out as some thought. Retail sales were up in the 2.5% to 3.5% range in January, year over year, according to multiple organizations, the fifth straight month that they've risen. Of course, the same months in late '08 and early '09 provided very weak comparisons. Nevertheless, things appear to still be headed in the right direction. Heading even more so in the right direction is manufacturing activity. New data from the Institute for Supply Management indicated that the manufacturing sector expanded in January for the sixth straight month, and at the fastest pace in more than five years. It also showed that new orders are accelerating, as they rose again for the seventh straight month. The non-manufacturing sector also showed growth, reversing a two-month trend in which it contracted slightly, according to ISM. The job market, meanwhile, continues to scuffle, with new jobless claims rising in the most recent week. The less than 2% increase was by no means terrible news, but it seemed to be another sign that the jobs picture isn't about to turn on a dime. Still, to keep things in perspective, in the same week a year ago initial claims were well above 600,000. The President and Congress pledging to make jobs creation a renewed priority, and hopefully they'll be able to make a meaningful impact. Finally, the real estate market is showing mixed signs. Existing home sales tumbled 16.7% in December, the National Association of Realtors reported last week. That followed a string of three straight big monthly gains, however, and the figure was still up 15% over December 2008 levels. Sale prices rose for the first time since June. Pending home sales, meanwhile, reversed a big November decline. They rose 1% in December, and year-over-year were up more than 10%, according to the NAR. The big fluctuations in home sales data in recent months have been attributed to the fact that the government's first-time homebuyer tax credit was initially scheduled to end in November, which caused many first-time buyers to rush to take advantage of the credit (which since has been extended). Finally, global economic concerns are having a big impact on the U.S. markets. News of debt troubles for several European countries rattled the markets Thursday; China's attempts to slow its rapid growth by implementing measures to cool off its booming housing market did the same the previous week. All in all, those factors helped drive the U.S. markets lower, with the S&P 500 down 4.8% since our last newsletter. The Hot List also lost ground, falling 7.3%. So far in 2010, the portfolio is down 4.8%, vs. 4.7% for the S&P. Over the long-term, the Hot List is well ahead of the index, however, having gained 129.5% since its July 2003 inception, compared to just 6.3% for the S&P. Finding Profits in the "Lost Decade" That 6.3% gain for the S&P over the past six-and-a-half years is striking. And, if you go back a bit further, the numbers get flat-out ugly. As you've probably heard or read by now, the S&P lost 24.1% in the 2000s decade, an annualized loss of about 2.7% per year. Those figures have led some to dub the period the "Lost Decade". But while it was likely a lost decade for investors who plopped money into broader U.S. market index funds at its beginning -- or, if history is any guide, for those who tried to time the market -- the 2000s weren't lost for others. If you had a simple, sensible, disciplined approach, you could have kept your portfolio in the black; you might even have generated some big gains. One important thing to keep in mind regarding this topic is that, while they are often used as synonyms for the broader stock market (and I may at times be guilty of that), often-used indexes like the S&P 500 or Dow Jones Industrial Average don't represent a real investor's portfolio -- in fact, as Ron Lieber noted in a recent piece for The New York Times, they don't even fully reflect the broader market, particularly in today's global world. Lieber says that if you'd have put $50,000 in the Vanguard Total Stock Market Index Fund (a much broader market measure that includes thousands more stocks than the S&P 500), and another $50,000 in Vanguard's Total International Stock Index Fund (both with dividends reinvested, in tax-deferred accounts), you'd have ended up with about $109,000 -- a 9% gain rather than the S&P's 24% loss during the "Lost Decade". Of course, most investors also don't put all of their money into one asset. So Lieber looked at how an investor would've fared if he or she'd put 50% in stocks (using that half U.S./half International breakdown) and half in a diversified bond index fund. The results: a 45.6% gain. While not spectacular (that amounts to less than 4% per year), it's a far cry from a "lost" decade. Disciplined investors could've made even more, however. If you'd used the same breakdown and added $1,000 a month to your portfolio, and rebalanced it annually back to those allocation targets, you'd have ended up with more than $300,000 -- annualized gains of about 12% per year, Lieber writes. CBS MoneyWatch's Allan Roth recently talked of similar virtues in rebalancing. Roth said that investors who used Vanguard stock index funds and a 60% stocks (two-thirds from the U.S.) and 40% bonds allocation could've boosted returns by about 1.5% per year by adding a fixed amount to their portfolio each year, and rebalancing back to those target weights each year, during the "Lost