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Executive Summary	June 25, 2010

The Economy The economic news has been mixed since our last newsletter, with new data highlighting both signs that the recovery continues -- and that substantial headwinds remain. On the positive side, industrial and manufacturing firms continues to rebound. Industrial production increased in May for the tenth time in eleven months, the Federal Reserve announced. And the increase was significant -- the 1.2% gain matched the second-largest monthly gain for the industrial sector in the past decade. Capacity utilization also rose to almost 75% -- reaching its highest level since October 2008. There was also a bit of good news in the job market, with the number of new claims for unemployment benefits falling about 4% in the most recent week (ending June 19). The number of continuing claims also dipped slightly, though it's unclear how much of that is due to people getting jobs and how much is due to long-term unemployed workers exhausting their benefits. Whatever the case, the broader unemployment picture is much better than it was a year ago, but still far from positive. An interesting tandem of data points came, meanwhile, from the U.S. consumer. According to the Commerce Department, retail sales fell 1.2% in May -- the first decline in eight months. But consumer confidence appears to be on the rise, as the Conference Board's Consumer Confidence Index rose in May to its highest level since March 2008. And the group's expectation index (which gives an idea of what consumers are expecting in the next few months) rose to its highest level in almost three years. Given that consumer spending accounts for about 70% of U.S. economic activity (and the impact that psychology can have on economic trends), that certainly bodes well. The housing market, a key to the economic recovery, also offered some mixed -- though not unexpected -- news. Existing-home sales remained elevated (almost 20% above their year-ago level) in May, according to the National Association of Realtors. The high number came as homebuyers took advantage of the government's homebuyer tax credit and very low mortgage rates, the Realtor's group said. While those figures include sales made before the homebuyer tax credits ended, May data on new home sales from the Commerce Department did not. And they painted a very different picture, falling 33% to record-low levels. At this point, it's hard to draw major conclusions from the housing data; it is certainly possible, and in fact likely, that many buyers made sure to make their purchases before the tax credit offer expired, meaning that their buys -- which otherwise might have been made later in the year -- counted for previous months. That would have made the May sales levels look artificially low. Nonetheless, the issue of how the housing market fares without the government's tax credit boost is certainly something to keep an eye on. The mixed economic news at home -- and continued worries about Europe's debt mess -- have made for some ups and downs for the market since our last newsletter. The S&P 500 ended the fortnight with a return of -1.2%, while the Hot List returned -0.4%. For the year, the portfolio is now down -6.8% vs. -3.7% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 124.6% vs. the S&P's 7.3% gain. Get Your Head Out of the Game The last couple months have had investors on a bit of an emotional roller-coaster. From the European debt woes to the massive oil spill in the Gulf of Mexico to the U.S.'s soaring budget deficit, investors have found plenty to worry about -- and that has meant some volatile times for the market. Volatile times can, of course, mean emotional times for investors. And, if you're a regular Hot List reader, you know that I believe emotion is perhaps the greatest enemy of the investor. It's not our fault, really -- in fact, the fields of behavioral finance and neuroeconomics show that as emotional creatures, we humans are, for the most part, born bad investors. Our emotions make us prone to numerous behavioral biases that, while in many cases are good for our survival, are dangerous for our portfolios. One intriguing new study in this area highlights one of those biases -- the so-called "herd mentality" -- and offers a look at why many investors succumb to it. The study (recently highlighted by The Wall Street Journal's Jason Zweig) was performed by researchers at University College London and Denmark's Aarhus University and published in the journal Current Biology. Entitled "How the Opinion of Others Affects Our Valuation of Objects", it actually focuses on music, not stocks. Participants whose brainwaves were being monitored were asked to list songs that they most wanted to buy online. Then, they were given ratings of those songs by two professional music "experts". After reading the reviews, they were then asked if they wanted to revise their lists. The results showed that the experts' opinions did indeed have an impact on the participants. And it's more than just a safety-in-numbers issue. "The brain scans showed that as soon as people learned they had chosen the same song as the experts, cells in the ventral striatum -- a reward center wired with dopamine neurons that respond to pleasures like sugar and sex -- fired intensely," Zweig explains. In other words, the study shows that it feels good to have someone agree with you. And, Zweig says, the scans showed something else: that finding out experts agreed with each other (regardless of whether they agreed with the participants) triggered activity in the participant's insula, a part of the brain associated with pain and heightened body awareness. "This suggests that the agreement of others may have a special ability to grab our mental attention," Zweig says. "No wonder a consensus opinion is almost impossible for investors to ignore." If you want a good example of investors succumbing to the herd mentality, look at the Internet bubble of the late 1990s. At that time, technology stocks were all the rage; if you didn't get in on the tech stock bonanza, others made you feel bad about it -- you were called old, stodgy, and out of touch