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Executive Summary	February 3, 2012

The Economy Pushing against several headwinds, the US economy is continuing its slow and steady recovery -- with a light possibly even forming at the end of the long, arduous tunnel that is the housing market. Since our last newsletter, a new Federal Reserve report showed that industrial production increased 0.4% in December, despite the fact that unseasonably warm temperatures caused utility sector output to decline significantly. For the fourth quarter, industrial production was up 3.1%, and for the full year it was up 4.1%, the second greatest improvement since 2000. And, manufacturing activity continued to expand in January, according to the Institute for Supply Management. Its manufacturing index showed that the sector expanded at an accelerating rate in January. It was the 30th straight month that the index has indicated an expansion in manufacturing activity. The labor market also keeps showing hopeful signs. New claims for unemployment are continuing to come in at a weekly rate well below the 400,000 mark that had proved such a barrier for so long, according to the Labor Department, and are now nearly 50% of what they were during the peak of the Great Recession. And continuing claims remain at levels not seen since before the Lehman Brothers collapse that triggered the 2008 financial crisis. Another piece of good news involved Americans' bank accounts. The personal savings rate (personal saving as a percentage of disposable income) rose by half a percentage point in December to 4.0%. That reversed a recent decline over the past few months, which had made it unclear if continuing gains in retail sales were the result of consumers overextending themselves. The new data indicates that Americans are continuing to spend without stretching themselves too thin. In the housing market, meanwhile, we're seeing the most hopeful signs we've seen in quite some time. Existing home sales rose 5.0% in December, according to the National Association of Realtors. It marked the 3rd straight month that the figure has increased, and put existing sales 3.6% ahead of where they were a year ago. NAR's Pending Home Sales Index declined 3.5% for the month, but remained 5.6% above its year-ago level. Perhaps more importantly, while 2011 marked the worst year for new home construction since at least 1963, the environment is improving. Homebuilder confidence about the newly built, single-family home market increased for a fourth straight month in January, according to the NAHB/Wells Fargo Housing Market Index, which hit its highest level since June of 2007. "Builders are seeing greater interest among potential buyers as employment and consumer confidence slowly improve in a growing number of markets, and this has helped to move the confidence gauge up from near-historic lows in the first half of 2011," the National Association of Homebuilders' chief economist said. Of course, Europe's debt woes continue to weigh heavily on investors' minds. Progress continues to be slow, but so far we haven't seen any major spillover effect on the U.S. economy. Since our last newsletter, the S&P 500 returned 0.8%, while the Hot List returned 3.7%. So far in 2012, the portfolio has returned 12.1% vs. 5.4% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 153.5% vs. the S&P's 32.5% gain. Inside the Portfolio In several recent newsletters, I've looked at the valuation of the broader stock market, seeing how stocks as a group stack up against a number of different valuation metrics, ranging from price-to-earnings ratios to price-to-book ratios to stock market-to-GDP ratios. All in all, as I've said before, I think the market is somewhere around fairly valued, if not a bit on the cheap side. Broader market valuations are of course important, and can give you an idea about whether market sentiment is too high, too low, or somewhere in the middle. But what's really critical for investors to remember is that in just about any climate, you can find individual stocks of good companies that are trading on the cheap. And, while those stocks can get caught up in broader market movements in the short term, over the long term they are the types of investments that can pay off big time regardless of what the broader market does. With that in mind, I thought that this week we could look a bit more deeply at the individual positions in the Hot List right now, to get an idea of just how attractive some of the best values in the market are right now. For starters, let's look at financial strength and position -- it doesn't matter how much you're paying for a stock if it's a dog. So, how does the Hot List stack up? Its 10 holdings currently have an average return on equity of 27.9%, which measures up very well against the broader market. In fact, it far exceeds the ROE target my David Dreman-based model uses, which involves taking the 1,500 largest stocks in the market, ranking them by ROE, and then take the average of the top 500. That average is currently 18.1%. When it comes to debt and balance sheets, the Hot List holdings are averaging a debt/equity ratio of 7.5% (not including the two financials, since other metrics are better used in establishing their financial strength). Five of the eight non-financials have no long-term debt, and none has a D/E higher than 34.5%. They on average have current ratios of 2.5 (anything over 2.0 is a sign of good liquidity, according to my Benjamin Graham-based model), and they on average have more than eight-and-a-half times as much net current assets ($1.1 billion) as long-term debt ($129 million). The non-financials