Executive Summary  |   Portfolio  |   Guru Analysis  |   Watch List

Executive Summary

November 6, 2015

The Economy While growth has slowed from earlier in the year, strong performance from the service sector has kept the economy chugging along in recent weeks. The private sector added 182,000 jobs in October, for example, according to payroll processor ADP. That's on the lower side for 2015, but it is still a pretty solid total. The Labor Department is scheduled to release its October jobs report today, and investors will no doubt be paying close attention to see if its numbers are in line with ADP's. The service sector continues to excel. It expanded in October for the 69th straight month, according to the Institute for Supply Management. The rate of expansion picked up from September, and was, in fact, the second-highest rate of the past year. New order growth accelerated from September's already strong pace, and employment conditions remained very strong. The manufacturing sector is a bit of a different story, however. While it expanded for the 34th straight month, according to ISM, it barely kept its head above water, with the group's manufacturing sector index coming in at 50.1 -- a reading of 50 demarcates the line between growth and contraction. New order growth did accelerate, but employment conditions worsened. Disappointing news also came from the housing market. New home sales fell 11.5% in September, according to the Census Bureau. That put them about 3% below where they were a year ago. Median sales prices rose, however, and are about 13.5% ahead of last year's pace. Another government report showed that gross domestic product rose at a pace of just 1.5% in the third quarter, well below the second quarter's 3.9% gain. One big reason for the decline was that businesses were working off an inventory glut, and thus did not spend much on restocking their wares. That was believed to cut off about 1.5 percentage points of GDP during the quarter. Consumer spending was solid, rising 3.2%. Personal income rose just 0.1% in September, meanwhile, its worst showing in several months, according to the Commerce Department. Real disposable personal income rose a decent 0.2%, while real personal consumption expenditures also increased 0.2%. A bit of deflation helped add to those numbers, as the real, after-inflation figures were actually higher than the unadjusted numbers. Amid all of this, the personal savings rate was 4.8%, up slightly from 4.7% in August. That's a pretty healthy level. Last but not least, gas prices have continued to slide. A gallon of regular unleaded on average cost $2.20 as of November 4, down from $2.29 a month earlier, according to AAA. That's more than 25% below where it was a year ago. Since our last newsletter, the S&P 500 returned 2.3%, while the Hot List returned 0.9%. So far in 2015, the portfolio has returned 0.7% vs. 2.0% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 225.8% vs. the S&P's 109.9% gain. Portfolio Update Overall, it has been a pretty good two weeks for the Hot List, but the performance of our individual holdings has varied wildly. Since our last newsletter, six of our holdings have gained ground and three have been in the red, with another right around break-even. Four of the holdings had gains or losses of about 9% or more. (Performance data as of mid-day trading on November 5.) The biggest winner was WisdomTree Financial (WETF), which was up more than 13%. The asset management firm reported third-quarter profit of $23.3 million, or 17 cents per share, on revenue of $80.8 million. Analysts surveyed by Zacks Investment Research expected earnings of 17 cents per share on revenue of $79.1 million. Shares of Wisdom Tree had been rising in the two weeks prior to the announcement, and they continued to move higher after. Our second-biggest winner was also a financial: Eagle Bancorp (EGBN). The Maryland-based small-cap gained about 9% since our last newsletter. Just before joining the portfolio on our last rebalancing, Eagle reported third-quarter earnings of $21.5 million, or 63 cents per share. That beat the 61 cents per share that analysts surveyed by Zacks Investment Research anticipated, and the earnings beat appears to have kept driving Eagle's shares higher over the past two weeks. Other nice winning positions for the past fortnight have been Sanderson Farms (SAFM) and Apple (AAPL), each of which gained about 5%. On the downside, however, we had two stocks that posted double-digit losses. Chart Industries (GTLS) tumbled 13% after announcing disappointing earnings. The Ohio-based diversified manufacturer reported third-quarter net income of $4.8 million, or 15 cents per share; when adjusted for non-recurring costs and severance costs earnings were 26 cents per share, according to the Associated Press. Analysts surveyed by Zacks Investment Research had expected earnings of 32 cents per share. Chart's revenue was $264 million for the quarter, beating forecasts of $255.9 million. But the earnings miss and a big decrease in its full-year EPS guidance spooked investors, driving shares much lower. The other big loser was Universal Insurance (UVE), which was down 10.5%. The Florida-based property and casualty insurer reported third quarter 2015 net income of $30.3 million, an increase of 42.0% over the same period in 2014 and a record in company history. Diluted EPS were $0.84, an increase of 37.7%, and also represented a company record. Total revenues increased by $53.5 million, or 51.7%, to $157.0 million. All that would seem to be very good news, as was the fact that the EPS results beat analysts' expectations by 25%, according to MarketBeat. Nevertheless, shares tumbled for reasons that were unclear. Given all of that, Universal bears watching going forward. The Hot List has been hovering around breakeven for the 2015 year. Hopefully the gains we've seen over the past few weeks will continue as we move into the final part of the year. We'll be back in two weeks, at which point we will rebalance the portfolio.		Editor-in-Chief: John Reese Since Inception   Hot List 225.8% S&P 500 109.9% Accuracy 54.5% Beta 1.2 YTD   Hot List 0.7% S&P 500 2.0% Since Last Issue   Hot List 0.9% S&P 500 2.3% Avg. Fundamentals   Market Cap (mil) $70,205 PE Ratio 17.7 5 Yr EPS Growth 30.2% Yield 1.0% Rel. Strength 70 Portfolio Sectors Financial 5 Services 1 Technology 1 Capital Goods 1 Consumer Cyclical 1 Consumer/Non-Cyclical 1