with the times. Investors piled into these high-flying stocks not because they'd analyzed them and found real value -- indeed, many of the companies behind these stocks had no value at all; instead, they piled in because they let other people's opinions affect them. And they paid dearly for doing so when the bubble burst and they were left holding onto worthless stocks. The tendency to follow the herd is far from the only behavioral bias that can impact investors. Another big one: hindsight bias -- the tendency to think, after the fact, that we could have easily avoided mistakes. The result is a false sense that you can avoid trouble in the future now that you've "learned your lesson". For those who try to jump in and out of the market without any sort of system, this is particularly dangerous -- so many factors go into stock movements in the short term that almost no one can be successful in such endeavors, and those who think they've "figured it out" are usually wrong. (The proof is in the pudding: According to data from DALBAR, Inc., the average equity fund investor has gained just 3.17% per year over the past two decades -- a period in which the S&P 500 has gained 8.2% annually.) The truth is that the future is never as obvious as it seems in hindsight, and the 2008 financial crisis is a great example. Today, there no doubt are many investors who believe they've "learned their lesson" from the market crash, and will now be able to avoid the next market plunge -- just think about all of the stories you've seen in the past year or so that claim to identified "the next bubble". But the reason that the crash was so severe and shocking was precisely because so few strategists rang the warning bell ahead of time. If it had been more obvious, the real estate and credit bubbles and corresponding stock market rise never would have lasted as long as they did. Nevertheless, you can bet that many investors will try to outsmart the market to avoid future downturns. And in doing so, you can also bet that many will key on false warning signals, and in the process jump in and out of the market at inopportune times. Many behavioral biases really rear their heads when it comes to deciding when to sell stocks. One of the big ones: "myopic loss aversion". Coined by behavioral finance pioneers Richard Thaler and Shlomo Benartzi, myopic loss aversion is the notion that investors hold on to losing stocks too long, not wanting to lock in losses. And there's biology behind it -- studies show that losses cause roughly twice as much emotional pain as gains create emotional pleasure. Investors will thus delay that pain by refusing to lock in losses, even if the stock has little in the way of future prospects. "Anchoring" is another bias that can lead investors to hold on to a stock too long. It is when one bases one's expectations on facts that are no longer relevant. For example, you'll often hear strategists touting a particular stock (or the market in general) saying that the stock is still well off its highs. And, on the surface, the fact that a stock is selling for, say, $40 when it used to trade at $60 makes it sound like a bargain. But that previous high may not be relevant anymore. If something has changed within a company's fundamentals, then it may not be realistic to expect its stock to climb back to its previous high. But many investors will "anchor" on that $60 figure, and assume that the stock has room to run. Another big foe for investors: "recency bias" -- the penchant for people to extrapolate the recent past into the future. For example, one argument against investing in stocks over the past year or two has been the poor performance of equities over the past decade. Why invest in stocks if the broader market has been in the red for the last ten years? What that argument leaves out, however, is the fact that over the longer haul, stocks have performed very well compared to other asset classes -- and they've done particularly well following poor periods. That doesn't mean that the coming decade will be a great one for stocks -- but it means you shouldn't just assume that stocks will fare poorly going forward just because they've fared poorly in recent years. There are still more cognitive biases that derail investors -- contra-positive investing occurs when one buys a stock because he or she has had a good experience with it previously, expectation bias makes us prone to focusing on data that supports our point of view -- but these should give you an idea of what investors are up against. The big question, then, is how do we keep these natural tendencies from destroying our portfolios? The answer, I believe, is that you stay disciplined and stick to the numbers -- that is, the numbers on a company's balance sheet and in its stock's fundamentals. By basing buying and selling decisions on what those numbers say -- rather than on what your gut, or your neighbor, or a pundit on TV tells you -- you keep many of those pesky biases I discussed (the tendency to follow the herd, for example) at bay. In addition, by using a disciplined rebalancing system that forces you to buy and sell stocks at regular intervals based on their fundamentals, you can avoid other pitfalls to which investors fall prey (such as myopic loss aversion or anchoring). In the end, staying disciplined and focusing on the numbers won't lead you to winners on every pick you make -- nothing can do that. But over the long haul, a disciplined, numbers-focused approach should put the odds in your favor. It's no coincidence that most, if not all, of the highly successful gurus on whom I base my strategies used an array of quantitative tests in picking stocks -- and it's also no coincidence that just about every one of them talked extensively about the need to stay disciplined. Their ability to do those things is a big part of what made them so successful, and it's a key reason for the Hot List's long-term success. In volatile times like these, that's particularly important to keep in mind.		Editor-in-Chief: John Reese Since Inception   Hot List 124.6% S&P 500 7.3% Accuracy 55.7% Beta 1.2 YTD   Hot List -6.8% S&P 500 -3.7% Since Last Issue   Hot List -0.4% S&P 500 -1.2% Avg. Fundamentals   Market Cap (mil) $15,922 PE Ratio 11.5 5 Yr EPS Growth 28.6% Yield 5.9% Rel. Strength 75 Portfolio Sectors Consumer Cyclical 2 Financial 2 Healthcare 2 Services 2 Technology 1 Basic Materials 1