also have very strong net cash positions -- the great Peter Lynch defined net cash as cash and marketable securities minus long term debt, and the model I base on his writings gives a bonus to stocks with net cash/prices ratios over 30% -- a very difficult target. Three of the non-financials in the Hot List meet that standard, and, collectively, the eight come darn close, averaging 26.1%. For non-financials, the equity/assets ratio and return on assets rate are better for assessing financial position. My Lynch-based model uses targets of 5% or the equity/assets ratio and 1% for return on assets; the two financials in the portfolio (Cash America International and Altisource Portfolio Solutions) are averaging a 65.5% equity/assets ratio and a 21.8% return on assets, blowing those targets away. How about earnings growth? On average, the 10 Hot List holdings have increased earnings per share in all but two years of the past decade. They're averaging long-term EPS growth of 26.2%, and none of the ten has a long-term growth rate below 15%. Now, let's look at valuation, and what we're paying for these quality stocks. For starters, the 10 holdings are trading at an average P/E ratio (using 12-month trailing earnings) of 11.5, significantly below current and long-term market averages. They are also trading at an average P/E-to-Growth ratio of 0.39, enough to fall into the "best-case" zone of my Lynch-based strategy (below 0.5). That means you're paying very little for some impressive growth. The group also averages a 0.99 price/sales ratio, which is below the current S&P 500 average of 1.3 (which itself is a solid figure). One metric that shows the Hot List holdings to be on the pricier side is the price/book ratio. The holdings average a P/B of 2.5, which is above the current S&P average of 2.0, though just slightly above the average of 2.43 since the late 1970s (that figure comes from Bespoke Investment Group). The Hot List also isn't heavy on dividends. While Telecom Argentina pays an impressive 7.3% yield and Ternium pays a healthy 3.2%, the portfolio as a whole averages a 1.1% dividend yield. But, seven of the eight stocks that aren't paying solid dividends are averaging an 18.5% return on retained earnings (earnings kept and not paid as dividends) over the past decade. That's well above the 12% minimum that Warren Buffett has used in analyzing stocks, according to the book Buffettology. And the eighth non-dividend-payer, Altisource Portfolio (which I excluded so it wouldn't skew the numbers too far in the positive direction), has generated a whopping 275% return on retained earnings over that time. So by generating big returns on the earnings they hold on to, many of these firms are probably doing more good for shareholders than they would by paying out those earnings as dividends. The bottom line of all this is that, regardless of what you think of the broader market's value, or the economy's direction, there are plenty of individual stocks out there that look extremely attractive. Companies with lengthy histories of strong earnings and sales growth, high returns on equity and assets, and low or no debt are trading at very reasonable prices, regardless of what's happening in Europe or what's happening with the broader market or economy. Now, the market could recognize those values tomorrow, or it could take a good deal longer -- the past few weeks are a hopeful sign that it may be occurring sooner rather than later, but in the short term anything can happen. Over the long haul, however, history shows that value and fundamentals do matter, and that financially and fundamentally sound stocks tend to be winners. To paraphrase hedge fund guru Joel Greenblatt, buying good companies at bargain prices just makes sense -- and that's something that I just can't see changing.		Editor-in-Chief: John Reese Since Inception   Hot List 153.5% S&P 500 32.5% Accuracy 57.1% Beta 1.2 YTD   Hot List 12.1% S&P 500 5.4% Since Last Issue   Hot List 3.7% S&P 500 0.8% Avg. Fundamentals   Market Cap (mil) $2,495 PE Ratio 11.5 5 Yr EPS Growth 26.2% Yield 1.1% Rel. Strength 58 Portfolio Sectors Services 5 Financial 2 Healthcare 1 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: Joseph Piotroski If you haven't heard of Joseph Piotroski, you're not alone. He's probably the least well-known of the investment "gurus" who inspired my strategies. Actually, he's not even a professional investor, but instead an accountant and college professor. In 2000, however, Piotroski showed that you don't need to be a smooth-talking Wall Street hotshot to make it big in the market. While teaching at the University of Chicago, he authored a research paper that showed how assessing stocks with simple accounting-based methods could produce excellent returns over the long haul. No fancy formulas, no insider knowledge -- just a straightforward assessment of a company's balance sheet. His study turned quite a few heads on Wall Street. It focused on companies that had high book/market ratios -- i.e. the type of unpopular stocks whose book values (total assets minus total liabilities) were high compared to the value investors ascribed to them (their share price multiplied by their number of shares). These are stocks that have very low expectations. Quite often, such firms have low book/market ratios because they are in financial distress, and investors wisely stay away from them. On certain occasions, however, high book/market firms may be good companies that are being overlooked by investors for one reason or another. These firms can be great investment opportunities, because their stock prices will likely jump once Wall Street realizes it's