Guru Spotlight: James O'Shaughnessy If you have ever invested using a quantitative strategy, you probably owe a debt of gratitude to James O'Shaughnessy. In his 1996 book What Works on Wall Street, O'Shaughnessy helped bring the notion of quantitative strategies to the masses. Through his work with the Compustat database, O'Shaughnessy was able to determine how well or poorly dozens of different quantitative strategies would have fared over the previous four-plus decades, and he provided detailed results in his book. In subsequent versions of What Works on Wall Street, O'Shaughnessy has expanded on his research, testing more strategies and delving into analysis of specific sectors as well. The most recent version includes data from as far back as the 1920s up through the 2009 financial crisis. At 681 pages, it is chock-full of incredibly valuable information, and any investor would be wise to read it. This week, let's look briefly at the five strategies that O'Shaughnessy found would have produced the best risk-adjusted returns from 1965 through 2009, and see if there might be any similarities among them. (Spoiler alert: There are!) Strategy 1: Trending Value This was the top performer in O'Shaughnessy's study, producing a Sharpe ratio of 0.91. The strategy looks for stocks in the top decile based on a composite value factor that takes into account a stock's price/book, price/earnings, price/sales, EBITDA/enterprise value, and price/cash flow ratios, as well as its shareholder yield. Then, from among that group it buys the stocks with the highest six-month relative strengths. Strategy 2: Low Price/Book, High Momentum, High Shareholder Yield The strategy with the second-highest risk-adjusted returns was this approach, which generated a 0.87 Sharpe ratio. The approach looks for stocks that are in the top three deciles based on their price/book ratios; have 3- and 6-month relative strengths above the market average; and have the highest shareholder yields. Strategy 3: Consumer Staples Plus Utilities With a Sharpe ratio of 0.86, this combined portfolio came in third. It is made up of the 25 stocks from the Consumer Staples sector with the highest shareholder yield, and the 25 stocks from the Utility sector that score highest on the value composite outlined in Strategy 1. Strategy 4: Micro-Cap Stocks, Low Price/Book, High Momentum Also coming in with a Sharpe ratio of 0.86, this approach keys on the market's smallest stocks. It looks for micro-caps that are in the top three deciles based on price/book ratio, and which have 3- and 6-month relative strengths greater than 0. Then from that group it takes the top 50 based on 12-month relative strength. Strategy 5: Low Price/Book, High Momentum, High Shareholder Yield The fifth-best performer, this approach had a 0.85 Sharpe ratio. It looks for stocks that were in the top three deciles based on price/book ratio, and which also had 3- and 6-month relative strengths higher than the market average. From that group, it then takes the top 25 according to shareholder yield. These five strategies are a pretty diverse bunch, ranging from approaches that are size- and industry-specific to those that have free range over the entire market. So what ties them together? What jumps out at me is that each of these strategies uses both value and momentum components. Yes, value stocks do in and of themselves tend to beat the market over the long haul. But as I've noted in some past newsletters, adding a momentum component to value approach can create a juggernaut of a strategy. O'Shaughnessy helped alert me to this notion years ago when I came across his book. His Cornerstone Growth strategy, which is now the basis for my O'Shaughnessy-based growth model, looks for stocks that have increased earnings per share in each of the past five years and which have high 12-month relative strengths. But O'Shaughnessy noted that what really made the strategy work was its combination of momentum with a value component: the price/sales ratio. By purchasing high momentum stocks that are still cheap, you are getting stocks that the market is embracing, but which still have room to run. Other research has supported O'Shaughnessy's contention about the combination of value and momentum. So, too, has my own experience. Many of my top-performing guru-based portfolios use combinations of momentum and value. The Motley Fool approach looks at 12-month relative strength and the PE-to-growth ratio. The Hot List and our other multi-guru portfolio, the Top 5 Gurus portfolio, both use a myriad of metrics on both the growth/momentum side and the value side. A strategy that incorporates both momentum and value metrics is no magic bullet. Like any other strategy, such an approach will go through down periods. But by buying stocks with good momentum that are still cheap, you