Advertisement Validea Capital Management - Private Portfolio Management Based on Strategies of Legends Are you looking for an alternative to your underperforming mutual funds or financial advisor? Click here to download Validea Capital's investment kit and learn more about the firm's guru-based portfolios. Get More Information on Validea Capital! ** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. Thre information above in not intended as personal investment advice and should not be interpreted as such. Guru Spotlight: Peter Lynch Picking the greatest mutual fund manager of all-time is a tough task. John Templeton, Benjamin Graham, John Neff -- a number of investors have put up the types of long-term track records that make it difficult to pick just one who was "The Greatest". If you were to rank Peter Lynch at the top of the list, however, you'd probably find few would disagree with you. During his 13-year tenure as the head of Fidelity Investments' Magellan Fund, Lynch produced a 29.2 percent average annual return -- nearly twice the 15.8 percent return that the S&P 500 posted during the same period. According to Barron's, over the last five years of Lynch's tenure, Magellan beat 99.5 percent of all other funds. If those numbers aren't impressive enough, try this one: If you'd invested $10,000 in Magellan the day Lynch took the helm, you would have had $280,000 on the day he retired 13 years later. Just like investors who entrusted him with their money, I, too, owe a special debt of gratitude to Lynch. When I was trying to find my way in the stock market many years ago, Lynch's book One Up On Wall Street was a big part of what put me on the right track. Lynch didn't use complicated schemes or highbrow financial language in giving investment advice; he focused on the basics, and his common sense approach and layman-friendly writing style resonated not only with me but with amateur and professional investors all over, as evidenced by its best-seller status. The wisdom of Lynch's approach so impressed me that I decided to try to computerize the method, the first step I took toward developing my Guru Strategy computer models. Just what was it about Lynch's approach that made him so incredibly successful? Interestingly, a big part of his approach involved something that is not at all exclusive to being a renowned professional fund manager: He invested in what he knew. Lynch believed that if you personally know something positive about a stock -- you buy the company's products, like its marketing, etc. -- you can get a beat on successful businesses before professional investors get around to them. In fact, one of the things that led him to one of his most successful investments -- undergarment manufacturer Hanes -- was his wife's affinity for the company's new pantyhose years ago. But while his "buy-what-you-know" advice has gained a lot of attention over the years, that part of his approach was only a starting point for Lynch. What his strategy really focused on was fundamentals -- that's why I was able to computerize it -- and the most important fundamental he looked at was one whose use he pioneered: the P/E/Growth ratio. The P/E/Growth ratio, or "PEG", divides a stock's price/earnings ratio by its historical growth rate. The theory behind this was relatively simple: The faster a company was growing, the more you should be willing to pay for its stock. To Lynch, PEGs below 1.0 were signs of growth stocks selling on the cheap; PEGs below 0.5 really indicated that a growth stock was a bargain. To show how the P/E/G can be more useful than the P/E ratio, Lynch has cited Wal-Mart, America's largest retailer. In his book "One Up On Wall Street", he notes that Wal-Mart's P/E was rarely below 20 during its three-decade rise. Its growth rate, however was consistently in the 25 to 30 percent range, generating huge profits for shareholders despite the P/E ratio not being particularly low. That also proved another one of Lynch's tenets: that a good company can grow for decades before earnings level off. The PEG wasn't the only abbreviation Lynch popularized within the stock market lexicon. His strategy is often used as a primary example of "GARP" -- Growth At A Reasonable Price -- investing, which blends growth and value tenets. While some categorize Lynch as a growth investor because his favorite type of stocks were "fast-growers" -- those growing earnings per share at an annual rate of at least 20 percent -- his use of PEG as a way to make sure he wasn't paying too much for growth really makes him a hybrid growth-value investor. One Size Doesn't Fit All One aspect of Lynch's approach that makes it different from those of other gurus I follow is his practice of evaluating different categories of stocks with different variables. His favorite category, as I noted, was "fast-growers". These companies were growing earnings at a rate of 20 to 50 percent per year. (Lynch didn't want growth rates above 50 percent, because it was unlikely companies could sustain such high growth rates over the long term). The other two main categories of stocks Lynch examined in his writings were "stalwarts" and "slow-growers". Stalwarts are large, steady firms that have multi-billion-dollar sales and moderate growth rates (between 10 and 20 percent). These are usually firms you know well -- Wal-Mart and IBM are current examples of "stalwarts" based on that definition. Their size and stability usually make them good stocks to have if the market hits a downturn, so Lynch typically kept some of them in his portfolio. "Slow-growers", meanwhile, are firms with higher sales that are growing EPS at an annual rate below 10 percent. These are the types of stocks you invest in primarily for their high dividend yields. One way Lynch treated slow-growers and stalwarts differently from fast-growers involved the PEG ratio. Because slow-growers and stalwarts tend to offer strong dividend yields, Lynch adjusted their PEG calculations to