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Executive Summary	January 8, 2010

The Economy As 2010 begins, the economy is continuing to do its best impression of The Little Engine that Could, slowly and steadily climbing its way out of the Great Recession -- though not without some bumps in the road. Among the continued positive signs since our last newsletter: New data showed the manufacturing sector grew for the fifth straight month in December, with the Institute for Supply Management's manufacturing index hitting its highest level in almost four years. New orders rose for the sixth straight month, hitting their highest level in five years, and for the third straight month, ISM's employment index indicated that hiring is picking up. Retail sales also picked up in December, coming in almost 3% higher than a year ago. In addition, a number of retailers, including major players like Macy's, Kohl's, and Sears, increased their fourth-quarter earnings guidance. Unemployment remains a major problem, though the past week has offered signs that things are slowly moving in the right direction. The government reported that new claims for unemployment remained almost flat in the most recent week, bringing the four-week average down to within about 6% of the level that is believed to signal new job creation. Automatic Data Processing also said that about 84,000 private sector jobs were lost in December, the lowest total in almost two years. The real employment test will come today, when the government releases the December unemployment rate. Another key area of the economy -- housing -- offered some bad news this week. The National Association of Realtors reported that its pending home sales index plunged 16% in November, ending a streak of nine straight monthly increases. Officials said a big reason for the decline was that numerous buyers had in previous months tried to beat the initial deadline for the government's first-time homebuyer tax credit. That caused pending sales figures to be quite high in those months, making November's figures pale in comparison. Nevertheless, the pending sales index was still 15.5% higher in November than it was a year earlier, a sign of how far the housing market has come in the past year. All in all, the economic news was good enough to help the market climb higher for the fortnight, with the S&P 500 gaining 1.3%. The Hot List fared better, gaining 5.0%. The portfolio finished 2009 with its best full year since we started tracking it more than six years ago, gaining 47.0%. That doubled the S&P's 23.5% return, and almost completely wiped out the loss the portfolio sustained in the market plunge of 2008. (From the start of '08 through the end of '09, the Hot List was down just 4.5%; the S&P lost more than 24% in the same period.) The Hot List has also started 2010 off on the right foot, gaining 5.4% so far vs. 2.4% for the S&P. Since its inception in July 2003, the portfolio is now up 154.0%, generating more than ten times the S&P's 14.1% return. Five Reasons for Optimism in 2010 One week into 2010, things are certainly looking better than they did last year at this time. A year ago, manufacturing and industrial figures were plunging, retail sales figures were dreadful, and the housing market seemed to be weakening by the day. And for investors, stocks were down more than 40% from their highs -- and about to head further downward. Today, the economy has stabilized, in part because of massive government intervention, and in part because the economy has gone through the natural process of working off much of the excesses that had built up heading into the recession. So as we head into the New Year, what can we expect from equities? Well, as you know, I'm not one for short-term predictions -- the market is far too complex and unpredictable for anyone to have a truly good grasp on what will happen in the coming 12 months. What I will say is that I see a number of reasons that equities remain attractive for long-term investors, even after their huge run-up. I briefly mentioned some of those reasons in our last newsletter, but I think it's important to delve a bit deeper into a handful of them now. Valuations are reasonable: Yes, stocks aren't as cheap as they were nine or ten months ago. But that's irrelevant. The question is, how expensive are they now? I'd argue that, while they're not dirt cheap, they aren't particularly expensive. S&P 500 firms are currently expected to earn $74.98 per share in 2010. At the index's current value, that makes for a forward P/E a bit over 15 -- far from expensive, especially when you consider that current interest rates are at or near historic lows. (Lower interest rates have historically meant that investors are willing to pay higher P/Es, because Treasuries and fixed-income investments offer little competition to stocks in terms of potential upside gains during low-interest-rate climates.) The 10-year P/E ratio, designed to even out earnings fluctuations, was a bit high at the end of '09, coming in around 20. But historically, 10-year P/Es at such levels have not meant a clear signal that stocks will head lower. More importantly, the Hot List isn't buying the market. It's buying the most fundamentally sound stocks in the market, and, because of its value bias, it's getting those stocks at attractive valuations -- regardless of what the broader market's P/E is. The "Lost Decade": Of course, a nice market tailwind does help. And history is offering signs that the next decade should be a