Decade". Now, I bring all of this up not to encourage you to rush out into bonds or the Chinese yuan or pork belly futures or any other type of non-stock asset, or to hide the fact that it was a rough decade for stocks. I do it, instead, to highlight two broader points. The first is that, while the Hot List has been and will remain an all-stock portfolio (that's our specialty), most investors should be diversified over other asset classes. How many asset classes, and to what degree, are dependent on factors like your age and your risk tolerance. Second, and perhaps more importantly, is that investors shouldn't be fooled by headlines that a down day, month, year, or even decade for the S&P 500, Dow, or Nasdaq means that there's no money to be made in stocks -- which brings me to the Hot List. While the Hot List portfolio wasn't around for the entire "Lost Decade" -- we launched it in 2003 -- its nearly seven years of existence have been accompanied by poor returns for the major indices. Since the portfolio's July 15, 2003 launch, the S&P 500 has gained a paltry 6.5%, or 0.9% per year; the Vanguard Total Stock Market Index has been better, but is still only up about 13%, or less than 2% annually. In that period of very weak stock returns, however, the Hot List has gained 129.5%, or 13.5% per year. And it hasn't done so with risky trading or esoteric schemes or lucky breaks; it's done so by sticking to some basic concepts: that the numbers (a stock's fundamentals and balance sheet) should drive buys and sells -- not emotion or gut feelings; that using a disciplined rebalancing system -- whether it involves rebalancing every month, quarter, or year -- is critical; and that sticking to a proven strategy is crucial, even when things get very, very tough. By doing so, the Hot List has posted excellent returns during a period that is being portrayed as a disaster for stock investors. Similarly, as the studies above show, investors who managed their portfolios with a dose of common sense and a good amount of discipline were able not only to preserve their wealth during the "Lost Decade", but to grow it significantly. To me, all of that is proof that those who use a solid approach, and have the stomach to stick with it, should reap the benefits over the long haul -- wherever the broader market goes this month, year, or even decade.		Editor-in-Chief: John Reese Since Inception   Hot List 129.5% S&P 500 6.3% Accuracy 55.7% Beta 1.2 YTD   Hot List -4.8% S&P 500 -4.7% Since Last Issue   Hot List -7.3% S&P 500 -4.8% Avg. Fundamentals   Market Cap (mil) $18,490 PE Ratio 10.0 5 Yr EPS Growth 38.3% Yield 2.7% Rel. Strength 48 Portfolio Sectors Services 5 Capital Goods 2 Consumer Cyclical 1 Energy 1 Transportation 1
Hot List Editor John Reese Announces Publication of New Book The Guru Investor shows you how to implement the strategies of Wall Street legends like Warren Buffett, Peter Lynch and Benjamin Graham in your own portfolio. Buy Your Copy Now! Guru Spotlight: Joseph Piotroski If you haven't heard of Joseph Piotroski, you're not alone. He's probably the least well-known of the investment "gurus" who inspired my strategies. Actually, he's not even a professional investor, but instead an accountant and college professor. In 2000, however, Piotroski showed that you don't need to be a smooth-talking Wall Street hot-shot to make it big in the market. While teaching at the University of Chicago, he authored a research paper that showed how assessing stocks with simple accounting-based methods could produce excellent returns over the long haul. No fancy formulas, no insider knowledge -- just a straightforward assessment of a company's balance sheet. His study turned quite a few heads on Wall Street. It focused on companies that had high book/market ratios -- i.e. the type of unpopular stocks whose book values (total assets minus total liabilities) were high compared to the value investors ascribed to them (their share price multiplied by their number of shares). Quite often, such firms have low book/market ratios because they are in financial distress, and investors wisely stay away from them. On certain occasions, however, high book/market firms may be good companies that are being overlooked by investors for one reason or another. These firms can be great investment opportunities, because their stock prices will likely jump once Wall Street realizes it's been shunning a winner. Through his research, Piotroski developed a methodology to separate the solid but overlooked high book/market firms from high book/market ratio firms that were in financial distress. He found that this method, which included a number of balance-sheet-based criteria, increased the return of a high book/market investor's portfolio by at least 7.5 percent annually. In addition, he found that buying the high book/market firms that passed his strategy and shorting those that didn't would have produced an impressive 23 percent average annual return from 1976 and 1996. Since I started tracking it in late February 2004, a 10-stock portfolio picked using my Piotroski-based model has outperformed the market, though with some big ups and downs. Over its first four-and-a-half years or so, it was more than five times ahead of the S&P 500. It was hit hard -- like the rest of the market -- in 2008, however, falling more than 37%, and it didn't bounce back much in 2009, gaining just 6.8%. Still, despite the recent