been shunning a winner. Through his research, Piotroski developed a methodology to separate the solid but overlooked high book/market firms from high book/market ratio firms that were in financial distress. He found that this method, which included a number of balance-sheet-based criteria, increased the return of a high book/market investor's portfolio by at least 7.5 percentage points annually. In addition, he found that buying the high book/market firms that passed his strategy and shorting those that didn't would have produced an impressive 23% average annual return from 1976 and 1996. Since I started tracking it in late February 2004, a 10-stock portfolio picked using my Piotroski-based model has outperformed the market handily, returning 6.0% annualized vs. 1.8% for the S&P 500. But it's not for the faint of heart, as it can be very volatile -- in fact, its beta of 1.37 is the highest of any of my 10-stock portfolios. It fared very well in 2004, 2005, and 2006, before struggling in 2007, 2008, and 2009. Then it roared back in 2010, gaining 55.9% -- more than four times the S&P 500's 12.8% gain. Last year, however, it was again hit hard, losing 24.4% while the broader market was flat. But so far in 2012 it has again bounced back strong, already gaining 17.8% vs. the S&P's 5.3% gain. (All 2012 and since-inception figures through Feb. 1.) The big swings are likely a result of the strategy keying on smaller, beaten-down stocks at a time when investors have been prone to bouts of fear -- primarily about macroeconomic issues. When those macro issues spark anxiety, investors dump smaller unloved stocks; then, when the fears subside, they dive back into the smaller value plays. So while you can make some nice profits over the long haul following a strategy like this, you have to have discipline -- or else you'll end up buying high, like after 2010, and selling low, like after 2011. Let's take a look at how Piotroski's approach, and the model I base on it, work. Diving into The Balance Sheet Piotroski wasn't the first to study high book/market stocks. But his research took things a step further than many past studies. He noted that the majority of high book/market stocks ended up being losers, and that the success of high book/market portfolios was usually dependent on the big gains of a small number of winners. Much as low price/earnings ratio investors like John Neff used a variety of tests to make sure low P/E stocks weren't rightfully being overlooked because of poor financials, Piotroski sought to separate the high book/market winners from the high book/market losers. The first step in this approach is, of course, to find high book/market ratio stocks. In his study, Piotroski focused on the stocks whose book/market ratios were in the top 20 percent of the market, so that's the figure I use. That's the easy part. The harder part is determining whether investors are avoiding a low-B/M stock because it is in financial trouble, or whether the company is a solid one that is simply being overlooked. The Piotroski-based model looks at a variety of factors to determine this, including return on assets and cash flow from operations, both of which should be positive. Piotroski also thought that good companies had cash from operations that was greater than net income. Such companies are making money because of their business -- not because of accounting changes, lawsuits, or other one-time gains. Several of Piotroski' other financial criteria don't necessarily look for fundamental excellence, but instead for improvement. This makes a lot of sense; a company whose return on assets had declined from 10 percent to 1 percent and whose cash flow from operations had dwindled from $10 million to $10,000 would pass the above ROA and cash flow tests, for example, but it certainly wouldn't be the type of strong performer Piotroski was targeting. Looking at how a company's fundamentals had been changing allowed him to not only get an idea of the firm's financial position, but also of whether that position was improving or declining. Among the other "change" criteria Piotroski examined were the long-term debt/assets ratio, which he wanted to be steady or declining; the current ratio (current assets/current liabilities), which he wanted to be steady or increasing; gross margin, which should be steady or rising; and asset turnover, which measures productivity by comparing how much sales a company is making in relation to the amount of assets it owns (That should be steady or increasing). As you can see, the Piotroski-based approach is a stringent one. Here are the ten stocks currently in its 10-stock portfolio: SkyWest, Inc. (SKYW) Alpha Natural Resources (ANR) HealthWays, Inc. (HWAY) AU Optronics Corp. (AUO) Digital Generation, Inc. (DGIT) Legg Mason, Inc. (LM) Brasil Telecom SA (BTM) Ternium S.A. (TX) ArcelorMittal (MT) Invacare Corporation (IVC) Think Small -- And Boring One final note on the Piotroski-based strategy: It usually ends up focusing on small stocks. Piotroski found that smaller high book/market firms were more likely to produce high returns than their larger counterparts, because small stocks are more likely to fly under the radar of analysts and investors. That means you are more likely to uncover winners using fundamental analysis of these smaller, less-followed stocks. For the same reason, the stocks that my Piotroski-based model usually chooses tend to be from boring industries or make boring products, though it will go into more "interesting" areas when valuations are right (as it is right now, with a few tech stocks among its holdings). But while they're not the flashiest firms, they're quite often the type of stocks that can pay excellent returns over the long haul. News about Validea Hot List Stocks Cash America International (CSH): Cash America reported fourth-quarter net income of $37.8 million, or $1.18 a share, compared with $34.7 million, or $1.10 a share from the year-ago period, but fell short of analysts' earnings expectations of $1.23 per share, according to Reuters. Revenue was up 26% to $463.3 million, which topped analysts' estimates of $436.4 million. The earnings shortfall was in part due to higher operating expenses to promote holiday sales, the company said. For the full 2011 year, earnings were $4.25 per share, falling short of estimates of $4.28 per share. Still, through Feb. 2, shares were up about 5.7% since our last newsletter. 