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Executive Summary	October 15, 2010

The Economy While fear remains elevated in the market and on Main Street, the economy and Corporate America continue to show improvement. Since our last newsletter, new data has shown that the manufacturing sector expanded in September for the 14th straight month. The Institute for Supply Management's manufacturing index showed that growth in the sector wasn't as strong as it had been earlier this year, but the index remained comfortably in expansion territory. The data also showed that employment conditions improved in the sector for the 10th straight month. The service sector also grew in September, according to ISM, and it did so at an accelerating rate -- a very good sign given the U.S.'s service-driven economy. ISM's data also showed growth in service sector jobs, reversing the decline that occurred in August. In general, however, the employment situation remains a concern. The Labor Department said last week that the unemployment rate held steady at 9.6% in September. The private sector added 64,000 jobs, but government jobs declined by 159,000. The unemployment rate doesn't take into account those "marginally attached" to the labor market (such as discouraged workers who've stopped looking for work), and those working part-time because that is their only option. That figure rose in September to 17.1%, up from 16.7% in August. But while they aren't adding a lot of jobs, U.S. corporations are posting strong profits. Several bellwethers have reported nice third-quarter results, including Google. The tech giant's net income rose 32%, while revenue jumped 23%. Intel also posted strong results, beating both revenue and profit estimates. Financial sector bellwether JPMorgan, meanwhile, reported a 23% jump in profits. In the housing market, pending home sales increased 4.3%, according to the National Association of Realtors. The market is continuing to readjust after many buyers rushed to get their purchases in by the homebuyer tax credit deadline. The biggest economic news of the past fortnight doesn't involve a number or a report, however -- it's the continued speculation that the Federal Reserve will take another crack at trying to spur the economy. At this point, nothing is for sure, but the speculation is that the Fed would do so by broadening its asset purchase plan. Investors seem to think another round of Fed assistance will help stocks -- talk of Fed action helped drive the S&P up 2.9% since our last newsletter, while the Hot List returned 4.9%. For the year, the portfolio stands at 4.5% vs. 5.3% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 152.0% vs. the S&P's 17.3% gain. It's Not (Just) The Economy, Stupid In today's world of instant information, it can be easy to get caught up in the reems of economic data that investors are deluged with every day. Unemployment statistics, manufacturing growth, housing market numbers -- investors hang on these and a myriad of other sets of data every day. But as you wade through the ocean of economic figures, it's important not to lose sight of a key broader point: The stock market is not the economy. Yes, the economy is, over the long term, the driving engine of the stock market. An economy that cannot overcome challenges, sustain growth, and inspire confidence over the long haul does not make for a healthy environment to invest -- that's why we give an update on the economy in each Hot List. But in the shorter term -- and the shorter term can mean periods of years -- the economy and the market can become quite detached. Strong growth does not guarantee strong stock returns, nor does weak growth guarantee poor stock market performance. In fact, forget "guarantee" -- the reality is that strong growth doesn't even mean that strong stock performance is likely, and weak growth doesn't mean weak market performance is likely. That's what the historical data shows, according to a 2009 paper published by Rajiv Jain and Daniel Kranson of Vontobel Asset Management. It examined stock market return data from 16 developed countries from 1900 to 2002, and the returns' correlation to gross domestic product growth. (The paper used data from Elroy Dimson, Paul Marsh, and Mike Staunton's book Triumph of the Optimists: 101 Years of Global Investment Returns), with updated figures for 2001-02 from University of Florida professor Jay Ritter.) Jain and Kranson's conclusion: "The data clearly shows that, over long periods and when adjusted for inflation, stock market returns and GDP per capital growth are negatively correlated." At best, they added, "there is no relationship between GDP per capita and stock returns over the long term." Ritter also looked at similar data for 19 developed countries from 1970 to 2002, and from 13 other countries, mostly emerging markets, from 1988 through 2002. The data for the first group showed a negative correlation between per-capita GDP and equity returns, Jain and Kranson say; the data for the second group shows a "marginally positive correlation". How can that be? Shouldn't economic growth and stock market returns be attached at the hip? Well, a big reason for the lack of (or in some cases, negative) correlation involves expectations. Much like popular growth stocks, countries