give yourself a great chance of beating the market over the long haul. O'Shaughnessy taught me that years ago, and my own experience has done nothing to make me doubt that belief. News about Validea Hot List Stocks WisdomTree Investments (WETF): On Oct. 30, WisdomTree announced it intends to enter the U.S. commodities ETF space through the acquisition of GreenHaven Commodity Services, LLC, the managing owner of the GreenHaven Continuous Commodity Index Fund, and GreenHaven Coal Services, LLC, the sponsor of the GreenHaven Coal Fund. The transaction is subject to approval by the GreenHaven Continuous Commodity Index Fund shareholders and customary closing conditions, and is expected to close in the fourth quarter of 2015. The transaction consideration is $11.75 million in cash. The continuous commodity fund had about $247 million in assets under management and the coal fund about $1 million in assets under management at the time the deal was announced. The financial impact of the transaction will not be material to WisdomTree earnings per share. 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 UVE UNIVERSAL INSURANCE HOLDINGS, INC. Insurance (Prop. & Casualty) 100 GTLS CHART INDUSTRIES, INC. Misc. Capital Goods 93 AAPL APPLE INC. Communications Equipment 83 SAFM SANDERSON FARMS, INC. Food Processing 74 FL FOOT LOCKER, INC. Retail (Apparel) 63 WETF WISDOMTREE INVESTMENTS, INC. Investment Services 58 PII POLARIS INDUSTRIES INC. Recreational Products 44 PNFP PINNACLE FINANCIAL PARTNERS Regional Banks 14 HRTG HERITAGE INSURANCE HOLDINGS INC Insurance (Prop. & Casualty) 6 EGBN EAGLE BANCORP, INC. Regional Banks 0 Ticker Market Cap Date Added Start Price Current Price Return UVE $1,147 8/28/2015 $24.08 $32.22 33.8% GTLS $592 3/13/2015 $33.50 $19.39 -42.1% AAPL $674,169 10/23/2015 $119.08 $120.92 1.5% SAFM $1,631 1/16/2015 $80.96 $72.78 -10.1% FL $9,612 7/31/2015 $70.55 $68.96 -2.3% WETF $2,791 9/25/2015 $17.01 $20.22 18.9% PII $7,496 10/23/2015 $110.33 $114.34 3.6% PNFP $2,227 10/23/2015 $54.68 $54.58 -0.2% HRTG $708 9/25/2015 $18.64 $23.61 26.7% EGBN $1,678 10/23/2015 $47.13 $50.23 6.6%

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer UVE   |   GTLS   |   AAPL   |   SAFM   |   FL   |   WETF   |   PII   |   PNFP   |   HRTG   |   EGBN   |   UNIVERSAL INSURANCE HOLDINGS, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool Universal Insurance Holdings, Inc. (UIH), with its wholly owned subsidiaries, is a vertically integrated insurance holding company performing all aspects of insurance underwriting, distribution and claims. The Company's offers homeowners' insurance through the Insurance Entities, Universal Property & Casualty Insurance Company (UPCIC) and American Platinum Property and Casualty Insurance Company (APPCIC). Substantially all aspects of insurance underwriting, distribution and claims processing are performed by the Company's subsidiaries. UPCIC, a wholly owned subsidiary of the Company, is a writer of homeowners insurance in Florida and has commenced its operations in North Carolina, South Carolina, Hawaii, Georgia, Massachusetts, Maryland, Delaware, and Indiana. APPCIC, also a wholly owned subsidiary, writes homeowners multi-peril insurance on Florida homes valued in excess of $1 million, which are limits and coverages currently not targeted through its affiliate UPCIC. Analysis Guru Score: 93% 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. UVE's profit margin of 20.11% passes this test. RELATIVE STRENGTH: [PASS] The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. UVE, with a relative strength of 94, satisfies this test. COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: [PASS] Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for UVE (37.70% for EPS, and 51.73% for Sales) are good enough to pass. INSIDER HOLDINGS: [FAIL] UVE's insiders should own at least 10% (they own 9.82%) of the company's outstanding shares. This does not satisfy the minimum requirement, and companies that do not pass this criteria are less attractive. 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. UVE's free cash flow of $2.70 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] UVE's profit margin has been consistent or even increasing over the past three years (Current year: 19.77%, Last year: 19.58%, Two years ago: 11.23%), 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 UVE's case. CASH AND CASH EQUIVALENTS: [PASS] UVE's level of cash $115.4 million passes this criteria. If a company is a cash generator, like UVE, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. "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 (UVE's is 0.33), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. UVE passes this test. The following criteria for UVE are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] UVE has not been significantly increasing the number of shares outstanding within recent years which is a good sign. UVE currently has 36.0 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. UVE's sales of $488.9 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". UVE passes the sales test. DAILY DOLLAR VOLUME: [PASS] UVE passes the Daily Dollar Volume (DDV of $17.7 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. UVE with a price of $32.22 passes the price test, even though it doesn't fall in the preferred range. 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: [PASS] UVE's income tax paid expressed as a percentage of pretax income this year was (42.81%) and last year (41.35%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.   