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Executive Summary	July 19, 2013

The Economy The housing rebound has been driving the U.S. economy for several months, but over the past few weeks other areas -- including the labor market, industrial arena, and consumer sector -- have been supplying the good news. For starters, the private sector added 202,000 jobs in June, the Labor Department said, the third straight month the figure has been around 200,000. Wages also increased, and average weekly earnings are now 2.5% above where they were a year ago -- not tremendous growth, but significantly better than inflation. Most of the jobs gained in June came from the service sector, but manufacturing appears to have picked up a bit, too. New Federal Reserve data showed that industrial production increased 0.3% in June, after being flat in May. The gains were driven by a 0.3% increase in manufacturing output and a 0.8% increase in mining output. Utility output dropped 0.1% Retail sales, meanwhile, increased 0.4% in June, according to the Commerce Department. They are now 3.7% above where they were a year ago. The June increase was driven largely by a big jump in auto sales, which likely has something to do with the rebound in the housing sector, as truck sales have been quite strong. As for housing, the latest report actually wasn't too good. Housing starts fell 9.9% in June, according to the Census Bureau, while permit issuance for new construction was down 7.5%. Starts are now about 8% above their year-ago level, and permit issuance is about 10% above where it was a year ago. Those figures are much lower than the year-over-year gains we've been seeing in recent months. But as we get further into the housing recovery, the year-over-year comparisons get more difficult, and one down month does not make a trend. Overseas, much of the focus remains on China. GDP in the Asian power grew at a 7.5% clip in the second quarter, according to government data, down from 7.7% in the first quarter. Industrial output for June, meanwhile, was weaker than expected, growing at 8.9%, The New York Times reported. Retail sales were better than expected, however, rising 13.3% in June. Though China's growth does seem to be slowing down, there are two key things to remember about the numbers: First, Chinese policymakers have been engineering a slowdown to make sure the country's economy doesn't get overheated, so, while the slowdown may be a bit greater than anticipated, it shouldn't come as a shock. In addition, China's government isn't the most transparent, so it's hard to say exactly how big the slowdown is. For now, perhaps the best we can say is that growth is slowing, but not to an overly troubling degree. Since our last newsletter, the S&P 500 returned 3.5%, while the Hot List returned 5.3%. So far in 2013, the portfolio has returned 27.4% vs. 18.5% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 245.6% vs. the S&P's 68.9% gain.		Editor-in-Chief: John Reese Since Inception   Hot List 245.6% S&P 500 68.9% Accuracy 57.0% Beta 1.2 YTD   Hot List 27.4% S&P 500 18.5% Since Last Issue   Hot List 5.3% S&P 500 3.5% Avg. Fundamentals   Market Cap (mil) $50,430 PE Ratio 11.9 5 Yr EPS Growth 22.8% Yield 2.0% Rel. Strength 74 Portfolio Sectors Energy 3 Financial 2 Consumer Cyclical 2 Conglomerates 1 Services 1 Technology 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. Portfolio Update The solid economic data, combined with more comfort with the Federal Reserve's quantitative easing plans, have made for a good fortnight for the broader market and the Hot List. As of early afternoon trading on July 18, three of the portfolio's holdings had notched double-digit gains since our last newsletter. Florida property and casualty insurer HCI Group was leading the way with a 15.4% gain. There didn't appear to be a specific catalyst, but as a small-cap financial, HCI tends to be very sensitive to economic sentiment, and the good economic news is likely a big part of its rise. USANA Health Sciences, meanwhile, continued its meteoric rise, gaining 11.3%. That put the nutritional supplement product company's shares up more than 140% since its Dec. 21 entrance into the portfolio. And hard drive maker Western Digital gained 10.1%. While it and USANA were likely boosted by the economic data, Western also may have been helped by its July 10 announcement that it would be buying data storage software provider VeloBit for an undisclosed sum. Stamps.com was the lone Hot List holding in the red, down less than 1% after an analyst downgraded the stock from "buy" to "neutral" on July 16. Prior to that, the stock had actually been performing well, gaining nearly 7% since our last newsletter. The downgrade caused it to tumble, and it was then downgraded by my Motley Fool-based strategy on July 17 since its relative strength fell. Shares did start to rebound on Wednesday and Thursday, though. We'll have to wait two weeks until our next rebalancing to see whether all of this affects its place in the portfolio. Guru Spotlight: Kenneth Fisher For decades, the price-to-earnings ratio has been the most widely used valuation measure for stock investors, and a key tool in the arsenals of many of the gurus I follow. While legendary investors like Benjamin Graham, Peter Lynch, and John Neff all used the ratio differently, they