good one for stocks. That's because the past decade has involved the worst ever 10-year return for stocks. Since 1926, when trailing 10-year compound annual returns have been 1% or less, the market has produced average annual returns of 10.7% for the next decade, according to data from Legg Mason and Steven Leuthold. Stimulus: To be sure, the economy has been improving, and some of that is due to the government's stimulus package. But much of that enormous package has yet to work its way into the system. According to ISI Group, $440 billion of the $787 billion stimulus package is designed to hit the economy in 2010. That should go a long way toward bolstering corporate profits, and, hopefully, facilitating job growth in coming years. Interest Rates: The low-rate environment we've been in is a big part of why stocks have surged. Companies have been able to borrow money at very low rates, increasing their profitability. And, as noted earlier, the low rates have meant low yields for Treasuries and fixed-income investments, making stocks one of the few places offering potentially high returns. It appears that low-rate climate will be with us for some time. In December, the Federal Reserve said it would keep rates "exceptionally low ... for an extended period", which should continue to benefit stocks. More Funds Left to Flow: While the market has surged, many individual investors have stayed on the sidelines. According to the Investment Company Institute, net flows to/from U.S. equity mutual funds were negative (-$5.4 billion) from April 1 through Nov. 30 of 2009. During that same period, investors were pumping money into bond funds -- a net of almost $300 billion. If the economy continues to improve and the market shows stability, there's a good chance a big chunk of that money could come back to stocks as investors become more risk-tolerant. Of course, 2010 will also feature obstacles for the economy and the stock market. The factors that led to the market crash and deep recession we've just been through -- bad loans, overleveraging, etc. -- were years in the making; it will take more than a year for them to truly be behind us. But there will always be obstacles. The Hot List has proven that it can withstand some exceptionally bad ones and excel over the long term, and I'm confident it will continue to do so in 2010 and beyond.		Editor-in-Chief: John Reese Since Inception   Hot List 154.0% S&P 500 14.1% Accuracy 57.3% Beta 1.2 YTD   Hot List 5.4% S&P 500 2.4% Since Last Issue   Hot List 5.0% S&P 500 1.3% Avg. Fundamentals   Market Cap (mil) $19,485 PE Ratio 19.2 5 Yr EPS Growth 38.7% Yield 1.9% Rel. Strength 68 Portfolio Sectors Energy 3 Services 2 Technology 1 Transportation 1 Financial 1 Capital Goods 1 Consumer Cyclical 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: Martin Zweig In the dozen or so years I've spent researching investment strategies, one of the greatest lessons I've learned is that there is no one single way to beat the market -- you can do so by taking numerous approaches. So while most of my strategies are either value oriented or a blend of value and growth, you can definitely make hay with a growth-oriented approach -- if it's a good one. Martin Zweig's approach is a great example of a good growth strategy. Zweig's investment newsletter, the Zweig Forecast, was one of the most highly regarded investment newsletters in the country, ranking number one for risk-adjusted returns during the 15 years that Hulbert Financial Digest monitored it. It produced an impressive 15.9 percent annualized return during that time. Zweig has also managed several mutual funds, and was co-founder of Zweig Dimenna Partners, a multibillion-dollar New York-based firm that has been ranked in the top 15 of Barron's list of the most successful hedge funds. Before we delve into Zweig's strategy, a few words about the man himself. While some of the gurus we've looked at in recent Guru Spotights -- Buffett and John Neff in particular come to mind -- lived modest lifestyles, Zweig put his fortune to use in some pretty fun, flashy ways. He has owned what Forbes reported was the most expensive apartment in New York City, a penthouse atop Manhattan's Pierre Hotel that was at one time valued at more than $70 million. He's also an avid collector of a variety of different kinds of memorabilia. The Wall Street Journal has reported that he's owned such one-of--a-kind items as Buddy Holly's guitar, the gun from Dirty Harry, the motorcycle from Easy Rider, and Michael Jordan's jersey from his rookie season with the Chicago Bulls. He even owns the sperm costume from Woody Allen's film Everything You Always Wanted to Know About Sex. His collecting interests also span the historic (several old stock certificates, including one signed by Commodore Vanderbilt) as well as the nostalgic (like the two old-fashioned gas pumps that are almost identical to those he'd seen at the nearby Mobil station while growing up in Cleveland), Financial World has reported. Zweig may spend his cash on some flashy, fun items, but the strategy he used to compile that cash was a disciplined, methodical approach. He examined earnings in a rigorous fashion, making sure growth wasn't just strong, but also consistent, accelerating, and sustainable. His method spanned several categories: Trend of Earnings: Earnings should be higher in the current quarter than they were a year ago in the same quarter. Earnings Persistence: Earnings per share should have increased in each year of the past five-year