include dividend yield. For example, consider a stock that is selling for $30, and has a P/E ratio of 10, EPS growth of 12 percent, and a 3 percent yield. To find the PEG, you'd divide the P/E (10) by the total of the growth rate and yield (12+3=15). That gives you 10/15=0.67, which, being under 1.0, indicates that the stock is indeed a good value. Another difference: For slow-growers, Lynch wanted a high yield, and the model I base on his approach requires dividend yield to be higher than the S&P average and greater than 3 percent. Beyond The PEG The PEG wasn't the only variable Lynch applied to all stocks. For fast-growers, stalwarts, and slow-growers alike, he also looked at the inventory/sales ratio, which my Lynch-based model wants to be declining, and the debt/equity ratio, which should be below 80%. (For financial companies, it uses the equity/assets ratio and return on assets rates rather than the debt/equity ratio, since financials typically have to carry a lot of debt as a part of their business.) The final part of the Lynch strategy includes two bonus categories: free cash flow/price ratio and net cash/price ratio. Lynch loved it when a stock had a free cash flow/price ratio greater than 35 percent, or a net cash/price ratio over 30 percent. (Lynch defined net cash as cash and marketable securities minus long term debt). Failing these tests doesn't hurt a stock, however, since these are only bonus criteria. A Market-Beater Since I started tracking it in July 2003, my Lynch-based 10-stock portfolio has been one of my better performers, gaining an average of about 8% per year -- while the S&P 500 has averaged annualized returns a little over 1%. It performed very well in 2003, 2004, 2005, and 2006, before having rough years in 2007 and 2008. It bounced back very strong in 2009, however, surging 45.7%. Here's a look at the stocks that currently make up my Lynch-based portfolio: EMCOR Group (EME) USA Mobility (USMO) Oplink Communications (OPLK) Integrated Device Technology (IDTI) Tech Data Corporation (TECD) Humana Inc. (HUM) HealthSpring, Inc. (HS) Net 1 UEPS Technologies (UEPS) Blyth, Inc. (BTH) Universal American Corporation (UAM) The Stomach's The Key While it's not a quantitative factor, there is another part of Lynch's strategy that was a critical part of his success: Don't bail when things get bad. Lynch recognized that the stock market was unpredictable in the short term, even to the smartest investors. In fact, he once said in an interview with American television station PBS that putting money into stocks and counting on having nice profits in a year or two is like "just like betting on red or black at the casino. ... What the market's going to do in one or two years, you don't know." Over the long-term, however, good stocks rise like no other investment vehicle, something Lynch recognized. His philosophy: Use a proven strategy and stay in the market for the long term and you'll realize those gains; jump in and out and there's a good chance that you'll miss out on a chunk of them. That, of course, is particularly hard to do when the market gets volatile. But the fear and anxiety investors feel during such times make it more important than ever to heed Lynch's advice: "The real key to making money in stocks," he once said, "is not to get scared out of them." News about Validea Hot List Stocks Sanofi-Aventis (SNY): Sanofi has made a deal with Regulus Therapeutics Inc to discover, develop, and commercialize microRNA therapeutics, MarketWatch reported on June 22. The alliance is potentially valued at over $750 million, and will initially focus on the therapeutic area of fibrosis. Jos. A. Bank Clothiers (JOSB): Bank announced this week that it will pay shareholders a dividend of one share of common stock for each two shares they own as of July 30, according to the Baltimore Business Journal. CEO R. Neal Black said the dividend reflects the company's growth in sales, earnings and cash flow. 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 HS HEALTHSPRING, INC Insurance (Accident & Health) 100 ARO AEROPOSTALE, INC. Retail (Apparel) 91 AZN ASTRAZENECA PLC (ADR) Biotechnology & Drugs 87 JOSB JOS. A. BANK CLOTHIERS, INC. Retail (Apparel) 85 CAAS CHINA AUTOMOTIVE SYSTEMS, INC. Auto & Truck Parts 73 AIXG AIXTRON AG (ADR) Semiconductors 68 OSK OSHKOSH CORPORATION Auto & Truck Manufacturers 67 ARCC ARES CAPITAL CORPORATION Misc. Financial Services 66 SNY SANOFI-AVENTIS SA (ADR) Biotechnology & Drugs 64 CLW CLEARWATER PAPER CORP Paper & Paper Products 62 Ticker Market Cap Date Added Start Price Current Price Return HS $967 5/14/2010 $17.18 $16.69 -2.9% ARO $2,741 11/27/2009 $20.99 $29.31 39.6% AZN $64,904 5/14/2010 $42.05 $45.07 7.2% JOSB $1,028 6/11/2010 $60.24 $56.02 -7.0% CAAS $512 4/16/2010 $21.39 $18.94 -11.5% AIXG $2,612 6/11/2010 $25.83 $26.18 1.4% OSK $2,952 5/14/2010 $38.34 $32.88 -14.2% ARCC $2,525 3/19/2010 $13.51 $13.17 -2.5% SNY $80,322 6/11/2010 $30.06 $30.46 1.3% CLW $655 5/14/2010 $65.08 $57.05 -12.3%

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 HS   |   ARO   |   AZN   |   JOSB   |   CAAS   |   AIXG   |   OSK   |   ARCC   |   SNY   |   CLW   |   HEALTHSPRING, INC Profile Strategy: Growth Investor Based on: Martin Zweig HealthSpring, Inc. (HealthSpring) is a managed care organization with a primary focus on Medicare, the federal government-sponsored health insurance program for United States citizens aged 65 and older, qualifying disabled persons and persons suffering from end-stage renal disease. As of December 31, 2009, the Company operated coordinated care Medicare Advantage plans in Alabama, Florida, Illinois, Mississippi, Tennessee, and Texas. As of January 1, 2010, it also commenced operations of Medicare Advantage plans in three counties in Northern Georgia. As of December 31, 2009, the Company's Medicare Advantage plans had over 189,000 members. The Company also offers prescription drug benefits in accordance with Medicare Part D to its Medicare Advantage plan members, in addition to providing other medical benefits (MA-PD) plans. It also offers prescription drug benefits nationally on a stand-alone basis in accordance with Medicare Part D (PDP). 