and many others agreed that the ratio itself was a key to finding bargain-priced stocks. The investing public and media seems to share their view, with the P/E ratio having long been the only valuation metric that most newspapers include in their daily stock listings. But in 1984, Kenneth Fisher sent a shockwave through the P/E-conscious investment world. Fisher -- the son of Phillip Fisher, who is known as the "Father of Growth Stock Investing" -- thought there was a major hole in the P/E ratio's usefulness. Part of the problem, he explained in his book Super Stocks, is that earnings -- even earnings of good companies -- can fluctuate greatly from year to year. The decision to replace equipment or facilities in one year rather than in another, the use of money for new research that will help the company reap profits later on, and changes in accounting methods can all turn one quarter's profits into the next quarter's losses, without regard for what Fisher thought was truly important in the long term -- how well or poorly the company's underlying business was performing. While earnings can fluctuate, Fisher found that sales were far more stable. In fact, he found that the sales of what he termed "Super Companies" -- those that were capable of growing their stock price 3 to 10 times in value in a period of 3 to 5 years -- rarely decline significantly. Because of that, he pioneered the use of a new way to value stocks: the price-to-sales ratio (PSR), which compared the total price of a company's stock to the sales the company generated. Fisher's findings -- and his results -- helped make the PSR a common part of investment parlance, and helped make him one of the most well-known investors in the world. (He is a perennial member of Forbes' list of "The 400 Richest Americans", his money management firm oversees tens of billions of dollars, and he is one of Forbes' longest running magazine columnists.) The common sense, mostly quantitative approach he laid out in Super Stocks also caught my attention, and led me to create my Fisher-based Guru Strategy. It's important to note that today, Fisher says his approach to investing has evolved quite a bit since Super Stocks. The key to winning big on Wall Street is knowing something that other people don't, he believes, and when too many people became familiar with PSR investing, he says he needed to find other ways to exploit the market. So why have I continued to use my Super Stocks-based model? Two reasons: First, Fisher's publisher reissued the book in 2007, with the same PSR focus. Second, the strategy flat out works. Since its July 2003 inception, my 10-stock Fisher-based portfolio has gained 256.4%, or 13.5% annualized, while the S&P 500 gained just 68.2%, or 5.3% annualized (figures through July 15). That makes it one of my most successful long-term strategies. Price-to-Sales and "The Glitch" Fisher is a student of investor psychology, and his observations about investor behavior are what led to his PSR discovery. Often, he found, companies will have a period of strong early growth and become the darlings of Wall Street, raising expectations to unrealistic levels. Then, they then have a setback. Their earnings drop, or continue to grow but simply don't keep pace with Wall Street's lofty expectations. Their stocks can then plummet as investors overreact and sell, thinking they've been led astray. But while investors overreact, Fisher believed that these "glitches" are often simply a part of a firm's maturation. Good companies with good management identify the problems, solve them, and move forward, and as they do the stock's price begins to rise again. If you can buy a stock when it hits a glitch and its price is down, you can make a bundle by sticking with it until it rights the ship and other investors jump on board. The key in all of this was finding a way to evaluate a firm when its earnings were down, or when it was losing money (remember, you can't use a P/E ratio to evaluate a company that is losing money, because it has no earnings). The answer: by looking at sales, and the PSR. According to the model I base on Fisher's writings, stocks with PSRs below 1.5 are good values. And the real winners are those with PSR values under 0.75 -- that's the sign of a Super Stock. To find the PSR, Fisher says to take the total value of a company's stock, i.e. its market cap (the per-share price multiplied by the number of shares outstanding). We then divide that number by the firm's trailing 12-month sales. One note: Because companies in what Fisher called "smokestack" industries -- that is, industrial or manufacturing type firms that make the everyday products we use -- grow slowly and don't earn exceptionally high margins, they don't generate a lot of excitement or command high prices on Wall Street. Their PSRs thus tend to be lower than those of companies that produce more exciting products, Fisher said. He adjusted his PSR target for these firms, and the model I base on his writings looks for smokestack firms with PSRs between 0.4 and 0.8; it is particularly high on those with PSR values under 0.4. Beyond the PSR While the PSR was key to Fisher's strategy, he warned not to rely exclusively on it. Terrible companies can have low PSRs simply because the investment world knows they are headed for financial ruin. Other quantitative