period; EPS should also have grown in each of the past four quarters (vs. the respective year-ago quarters). Long-Term Growth: EPS should be growing by at least 15 percent over the long term; a growth rate over 30 percent is exceptional. Earnings Acceleration: EPS growth for the current quarter (vs. the same quarter last year) should be greater than the average growth for the previous three quarters (vs. the respective three quarters from a year ago). EPS growth in the current quarter also should be greater than the long-term growth rate. These criteria made sure that Zweig wasn't getting in late on a stock that had great long-term growth numbers, but which was coming to the end of its growth run. While Zweig's EPS focus certainly puts him on the "growth" side of the growth/value spectrum, his approach was by no means a growth-at-all-costs strategy. Like all of the gurus I follow, he included a key value-based component in his method. He made sure that a stock's price/earnings ratio was no greater than three times the market average, and no greater than 43, regardless of what the market average was. (He also didn't like stocks with P/Es less than 5, because they could be indicative of an outright dog that investors were wisely avoiding.) In addition, Zweig wanted to know that a firm's earnings growth was sustainable over the long haul. And that meant that the growth was coming primarily from sales -- not sost-cutting or other non-sales measures. My Zweig model requires a firm's revenue growth to be at least 85 percent of EPS growth. If a stock fails that test but its revenues are growing by at least 30 percent a year, it passes, however, since that is still a very strong revenue growth rate. Like earnings growth, Zweig believed sales growth should be increasing. My model thus requires that a stock's sales growth for the most recent quarter (vs. the year-ago quarter) to be greater than the previous quarter's sales growth rate (vs. the year-ago quarter). Finally, Zweig also wanted to makes sure a firm's growth wasn't driven by unsustainable amounts of leverage (a key observation given all that's happened recently). Realizing that different industries require different debt loads, he looked for stocks whose debt/equity ratios were lower than their industry average. There's one more thing you should know about Zweig. He relied a good amount on technical factors to adjust how much of his portfolio he put into stocks. Some of the indicators he used to move in and out of the market included the Federal Reserve's discount rate; installment debt levels; and the prime rate. His mottos included "Don't fight the Fed" (meaning investors should be more bullish when interest rates were low or falling) and "Don't fight the tape" (which related to his practice of getting more bullish or bearish based on market trends). Those rules are tough for an individual investor to put into practice; Zweig used what he called a "Super Model" that meshed all of his indicators into a system that determined how bullish or bearish he was. But over the years, I've found that using only the quantitative, fundamental-based criteria Zweig outlined in his book can produce very strong results. My Zweig-based portfolio has gained 64.3% since its July 2003 inception (that's 9.0% annually), while the S&P 500 has gained just 14.1% (2.1% annually). The model tends to choose stocks from a variety of areas, usually holding onto them for a period of a few months (though it is not averse to longer periods if the stock continues to be a prospect for more growth.) Here's a look at the 10-stock portfolios current holdings: Strayer Education (STRA) National Presto Industries (NPK) Mantech International (MANT) Panera Bread Company (PNRA) CVS Caremark Corporation (CVS) ITT Educational Services (ESI) Fuqi International (FUQI) HCC Insurance Holdings (HCC) Sturm, Ruger & Company (RGR) World Acceptance Corp. (WRLD) What I really like about the Zweig strategy is that, while it certainly would qualify as a growth approach, it doesn't look at growth in a vacuum. As you've seen, it examines earnings growth from a variety of angles, making sure that it is strong, improving, and sustainable. In doing so, it allows you to find some fast-growing growth stocks that are not paper tigers, but instead solid prospects for continued long-term success. News about Validea Hot List Stocks Aeropostale (ARO): The teen clothing retailer reported same-store sales rose 10.1% in December, more than tripling expectations of 3.1%, according to Reuters. Aeropostale also raised its outlook for the current quarter. Chevron (CVX): Two contract workers were shot dead by Nigerian soldiers in southern Nigeria at an under-construction Chevron plant this week, the Associated Press reported. The shootings stemmed from what a government spokesman called "a minor disagreement that got out of hand," and caused a riot that lasted from Monday afternoon through Tuesday, AP reported. Several buildings were destroyed and Chevron operations were halted, but officials had restored order by Wednesday, AP stated. Government officials are investigating. 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 90 ARO AEROPOSTALE, INC. Retail (Apparel) 90 ESI ITT EDUCATIONAL SERVICES, INC. Schools 79 TDW TIDEWATER INC. Water Transportation 72 NOV NATIONAL-OILWELL VARCO, INC. Oil Well Services & Equipment 58 DRC DRESSER-RAND GROUP INC. Misc. Capital Goods 53 WRLD WORLD ACCEPTANCE CORP. Consumer Financial Services 35 CVX CHEVRON CORPORATION Oil & Gas - Integrated 34 TLVT TELVENT GIT, S.A Computer Services 31 OIS OIL STATES INTERNATIONAL, INC. Oil Well Services & Equipment 5 Ticker Market Cap Date Added Start Price Current Price Return FUQI $572 10/30/2009 $20.49 $20.69 1.0% ARO $2,269 11/27/2009 $31.49 $34.35 9.1% ESI $3,786 10/30/2009 $90.35 $102.47 13.4% TDW $2,573 10/30/2009 $41.67 $49.77 19.4% NOV $19,704 10/30/2009 $40.99 $47.10 14.9% DRC $2,777 11/27/2009 $28.46 $33.65 18.2% WRLD $611 12/24/2009 $36.17 $37.59 3.9% CVX $159,157 11/27/2009 $78.17 $79.33 1.5% TLVT $1,330 12/24/2009 $38.00 $39.43 3.8% OIS $2,067 10/30/2009 $34.44 $41.54 20.6%