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. HS's P/E is 6.37, based on trailing 12 month earnings, while the current market PE is 14.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [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. HS's revenue growth is 31.35%, while it's earnings growth rate is 46.12%, based on the average of the 3, 4 and 5 year historical eps growth rates. Sales growth is not at least 85% of EPS growth so the initial part of this criteria is not met, however, since both sales growth and eps growth are greater than 30%, that requirement is waived and the company passes this test. SALES GROWTH RATE: [FAIL] 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 (17.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (25.3%) of the current year. Sales growth for the prior must be greater than the latter. For HS this criterion has not been met and fails this test. 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. HS's EPS ($0.59) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. HS's EPS for this quarter last year ($0.38) 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. HS's growth rate of 55.26% 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 HS is 23.06%. This should be less than the growth rates for the 3 previous quarters which are -19.44%, 45.28% and 33.33%. HS 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, 15.34%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 55.26%, (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, 55.26% must be greater than or equal to the historical growth which is 46.12%. HS 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. HS, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.24, 1.44, 1.51, 2.12 and 2.41, 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. HS's long-term growth rate of 46.12%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For HS, this criterion has not been met (insider sell transactions are 40, while insiders buying number 1). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.   AEROPOSTALE, INC. Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher 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 Aropostale merchandise through its e-commerce Website, www.aeropostale.com. During the fiscal year ended January 30, 2010 (fiscal 2009), the Company launched P.S. from Aeropostale, which offers casual clothing and accessories focused on elementary school children between the ages of 7 and 12. During fiscal 2009, the Company completed the closure of its 14 store Jimmy'Z concept. Jimmy'Z Surf Co., Inc., a wholly owned subsidiary of Aeropostale, Inc., was a contemporary lifestyle brand targeting young women and men aged 18 to 25. Analysis Guru Score: 90% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratio between .75 and 1.5 are good values. ARO's P/S ratio of 1.20 based on trailing 12 month sales, falls within the "good values" range for non-cyclical companies and is considered attractive. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. ARO's Debt/Equity of 0.00% is exceptional, thus passing the test. PRICE/RESEARCH RATIO: [PASS] This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. ARO 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 ARO At this Point Is ARO a "Super Stock"? NO PRICE/SALES RATIO: [FAIL] The prospective company should have a low Price/Sales ratio. To be considered a "Super Stock", non-cyclical (non-Smokestack) companies should have Price/Sales ratios below .75. However, ARO, who has a P/S of 1.20, does not fall within the "Super Stock" range. It does fall between 0.75 and 1.5, which is considered the "good values" range for non-cyclical companies. Nonetheless, it does not pass this "Super Stock" criterion. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. ARO's inflation adjusted EPS growth rate of 31.28% 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. ARO's free cash per share of 2.78 passes this criterion. THREE YEAR AVERAGE NET PROFIT MARGIN: [PASS] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. ARO, whose three year net profit margin averages 8.78%, passes this evaluation.   ASTRAZENECA PLC (ADR) Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy AstraZeneca PLC (AstraZeneca) is a biopharmaceutical company. The Company focuses on the discovery, development and commercialization of prescription medicines for six areas of healthcare. Its six areas of healthcare includes cardiovascular, gastrointestinal, infection, neuroscience, oncology, and respiratory and inflammation. The Company's products include Crestor, Nexium, Synagis, Seroquel, Arimidex and Symbicort. The Company owns and operates a range of research and development (R&D), production and marketing facilities worldwide. 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. AZN's market cap of $64,904 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 ($0.98). AZN's cash flow per share of $6.82 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 (667 million shares). These are the more well known and highly traded companies. AZN, who has 1,458 million shares outstanding, passes this test. TRAILING 12 MONTH SALES: [PASS] A company's trailing 12 month sales ($33,679 million) are required to be 1.5 times greater than the mean of the market's trailing 12 month sales ($16,637 million). AZN 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. AZN, with a dividend yield of 7.59%, is one of the 50 companies that satisfy this last criterion.   JOS. A. BANK CLOTHIERS, INC. Profile Strategy: Growth Investor Based on: Martin Zweig Jos. A. Bank Clothiers, Inc. (Jos. A. Bank) is a designer, manufacturer, retailer and direct marketer (through stores, catalog and Internet) of men's tailored and casual clothing and accessories. The Company sells substantially all of its products exclusively under the Jos. A. Bank label through its 473 retail stores (as of January 30, 2010, which includes seven outlet stores and 13 franchise stores) located throughout 42 states and the District of Columbia in the United States, as well as through the Company's nationwide catalog and Internet (www.josbank.com) operations. Jos. A. Bank operates through two segments: Stores and Direct Marketing. The Company's Stores segment consists of its 453 Full-line Stores. The Company opened 14 stores (and closed one store) during the fiscal year ended January 30, 2010 (fiscal 2009). The Company's Direct Marketing segment consists of its Internet and catalog channels. Analysis Guru Score: 85% P/E RATIO: [PASS] The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. JOSB's P/E is 13.75, based on trailing 12 month earnings, while the current market PE is 14.