measures Fisher used include profit margins (he wanted three-year average net margins to be at least 5%; the debt/equity ratio (this should be no greater than 40%, and is not applied to financial firms); and earnings growth (the inflation-adjusted long-term EPS growth rate should be at least 15% per year). Fisher also made an interesting observation about companies in the technology and medical industries. He saw research as a commodity, and to measure how much Wall Street valued the research that a company did, he compared the value of the company's stock (its market cap) to the money it spends on research. Price/research ratios less than 5% were the best case, and those between 5 and 10% were still indicative of bargains. Those between 10 and 15% were borderline, while those over 15% should be avoided. One of the Best The variety of variables in my Fisher-based model are a big part of why I think it continues to work, long after the PSR has become a well-known stock analysis tool. While it uses the PSR as its focal point, it also makes sure firms have strong profit margins, earnings growth, and cash flows, and low debt/equity ratios. That well-rounded approach helped it get through one of the worst periods for the broader market in history and stay far, far ahead of the market over the long haul -- all while the PSR has been a well-known investing tool. I expect this solid approach will continue to pay dividends over the long haul. Now, here's a look at the stocks that currently make up my 10-stock Fisher-based portfolio. Lear Corporation (LEA) Zagg Inc. (ZAGG) HollyFrontier Corp. (HFC) Telecom Argentina (TEO) Ascena Retail Group (ASNA) Bridgepoint Education (BPI) Royal Dutch Shell Plc (RDS.A) USANA Health Sciences, Inc. (USNA) Williams-Sonoma Inc. (WSM) Signet Jewelers Ltd. (SIG) News about Validea Hot List Stocks Western Digital (WDC): Western Digital said on July 10 that it had bought data storage software provider VeloBit for an undisclosed amount, the Associated Press reported. VeloBit is a privately held, Massachusetts-based company that makes software that increases storage system performance. Western Digital said the move is part of its strategy to increase the overall value of data-center storage products by integrating its solid-state drives with software, AP reported. Chevron Corporation (CVX): Chevron has signed the first agreement with Argentina's government since it nationalized YPF SA in 2012, paying $1.24 billion to help develop shale oil and natural gas in Vaca Muerta, the second-largest shale gas deposit and fourth-largest shale oil reservoir in the world, Bloomberg reported. While the initial investment is $1.24 billion, the deal may reach as much as $15 billion eventually, Bloomberg stated. Argentina had seized control of YPF from Spain's Repsol SA a little over a year ago to help slow rapidly rising fuel imports. 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 HCI HCI GROUP INC Insurance (Prop. & Casualty) 100 LEA LEAR CORPORATION Auto & Truck Parts 75 USNA USANA HEALTH SCIENCES, INC. Conglomerates 70 WSM WILLIAMS-SONOMA, INC. Furniture & Fixtures 66 AFSI AMTRUST FINANCIAL SERVICES, INC. Insurance (Prop. & Casualty) 65 HFC HOLLYFRONTIER CORP Oil & Gas Operations 63 RDS.A ROYAL DUTCH SHELL PLC (ADR) Oil & Gas - Integrated 59 CVX CHEVRON CORPORATION Oil & Gas - Integrated 57 WDC WESTERN DIGITAL CORP Computer Storage Devices 30 STMP STAMPS.COM INC. Retail (Catalog & Mail Order) 26 Ticker Market Cap Date Added Start Price Current Price Return HCI $380 6/7/2013 $34.20 $34.84 1.9% LEA $6,080 5/10/2013 $60.48 $65.76 8.7% USNA $1,108 12/21/2012 $33.83 $82.15 142.8% WSM $5,709 5/10/2013 $56.93 $58.74 3.2% AFSI $2,690 7/5/2013 $39.36 $39.91 1.4% HFC $8,325 4/12/2013 $46.83 $40.99 -12.5% RDS.A $219,699 3/15/2013 $66.20 $67.71 2.3% CVX $243,224 5/10/2013 $123.23 $125.47 1.8% WDC $16,464 7/5/2013 $64.51 $69.65 8.0% STMP $618 6/7/2013 $38.96 $40.01 2.7%

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 HCI   |   LEA   |   USNA   |   WSM   |   AFSI   |   HFC   |   RDS.A   |   CVX   |   WDC   |   STMP   |   HCI GROUP INC Profile Strategy: P/E/Growth Investor Based on: Peter Lynch HCI Group Inc, formerly Homeowners Choice, Inc., is a holding company. The Company, through its subsidiaries, is engaged in the property and casualty insurance business. Through Homeowners Choice Property & Casualty Insurance Company, Inc. (HCPC) and subsidiaries, primarily Homeowners Choice Managers, Inc. (HCM), Southern Administration, Inc., Claddaugh Casualty Insurance Company, Ltd., and its subsidiary, HCPCI Holdings LLC, it provides property and casualty homeowners' insurance, condominium-owners' insurance and tenants' insurance to individuals owning property in Florida. Its subsidiaries also include TV Investment Holdings LLC, which owns and operates a marina facility located in Florida; Unthink Technologies Private Limited. During the year ended December 31, 2011, it organized TV Investment Holdings LLC, HCI Holdings LLC and HCI Technical Resources, Inc. Analysis Guru Score: 100% DETERMINE THE CLASSIFICATION: This methodology would consider HCI a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (8.57) relative to the growth rate (31.66%), 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 HCI (0.27) 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. HCI, whose sales are $183.2 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. EPS GROWTH RATE: [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 HCI is 31.