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   |   TDW   |   NOV   |   DRC   |   WRLD   |   CVX   |   TLVT   |   OIS   |   FUQI INTERNATIONAL, INC. Profile Strategy: Growth Investor Based on: Martin Zweig 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: 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. FUQI's P/E is 9.91, based on trailing 12 month earnings, while the current market PE is 20.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [PASS] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. FUQI's revenue growth is 65.32%, while it's earnings growth rate is 42.99%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, FUQI passes this criterion. SALES GROWTH RATE: [PASS] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (35.8%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-30.2%) of the current year. Sales growth for the prior must be greater than the latter. For FUQI 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. FUQI's EPS ($0.73) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. FUQI's EPS for this quarter last year ($0.31) 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. FUQI's growth rate of 135.48% 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 FUQI is 21.49%. This should be less than the growth rates for the 3 previous quarters which are 15.38%, 45.16% and -17.86%. FUQI 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, 7.94%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 135.48%, (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, 135.48% must be greater than or equal to the historical growth which is 42.99%. FUQI 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. FUQI, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.34, 0.48, 0.50, 0.86 and 1.32, 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. FUQI's long-term growth rate of 42.99%, 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. FUQI's Debt/Equity (16.74%) is not considered high relative to its industry (30.56%) 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 FUQI, this criterion has not been met (insider sell transactions are 1, while insiders buying number 0). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.   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 14.5% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers. LOOK AT THE ABILITY TO PAY OFF DEBT [PASS] Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. 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 $34.35. An investor, purchasing ARO, could expect to receive a 8.62% initial rate of return. Furthermore, he or she could expect the rate to increase 14.5% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 4.60%. Compare this with ARO's initial yield of 8.62%, which will expand at an annual rate of 14.5%, based on the analysts' consensus estimated long term growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding. CALCULATE THE FUTURE EPS: [No Pass/Fail] ARO currently has a book value of $6.79. 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 $100.18 in ten years. If it can still earn 30.9% on equity in ten years, then expected EPS will be $30.94. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $30.94 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 11.6 and you get ARO's projected future stock price of $358.31. 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 $358.31. 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 14.5%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $11.49. 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 11.6. This equals the future stock price of $133.10. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $133.10. 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 $34.35 and the future expected stock price, including the dividend pool, of $133.10. If you were to invest in ARO at this time, you could expect a 14.5% 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 14.5% 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 0.48, 0.57, 0.70, 0.94, 1.27, 1.61, 2.33, 2.72, 3.71, 5.17. Buffett would consider ESI's earnings predictable. In fact EPS have increased every year. ESI's long term historical EPS growth rate is 32.1%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 16.9% 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 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 ESI, over the last ten years, is 39.5%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 40.9%, 41.3%, 41.4%, 47.5%, 39.6%, 31.5%, 34.5%, 107.2%, 208.6%, 106.6%, and the average ROE over the last 3 years is 140.8%, thus passing this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: [PASS] Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for ESI, over the last ten years, is 44.6% and the average ROTC over the past 3 years is 56.6%, which is high enough to pass. It is not enough that the average be at least 12%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROTC must be at least 9% for Buffett to feel comfortable that the ROTC is consistent. The ROTC for the last 10 years, from earliest to latest, is 40.9%, 41.3%, 41.4%, 47.5%, 39.6%, 31.5%, 34.5%, 43.9%, 66.7%, 59.3%, 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 $3.50 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 $19.50 and compares it to the gain in EPS over the same period of $4.69. ESI's management has proven it can earn shareholders a 24.1% 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 45,990,002 to 38,000,000, 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 $7.06 and divide it by the current market price of $102.47. An investor, purchasing ESI, could expect to receive a 6.89% initial rate of return. Furthermore, he or she could expect the rate to increase 16.9% 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 6.89%, which will expand at an annual rate of 16.9%, 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 $5.78. It is safe to say that if ESI can preserve its average rate of return on equity of 39.5% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 39.5% and it will have a book value of $161.31 in ten years. If it can still earn 39.5% on equity in ten years, then expected EPS will be $63.72. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $63.72 and multiply them by the lower of the 5 year average P/E ratio (22.7) or current P/E ratio (current P/E in this case), which is 14.5 and you get ESI's projected future stock price of $923.96. 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 $923.96. These numbers indicate that one could expect to make a 24.6% average annual return on ESI'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 16.9%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $33.50. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (22.7) or current P/E ratio (current P/E in this case), which is 14.5. This equals the future stock price of $485.80. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $485.80. 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 $102.47 and the future expected stock price, including the dividend pool, of $485.80. If you were to invest in ESI at this time, you could expect a 16.8% 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 16.8% and 24.6%. 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 20.7% on ESI stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   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 (6.93) 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 (0.16) 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 $1,326.1 million, needs to have a P/E below 40 to pass this criterion. TDW's P/E of (6.93) 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 (12.66%) 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 (-0.94%) 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: Value Investor Based on: Benjamin Graham 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: 100% SECTOR: [PASS] NOV 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. NOV's sales of $13,388.2 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. NOV's current ratio of 2.09 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 NOV is $875.0 million, while the net current assets are $5,418.0 million. NOV 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. NOV's EPS growth over that period of 1,608.1% 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. NOV's P/E of 13.30 (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. NOV's Price/Book ratio is 1.39, while the P/E is 13.30. NOV passes the Price/Book test.   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 $2,777 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 1.12, 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 75, is in the top 50 and would pass this last criterion.   WORLD ACCEPTANCE CORP. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy World Acceptance Corporation is engaged in the small-loan consumer finance business, offering short-term small loans, medium-term larger loans, related credit insurance and ancillary products and services to individuals. The Company offers standardized installment loans through 944 offices in South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee, Illinois, Missouri, New Mexico, Kentucky, Alabama and Mexico as of March 31, 2009. World Acceptance Corporation serves individuals with limited access to consumer credit from banks, savings and loans, other consumer finance businesses and credit card lenders. The Company also offers income tax return preparation services and access to refund anticipation loans through a third party bank to its customers and others. During the fiscal year ended March 31, 2009 (fiscal 2009), the Company opened 98 new offices, 11 other offices were purchased and three offices were closed or merged into other existing offices. 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. WRLD, with a market cap of $611 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. WRLD, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.74, 2.02, 2.60, 3.05 and 3.69, 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. WRLD's Price/Sales ratio of 1.46, 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. WRLD, whose relative strength is 73, is in the top 50 and would pass this last criterion.   