CHART INDUSTRIES, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Chart Industries, Inc. (Chart) is a diversified manufacturer of engineered equipment engineered equipment for the industrial gas, energy, and biomedical industries. The Company's equipment and engineered systems are used for low-temperature and cryogenic applications. It operates through three segments: Energy & Chemicals (E&C), Distribution & Storage (D&S) and BioMedical. Its products include vacuum insulated containment vessels, heat exchangers, cold boxes and other cryogenic components. Its E&C and D&S segments manufacture products used in energy-related and industrial applications, such as the separation, liquefaction, distribution and storage of hydrocarbon and industrial gases. Through its BioMedical segment, it supplies cryogenic and other equipment used in the medical, biological research and animal breeding industries. The Company, through Thermax, Inc., provides cryogenic fluid vaporizers utilized in industrial gas, petro-chemical and liquefied natural gas applications. Analysis Guru Score: 75% 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. GTLS, with a market cap of $592 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. GTLS, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.69, 1.47, 2.36, 2.60 and 2.67, 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. GTLS's Price/Sales ratio of 0.54, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [FAIL] 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. GTLS has a relative strength of 20. This does not pass the final criterion. As a result, this methodology would not consider the stock even though it passed the previous three criteria.   APPLE INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Apple Inc. designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players and sells a variety of related software, services, peripherals, networking solutions and third-party digital content and applications. The Company's products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud and a variety of accessory, service and support offerings. The Company offers a range of mobile communication and media devices, personal computing products and portable digital music players, as well as a variety of related software, services, peripherals, networking solutions and third-party hardware and software products. The Company's primary products include iPhone, iPad, Mac, iPod, iTunes, Mac App Store, iCloud, Operating System Software, Application Software and Other Application Software. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider AAPL a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (13.15) relative to the growth rate (23.54%), 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 AAPL (0.56) 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. AAPL, whose sales are $233,715.0 million, needs to have a P/E below 40 to pass this criterion. AAPL's P/E of (13.15) 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 AAPL was 1.15% last year, while for this year it is 1.01%. Since inventory to sales has decreased from last year by -0.15%, AAPL 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 AAPL is 23.5%, 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 AAPL (54.01%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for AAPL should be good enough to compensate. 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 AAPL (8.31%) 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 AAPL (-1.73%) 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.   SANDERSON FARMS, INC. Profile Strategy: Value Investor Based on: Benjamin Graham Sanderson Farms, Inc. is a poultry processing company which is engaged in the production, processing, marketing and distribution of fresh and frozen chicken and other prepared chicken items. In addition, the Company is engaged in the processing, marketing and distribution of prepared chicken through its wholly owned subsidiary, Sanderson Farms, Inc. (Foods Division). It produces a range of processed chicken products and prepared chicken items. It sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, under the Sanderson Farms brand name to retailers, distributors, and casual dining operators in the south-eastern, south-western, north-eastern and western United States and to customers who resell frozen chicken into export markets. During the fiscal year ended October 31, 2013 (fiscal 2013), it processed 452 million chickens, or over 3.0 billion dressed pounds. Analysis Guru Score: 86% SECTOR: [PASS] SAFM 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. SAFM's sales of $2,884.7 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. SAFM's current ratio of 3.61 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 SAFM is $0.0 million, while the net current assets are $394.3 million. SAFM passes this test. LONG-TERM EPS GROWTH: [FAIL] 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. EPS for SAFM were negative within the last 5 years and therefore the company fails this criterion. 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. SAFM's P/E of 11.60 (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. SAFM's Price/Book ratio is 1.60, while the P/E is 11.60. SAFM passes the Price/Book test.   