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] HCI 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. HCI's Equity/Assets ratio (34.00%) 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. HCI's ROA (13.86%) 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 HCI (28.24%) 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 HCI (49.57%) is considered favorable.   LEAR CORPORATION Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Lear Corporation is a tier 1 supplier to the global automotive industry. The Company supplies its products to automotive manufacturers with automotive seat systems and related components, as well as electrical distribution systems and related components. The Company has two segments: seating and electrical power management systems (EPMS). The seating segment includes seat systems and related components, such as seat frames, recliner mechanisms, seat tracks, seat trim covers, headrests and seat foam. The EPMS segment includes electrical distribution systems for traditional powertrain vehicles, as well as for hybrid and electric vehicles. As of December 31, 2011, it had 20 joint ventures located throughout Asia, as well as five in North America, two in Europe and Africa and one with operations in all three regions. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider LEA a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (5.13) relative to the growth rate (24.33%), based on the average of the 2 and 5 year historical and the current year 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 LEA (0.21) 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. LEA, whose sales are $14,870.1 million, needs to have a P/E below 40 to pass this criterion. LEA's P/E of (5.13) 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 LEA was 4.51% last year, while for this year it is 4.99%. 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 (0.49%) 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 LEA is 24.3%, based on the average of the 2 and 5 year historical and the current year eps growth rates, which is considered very good. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for LEA (31.45%) to be normal (equity is approximately twice debt). FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for LEA (3.30%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for LEA (5.47%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.   USANA HEALTH SCIENCES, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool USANA Health Sciences, Inc. develops and manufactures science-based nutritional and personal care products. The Company has operations in 15 markets worldwide, where it distributes and sells its products by way of direct selling. The Company reports operations in two geographic regions: North America and Asia Pacific, which is further divided into three sub-regions; Southeast Asia/Pacific, Greater China, and North Asia. North America includes the United States, Canada, Mexico, and direct sales from the United States to the United Kingdom and the Netherlands. Southeast Asia/Pacific includes Australia, New Zealand, Singapore, Malaysia, and the Philippines; Greater China includes Hong Kong, Taiwan and China; and North Asia includes Japan and South Korea. The Company's customer base consists of two types of customers: Associates and Preferred Customers. As of December 31, 2011, the Company had 222,000 active Associates and 64,000 active Preferred Customers worldwide. Analysis Guru Score: 76% 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. USNA's profit margin of 10.62% 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. USNA, with a relative strength of 91, satisfies this test. COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: [FAIL] 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 USNA (42.22% for EPS, and 9.71% for Sales) are not good enough to pass. INSIDER HOLDINGS: [PASS] USNA's insiders should own at least 10% (they own 52.77% ) 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. USNA's free cash flow of $5.65 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] USNA's profit margin has been consistent or even increasing over the past three years (Current year: 10.24%, Last year: 8.72%, Two years ago: 8.82%), 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 USNA's case. CASH AND CASH EQUIVALENTS: [FAIL] USNA's level of cash and cash equivalents per sales, 10.67 %, does not pass this criteria of roughly 20%(a number we determined to be appropriate based on various examples). USNA 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 USNA was 6.35% last year, while for this year it is 5.62%. Since the inventory to sales is decreasing by -0.73% 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 USNA was 1.65% last year, while for this year it is 2.17%. 