producing stronger growth are going to attract a lot of investors, which bids up the prices for stocks in those regions. Just look at how investors have been pouring money into emerging markets lately, while shunning the U.S., Europe, and other developed markets that are expected to produce slower growth. Much as with beaten-down value stocks, economies going through shorter-term slowdowns can thus present opportunities to "buy low". Expectations aren't the only reason stock returns and the economy often don't jive. Jain and Kranson offer several other reasons. Among them: GDP is analogous to sales; stock returns to corporate profits: GDP takes into account the value of goods and services produced in a country -- regardless of the margins being earned on those goods. If a company cuts prices and margins to boost sales, it will be adding to GDP, but not doing much for profits, which drive share prices. Globalization: Many of the largest companies in the world sell their products and services in a number of countries, not just their home markets. So when a U.S. firm has overseas operations that are bringing in lots of sales and profits, it's good for the company -- but not included in U.S. GDP. Not the "Full" Economy: The performance of private, government-owned, or newly-formed companies often isn't reflected in the stock market, but it does count toward GDP. There are other reasons to look far beyond GDP growth, too. For instance, in emerging markets, demand may drive excellent sales growth, and, therefore, strong GDP growth. But to make money for shareholders, corporations need to turn those sales into profits. For new, up-and-coming firms, it may take time to work out the kinks and become more efficient to get the most out of their sales. So, what does all of this mean? Does it mean we should hope for weak economic growth for the U.S.? Of course not. At the end of the day, the stock market is as strong as the companies behind its stocks, and successful companies over the long haul will spur solid economic growth. What it does mean, however, is that in the end, good investing comes back to finding value in individual companies, wherever they are located -- not making sweeping decisions based on one piece of macroeconomic data. Blindly dumping money into emerging market stocks because those markets are expected to grow GDP more quickly than others is no recipe for success. Similarly, avoiding the U.S. and other developed markets because of fears of prolonged anemic growth is equally narrow-minded. That's the tact that many investors are taking right now, however. Like a number of the gurus I follow, I believe the fears of prolonged slow U.S. growth are a) overblown, and b) helping create a myriad of buying opportunities in individual stocks. While focusing on slow-growth fears that they don't even know will come to fruition, investors are ignoring factors like valuations (which, for many strong companies' shares, are very cheap); interest rates (which, being incredibly low, mean fixed-income investments offer little competition to stocks); and the high levels of cash on the sidelines and on many companies' balance sheets (which they can put to use through share buybacks, acquisitions, or dividend payouts, all of which benefit shareholders). Even if growth is weak for an extended period -- which I don't think it will be -- those other factors are combining to make for some excellent opportunities right here in the U.S. And those who continue to focus solely on the macro forecasts are likely to regret not taking advantage of them.		Editor-in-Chief: John Reese Since Inception   Hot List 152.0% S&P 500 17.3% Accuracy 56.7% Beta 1.2 YTD   Hot List 4.5% S&P 500 5.3% Since Last Issue   Hot List 4.9% S&P 500 2.9% Avg. Fundamentals   Market Cap (mil) $13,872 PE Ratio 10.9 5 Yr EPS Growth 45.9% Yield 4.2% Rel. Strength 58 Portfolio Sectors Services 4 Technology 2 Consumer Cyclical 1 Energy 1 Financial 1 Healthcare 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: Joel Greenblatt Anyone who has ever put cash in the market knows that making money in stocks is hard. But what a lot of investors don't realize is that while it is difficult, it doesn't have to be complicated. You don't need incomprehensible, esoteric formulas and you don't need to spend every waking hour analyzing stocks -- Joel Greenblatt has proved that. Back in 2005, Greenblatt created a stir in the investment world with the publication of The Little Book that Beats The Market, a concise, easy-to-understand bestseller that showed how investors could produce outstanding long-term returns using his "Magic Formula" -- a purely quantitative approach had just two variables: return on capital and earnings yield. Greenblatt's back-testing found that focusing on stocks that rated highly in those areas would have produced a remarkable 30.8 percent return from 1988 through 2004, more than doubling the S&P 500's 12.4 percent return during that period. Greenblatt also posted impressive numbers in his money management experience, with his hedge fund, Gotham Capital, producing returns of 40 percent per year over a span of more than two decades. Written in an extremely layperson-friendly manner, Greenblatt's "Little Book" -- it's only 176 pages long and small enough to fit in