FOOT LOCKER, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Foot Locker, Inc. is a retailer of shoes and apparel. The Company operates in two segments: Athletic Stores and Direct-to-Customers. The Athletic Stores segment is an athletic footwear and apparel retailer whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction and SIX:02, as well as the retail stores of Runners Point Group, including Runners Point and Sidestep. The Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and the direct-to-customer subsidiary of Runners Point Group, which sell to customers through their Internet and mobile sites and catalogs. As of January 31, 2015, the Company operated 3,423 primarily mall-based stores in the United States, Canada, Europe, Australia and New Zealand. As of January 31, 2015, the Company operated a total of 78 franchised stores, of which 31 are in the Middle East, 27 in Germany and Switzerland, and 20 in the Republic of Korea. 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. FL, with a market cap of $9,612 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. FL, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.08, 1.80, 2.58, 2.85 and 3.56, 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. FL's Price/Sales ratio of 1.32, 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. FL, whose relative strength is 86, is in the top 50 and would pass this last criterion.   WISDOMTREE INVESTMENTS, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch WisdomTree Investments, Inc. is an asset management company that focuses on exchange-traded funds (ETFs). The Company's family of ETFs includes fundamentally weighted funds that track its own indexes, funds that track third party indexes and actively managed funds. The Company distributes its ETFs through all major channels within the asset management industry, including brokerage firms, registered investment advisers, institutional investors, private wealth managers and discount brokers. Most of its index-based funds employ a fundamental weighted investment methodology, which weights securities on the basis of factors, such as dividends or earnings, whereas most other ETF industry indexes use a capitalization weighted methodology. In addition, it also offers actively managed ETFs, which are ETFs that are not-based on a particular index but rather are actively managed with complete transparency into the ETF's portfolio on a daily basis. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: This methodology would consider WETF a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (49.42) relative to the growth rate (112.17%), 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 WETF (0.44) 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. WETF, whose sales are $238.4 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 WETF is 112.2%, based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, which is considered too fast. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] WETF 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. WETF's Equity/Assets ratio (82.00%) 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. WETF's ROA (25.36%) 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 WETF (2.37%) 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 WETF (5.92%) 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.   POLARIS INDUSTRIES INC. Profile Strategy: Patient Investor Based on: Warren Buffett Polaris Industries Inc. (Polaris) designs, engineers and manufactures off-road vehicles (ORV), including all-terrain vehicles (ATV) and side-by-side vehicles for recreational and utility use, snowmobiles, motorcycles and small vehicles (SV). These products are sold through dealers and distributors located in the United States, Canada and Europe. The Company's ORVs include core ATVs, and RANGER and RZR side-by-side vehicles. The Company produces a range of snowmobiles, consisting of 32 models, ranging from youth models to utility and economy models to performance and competition models. Polaris' Motorcycles division consists of Victory, Indian motorcycles and three-wheel roadster motorcycle, Slingshot. The Company offer products in the light-duty hauling, people mover and urban/suburban commuting sub-sectors of the small vehicles industry. The Company produces or supplies a range of replacement parts and accessories for its product lines. 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 1.57, 1.36, 1.55, 1.75, 1.53, 2.14, 3.20, 4.40, 5.40, 6.65. Buffett would consider PII's earnings predictable, although earnings have declined 2 time(s) in the past seven years, with the most recent decline 6 years ago. The dips have totaled 25.9%. PII's long term historical EPS growth rate is 16.1%, based on the 10 year average EPS growth rate, 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. PII has a debt of 311.8 million and earnings of 473.7 million, which could be used to pay off the debt in less than two years, which is considered exceptional. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [PASS] Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for PII, over the last ten years, is 42.1%, 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 34.8%, 57.7%, 61.3%, 82.9%, 48.8%, 39.5%, 43.8%, 43.7%, 66.2%, 51.2%, and the average ROE over the last 3 years is 53.7%, 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 PII, over the last ten years, is 33.2% and the average ROTC over the past 3 years is 40.6%, which is high enough to pass. It is not enough that the average be at least 12%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROTC must be at least 9% for Buffett to feel comfortable that the ROTC is consistent. The ROTC for the last 10 years, from earliest to latest, is 33.2%, 23.1%, 28.4%, 33.7%, 24.7%, 31.1%, 36.3%, 38.0%, 43.2%, 40.7%, thus passing this criterion. LOOK AT CAPITAL EXPENDITURES: [PASS] Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. PII's free cash flow per share of $2.89 is positive, indicating that the company is generating more cash that it is consuming. This is a favorable sign, and so the