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [FAIL] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. JOSB's revenue growth is 13.70%, while it's earnings growth rate is 19.48%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, JOSB fails this criterion. SALES GROWTH RATE: [FAIL] 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 (10%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (12.4%) of the current year. Sales growth for the prior must be greater than the latter. For JOSB this criterion has not been met and fails this test. The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria. CURRENT QUARTER EARNINGS: [PASS] The first of these criteria is that the current EPS be positive. JOSB's EPS ($0.85) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. JOSB's EPS for this quarter last year ($0.62) pass this test. POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: [PASS] The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. JOSB's growth rate of 37.10% passes this test. EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: [PASS] Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for JOSB is 9.74%. This should be less than the growth rates for the 3 previous quarters, which are 41.67%, 26.00%, and 15.76%. JOSB passes this test, which means that it has 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, 22.43%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 37.10%, (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, 37.10% must be greater than or equal to the historical growth which is 19.48%. JOSB would therefore pass this test. EARNINGS PERSISTENCE: [PASS] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. JOSB, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.96, 2.36, 2.72, 3.17 and 3.84, passes this test. LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. JOSB's long-term growth rate of 19.48%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. TOTAL DEBT/EQUITY RATIO: [PASS] A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. JOSB's Debt/Equity (0.00%) is not considered high relative to its industry (31.30%) and passes this test. INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For JOSB, this criterion has not been met (insider sell transactions are 0, while insiders buying number 2). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.   CHINA AUTOMOTIVE SYSTEMS, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool China Automotive Systems, Inc. (China Automotive) is a holding company and has no significant business operations or assets other than its interest in Great Genesis Holdings Limited (Genesis). Through Genesis, the Company manufactures power steering systems and other component parts for automobiles. All operations are conducted through eight Sino-foreign joint ventures in China and a wholly owned subsidiary in the United States. The Company has business relations with more than 60 vehicle manufacturers, including FAW Group and Dongfeng Auto Group, automobile manufacturers in China; Shenyang Brilliance Jinbei Co., Ltd., light vehicle manufacturer in China; Chery Automobile Co., Ltd, state-owned car manufacturer in China, and Xi'an BYD Auto Co., Ltd and Zhejiang Geely Automobile Co., Ltd., car manufacturers. 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. CAAS's profit margin of 13.91% 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. CAAS, with a relative strength of 97, 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 CAAS (325.00% for EPS, and 88.43% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] CAAS's insiders should own at least 10% (they own 75.33% ) of the company's outstanding shares which is extremely attractive since the minimum requirement is 10%. A high percentage indicates that the insiders are confident that the company will do well. CASH FLOW FROM OPERATIONS: [PASS] A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. CAAS's free cash flow of $0.54 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] CAAS's profit margin has been consistent or even increasing over the past three years (Current year: 9.16%, Last year: 7.62%, Two years ago: 6.63%), 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 CAAS's case. CASH AND CASH EQUIVALENTS: [FAIL] CAAS's level of cash and cash equivalents per sales, 14.73 %, does not pass this criteria of roughly 20%(a number we determined to be appropriate based on various examples). CAAS will have a more difficult time paying off debt (if it has any) or acquiring other companies than a company that passes this criteria. 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 CAAS was 17.17% last year, while for this year it is 11.67%. Since the inventory to sales is decreasing by -5.49% 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 CAAS was 59.09% last year, while for this year it is 60.59%. 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] CAAS's trailing twelve-month Debt/Equity ratio (0.20%) is a little higher than what this methodology is looking for, but is still at an acceptable level. The superior companies that you are looking for don't need to borrow money in order to grow. This company has borrowed very little which is still OK. "THE FOOL RATIO" (P/E TO GROWTH): [PASS] The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (CAAS's is 0.44), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. CAAS passes this test. The following criteria for CAAS are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] CAAS has not been significantly increasing the number of shares outstanding within recent years which is a good sign. CAAS currently has 32.0 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. CAAS's sales of $295.1 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". CAAS passes the sales test. DAILY DOLLAR VOLUME: [PASS] CAAS passes the Daily Dollar Volume (DDV of $13.5 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf." PRICE: [PASS] This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. CAAS with a price of $18.94 passes the price test. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions. INCOME TAX PERCENTAGE: [FAIL] CAAS's income tax paid expressed as a percentage of pretax income either this year (14.04%) or last year (1.07%) 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%).   AIXTRON AG (ADR) Profile Strategy: Growth Investor Based on: Martin Zweig AIXTRON AG (AIXTRON) is a provider of deposition equipment to the semiconductor industry. The Company's technology solutions are used by a range of customers worldwide to build advanced components for electronic and opto-electronic applications based on compound, silicon, or organic semiconductor materials. Such components are used in displays, signaling, lighting, fiber optic communication systems, wireless and mobile telephony applications, optical and electronic storage devices, computing, as well as a range of other leading-edge technologies. AIXTRON's business activities include developing, producing and installing equipment for coating semiconductor materials, process engineering, consulting and training, including ongoing customer support. AIXTRON supplies to customers both full production-scale material deposition systems and small scale systems for Research and Development (R&D) use and small-scale production use. 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. AIXG's P/E is 29.35, based on trailing 12 month earnings, while the current market PE is 14.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [FAIL] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. AIXG's revenue growth is 18.65%, while it's earnings growth rate is 64.11%, based on the average of the 3 and 5 year historical eps growth rates. Therefore, AIXG fails this criterion. SALES GROWTH RATE: [PASS] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (234.3%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (43.2%) of the current year. Sales growth for the prior must be greater than the latter. For AIXG 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. AIXG's EPS ($0.38) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. AIXG's EPS for this quarter last year ($0.07) 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. AIXG's growth rate of 442.86% 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 AIXG is 32.05%. This should be less than the growth rates for the 3 previous quarters which are -60.00%, 87.50% and 433.33%. AIXG 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, 112.50%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 442.86%, (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, 442.86% must be greater than or equal to the historical growth which is 64.11%. AIXG 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. AIXG, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were -0.81, 0.08, 0.24, 0.32 and 0.60, 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. AIXG's long-term growth rate of 64.11%, based on the average of the 3 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. AIXG's Debt/Equity (0.00%) is not considered high relative to its industry (7.15%) 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 AIXG, this criterion has not been met (insider sell transactions are 0, 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.   OSHKOSH CORPORATION Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Oshkosh Corporation (Oshkosh) is a designer, manufacturer and marketer of a range of specialty vehicles and vehicle bodies, including defense trucks, access equipment, fire & emergency vehicles and concrete mixers and refuse collection vehicles. The Company operates in four business segments: defense, access equipment, fire & emergency, and commercial. It manufactures defense trucks under the Oshkosh brand name, and is a manufacturer of severe-duty heavy- and medium-payload tactical trucks for the United States Department of Defense (DoD). The Company is also the manufacturer of aerial work platforms under the JLG brand name. Under the Pierce brand name, the Company manufactures fire apparatus assembled on both custom and commercial chassis. The Company manufactures aircraft rescue and fire fighting (ARFF) and airport snow removal vehicles under the Oshkosh brand name and ambulances under the Medtec brand name. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: This methodology would consider OSK a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (5.92) relative to the growth rate (31.00%), based on the average of the 3, 4 and 5 year historical eps growth rates using the current fiscal year eps estimate, 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 OSK (0.19) 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. OSK, whose sales are $7,969.3 million, needs to have a P/E below 40 to pass this criterion. OSK's P/E of (5.92) 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 OSK was 13.69% last year, while for this year it is 15.03%. 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 (1.34%) 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 OSK is 31.0%, based on the average of the 3, 4 and 5 year historical eps growth rates using the current fiscal year eps estimate, which is acceptable. TOTAL DEBT/EQUITY RATIO: [FAIL] OSK's Debt/Equity (167.54%) is above 80% and is considered very weak. Therefore, OSK fails this test. 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 OSK (32.73%) 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 OSK (-36.26%) 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.   