struggles, the portfolio is up 16.7% since inception, a period in which the S&P 500 has lost 4.3%. Let's take a look at how Piotroski's approach, and the model I base off of it, work. Diving into The Balance Sheet Piotroski wasn't the first to study high book/market stocks. But his research took things a step further than many past studies. He noted that the majority of high book/market stocks ended up being losers, and that the success of high book/market portfolios was usually dependent on the big gains of a small number of winners. Much as low price/earnings ratio investors like John Neff used a variety of tests to make sure low P/E stocks weren't rightfully being overlooked because of poor financials, Piotroski sought to separate the high book/market winners from the high book/market losers. The first step in this approach is, of course, to find high book/market ratio stocks. In his study, Piotroski focused on the stocks whose book/market ratios were in the top 20 percent of the market, so that's the figure I use. That's the easy part. The harder part is determining whether investors are avoiding a low-B/M stock because it is in financial trouble, or whether the company is a solid one that is simply being overlooked. The Piotroski-based model looks at a variety of factors to determine this, including return on assets and cash flow from operations, both of which should be positive. Piotroski also thought that good companies had cash from operations that was greater than net income. Such companies are making money because of their business -- not because of accounting changes, lawsuits, or other one-time gains. Several of Piotroski' other financial criteria don't necessarily look for fundamental excellence, but instead for improvement. This makes a lot of sense; a company whose return on assets had declined from 10 percent to 1 percent and whose cash flow from operations had dwindled from $10 million to $10,000 would pass the above ROA and cash flow tests, for example, but it certainly wouldn't be the type of strong performer Piotroski was targeting. Looking at how a company's fundamentals had been changing allowed him to not only get an idea of the firm's financial position, but also of whether that position was improving or declining. Among the other "change" criteria Piotroski examined were the long-term debt-asset ratio, which he wanted to be declining; the current ratio (current assets/current liabilities), which he wanted to be increasing; gross margin, which should be rising; and asset turnover, which measures productivity by comparing how much sales a company is making in relation to the amount of assets it owns (That should be increasing). As you can see, the Piotroski-based approach is a stringent one. Here are the ten stocks that rate high enough to make it into its 10-stock portfolio: IAC/InterActiveCorp (IACI) Overseas Shipholding Group (OSG) Petroleum Development Corporation (PTD) SkyWest, Inc. (SKYW) The Pantry, Inc. (PTRY) Imation Corp. (IMN) Omnicare, Inc. (OCR) Ceradyne, Inc. (CRDN) Assurant, Inc. (AIZ) Winn-Dixie Stores (WINN) Think Small -- And Boring One final note on the Piotroski-based strategy: It usually ends up focusing on small stocks. Piotroski found that smaller high book/market firms were more likely to produce high returns than their larger counterparts, because small stocks are more likely to fly under the radar of analysts and investors. That means you are more likely to uncover winners using fundamental analysis of these smaller, less-followed stocks. For the same reason, the stocks that my Piotroski-based model usually chooses tend to be from boring industries or make boring products. But while they're not the most flashy firms, they're quite often the type of stocks that can pay excellent returns over the long haul. News about Validea Hot List Stocks Aeropostale Inc. (ARO): On Feb. 3, Aeropostale announced a 3-for-2 stock split, the Associated Press reported. Shareholders of record at the close of business on Feb. 24 will get one share for each two that they own, with the new shares being distributed on or about March 4. Cash will be paid in place of fractional shares, based on the March 4 closing stock price as adjusted for the split, AP reported. Aeropostale has about 62.7 million shares outstanding; after the split it should have about 94 million, the company said. National Oilwell-Varco (NOV): On Feb. 3, Varco announced a net fourth-quarter profit of $394 million, or $0.94 per share, down 33% from the year-ago period. Excluding items, earnings were $0.96 a share, beating analysts' estimates of $0.77 per share, Fox Business News reported. The better-than-expected results were driven by strong new orders numbers ($580 million vs. analysts' estimates of $500 million). Revenues were $3.13 billion, beating analysts' expectations of $2.86 billion. 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 FUQI FUQI INTERNATIONAL, INC. Jewelry & Silverware 96 ARO AEROPOSTALE, INC. Retail (Apparel) 80 ESI ITT EDUCATIONAL SERVICES, INC. Schools 73 EME EMCOR GROUP, INC. Construction Services 63 DRC DRESSER-RAND GROUP INC. Misc. Capital Goods 62 TEF TELEFONICA S.A. (ADR) Communications Services 58 CVS CVS CAREMARK CORPORATION Retail (Drugs) 55 GME GAMESTOP CORP. Retail (Technology) 53 TDW TIDEWATER INC. Water Transportation 51 NOV NATIONAL-OILWELL VARCO, INC. Oil Well Services & Equipment 51 Ticker Market Cap Date Added Start Price Current Price Return FUQI $443 10/30/2009 $20.49 $16.03 -21.8% ARO $2,169 11/27/2009 $31.49 $32.83 4.3% ESI $3,371 10/30/2009 $90.35 $95.11 5.3% EME $1,519 1/22/2010 $24.55 $23.04 -6.2% DRC $2,471 11/27/2009 $28.46 $29.95 5.2% TEF $107,556 1/22/2010 $75.11 $68.58 -8.7% CVS $43,938 1/22/2010 $33.24 $31.15 -6.3% GME $3,312 1/22/2010 $20.03 $20.10 0.3% TDW $2,318 10/30/2009 $41.67 $44.83 7.6% NOV $17,801 10/30/2009 $40.99 $42.54 3.8%