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 FRX FOREST LABORATORIES, INC. Biotechnology & Drugs 100 JOSB JOS. A. BANK CLOTHIERS, INC. Retail (Apparel) 77 TEO TELECOM ARGENTINA S.A. (ADR) Communications Services 70 TX TERNIUM S.A. (ADR) Iron & Steel 70 BPI BRIDGEPOINT EDUCATION, INC. Schools 69 TECD TECH DATA CORP Computer Hardware 63 ASPS ALTISOURCE PORTFOLIO SOLUTIONS S.A. Consumer Financial Services 60 ARO AEROPOSTALE, INC. Retail (Apparel) 59 CSH CASH AMERICA INTERNATIONAL, INC. Misc. Financial Services 48 CPLA CAPELLA EDUCATION COMPANY Schools 38 Ticker Market Cap Date Added Start Price Current Price Return FRX $8,447 9/2/2011 $33.10 $31.62 -4.5% JOSB $1,338 12/23/2011 $49.89 $48.08 -3.6% TEO $2,257 1/20/2012 $21.58 $21.91 1.5% TX $4,759 9/2/2011 $24.48 $23.74 -3.0% BPI $1,373 3/18/2011 $18.02 $26.60 47.6% TECD $2,161 1/20/2012 $52.33 $52.35 0.0% ASPS $1,286 1/20/2012 $50.64 $53.90 6.4% ARO $1,359 10/28/2011 $14.30 $16.83 17.7% CSH $1,327 12/23/2011 $47.96 $45.31 -5.5% CPLA $647 9/2/2011 $30.42 $44.75 47.1%

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 FRX   |   JOSB   |   TEO   |   TX   |   BPI   |   TECD   |   ASPS   |   ARO   |   CSH   |   CPLA   |   FOREST LABORATORIES, INC. Profile Strategy: Contrarian Investor Based on: David Dreman Forest Laboratories, Inc. (Forest) develops, manufactures and sells branded forms of ethical drug products, most of which requires a physician's prescription. The Company also focuses on the development and introduction of new products, including products developed in collaboration with licensing partners. Its products include those developed by the Company and those acquired from other pharmaceutical companies and integrated into its marketing and distribution systems. The Company's principal products include Lexapro, Namenda, Bystolic, Savella and Teflaro. On April 13, 2011, the Company acquired Clinical Data Inc. (Clinical Data), a specialty pharmaceutical company. Analysis Guru Score: 71% MARKET CAP: [PASS] Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. FRX has a market cap of $8,447 million, therefore passing the test. EARNINGS TREND: [PASS] A company should show a rising trend in the reported earnings for the most recent quarters. FRX's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.91, 1.04 have been increasing, and therefore the company passes this test. EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: [PASS] This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. FRX passes this test as its EPS growth rate over the past 6 months (15.55%) has beaten that of the S&P (-3.35%). FRX's estimated EPS growth for the current year is (3.06%), which indicates the company is expected to experience positive earnings growth. As a result, FRX passes this test. This methodology would utilize four separate criteria to determine if FRX is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest". P/E RATIO: [PASS] The P/E of a company should be in the bottom 20% of the overall market. FRX's P/E of 7.96, based on trailing 12 month earnings, meets the bottom 20% criterion (below 8.86), and therefore passes this test. PRICE/CASH FLOW (P/CF) RATIO: [FAIL] The P/CF of a company should be in the bottom 20% of the overall market. FRX's P/CF of 8.09 does not meet the bottom 20% criterion (below 4.72), and therefore fails this test. PRICE/BOOK (P/B) VALUE: [FAIL] The P/B value of a company should be in the bottom 20% of the overall market. FRX's P/B is currently 1.54, which does not meet the bottom 20% criterion (below 0.68), and it therefore fails this test. PRICE/DIVIDEND (P/D) RATIO: [FAIL] The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). FRX's P/D is not available, and hence an opinion cannot be rendered at this time. This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below. CURRENT RATIO: [PASS] A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [2.05] or greater than 2). This is one identifier of financially strong companies, according to this methodology. FRX's current ratio of 3.58 passes the test. PAYOUT RATIO: [FAIL] A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for FRX is not available, and hence no opinion can be rendered on this variable. RETURN ON EQUITY: [PASS] The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 18.12%, and would consider anything over 27% to be staggering. The ROE for FRX of 18.71% is high enough to pass this criterion. PRE-TAX PROFIT MARGINS: [PASS] This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. FRX's pre-tax profit margin is 30.67%, thus passing this criterion. YIELD: [FAIL] The company in question should have a yield that is high and that can be maintained or increased. FRX's current yield is not available (or one is not paid) at the present time, while the market yield is 2.72%. Hence, this criterion cannot be evaluated. LOOK AT THE TOTAL DEBT/EQUITY: [PASS] The company must have a low debt to equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should be less than 20% or less than the industry average. FRX's Total Debt/Equity of 0.00% is considered exceptional.   