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] USNA's trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don't need to borrow money in order to grow. "THE FOOL RATIO" (P/E TO GROWTH): [FAIL] The "Fool Ratio" is an extremely important aspect of this analysis. The methodology says consider holding the shares when the company's Fool Ratio is greater than 0.65 (USNA's is 0.82), but initial purchases in this range are unfavorable. The following criteria for USNA are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] USNA has not been significantly increasing the number of shares outstanding within recent years which is a good sign. USNA currently has 14.0 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: [FAIL] 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. USNA's sales of $663.7 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years. DAILY DOLLAR VOLUME: [PASS] USNA passes the Daily Dollar Volume (DDV of $9.5 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf." PRICE: [PASS] This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. USNA with a price of $82.15 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] USNA's income tax paid expressed as a percentage of pretax income this year was (32.50%) and last year (34.50%) 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.   WILLIAMS-SONOMA, INC. Profile Strategy: Value Investor Based on: Benjamin Graham Williams-Sonoma, Inc. is a multi-channel specialty retailer of products for the home. The direct-to-customer segment of the Company's business sells its products through its six e-commerce Websites (williams-sonoma.com, potterybarn.com, potterybarnkids.com, pbteen.com, westelm.com and rejuvenation.com) and seven direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed and Bath, PBteen, West Elm and Rejuvenation). Its e-commerce platform is available to customers in more than 75 countries, while its catalogs reach customers throughout the United States. The retail segment of its business sells products through its five retail store concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation). As of January 29, 2012, it operated 576 stores in 44 states, Washington, D.C., Canada and Puerto Rico. On November 1, 2011, the Company acquired Rejuvenation Inc. Analysis Guru Score: 71% SECTOR: [PASS] WSM 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. WSM's sales of $4,113.1 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. WSM's current ratio of 2.12 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 WSM is $3.8 million, while the net current assets are $628.8 million. WSM 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. WSM's EPS growth over that period of 66.4% passes the EPS growth test. P/E RATIO: [FAIL] The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. WSM's P/E of 22.24 (using the current PE) fails this test. PRICE/BOOK RATIO: [FAIL] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. WSM's Price/Book ratio is 4.46, while the P/E is 22.24. WSM fails the Price/Book test.   AMTRUST FINANCIAL SERVICES, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Amtrust Financial Services, Inc. is a holding company. The Company is a multinational specialty property and casualty insurer focused on generating consistent underwriting profits. The Company operates in four segments: small commercial business, specialty program and personal lines reinsurance. In January 2013, the Company acquired First Nonprofit Companies, Inc. In February 2013, its subsidiary acquired Car Care Plan (Holdings) Limited from Ally Insurance Holdings, Inc. In April 2013, it acquired Sequoia Insurance Company and its subsidiaries, Sequoia Indemnity Company and Personal Express Insurance Company. In May 2013, the Company acquired Mutual Insurers Holding Company (MIHC) and MIHC's subsidiary, First Nonprofit Insurance Company. Analysis Guru Score: 100% MARKET CAP: [PASS] The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. AFSI, with a market cap of $2,690 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. AFSI, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.37, 1.72, 2.14, 2.52 and 2.58, 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. AFSI's Price/Sales ratio of 1.33, 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. AFSI, whose relative strength is 77, is in the top 50 and would pass this last criterion.   HOLLYFRONTIER CORP Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher HollyFrontier Corporation (HollyFrontier), formerly Holly Corporation, is a petroleum refiner, which produces light products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. HollyFrontier operates in two segments: Refining and Holly Energy Partners, L.P. (HEP). The Refining segment includes the operations of its El Dorado, Tulsa, Navajo, Cheyenne and Woods Cross Refineries and NK Asphalt. The HEP segment involves all of the operations of HEP. As of December 31, 2011, it operated five refineries having a combined crude oil processing capacity of 443,000 barrels per day that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain regions of the United States. The Company merged with Frontier Oil Corporation (Frontier), on July 1, 2011. On November 9, 2011, HEP acquired from the Company certain tankage, loading rack and crude receiving assets located at its El Dorado and Cheyenne Refineries. Analysis Guru Score: 100% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. HFC's P/S of 0.42 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. HFC's Debt/Equity of 20.42% is acceptable, 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. HFC 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 HFC At this Point Is HFC a "Super Stock"? YES PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.HFC's P/S ratio of 0.42 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. HFC's inflation adjusted EPS growth rate of 207.14% 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. HFC's free cash per share of 3.25 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. HFC, whose three year net profit margin averages 5.49%, passes this evaluation.   