your jacket pocket -- broke investing down into terms even an elementary schooler could understand. In fact, Greenblatt said he wrote the book as a way to teach his five children how to make money for themselves. Using several simple analogies, he explains a variety of stock market principles. One of these he often returns to involves Jason, a sixth-grade classmate of Greenblatt's youngest son who makes a bundle selling gum to fellow students. Greenblatt uses Jason's business as a jumping off point to explain issues like supply, demand, taxation, and rates of return. In reality, the "Magic Formula" is less about magic than it is about simple, common sense investment theory. As Greenblatt explains, the two-step formula is designed to buy stock in good companies at bargain prices -- something that other great value investors, like Warren Buffett, Benjamin Graham, and John Neff also did. The return on capital variable accomplishes the first part of that goal (buying good companies), because it looks at how much profit a firm is generating using its capital. The earnings yield variable, meanwhile, accomplishes the second part of the task -- buying those good companies' stocks on the cheap. The earnings yield is similar to the inverse of the price/earnings ratio; stocks with high earnings yields are taking in a relatively high amount of earnings compared to the price of their stock. The Details To choose stocks, Greenblatt simply ranked all stocks by return on capital, with the best being number 1, the second number 2, and so forth. Then, he ranked them in the same way by earnings yield. He then added up the two rankings, and invested in the stocks with the lowest combined numerical ranking. The slightly unconventional ways in which Greenblatt calculates earnings yield and return on capital also involve some good common sense -- and are particularly interesting given the recent credit crisis. For example, in figuring out the capital part of the return on capital variable and the earnings part of the earnings yield variable, he doesn't use simple earnings; instead, he uses earnings before interest and taxation. The reason: These parts of the equations should see how well a company's underlying business is doing, and taxes and debt payments can obscure that picture. In addition, in figuring earnings yield, Greenblatt divides EBIT not by the total price of a company's stock, but instead by enterprise value -- which includes not only the total price of the firm's stock, but also its debt. This give the investor an idea of what kind of yield they could expect if buying the entire firm -- including both its assets and its debts. In the past few months, we've seen how misleading conventionally derived P/E ratios and earnings yields could be, since earnings had been propped up by the use of huge amounts of debt. Greenblatt's earnings yield calculation is a way to find stocks that are producing a good earnings yield that isn't contingent on a high debt load. In my Greenblatt model, I calculate return on capital and earnings yield in the same ways that Greenblatt lays out in his book. We added the Greenblatt portfolio to our site in January of 2009, but have been tracking its performance internally for several years, and its underlying model has factored into our Hot List selections for the past three years or so. So far, the model has been an exceptional performer. Since we began tracking our 10-stock Greenblatt-based portfolio in late 2005, the S&P 500 has fallen about 7%, but the portfolio has gained about 50%, or 8.7% per year. The Greenblatt portfolio also did what few funds have done: limit losses in what for stocks was a terrible 2008, and handily beat the market in the 2009 rebound. It fell 26.3% in '08 -- not good, but much better than the S&P 500's 38.5% loss -- and surged 63.1% last year, vs. 23.5% for the S&P. This year it's been volatile. Greenblatt stresses that the strategy won't beat the market every month or even every year, and for much of 2010 the portfolio has significantly lagged the S&P. But it began to bounce back strongly recently, and is now in the black for the year (through Oct. 13), showing that patience is rewarded. One note: Because of the way financial and utility companies are financed (i.e. with large amounts of debt), Greenblatt excludes them from his screening process, so I do the same. He also doesn't include foreign stocks, so I exclude those from my model as well. Here's a look at the current holdings of my Greenblatt-based portfolio: Aeropostale (ARO) Bridgepoint Education Inc. (BPI) H&R Block, Inc. (HRB) China Yuchai International Limited (CYD) GameStop Corp. (GME) Almost Family, Inc. (AFAM) United Online, Inc. (UNTD) LHC Group (LHCG) VirnetX Holding Corporation (VHC) AmSurg Corp (AMSG) "Magic"? Or Discipline? While Greenblatt's methodology is completely quantitative, one of the most important aspects of his approach is psychological -- and it's something that I believe is critical to keep in mind in the current financial climate. To Greenblatt, the hardest part about using the Magic Formula isn't in the specifics of the variables; it's having the mental toughness to stick with the strategy, even during bad periods. If the formula worked all the time, everyone would use it, which would eventually cause