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 FUQI   |   ARO   |   ESI   |   EME   |   DRC   |   TEF   |   CVS   |   GME   |   TDW   |   NOV   |   FUQI INTERNATIONAL, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool Fuqi International, Inc. (Fuqi) is a designer of precious metal jewelry in China, developing, promoting, and selling a range of products in the Chinese luxury goods market. The Company's products consist of a range of styles and designs made from gold and other precious metals, such as platinum and Karat gold (K-gold). The Company also produce jewelry items that contain diamonds and other precious stones on a custom-order basis. Its design database contains over 30,000 products. The Company operates through its wholly owned subsidiary Fuqi International Holdings Co., Ltd. (Fuqi BVI) and its wholly owned subsidiary, Shenzhen Fuqi Jewelry Co., Ltd. (Fuqi China). As of December 31, 2008, the Company had 69 jewelry retail counters and stores in China. Analysis Guru Score: 91% 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. FUQI's profit margin of 10.28% 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. FUQI, with a relative strength of 93, 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 FUQI (135.48% for EPS, and 35.77% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] FUQI's insiders should own at least 10% (they own 42.95% ) 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: [FAIL] 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. FUQI's free cash flow of $-0.42 per share fails this test. PROFIT MARGIN CONSISTENCY: [PASS] FUQI's profit margin has been consistent or even increasing over the past three years (Current year: 7.58%, Last year: 9.29%, Two years ago: 6.28%), 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 FUQI's case. CASH AND CASH EQUIVALENTS: [PASS] FUQI's level of cash $58.0 million passes this criteria. If a company is a cash generator, like FUQI, 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 FUQI was 20.36% last year, while for this year it is 12.08%. Since the inventory to sales is decreasing by -8.28% the stock passes this criterion. 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 FUQI was 17.83% last year, while for this year it is 20.71%. 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] FUQI'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 (FUQI's is 0.18), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. FUQI passes this test. The following criteria for FUQI are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] FUQI has not been significantly increasing the number of shares outstanding within recent years which is a good sign. FUQI currently has 26.0 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. FUQI's sales of $466.9 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". FUQI passes the sales test. DAILY DOLLAR VOLUME: [PASS] FUQI passes the Daily Dollar Volume (DDV of $20.9 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. FUQI with a price of $16.03 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: [FAIL] FUQI's income tax paid expressed as a percentage of pretax income either this year (19.75%) or last year (13.45%) is below 20% which is cause for concern. Because the tax rate is below 20% this could mean that the earnings that were reported are unrealistically inflated due to the lower level of income tax paid. However, we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%).   AEROPOSTALE, INC. Profile Strategy: Patient Investor Based on: Warren Buffett Aeropostale, Inc. is a mall-based specialty retailer of casual apparel and accessories. The Company designs, markets and sells its own brand of merchandise principally targeting 14 to 17 year-old young women and young men. The Company also sells Aeropostale merchandise through its e-commerce Website, www.aeropostale.com. As of January 31, 2009, it operated 914 stores, consisting of 874 Aeropostale stores in 48 states and Puerto Rico, 29 Aeropostale stores in Canada, and 11 Jimmy'Z stores in 10 states. The Company locates its stores primarily in shopping malls, outlet centers and, to a much lesser degree, lifestyle and off-mall shopping centers. The Company has developed a new retail store concept called P.S. from Aeropostale, which will offer casual clothing and accessories focusing on elementary school children between the ages of seven and 12. It offers a focused collection of apparel, including graphic t-shirts, tops, bottoms, sweaters, jeans, outerwear and accessories. Analysis Guru Score: 100% STAGE 1: "Is this a Buffett type company?" A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage. LOOK FOR EARNINGS PREDICTABILITY: [PASS] Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.11, 0.12, 0.35, 0.36, 0.62, 0.98, 1.00, 1.32, 1.73, 2.21. Buffett would consider ARO's earnings predictable. In fact EPS have increased every year. ARO's long term historical EPS growth rate is 27.1%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 