JOS. A. BANK CLOTHIERS, INC. Profile Strategy: Value Investor Based on: Benjamin Graham Jos. A. Bank Clothiers, Inc. (Jos. A. Bank) is a designer, manufacturer, retailer and direct marketer of men's tailored and casual clothing and accessories and is a retailer of tuxedo rental products. It sells substantially all of its products exclusively under the Jos. A. Bank label through its 506 retail stores (as of January 29, 2011, which includes 12 outlet and factory stores and 14 franchise stores) located throughout 42 states and the District of Columbia in the United States, as well as through the Company's nationwide catalog and Internet (www.josbank.com) operations. It sources substantially all of its merchandise from suppliers and manufacturers or through buying agents using Jos. A. Bank designs and specifications. The Company operates in two segments: Stores and Direct Marketing. The Stores segment consists of all Company-owned stores, excluding outlet and factory stores (full-line stores). The Direct Marketing segment consists of its Internet and catalog operations. Analysis Guru Score: 71% SECTOR: [PASS] JOSB 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. JOSB's sales of $951.9 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. JOSB's current ratio of 3.78 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 JOSB is $0.0 million, while the net current assets are $451.6 million. JOSB 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. JOSB's EPS growth over that period of 699.0% passes the EPS growth test. P/E RATIO: [FAIL] 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. JOSB's P/E of 18.60 (using the 3 year PE) fails this test. PRICE/BOOK RATIO: [FAIL] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. JOSB's Price/Book ratio is 2.48, while the P/E is 18.60. JOSB fails the Price/Book test.   TELECOM ARGENTINA S.A. (ADR) Profile Strategy: Contrarian Investor Based on: David Dreman Telecom Argentina SA (Telecom) is an Argentina-based company primarily engaged in the provision of national fixed-line telecommunication services, international long-distance service, data transmission and Internet services and mobile telephony. The Company also offers such solutions as online business and Web hosting, virtual private network (VPN), mobile operating systems developed by Microsoft and Blackberry, toll-free telephone numbers, call centers and voice over Internet protocol (VoIP) line, as well as other services mainly aimed at corporate clients. The Company's subsidiaries are structured in two business segments: Fixed Telephony, comprising Telecom Argentina USA Inc and Micro Sistemas Sociedad Anonima, and Mobile Services, including Telecom Personal SA, Nucleo SA and Springville SA. As of December 31, 2010, the Company's majority shareholder was Nortel SA, 54.74% of its interest. Analysis Guru Score: 84% MARKET CAP: [PASS] Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. TEO has a market cap of $2,257 million, therefore passing the test. EARNINGS TREND: [PASS] A company should show a rising trend in the reported earnings for the most recent quarters. TEO's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.14, 0.71 have been increasing, and therefore the company passes this test. EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: [PASS] This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. TEO passes this test as its EPS growth rate over the past 6 months (407.14%) has beaten that of the S&P (-3.35%). TEO's estimated EPS growth for the current year is (564.44%), which indicates the company is expected to experience positive earnings growth. As a result, TEO passes this test. This methodology would utilize four separate criteria to determine if TEO is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest". P/E RATIO: [PASS] The P/E of a company should be in the bottom 20% of the overall market. TEO's P/E of 7.63, based on trailing 12 month earnings, meets the bottom 20% criterion (below 8.86), and therefore passes this test. PRICE/CASH FLOW (P/CF) RATIO: [PASS] The P/CF of a company should be in the bottom 20% of the overall market. TEO's P/CF of 2.24 meets the bottom 20% criterion (below 4.72) and therefore passes this test. PRICE/BOOK (P/B) VALUE: [FAIL] The P/B value of a company should be in the bottom 20% of the overall market. TEO's P/B is currently 2.60, which does not meet the bottom 20% criterion (below 0.68), and it therefore fails this test. PRICE/DIVIDEND (P/D) RATIO: [PASS] The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). TEO's P/D of 13.59 meets the bottom 20% criterion (below 18.80 or yield above 3.7% ), and it therefore passes this test. This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below. CURRENT RATIO: [FAIL] A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.16] or greater than 2). This is one identifier of financially strong companies, according to this methodology. TEO's current ratio of 0.97 fails the test. PAYOUT RATIO: [FAIL] A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for TEO is 37.44%, while its historical payout ratio has been 24.46%. Therefore, it fails the payout criterion. RETURN ON EQUITY: [PASS] The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 18.12%, and would consider anything over 27% to be staggering. The ROE for TEO of 37.95% is high enough to pass this criterion. PRE-TAX PROFIT MARGINS: [PASS] This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. TEO's pre-tax profit margin is 21.51%, thus passing this criterion. YIELD: [PASS] The company in question should have a yield that is high and that can be maintained or increased. TEO's current yield is 7.36%, while the market yield is 2.72%. TEO passes this test. LOOK AT THE TOTAL DEBT/EQUITY: [PASS] The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 92.77%. TEO's Total Debt/Equity of 2.03% is considered acceptable.   