the stocks it picks to become overpriced and the formula to fail. But because the strategy fails once in a while, many investors bail, allowing those who stick with it to get good stocks at bargain prices. In essence, the strategy works because it doesn't always work -- a notion that is true for any good strategy. News about Validea Hot List Stocks Dollar Tree Inc. (DLTR): Dollar Tree has announced that it is buying Canada's Dollar Giant Store Ltd. for approximately $52 million in cash, the firm's first expansion of retail operations outside the U.S. The deal is expected to close by mid-November, and includes 85 Dollar Giant stores, including substantially all assets, inventory, leasehold rights and intellectual property. A company official said the move gives Dollar Tree a platform for significant growth in the Canadian market. Sanofi-Aventis SA (SNY): Biotech firm Genzyme rejected Sanofi's $18.5 billion hostile takeover bid last week, saying that it was too low. Sanofi also announced that it will be cutting about 25% of its U.S. Pharmaceutical Operations workforce, eliminating about 1,700 jobs. The cuts, which will be finalized by mid-December, come as part of Sanofi's "ongoing transformation to better respond to patients and customers in a challenging healthcare marketplace," the firm said. Sanofi's U.S. Pharmaceutical segment will now focus on Diabetes, Atrial Fibrillation and Oncology. The restructuring is designed to position the firm for growth after the impact of patent expiries, as well as increase business development and "ensure appropriate investment in late-life cycle products," the company said. 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 CAAS CHINA AUTOMOTIVE SYSTEMS, INC. Auto & Truck Parts 100 HS HEALTHSPRING, INC Insurance (Accident & Health) 71 WDC WESTERN DIGITAL CORP. Computer Storage Devices 69 RIMM RESEARCH IN MOTION LIMITED (USA) Communications Equipment 68 LLEN L&L ENERGY, INC. Coal 58 SNY SANOFI-AVENTIS SA (ADR) Biotechnology & Drugs 58 GME GAMESTOP CORP. Retail (Technology) 57 DLTR DOLLAR TREE, INC. Retail (Department & Discount) 57 ARO AEROPOSTALE, INC. Retail (Apparel) 51 JOSB JOS. A. BANK CLOTHIERS, INC. Retail (Apparel) 41 Ticker Market Cap Date Added Start Price Current Price Return CAAS $461 4/16/2010 $21.39 $17.02 -20.4% HS $1,517 5/14/2010 $17.18 $26.52 54.4% WDC $6,763 7/9/2010 $31.59 $29.49 -6.6% RIMM $25,763 10/1/2010 $50.21 $49.12 -2.2% LLEN $261 10/1/2010 $8.35 $8.72 4.4% SNY $91,043 9/3/2010 $30.20 $34.89 15.5% GME $2,830 9/3/2010 $19.01 $18.82 -1.0% DLTR $6,302 9/3/2010 $46.03 $49.64 7.8% ARO $2,505 8/6/2010 $24.86 $27.09 9.0% JOSB $1,276 6/11/2010 $40.16 $46.37 15.5%

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 CAAS   |   HS   |   WDC   |   RIMM   |   LLEN   |   SNY   |   GME   |   DLTR   |   ARO   |   JOSB   |   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: 83% PROFIT MARGIN: [PASS] This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. CAAS's profit margin of 13.74% passes this test. RELATIVE STRENGTH: [FAIL] The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. Although CAAS's relative strength of 88 is below the acceptable level, yet it is very close. Keep an eye on the stock as it could move into the acceptable range. COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: [PASS] Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for CAAS (47.37% for EPS, and 36.17% 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, 13.68 %, 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 (0.19%) 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 0.36), 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 $317.7 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 $6.0 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 $17.02 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%).   HEALTHSPRING, INC Profile Strategy: P/E/Growth Investor Based on: Peter Lynch 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: 93% DETERMINE THE CLASSIFICATION: This methodology would consider HS a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (8.80) relative to the growth rate (46.12%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for HS (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. HS, whose sales are $2,866.3 million, needs to have a P/E below 40 to pass this criterion. HS's P/E of (8.80) is considered acceptable. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for HS is 46.1%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] HS 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. HS's Equity/Assets ratio (65.00%) 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. HS's ROA (11.34%) 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 HS (10.48%) 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 HS (19.53%) 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.   WESTERN DIGITAL CORP. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Western Digital Corporation (WD) designs, develops, manufactures and sells hard drives. It sells its products worldwide to original equipment manufacturers (OEMs) and original design manufacturers (ODMs) for use in computer systems, subsystems or consumer electronics (CE) devices, and to distributors, resellers and retailers. Its hard drives are used in desktop computers, notebook computers, and enterprise applications such as servers, workstations, network attached storage, storage area networks and video surveillance equipment. Its hard drives are used in CE applications, such as digital video recorders (DVRs), and satellite and cable set-top boxes (STBs). It also sells its hard drives as stand-alone storage products by integrating them into finished enclosures, embedding application software and offering the products as WD-branded external storage appliances for personal data backup and portable or expanded storage of digital music, video and other digital data. Analysis Guru Score: 100% DETERMINE THE CLASSIFICATION: This methodology would consider WDC a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (4.97) relative to the growth rate (38.09%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for WDC (0.13) 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. WDC, whose sales are $9,850.0 million, needs to have a P/E below 40 to pass this criterion. WDC's P/E of (4.97) 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 WDC was 5.04% last year, while for this year it is 5.69%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (0.64%) 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 WDC is 38.1%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for WDC (8.49%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company. 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 WDC (17.53%) 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 WDC (35.21%) is high enough to add to the attractiveness of this company.   RESEARCH IN MOTION LIMITED (USA) Profile Strategy: Growth Investor Based on: Martin Zweig Research In Motion Limited (RIM) is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software and services that support multiple wireless network standards, RIM provides platforms and solutions for seamless access to time-sensitive information, including e-mail, phone, short message service (SMS), Internet and intranet-based applications. RIM's portfolio of products, services and embedded technologies are used by organizations worldwide and include the BlackBerry wireless solution, the RIM Wireless Handheld product line, software development tools and other software and hardware. Its subsidiaries include Research In Motion Corporation, Research In Motion UK Limited and RIM Finance, LLC. On June 2, 2010, Harman International sold its software operating systems unit, QNX Software Systems, to the Company. 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. RIMM's P/E is 9.44, based on trailing 12 month earnings, while the current market PE is 16.00. 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. RIMM's revenue growth is 65.00%, while it's earnings growth rate is 61.08%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, RIMM passes this criterion. SALES GROWTH RATE: [PASS] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (31.1%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (23.7%) of the current year. Sales growth for the prior must be greater than the latter. For RIMM 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. RIMM's EPS ($1.46) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. RIMM's EPS for this quarter last year ($0.83) 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. RIMM's growth rate of 75.90% 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 RIMM is 30.54%. This should be less than the growth rates for the 3 previous quarters which are 59.42%, 41.11% and 23.21%. RIMM 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, 38.38%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 75.90%, (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, 75.90% must be greater than or equal to the historical growth which is 61.08%. RIMM 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. RIMM, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.64, 1.10, 2.26, 3.30 and 4.31, 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. RIMM's long-term growth rate of 61.08%, 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. RIMM's Debt/Equity (0.00%) is not considered high relative to its industry (39.79%) and passes this test.   L&L ENERGY, INC. Profile Strategy: Growth Investor Based on: Martin Zweig L & L Energy, Inc. (L & L) is engaged in the businesses of coal mining, coal washing, coal coking and coal wholesaling. The Company's operations are conducted in Yunnan and Guizhou provinces in the southwest region of the People's Republic of China. As of April 30, 2010, the Company had three operating subsidiaries: KMC, which has coal wholesale operations and Ping Yi Coal Mine (mining operations PYC); two coal mining operations (DaPuAn Mine and SuTsong Mine), including DaPuAn's coal washing operations (the 2 Mines or LLC), and L&L Yunnan Tianneng Industry Co. Ltd. (including Hong Xing coal washing and ZoneLin coking operations) (TNI). 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. LLEN's P/E is 6.27, based on trailing 12 month earnings, while the current market PE is 16.00. 