14.6% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers. LOOK AT THE ABILITY TO PAY OFF DEBT [PASS] Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. ARO 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 ARO, over the last ten years, is 30.9%, 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 31.1%, 24.5%, 34.6%, 22.5%, 28.0%, 34.1%, 28.5%, 32.8%, 58.3%, 41.7%, and the average ROE over the last 3 years is 44.3%, 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 ARO, over the last ten years, is 33.6% and the average ROTC over the past 3 years is 44.3%, 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 31.1%, 24.5%, 34.6%, 22.5%, 28.0%, 34.1%, 28.5%, 32.8%, 58.3%, 41.7%, 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. ARO's free cash flow per share of $1.76 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 $8.80 and compares it to the gain in EPS over the same period of $2.10. ARO's management has proven it can earn shareholders a 23.9% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work. HAS THE COMPANY BEEN BUYING BACK SHARES: [BONUS PASS] Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. ARO's shares outstanding have fallen over the past five years from 83,050,003 to 68,000,000, 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 ARO quantitatively. STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return. CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail] Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $2.96 and divide it by the current market price of $32.83. An investor, purchasing ARO, could expect to receive a 9.02% initial rate of return. Furthermore, he or she could expect the rate to increase 14.6% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 4.60%. Compare this with ARO's initial yield of 9.02%, which will expand at an annual rate of 14.6%, based on the analysts' consensus estimated long term growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding. CALCULATE THE FUTURE EPS: [No Pass/Fail] ARO currently has a book value of $6.78. It is safe to say that if ARO can preserve its average rate of return on equity of 30.9% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 30.9% and it will have a book value of $100.10 in ten years. If it can still earn 30.9% on equity in ten years, then expected EPS will be $30.92. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $30.92 and multiply them by the lower of the 5 year average P/E ratio (15.6) or current P/E ratio (current P/E in this case), which is 11.1 and you get ARO's projected future stock price of $342.26. 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 $342.26. These numbers indicate that one could expect to make a 26.4% average annual return on ARO'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 14.6%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $11.58. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (15.6) or current P/E ratio (current P/E in this case), which is 11.1. This equals the future stock price of $128.25. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $128.25. 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 $32.83 and the future expected stock price, including the dividend pool, of $128.25. If you were to invest in ARO at this time, you could expect a 14.6% average annual return on your money. Buffett likes to see a 15% return, but nonetheless would accept this 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 14.6% and 26.4%. 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 20.5% on ARO stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   ITT EDUCATIONAL SERVICES, INC. Profile Strategy: Patient Investor Based on: Warren Buffett ITT Educational Services, Inc. (ITT/ESI), is a provider of postsecondary degree programs in the United States based on revenue and student enrollment. As of December 31, 2008, the Company offered master, bachelor and associate degree programs to approximately 62,000 students. As of December 31, 2008, it had 105 institutes and nine learning sites located in 37 states. All of its institutes are authorized by the applicable education authorities of the states, in which they operate, and are accredited by an accrediting commission recognized by the United States Department of Education (ED). During the year ended December 31, 2008, the Company began its operations at eight new institutes. As of December 31, 2008, the Company offered 33 degree programs in various fields schools of study: information technology (IT); electronics technology; drafting and design; business; criminal justice, and health sciences. Analysis Guru Score: 100% STAGE 1: "Is this a Buffett type company?" A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage. LOOK FOR EARNINGS PREDICTABILITY: [PASS] Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.57, 0.70, 0.94, 1.27, 1.61, 2.33, 2.72, 3.71, 5.14, 7.91. Buffett would consider ESI's earnings predictable. In fact EPS have increased every year. ESI's long term historical EPS growth rate is 32.3%, based on the 10 year average EPS growth rate, and it is expected to grow earnings 17.1% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers. LOOK AT THE ABILITY TO PAY OFF DEBT [PASS] Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. ESI has a debt of 150.0 million and earnings of 289.3 million, which could be used to pay off the debt in less than two years, which is considered exceptional. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [PASS] Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for ESI, over the last ten years, is 39.3%, 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 41.3%, 41.4%, 47.5%, 39.6%, 31.5%, 34.5%, 107.2%, 208.6%, 114.4%, 179.2%, and the average ROE over the last 3 years is 167.4%, 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 ESI, over the last ten years, is 49.9% and the average ROTC over the past 3 years is 73.2%, 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 41.3%, 41.4%, 47.5%, 39.6%, 31.5%, 34.5%, 43.9%, 66.7%, 61.4%, 91.5%, thus passing this criterion. LOOK AT CAPITAL EXPENDITURES: [PASS] Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. ESI's free cash flow per share of $7.20 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 $26.90 and compares it to the gain in EPS over the same period of $7.34. ESI's management has proven it can earn shareholders a 27.3% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work. HAS THE COMPANY BEEN BUYING BACK SHARES: [BONUS PASS] Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. ESI's shares outstanding have fallen over the past five years from 45,689,999 to 37,000,000, 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 ESI 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 $7.82 and divide it by the current market price of $95.11. An investor, purchasing ESI, could expect to receive a 8.22% initial rate of return. Furthermore, he or she could expect the rate to increase 17.1% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 4.60%. Compare this with ESI's initial yield of 8.22%, which will expand at an annual rate of 17.1%, based on the analysts' consensus estimated long term growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding. CALCULATE THE FUTURE EPS: [No Pass/Fail] ESI currently has a book value of $4.42. It is safe to say that if ESI can preserve its average rate of return on equity of 39.3% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 39.3% and it will have a book value of $121.26 in ten years. If it can still earn 39.3% on equity in ten years, then expected EPS will be $47.62. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $47.62 and multiply them by the lower of the 5 year average P/E ratio (18.4) or current P/E ratio (current P/E in this case), which is 12.2 and you get ESI's projected future stock price of $579.48. 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 $579.48. These numbers indicate that one could expect to make a 19.8% average annual return on ESI's stock at the present time. Buffett would consider this a great return. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 17.1%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $37.85. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (18.4) or current P/E ratio (current P/E in this case), which is 12.2. This equals the future stock price of $460.60. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $460.60. 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 $95.11 and the future expected stock price, including the dividend pool, of $460.60. If you were to invest in ESI at this time, you could expect a 17.1% average annual return on your money. Buffett would consider this a great return. LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [PASS] Based on the two different methods, you could expect an annual compounding rate of return somewhere between 17.1% and 19.8%. 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 18.4% on ESI stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   EMCOR GROUP, INC. Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher EMCOR Group, Inc. (EMCOR) is an electrical and mechanical construction and facilities services company in the United States, Canada, the United Kingdom and in the world. The Company's segments include United States electrical construction and facilities services, United States mechanical construction and facilities services, United States facilities services, Canada construction and facilities services, United Kingdom construction and facilities services, and Other international construction and facilities services. The Company specializes in providing construction services relating to electrical and mechanical systems in facilities of all types and in providing services for the operation, maintenance and management of all aspects of such facilities (referred to as facilities services). 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. EME's P/S of 0.26 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. EME's Debt/Equity of 16.64% 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. EME 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 EME At this Point Is EME 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.EME's P/S ratio of 0.26 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. EME's inflation adjusted EPS growth rate of 46.49% 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. EME's free cash per share of 4.43 passes this criterion. THREE YEAR AVERAGE NET PROFIT MARGIN: [FAIL] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. EME, whose three year net profit margin averages 2.20%, fails this evaluation.   