TERNIUM S.A. (ADR) Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Ternium SA is a steel company in Latin America that manufactures and processes flat and long steel products for the construction, home appliances, capital goods, container, food, energy and automotive industries. The Company operates in three segments: Flat Steel Products, comprising the manufacturing and marketing of hot rolled coils and sheets, cold rolled coils and sheets, tin plate, welded pipes, hot dipped galvanized and electro-galvanized sheets and pre-painted sheets; Long Steel Products, comprising the manufacturing and marketing of billets (steel in its basic, semi-finished state), wire rod and bars; Others, comprising mainly pig iron, pellets and pre-engineered metal buildings. During the year ended December 31, 2010, Flat Steel Products accounted to 86% of the Company's overall revenues. Approximately 57% of Ternium's sales were generated in North America and 41% in South and Central America. Analysis Guru Score: 100% DETERMINE THE CLASSIFICATION: This methodology would consider TX a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (9.66) relative to the growth rate (29.91%), based on the average of the 3 and 4 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 TX (0.32) 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. TX, whose sales are $8,887.1 million, needs to have a P/E below 40 to pass this criterion. TX's P/E of (9.66) 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 TX was 27.23% last year, while for this year it is 26.46%. Since inventory to sales has decreased from last year by -0.77%, TX 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 TX is 29.9%, based on the average of the 3 and 4 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for TX (34.52%) to be normal (equity is approximately twice debt). FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for TX (7.50%) 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: [BONUS PASS] 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 TX (39.92%) is high enough to add to the attractiveness of this company.   BRIDGEPOINT EDUCATION, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Bridgepoint Education, Inc. (Bridgepoint) is a provider of postsecondary education services. The Company's wholly owned subsidiaries, Ashford University and the University of the Rockies, are regionally accredited academic institutions that offer associate's, bachelor's, master's and doctoral programs in the disciplines of business, education, psychology, social sciences and health sciences. These institutions deliver programs online, as well as at its traditional campuses located in Clinton, Iowa, and Colorado Springs, Colorado. As of December 31, 2010, it offered approximately 1,345 courses, 71 degree programs and 134 specializations. As of December 31, 2010, it had 77,892 students enrolled in its institutions, 99% of whom were attending classes online. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider BPI a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (8.72) relative to the growth rate (36.60%), 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 BPI (0.24) is very favorable. SALES AND P/E RATIO: [NEUTRAL] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. BPI, whose sales are $904.5 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. EPS GROWTH RATE: [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 BPI is 36.6%, based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, 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 BPI (0.00%) to be wonderfully low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for BPI (10.30%) 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 BPI (18.74%) 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.   TECH DATA CORP Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Tech Data Corporation (Tech Data) is a distributor of technology products. The Company serves approximately 125,000 value-added resellers (VARs), direct marketers, retailers and corporate resellers in more than 100 countries throughout North America, Latin America and Europe. In February 2011, the Company announced that it had created two new business divisions: HP Solutions Division And Networking Solutions Group. On October 1, 2010, the Company completed the acquisition of Triade Holding B.V. (Triade). On October 1, 2010, Brightstar Europe Limited (BEL), a consolidated joint venture between the Company and Brightstar Corporation, acquired Mobile Communication Company B.V. and Mobile Communications Company Belgium N.V. In October 2011, Mensch und Maschine Software SE sold its complete distribution business to the Company. Analysis Guru Score: 100% MARKET CAP: [PASS] The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. TECD, with a market cap of $2,161 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. TECD, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were -1.83, 1.85, 2.28, 3.54 and 4.36, 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. TECD's Price/Sales ratio of 0.08, 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. TECD, whose relative strength is 72, is in the top 50 and would pass this last criterion.   ALTISOURCE PORTFOLIO SOLUTIONS S.A. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Altisource Portfolio Solutions S.A. (Altisource) together with its subsidiaries, is a provider of services focused on high value, knowledge-based functions principally related to real estate and mortgage portfolio management, asset recovery and customer relationship management. The Company utilizing integrated technology that includes decision models and behavioral-based scripting engines. The Company has three segments: Mortgage Services consists of mortgage management services that span the mortgage lifecycle; Financial Services principally consists of unsecured asset recovery and customer relationship management, and Technology Services consists of modular, integrated technological solutions for loan servicing, vendor management and invoice presentment and payment, as well as providing infrastructure support. In February 2010, Altisource acquired the interests of The Mortgage Partnership of America, L.L.C. (MPA). Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: This methodology would consider ASPS a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (22.40) relative to the growth rate (79.22%), based on the average of the 3 and 4 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 ASPS (0.28) is very favorable. SALES AND P/E RATIO: [NEUTRAL] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. ASPS, whose sales are $383.2 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. EPS GROWTH RATE: [FAIL] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for ASPS is 79.2%, based on the average of the 3 and 4 year historical eps growth rates, which is considered too fast. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] ASPS 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. ASPS's Equity/Assets ratio (77.00%) 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. ASPS's ROA (34.87%) 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 ASPS (2.91%) 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 ASPS (1.62%) 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.   AEROPOSTALE, INC. Profile Strategy: Patient Investor Based on: Warren Buffett Aeropostale, Inc. is a mall-based, specialty retailer of casual apparel and accessories, principally targeting 14 to 17 year-old young women and men through its Aeropostale stores and 7 to 12 year-old kids through its P.S. from Aeropostale stores. The Company designs, sources, markets and sells all of its own merchandise. P.S. from Aeropostale products can be purchased in P.S. from Aeropostale stores, in certain Aeropostale stores, including its new Times Square store in New York City and online at www.ps4u.com. As of January 29, 2011, it operated 965 Aeropostale stores, consisting of 906 stores in 49 states and Puerto Rico, 59 stores in Canada, as well as 47 P.S. from Aeropostale stores in 13 states. In addition, pursuant to a Licensing Agreement, one of its international licensees operated 10 Aeropostale stores in the United Arab Emirates as of January 29, 2011. During March 2011, it announced that it had signed a second licensing agreement. 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 0.23, 0.24, 0.41, 0.65, 0.67, 0.88, 1.15, 1.47, 2.27, 2.49. Buffett would consider ARO's earnings predictable. In fact EPS have increased every year. ARO's long term historical EPS growth rate is 29.6%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 12.6% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers. LOOK AT THE ABILITY TO PAY OFF DEBT [PASS] Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. ARO has no long term debt and therefore would pass this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [PASS] Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for ARO, over the last ten years, is 35.6%, 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 34.7%, 22.5%, 28.0%, 34.1%, 28.5%, 32.8%, 58.4%, 41.7%, 49.1%, 48.8%, and the average ROE over the last 3 years is 46.5%, 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 37.9% and the average ROTC over the past 3 years is 46.5%, 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 34.7%, 22.5%, 28.0%, 34.1%, 28.5%, 32.8%, 58.4%, 41.7%, 49.1%, 48.8%, 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 $10.46 and compares it to the gain in EPS over the same period of $2.26. ARO's management has proven it can earn shareholders a 21.6% 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 116,199,997 to 81,000,000, 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 $1.48 and divide it by the current market price of $16.83. An investor, purchasing ARO, could expect to receive a 8.79% initial rate of return. Furthermore, he or she could expect the rate to increase 12.6% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 3.47%. Compare this with ARO's initial yield of 8.79%, which will expand at an annual rate of 12.6%, based on the analysts' consensus estimated long term growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding. CALCULATE THE FUTURE EPS: [No Pass/Fail] ARO currently has a book value of $4.73. It is safe to say that if ARO can preserve its average rate of return on equity of 35.6% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 35.6% and it will have a book value of $99.25 in ten years. If it can still earn 35.6% on equity in ten years, then expected EPS will be $35.32. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $35.32 and multiply them by the lower of the 5 year average P/E ratio (11.6) or current P/E ratio (current P/E in this case), which is 11.4 and you get ARO's projected future stock price of $402.62. 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 $402.62. These numbers indicate that one could expect to make a 37.4% 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 12.6%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $4.84. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (11.6) or current P/E ratio (current P/E in this case), which is 11.4. This equals the future stock price of $55.18. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $55.18. 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 $16.83 and the future expected stock price, including the dividend pool, of $55.18. If you were to invest in ARO at this time, you could expect a 12.6% average annual return on your money. Buffett likes to see a 15% return, but nonetheless would accept this return. LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [PASS] Based on the two different methods, you could expect an annual compounding rate of return somewhere between 12.6% and 37.4%. 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 25.0% on ARO stock for the next ten years, based on the current fundamentals. Buffett would consider this an exceptional return, thus passing the criterion.   CASH AMERICA INTERNATIONAL, INC. Profile Strategy: Value Investor Based on: Benjamin Graham Cash America International, Inc. provides specialty financial services to individuals through retail services locations and through electronic distribution platforms known as e-commerce activities. These services include secured non-recourse loans, commonly referred to as pawn loans and unsecured consumer loans. The Company's consumer loan portfolio includes short-term single payment loans, longer-term multi-payment installment loans, credit services and participation interests purchased from third parties in the micro line of credit (MLOC) services channel. Through the Credit Services Organization program (the CSO program), it provides a third-party lender's consumer loan product in some markets by acting as a credit services organization on behalf of consumers. As of December 31, 2010, it operated in two segments: retail services and e-commerce. During the year ended December 31, 2010, the Company renamed its Internet Services Division as the E-Commerce Division. Analysis Guru Score: 86% SECTOR: [FAIL] CSH is in the Financial sector, which is one sector that this methodology avoids. Technology and financial stocks were considered too risky to invest in when this methodology was published. Although times have changed since then with respect to the risk of financial stocks, several of Graham's criteria, like the Current Ratio and Debt to Current Assets, do not apply to financial companies. As a result, the company will not be able to pass this methodology, although we will include the remainder of the analysis for informational purposes. SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. CSH's sales of $1,540.6 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. CSH's current ratio of 4.72 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 CSH is $503.0 million, while the net current assets are $644.9 million. CSH 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. CSH's EPS growth over that period of 512.2% 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. CSH's P/E of 12.30 (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. CSH's Price/Book ratio is 1.47, while the P/E is 12.30. CSH passes the Price/Book test.   CAPELLA EDUCATION COMPANY Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Capella Education Company is an online postsecondary education services company. Through its wholly owned subsidiary, Capella University, the Company offers a range of doctoral, master's and bachelor's programs. As December 31, 2010, it offered over 1,250 online courses and 43 academic programs with 136 specializations to over 39,000 learners. It also offers certificate programs, which consist of a series of courses focused on a particular area of study. In addition, Capella Education Company also offers academic services, such as new learner orientation, technical support, academic advising, research services (particularly for doctoral degree candidates), writing services and online tutoring. It also provides appropriate educational accommodations to learners with documented disabilities through its disability support services team. During the year ended December 31, 2010, it formed the joint-venture Sophia Learning, LLC, as majority owner. Analysis Guru Score: 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. CPLA's P/S ratio of 1.49 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. CPLA'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. CPLA 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 CPLA At this Point Is CPLA 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, CPLA, who has a P/S of 1.49, 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%. CPLA's inflation adjusted EPS growth rate of 34.01% 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. CPLA's free cash per share of 3.74 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. CPLA, whose three year net profit margin averages 12.57%, passes this evaluation.   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 CACI CACI INTERNATIONAL INC Software & Programming 71 NOC NORTHROP GRUMMAN CORPORATION Aerospace & Defense 70 BIG BIG LOTS, INC. Retail (Specialty) 57 GTAT GT ADVANCED TECHNOLOGIES INC Semiconductors 56 LULU LULULEMON ATHLETICA INC. Retail (Apparel) 55 SWI SOLARWINDS, INC. Software & Programming 55 DFS DISCOVER FINANCIAL SERVICES Consumer Financial Services 53 HITK HI-TECH PHARMACAL CO. Biotechnology & Drugs 52 ROST ROSS STORES, INC. Retail (Apparel) 51 TJX THE TJX COMPANIES, INC. Retail (Department & Discount) 51

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