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. LLEN's revenue growth is 72.62%, while it's earnings growth rate is 149.55%, 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: [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 (394.5%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (238.9%) of the current year. Sales growth for the prior must be greater than the latter. For LLEN 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. LLEN's EPS ($0.36) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. LLEN's EPS for this quarter last year ($0.12) 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. LLEN's growth rate of 200.00% 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 LLEN is 74.78%. This should be less than the growth rates for the 3 previous quarters, which are 180.00%, 277.78%, and 150.00%. LLEN 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, 191.43%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 200.00%, (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, 200.00% must be greater than or equal to the historical growth which is 149.55%. LLEN would therefore pass this test. EARNINGS PERSISTENCE: [FAIL] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. LLEN, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.03, 0.06, 0.01, 0.47, and 1.21, fails 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. LLEN's long-term growth rate of 149.55%, 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. LLEN's Debt/Equity (4.57%) is not considered high relative to its industry (84.01%) 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 LLEN, this criterion has not been met (insider sell transactions are 2, 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.   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. In October 2010, Siegfried Holding AG sold its PulmoJet Inhalation Project to the Company. 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 $44,299.1 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 2.40 passes the test. LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for SNY is $9,939.0 million, while the net current assets are $20,504.6 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 183.1% passes the EPS growth test. P/E RATIO: [PASS] The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. SNY's P/E of 10.71 (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 1.23, while the P/E is 10.71. SNY passes the Price/Book test.   GAMESTOP CORP. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch GameStop Corp. (GameStop) is a retailer of video game products and personal computer (PC) entertainment software. The Company sells new and used video game hardware, video game software and accessories, as well as PC entertainment software, and related accessories and other merchandise. As of January 30, 2010, the Company operated 6,450 stores in the United States, Australia, Canada and Europe, primarily under the names GameStop and EB Games. GameStop also operates the electronic commerce Website www.gamestop.com and publish Game Informer, a multi-platform video game magazine in the United States based on circulation, with approximately 4 million subscribers. During the fiscal year ended January 30, 2010 (fiscal 2009), GameStop operated its business in four segments: United States, Canada, Australia and Europe. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider GME a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (8.04) relative to the growth rate (31.10%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for GME (0.26) is very favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. GME, whose sales are $9,240.5 million, needs to have a P/E below 40 to pass this criterion. GME's P/E of (8.04) is considered acceptable. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for GME is 31.1%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for GME (16.94%) to be acceptable (equity is three to ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for GME (15.20%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for GME (15.79%) 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.   DOLLAR TREE, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Dollar Tree, Inc. (Dollar Tree) is an operator of discount variety stores offering merchandise at the fixed price of one dollar. At January 30, 2010, the Company operated 3,806 discount variety retail stores. Approximately 3,650 of these stores sell substantially all items for one dollar or less. The remaining stores, operating as Deal$, sell items for one dollar or less but also sell items for more than one dollar. Dollar Tree's stores operate under the names of Dollar Tree, Deal$ and Dollar Bills. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider DLTR a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (18.94) relative to the growth rate (21.20%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for DLTR (0.89) makes it favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. DLTR, whose sales are $5,537.8 million, needs to have a P/E below 40 to pass this criterion. DLTR's P/E of (18.94) is considered acceptable. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for DLTR is 21.2%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for DLTR (19.29%) to be acceptable (equity is three to ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for DLTR (6.20%) 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 DLTR (5.50%) 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: 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 1.08 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 1.08, 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.   