ROYAL DUTCH SHELL PLC (ADR) Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Royal Dutch Shell plc (Shell) is an independent oil and gas company. The Company owns, directly or indirectly, investments in the numerous companies constituting Shell. Shell is engaged worldwide in the principal aspects of the oil and gas industry and also has interests in chemicals and other energy-related businesses. The Company operates in three segments: Upstream, Downstream and Corporate. Upstream combines the operating segments Upstream International and Upstream Americas, which are engaged in searching for and recovering crude oil and natural gas; the liquefaction and transportation of gas; the extraction of bitumen from oil sands that is converted into synthetic crude oil, and wind energy. Downstream is engaged in manufacturing; distribution and marketing activities for oil products and chemicals. Corporate represents the key support functions, comprising holdings and treasury, headquarters, central functions and Shells self-insurance activities. 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 ratios below 0.75 are tremendous values and should be sought. RDS.A's P/S of 0.48 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. RDS.A's Debt/Equity of 19.90% is acceptable, 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. RDS.A 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 RDS.A At this Point Is RDS.A a "Super Stock"? NO PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.RDS.A's P/S ratio of 0.48 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors. LONG-TERM EPS GROWTH RATE: [FAIL] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. RDS.A's inflation adjusted EPS growth rate of 5.80% fails 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. RDS.A's free cash per share of 1.97 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. RDS.A, whose three year net profit margin averages 5.91%, passes this evaluation.   CHEVRON CORPORATION Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Chevron Corporation (Chevron) manages its investments in subsidiaries and affiliates and provides administrative, financial, management and technology support to the United States and international subsidiaries that engage in fully integrated petroleum operations, chemicals operations, mining activities, power generation and energy services. Upstream operations consist primarily of exploring for, developing and producing crude oil and natural gas; processing, transportation and regasification associated with liquefied natural gas; transporting crude oil by international oil export pipelines; transporting, storage and marketing of natural gas, and a gas-to-liquids project. Downstream operations consist primarily of refining crude oil into petroleum products; transporting crude oil and refined products by pipeline, marine vessel, motor equipment and rail car, and manufacturing and marketing of commodity petrochemicals, plastics for industrial uses and fuel and lubricant additives. Analysis Guru Score: 100% MARKET CAP: [PASS] The Cornerstone Value Strategy looks for large, well known companies whose market cap is greater than $1 billion. These companies exhibit solid and stable earnings. CVX's market cap of $243,224 million passes this test. CASH FLOW PER SHARE: [PASS] The second criterion requires that the company exhibit strong cash flows. Companies with strong cash flow are typically the value oriented investments that this strategy looks for. The company's cash flow per share must be greater than the mean of the market cash flow per share ($1.40). CVX's cash flow per share of $20.50 passes this test. SHARES OUTSTANDING: [PASS] This particular strategy looks for companies whose total number of outstanding shares are in excess of the market average (615 million shares). These are the more well known and highly traded companies. CVX, who has 1,944 million shares outstanding, passes this test. TRAILING 12 MONTH SALES: [PASS] A company's trailing 12 month sales ($238,022 million) are required to be 1.5 times greater than the mean of the market's trailing 12 month sales ($20,762 million). CVX passes this test. DIVIDEND: [PASS] The final step in the Cornerstone Value strategy is to select the 50 companies from the market leaders group (those that have passed the previous four criteria) that have the highest dividend yield. CVX, with a dividend yield of 3.19%, is one of the 50 companies that satisfy this last criterion.   