ARES CAPITAL CORPORATION Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Ares Capital Corporation (Ares Capital) is a specialty finance company, which is a closed-end, non-diversified management investment company. Ares Capital's investment objective is to generate both current income and capital appreciation through debt and equity investments. It invests in United States middle-market companies. It invests primarily in first and second lien senior loans and mezzanine debt, which in some cases includes an equity component like warrants. First and second lien senior loans generally are senior debt instruments that rank ahead of subordinated debt of a given portfolio company. Its investments have ranged between $10 million and $100 million each, although the investment sizes may be more or less than the targeted range. The Company's investment adviser is Ares Capital Management LLC. In April 2010, Ares Capital Corporation completed its merger with Allied Capital Corporation. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: ARCC is considered a "Stalwart", according to this methodology, for its earnings growth of 19.24%. This is based on based on the average of the 3, 4 and 5 year historical eps growth rates, which lies within a moderate 10%-19% range. 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. However, ARCC is not considered a "True Stalwart" for its sales of $256 million are less than the multi-billion dollar level. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for ARCC (0.20), based on the average of the 3, 4 and 5 year historical eps growth rates, is excellent. EARNINGS PER SHARE: [PASS] The EPS for a stalwart company must be positive. ARCC's EPS ($2.25) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] ARCC is a financial company so debt to equity rules are not applied to determine the company's financial soundness. EQUITY/ASSETS RATIO: [PASS] This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. ARCC's Equity/Assets ratio (66.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion. RETURN ON ASSETS: [PASS] This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. ARCC's ROA (11.03%) is above the minimum 1% that this methodology looks for, thus passing the criterion. 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 ARCC (-13.21%) 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 ARCC (6.03%) 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.   SANOFI-AVENTIS SA (ADR) Profile Strategy: Value Investor Based on: Benjamin Graham Sanofi-Aventis is a pharmaceutical group engaged in the research, development, manufacture and marketing of healthcare products. The Company's business includes two main activities: pharmaceuticals and human vaccines through sanofi pasteur. The Company is also present in animal health products through Merial Limited (Merial). In its pharmaceutical activity, the Company specializes in six therapeutic areas: diabetes, oncology, thrombosis and cardiovascular, central nervous system (CNS), and internal medicine. The global portfolio of sanofi-aventis also consists of a range of other pharmaceutical products in Consumer Health Care (CHC) and other prescription drugs, including generics. It offers vaccines in five areas: pediatric combination vaccines, influenza vaccines, adult and adolescent booster vaccines, meningitis vaccines and travel and endemic vaccines. Analysis Guru Score: 100% SECTOR: [PASS] SNY 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. SNY's sales of $38,269.6 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. SNY's current ratio of 2.18 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 SNY is $7,894.7 million, while the net current assets are $15,985.2 million. SNY 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. SNY's EPS growth over that period of 170.4% 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. SNY's P/E of 11.96 (using the current PE) passes this test. PRICE/BOOK RATIO: [PASS] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. SNY's Price/Book ratio is 1.33, while the P/E is 11.96. SNY passes the Price/Book test.   CLEARWATER PAPER CORP Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Clearwater Paper Corporation is a producer of tissue and paperboard products in the United States. The Company's products are manufactured in the United States and utilize primarily wood pulp. The Company operates in three segments: Consumer Products, Pulp and Paperboard, and Wood Products. Its private label tissue products, such as facial and bath tissue, paper towels and napkins, are used at home and are principally sold in grocery stores in the United States. The Company's paperboard is sold in the packaging industry and it is used by its customers to make packaging for products, including liquids, pharmaceuticals, consumer goods packaging. The Company is vertically integrated and produces the pulp required in its tissue and paperboard businesses. The Company also manufactures wood products, including cedar and lumber products. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider CLW a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (3.96) relative to the growth rate (23.25%), based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, 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 CLW (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. CLW, whose sales are $1,294.0 million, needs to have a P/E below 40 to pass this criterion. CLW's P/E of (3.96) 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 CLW was 12.30% last year, while for this year it is 13.58%. 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 (1.28%) 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 CLW is 23.2%, based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, which is considered very good. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for CLW (39.98%) 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 CLW (30.59%) 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 CLW (6.20%) 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.   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 WDC WESTERN DIGITAL CORP. Computer Storage Devices 72 CZZ COSAN LIMITED Crops 66 EME EMCOR GROUP, INC. Construction Services 64 COCO CORINTHIAN COLLEGES, INC. Schools 62 AMED AMEDISYS, INC. Healthcare Facilities 59 GME GAMESTOP CORP. Retail (Technology) 58 LINC LINCOLN EDUCATIONAL SERVICES CORPORATION Schools 58 NOV NATIONAL-OILWELL VARCO, INC. Oil Well Services & Equipment 56 ESV ENSCO PLC Oil Well Services & Equipment 56 MFC MANULIFE FINANCIAL CORPORATION (USA) Insurance (Life) 54

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