JOS. A. BANK CLOTHIERS, INC. Profile Strategy: Patient Investor Based on: Warren Buffett 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: 92% 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, 0.30, 0.44, 0.62, 0.92, 1.30, 1.57, 1.82, 2.11, 2.56. Buffett would consider JOSB's earnings predictable. In fact EPS have increased every year. JOSB's long term historical EPS growth rate is 19.6%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 15.0% 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. JOSB 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 JOSB, over the last ten years, is 17.2%, 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 10.5%, 12.0%, 14.5%, 17.9%, 20.2%, 22.0%, 20.4%, 19.0%, 18.0%, 17.9%, and the average ROE over the last 3 years is 18.3%, thus passing this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: [PASS] Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for JOSB, over the last ten years, is 14.7% and the average ROTC over the past 3 years is 18.3%, which is high enough to pass. It is not enough that the average be at least 12%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROTC must be at least 9% for Buffett to feel comfortable that the ROTC is consistent. The ROTC for the last 10 years, from earliest to latest, is 9.2%, 9.2%, 12.1%, 11.4%, 15.4%, 17.5%, 17.0%, 19.0%, 18.0%, 17.9%, 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. JOSB's free cash flow per share of $2.46 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 $11.87 and compares it to the gain in EPS over the same period of $2.33. JOSB's management has proven it can earn shareholders a 19.6% 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: [NEUTRAL] 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. JOSB's shares outstanding have not fallen in either the current year or the last 3 or 5 years and so it fails 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 JOSB quantitatively. STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return. CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail] Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $2.86 and divide it by the current market price of $46.37. An investor, purchasing JOSB, could expect to receive a 6.17% initial rate of return. Furthermore, he or she could expect the rate to increase 15.0% 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 JOSB's initial yield of 6.17%, which will expand at an annual rate of 15.0%, 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] JOSB currently has a book value of $15.46. It is safe to say that if JOSB can preserve its average rate of return on equity of 17.2% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 17.2% and it will have a book value of $75.81 in ten years. If it can still earn 17.2% on equity in ten years, then expected EPS will be $13.07. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $13.07 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (16.2) (5 year average P/E in this case), which is 12.0 and you get JOSB's projected future stock price of $156.41. 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 $156.41. These numbers indicate that one could expect to make a 12.9% average annual return on JOSB's stock at the present time. Although, the return is slightly below the liking of Buffett, the return would still be somewhat acceptable. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 15.0%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $11.57. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (16.2) (5 year average P/E in this case), which is 12.0. This equals the future stock price of $138.50. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $138.50. 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 $46.37 and the future expected stock price, including the dividend pool, of $138.50. If you were to invest in JOSB at this time, you could expect a 11.6% average annual return on your money. Buffett likes to see a 15% return, and would even go down to 12%. 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 11.6% and 12.9%. 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 12.2% on JOSB stock for the next ten years, based on the current fundamentals. Buffett likes to see a 15% return, but nonetheless would accept this return, thus passing the criterion.   Watch List The Watch List contains the highest scoring stocks according to our guru consensus system that are not currently in the Hot List portfolio. We provide this list both for informational purposes and for investors who are not comfortable with a portfolio of ten stocks. Ticker Company Name Industry Guru Score CCME CHINA MEDIAEXPRESS HOLDINGS INC Advertising 73 LULU LULULEMON ATHLETICA INC. Apparel/Accessories 54 ROST ROSS STORES, INC. Retail (Apparel) 53 EZPW EZCORP, INC. Consumer Financial Services 52 CSH CASH AMERICA INTERNATIONAL, INC. Misc. Financial Services 52 APOL APOLLO GROUP, INC. Schools 51 NOV NATIONAL-OILWELL VARCO, INC. Oil Well Services & Equipment 50 EME EMCOR GROUP, INC. Construction Services 50 RTN RAYTHEON COMPANY Aerospace & Defense 48 ARCC ARES CAPITAL CORPORATION Misc. Financial Services 47

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