CHEVRON CORPORATION Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Chevron Corporation (Chevron) manages its investments in subsidiaries and affiliates, and provides administrative, financial, management and technology support to the United States and International subsidiaries that engage in fully integrated petroleum operations, chemicals operations, mining operations of coal and other minerals, power generation and energy services. Exploration and production (upstream) operations consist of exploring for, developing and producing crude oil and natural gas, and also marketing natural gas. Refining, marketing and transportation (downstream) operations relate to refining crude oil into finished petroleum products; marketing crude oil and the many products derived from petroleum, and transporting crude oil, natural gas and petroleum products by pipeline, marine vessel, motor equipment and rail car. In April 2009, Reliance Industries Limited bought back Chevron Corporation's 5% stake in Reliance Petroleum Limited. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider CVX a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (12.91) relative to the growth rate (21.78%), 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 CVX (0.59) makes it favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. CVX, whose sales are $168,163.0 million, needs to have a P/E below 40 to pass this criterion. CVX's P/E of (12.91) 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 CVX was 2.40% last year, while for this year it is 2.51%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (0.11%) is below 5%. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for CVX is 21.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for CVX (11.63%) to be acceptable (equity is three to ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for CVX (2.95%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for CVX (-0.47%) 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.   TELVENT GIT, S.A Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Telvent GIT, S.A. is an information technology (IT) company that specializes in value-added real time products, services and integrated solutions to customers in targeted industrial sectors (Energy, Transportation, Environment and Agriculture), as well as Global Services, primarily in Europe, North America, Latin America, the Asia-Pacific region, the Middle-East and Africa. Products and services solutions include systems integration, consulting services, design and engineering services, real-time business-to-business information services and software. The Company has five segments: Energy, Transportation, Environment, Agriculture and Global Services. On October 28, 2008, the Company's subsidiary, Telvent Export, acquired 100% of DTN Holding Company, Inc., a business information service provider in North America, for a purchase price of United States. 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. TLVT, with a market cap of $1,330 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. TLVT, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.67, 0.70, 1.07, 1.22 and 1.44, 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. TLVT's Price/Sales ratio of 1.12, 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. TLVT, whose relative strength is 90, is in the top 50 and would pass this last criterion.   OIL STATES INTERNATIONAL, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Oil States International, Inc. (Oil States) through its subsidiaries, is a provider of specialty products and services to oil and gas drilling and production companies worldwide. The Company operates in a number of oil and gas producing regions, including the Gulf of Mexico, United States onshore, West Africa, the North Sea, Canada, South America and Southeast and Central Asia. Its customers include many of the national oil companies, major and independent oil and gas companies and other oilfield service companies. Oil States operates in three principal business segments: offshore products, tubular services and well site services. The Company's well site services segment includes the accommodations, rental tools and drilling services businesses. On February 1, 2008, Oil States purchased all of Christina Lake Enterprises Ltd., the owners of an accommodations lodge (Christina Lake Lodge) in the Conklin area of Alberta, Canada. 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. OIS, with a market cap of $2,067 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. OIS, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.19, 2.41, 3.89, 4.00 and 4.33, 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. OIS's Price/Sales ratio of 0.83, 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. OIS, whose relative strength is 82, is in the top 50 and would pass this last criterion.   Watch List The Watch List contains the highest scoring stocks according to our guru consensus system that are not currently in the Hot List portfolio. We provide this list both for informational purposes and for investors who are not comfortable with a portfolio of ten stocks. Ticker Company Name Industry Guru Score TEF TELEFONICA S.A. (ADR) Communications Services 53 CVS CVS CAREMARK CORPORATION Retail (Drugs) 53 GME GAMESTOP CORP. Retail (Technology) 50 AMED AMEDISYS, INC. Healthcare Facilities 49 BKE THE BUCKLE, INC. Retail (Apparel) 49 TGI TRIUMPH GROUP, INC. Aerospace & Defense 49 PPD PRE-PAID LEGAL SERVICES, INC. Personal Services 49 GD GENERAL DYNAMICS CORPORATION Aerospace & Defense 48 PRA PROASSURANCE CORPORATION Insurance (Prop. & Casualty) 45 ESV ENSCO INTERNATIONAL INCORPORATED Oil Well Services & Equipment 45

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