DRESSER-RAND GROUP INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Dresser-Rand Group Inc. is the global supplier of custom-engineered rotating equipment solutions for the applications in the oil, gas, petrochemical and process industries. The products and service applications include oil and gas production; high-pressure field injection, gas lift, and enhanced oil recovery; natural gas processing; gas liquefaction; gas transmission and storage; refining; petrochemical production; and general industrial markets, such as paper, steel, sugar, distributed power and United States Navy. The Company operates globally with manufacturing facilities in the United States, France, United Kingdom, Germany, Norway, China and India. It operates a range of products and clients to the global client base in over 140 countries from the global locations in 18 United States states and 26 countries. The Company operates in two business segments: new units, and aftermarket parts and services. 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. DRC, with a market cap of $2,471 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. DRC, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.13, 0.56, 0.92, 1.25 and 2.36, 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. DRC's Price/Sales ratio of 1.00, 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. DRC, whose relative strength is 64, is in the top 50 and would pass this last criterion.   TELEFONICA S.A. (ADR) Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Telefonica, S.A. (Telefonica), together with its subsidiaries and investees, operates in the telecommunications, media and contact center industries. The Company is also involved in the media and contact center activities through investments in Telefonica de Contenidos and Atento. The Company operates in three business areas: Telefonica Spain, Telefonica Europe and Telefonica Latin America. In Latin America, Telefonica provides service to more than 158 million customers in Brazil, Argentina, Chile and Peru, and has substantial operations in Colombia, Ecuador, El Salvador, Guatemala, Mexico, Morocco, Nicaragua, Panama, Puerto Rico, Uruguay and Venezuela. In Europe, it has operating companies in the United Kingdom, Ireland, Germany, Czech Republic and Slovakia. On April 3, 2008, Vivo Participacoes, S.A. completed the acquisition of 53.90% of Telemig Celular Participacoes, S.A. In December 2009, the Company acquired JAJAH. 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. TEF's market cap of $107,556 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 ($0.53). TEF's cash flow per share of $14.62 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 (654 million shares). These are the more well known and highly traded companies. TEF, who has 1,512 million shares outstanding, passes this test. TRAILING 12 MONTH SALES: [PASS] A company's trailing 12 month sales ($77,893 million) are required to be 1.5 times greater than the mean of the market's trailing 12 month sales ($16,035 million). TEF 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. TEF, with a dividend yield of 6.49%, is one of the 50 companies that satisfy this last criterion.   CVS CAREMARK CORPORATION Profile Strategy: P/E/Growth Investor Based on: Peter Lynch CVS Caremark Corporation (CVS Caremark) is a provider of prescriptions and related healthcare services in the United States. It is a pharmacy services company and drives value for its customers through its approximately 6,900 CVS/pharmacy and Longs Drug retail stores; CVS Caremark's pharmacy benefit management, mail order and specialty pharmacy division, Caremark Pharmacy Services; its retail-based health clinic subsidiary, MinuteClinic, and Its online pharmacy, CVS.com. The Company operates in two business segments: Pharmacy Services and Retail Pharmacy. October 20, 2008, CVS Caremark acquired Longs Drug Stores Corporation, which includes 529 retail drug stores (the Longs Drug Stores) and RxAmerica LLC (RxAmerica), which provides pharmacy benefit management services, and certain other related assets. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: CVS is considered a "True Stalwart", according to this methodology, as its earnings growth of 17.64% lies within a moderate 10%-19% range and its annual sales of $97,049 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. CVS is attractive if CVS can hold its own during a recession. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for CVS (0.67), 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. CVS's EPS ($2.47) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for CVS (33.52%) to be normal (equity is approximately twice debt). 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 CVS (3.02%) 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 CVS (-16.45%) 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.   GAMESTOP CORP. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch GameStop Corp. (GameStop) is a retailer of video game products and personal computer (PC) entertainment software. The Company sells new and used video game hardware, video game software and accessories, as well as PC entertainment software, and related accessories and other merchandise. As of January 31, 2009, the Company operated 6,207 stores in the United States, Australia, Canada and Europe, primarily under the names GameStop and EB Games. During the fiscal year ended January 31, 2009, GameStop operated its business in four segments: United States, Canada, Australia and Europe. On April 5, 2008, GameStop acquired Free Record Shop Norway AS. In July 2008, the Company purchased certain assets and Website operations from The Gamesman Limited, a video game and entertainment software retailer, including eight stores in New Zealand. On November 17, 2008, GameStop France SAS, a wholly owned subsidiary of the Company, acquired SFMI Micromania SAS. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider GME a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (8.56) relative to the growth rate (41.11%), 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 GME (0.21) is very favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. GME, whose sales are $9,046.1 million, needs to have a P/E below 40 to pass this criterion. GME's P/E of (8.56) is considered acceptable. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for GME is 41.1%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for GME (16.94%) 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 GME (10.85%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for GME (3.88%) 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.   TIDEWATER INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Tidewater Inc. provides offshore supply vessels and marine support services to the offshore energy industry through the operation of offshore marine service vessels. As of March 31, 2008, the Company had a total of 430 vessels, of which 10 were operated through joint ventures, 61 were stacked and 11 vessels withdrawn from service. The Company provides services supporting all phases of offshore exploration, development and production, including towing of and anchor handling of mobile drilling rigs and equipment; transporting supplies and personnel necessary to sustain drilling, workover and production activities; assisting in offshore construction activities, and a variety of specialized services, including pipe laying, cable laying and three-dimensional (3-D) seismic work. The Company operates in two segments: United States and International. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider TDW a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (7.40) relative to the growth rate (43.35%), 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 TDW (0.17) is very favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. TDW, whose sales are $1,250.3 million, needs to have a P/E below 40 to pass this criterion. TDW's P/E of (7.40) is considered acceptable. INVENTORY TO SALES: [PASS] When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for TDW was 3.65% last year, while for this year it is 3.50%. Since inventory to sales has decreased from last year by -0.15%, TDW passes this test. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for TDW is 43.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for TDW (12.40%) 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 TDW (0.04%) 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 TDW (-1.04%) 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.   NATIONAL-OILWELL VARCO, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch National Oilwell Varco, Inc. (NOV) is a provider of equipment and components used in oil and gas drilling and production operations, oilfield services, and supply chain integration services to the upstream oil and gas industry. The Company operates in three segments. The Rig Technology segment designs, manufactures, sells and services systems for the drilling, completion and servicing of oil and gas wells. The Petroleum Services & Supplies segment provides a variety of consumable goods and services used to drill, complete, remediate and workover oil and gas wells, service pipelines, flowlines and other oilfield tubular goods. The Distribution Services segment provides maintenance, repair and operating (MRO) supplies, and spare parts to drill site and production locations worldwide. In April 2009, NOV acquired ASEP Group Holding B.V. and Anson Limited.In December 2009, National-Oilwell Varco, Inc. acquired Hochang Machinery Industries Co., Ltd. and South Seas Inspection (S) Pte. Ltd. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider NOV a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (12.11) relative to the growth rate (33.84%), 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 NOV (0.36) is very favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. NOV, whose sales are $12,712.0 million, needs to have a P/E below 40 to pass this criterion. NOV's P/E of (12.11) is considered acceptable. INVENTORY TO SALES: [PASS] When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for NOV was 28.34% last year, while for this year it is 27.45%. Since inventory to sales has decreased from last year by -0.88%, NOV passes this test. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for NOV is 33.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for NOV (6.26%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.   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 OIS OIL STATES INTERNATIONAL, INC. Oil Well Services & Equipment 56 HCC HCC INSURANCE HOLDINGS, INC. Insurance (Prop. & Casualty) 56 NEU NEWMARKET CORPORATION Chemical Manufacturing 55 TGI TRIUMPH GROUP, INC. Aerospace & Defense 51 APOL APOLLO GROUP, INC. Schools 49 PRA PROASSURANCE CORPORATION Insurance (Prop. & Casualty) 47 ESV ENSCO INTERNATIONAL PLC Oil Well Services & Equipment 47 NE NOBLE CORPORATION Oil Well Services & Equipment 47 MANT MANTECH INTERNATIONAL CORPORATION Computer Services 46 AZN ASTRAZENECA PLC (ADR) Major Drugs 44

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