company passes this criterion. LOOK AT MANAGEMENT'S USE OF RETAINED EARNINGS: [PASS] Buffett likes to see if management has spent retained earnings in a way that benefits shareholders. To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $19.61 and compares it to the gain in EPS over the same period of $5.08. PII's management has proven it can earn shareholders a 25.9% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work. HAS THE COMPANY BEEN BUYING BACK SHARES: [BONUS PASS] Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. PII's shares outstanding have fallen over the past five years from 68,470,001 to 67,000,000, 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 PII quantitatively. STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return. CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail] Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $7.07 and divide it by the current market price of $114.34. An investor, purchasing PII, could expect to receive a 6.18% 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 3.15%. Compare this with PII's initial yield of 6.18%, 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] PII currently has a book value of $14.29. It is safe to say that if PII can preserve its average rate of return on equity of 42.1% and continues to retain 67.44% of its earnings, it will be able to sustain an earnings growth rate of 28.4% and it will have a book value of $174.14 in ten years. If it can still earn 42.1% on equity in ten years, then expected EPS will be $73.34. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $73.34 and multiply them by the lower of the 5 year average P/E ratio (21.8) or current P/E ratio (current P/E in this case), which is 16.2 and you get PII's projected future stock price of $1,186.63. 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 $53.75. This gives you a total dollar amount of $1,240.38. These numbers indicate that one could expect to make a 26.9% average annual return on PII'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 15.0%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $28.60. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (21.8) or current P/E ratio (current P/E in this case), which is 16.2. This equals the future stock price of $462.78. Add in the total expected dividend pool of $53.75 to get a total dollar amount of $516.53. 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 $114.34 and the future expected stock price, including the dividend pool, of $516.53. If you were to invest in PII at this time, you could expect a 16.28% average annual return on your money. Buffett would consider this a great return. LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [PASS] Based on the two different methods, you could expect an annual compounding rate of return somewhere between 16.3% and 26.9%. 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 21.6% on PII stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   PINNACLE FINANCIAL PARTNERS Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Pinnacle Financial Partners, Inc. (Pinnacle) is a bank holding company. Pinnacle operates through its wholly owned subsidiary, Pinnacle Bank. The Company operates as a community bank primarily in the urban markets of Nashville and Knoxville, Tennessee. As an urban community bank, Pinnacle provides the personalized service associated with small community banks, while seeking to offer the products and services, such as investments and treasury management, offered by large regional and national banks. Pinnacle Bank offers an array of convenience-centered products and services, including 24-hour telephone and internet banking, mobile banking, debit and credit cards, direct deposit, remote deposit and cash management services for small- to medium-sized businesses. In addition, Pinnacle Bank is associated with a network of automated teller machines of other financial institutions that its clients are able to use throughout Tennessee and other regions across the nation. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider PNFP a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (22.66) relative to the growth rate (28.55%), 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 PNFP (0.79) makes it 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. PNFP, whose sales are $230.9 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 PNFP is 28.6%, based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, which is acceptable. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] PNFP 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. PNFP's Equity/Assets ratio (13.00%) is 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. PNFP's ROA (1.21%) 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 PNFP (4.05%) 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 PNFP (-4.40%) 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.   HERITAGE INSURANCE HOLDINGS INC Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Heritage Insurance Holdings, Inc. (Heritage Insurance), formerly Heritage Insurance Holdings, LLC, is a property and casualty insurance holding company. The Company is engaged in providing personal and commercial residential insurance. Through Its subsidiary, Heritage Property & Casualty Insurance Company (Heritage P&C), it provides personal residential insurance for single-family homeowners and condominium owners, rental property insurance and commercial residential insurance in the state of Florida. The Company is vertically integrated and control or manage all aspects of insurance underwriting, actuRoboto analysis, distribution and claims processing, and adjusting. It has approximately 207,000 personal residential policies in force and approximately 2,400 commercial residential policies in force. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: This methodology would consider HRTG a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (7.76) relative to the growth rate (51.34%), 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 HRTG (0.15) 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. HRTG, whose sales are $378.9 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 HRTG is 51.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered too fast. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] HRTG 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. HRTG's Equity/Assets ratio (39.00%) 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. HRTG's ROA (13.35%) 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 HRTG (30.71%) 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 HRTG (22.66%) 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.   EAGLE BANCORP, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Eagle Bancorp, Inc. is a bank holding company for EagleBank (the Bank). The Bank is the Company's principal operating subsidiary. The Bank is a chartered commercial bank. The Bank operates twenty two banking offices: seven in Montgomery County, Maryland; five located in the District of Columbia, and ten in Northern Virginia. The Bank offers a range of commercial banking services to its business and professional clients, as well as consumer banking services to individuals living or working in the service area. The Bank also provides commercial banking services to sole proprietorships, small, medium and large-sized businesses, partnerships, corporations, non-profit organizations and associations, and investors. The Bank offers a range of retail banking services to accommodate the individual needs of both corporate customers as well as the community the Bank serves. The Bank also offers online banking, mobile banking and a remote deposit service. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider EGBN a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (21.45) relative to the growth rate (24.78%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for EGBN (0.87) makes it 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. EGBN, whose sales are $242.0 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 EGBN is 24.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] EGBN 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. EGBN's Equity/Assets ratio (13.00%) is 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. EGBN's ROA (1.52%) 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 EGBN (3.88%) 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 EGBN (-3.57%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.   Watch List The Watch List contains the highest scoring stocks according to our guru consensus system that are not currently in the Hot List portfolio. We provide this list both for informational purposes and for investors who are not comfortable with a portfolio of ten stocks. Ticker Company Name Industry Guru Score VLO VALERO ENERGY CORPORATION Oil & Gas Operations 91 TBI TRUEBLUE INC Business Services 74 HOMB HOME BANCSHARES INC Regional Banks 74 SYNT SYNTEL, INC. Computer Services 73 TSO TESORO CORPORATION Oil & Gas Operations 73 AFSI AMTRUST FINANCIAL SERVICES INC Insurance (Prop. & Casualty) 71 OUTR OUTERWALL INC Recreational Activities 64 FNBC FIRST NBC BANK HOLDING COMPANY Regional Banks 62 AGO ASSURED GUARANTY LTD. Insurance (Prop. & Casualty) 61 CALM CAL-MAINE FOODS INC Fish/Livestock 61

Disclaimer

The names of individuals (i.e., the 'gurus') appearing in this report are for identification purposes of his methodology only, as derived by Validea.com from published sources, and are not intended to suggest or imply any affiliation with or endorsement or even agreement with this report personally by such gurus, or any knowledge or approval by such persons of the content of this report. All trademarks, service marks and tradenames appearing in this report are the property of their respective owners, and are likewise used for identification purposes only. Validea is not registered as a securities broker-dealer or investment advisor either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. Validea is not responsible for trades executed by users of this site based on the information included herein. The information presented on this website does not represent a recommendation to buy or sell stocks or any financial instrument nor is it intended as an endorsement of any security or investment. The information on this website is generic by nature and is not personalized to the specific situation of any individual. The user therefore bears complete responsibility for their own investment research and should seek the advice of a qualified investment professional prior to making any investment decisions. Performance results are based on model portfolios and do not reflect actual trading. Actual performance will vary based on a variety of factors, including market conditions and trading costs. Past performance is not necessarily indicative of future results. Individual stocks mentioned throughout this web site may be holdings in the managed portfolios of Validea Capital Management, a separate asset management firm founded by Validea.com founder John Reese. Validea Capital Management, which is a separate legal entity and an SEC registered investment advisory firm, uses, in part, the strategies on the web site to select stocks for its clients.