WESTERN DIGITAL CORP Profile Strategy: Contrarian Investor Based on: David Dreman Western Digital Corporation (WD) is a provider of solutions for the collection, storage, management, protection and use of digital content, including audio and video. Its principal products are hard drives, which are devices that use one or more rotating magnetic disks (magnetic media) to store and allow access to data. Its hard drives are used in desktop and notebook computers, corporate and cloud computing data centers, home entertainment equipment and stand-alone consumer storage devices. In addition to hard drives, its other products include solid-state drives and home entertainment and networking products. Effective March 8, 2012, it acquired Viviti Technologies Ltd. In May 2012, the Company completed the divestiture of certain 3.5-inch hard drive assets to Toshiba Corporation. As part of its deal with Toshiba, WD also completed its purchase of Toshiba Storage Device (Thailand) Company Limited (TSDT). Effective July 10, 2013, Western Digital Corp acquired VeloBit Inc. Analysis Guru Score: 76% MARKET CAP: [PASS] Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. WDC has a market cap of $16,464 million, therefore passing the test. EARNINGS TREND: [PASS] A company should show a rising trend in the reported earnings for the most recent quarters. WDC's EPS for the past 2 quarters, (from earliest to most recent quarter) 1.36, 1.60 have been increasing, and therefore the company passes this test. EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: [FAIL] This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. WDC fails this test as its EPS growth rate for the past 6 months (-22.33%) does not beat that of the S&P (2.03%). This methodology would utilize four separate criteria to determine if WDC is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest". P/E RATIO: [PASS] The P/E of a company should be in the bottom 20% of the overall market. WDC's P/E of 8.84, based on trailing 12 month earnings, meets the bottom 20% criterion (below 10.48), and therefore passes this test. PRICE/CASH FLOW (P/CF) RATIO: [PASS] The P/CF of a company should be in the bottom 20% of the overall market. WDC's P/CF of 5.05 meets the bottom 20% criterion (below 5.93) and therefore passes this test. PRICE/BOOK (P/B) VALUE: [FAIL] The P/B value of a company should be in the bottom 20% of the overall market. WDC's P/B is currently 1.97, which does not meet the bottom 20% criterion (below 0.84), and it therefore fails this test. PRICE/DIVIDEND (P/D) RATIO: [FAIL] The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). WDC's P/D of 69.44 does not meet the bottom 20% criterion (below 20.62 or yield above 3.7%), and it therefore fails this test. This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below. CURRENT RATIO: [PASS] A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [5.13] or greater than 2). This is one identifier of financially strong companies, according to this methodology. WDC's current ratio of 2.28 passes the test. PAYOUT RATIO: [FAIL] A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for WDC is 9.07%, but unfortunately we do not have the historical payout ratio. Hence an opinion cannot be rendered at this time. RETURN ON EQUITY: [PASS] The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 16.55%, and would consider anything over 27% to be staggering. The ROE for WDC of 25.13% is high enough to pass this criterion. PRE-TAX PROFIT MARGINS: [PASS] This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. WDC's pre-tax profit margin is 13.76%, thus passing this criterion. YIELD: [FAIL] The company in question should have a yield that is high and that can be maintained or increased. WDC's current yield is 1.44%, while the market yield is 2.58%. WDC fails this test. LOOK AT THE TOTAL DEBT/EQUITY: [FAIL] The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20%. WDC's Total Debt/Equity of 23.90% is not acceptable.   STAMPS.COM INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Stamps.com Inc. is a provider of Internet-based postage solutions. The Company's customers use its service to mail and ship a variety of mail pieces, including postcards, envelopes, flats and packages, using a range of United States Postal Service (the USPS) mail classes, including First Class Mail, Priority Mail, Express Mail, Media Mail, Parcel Post, and others. Its customers include individuals, small businesses, home offices, medium-size businesses and enterprises. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: This methodology would consider STMP a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (21.82) relative to the growth rate (53.95%), 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 STMP (0.40) 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. STMP, whose sales are $119.5 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. EPS GROWTH RATE: [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 STMP is 54.0%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered too fast. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for STMP (0.00%) to be wonderfully low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for STMP (0.12%) 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 STMP (5.61%) 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 IPAR INTER PARFUMS, INC. Personal & Household Prods. 82 OSTK OVERSTOCK.COM, INC. Retail (Catalog & Mail Order) 78 STO STATOIL ASA(ADR) Oil & Gas - Integrated 74 BPI BRIDGEPOINT EDUCATION INC Schools 68 VLO VALERO ENERGY CORPORATION Oil & Gas Operations 67 ROST ROSS STORES, INC. Retail (Apparel) 62 KORS MICHAEL KORS HOLDINGS LTD Apparel/Accessories 59 MPC MARATHON PETROLEUM CORP Oil & Gas Operations 55 SIG SIGNET JEWELERS LTD. Retail (Specialty) 52 VALE VALE SA (ADR) Metal Mining 52

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