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Executive Summary September 2, 2011

The Economy

Last weekend, Hurricane Irene battered parts of the east coast. But while certain areas were no doubt hit quite hard, the overall damage -- particularly in large cities -- ended up being much less severe than the dire forecasts had indicated in the days leading up to the storm.

The current economic picture seems to be a similar one. The economy has taken its hits in the past couple months, with sluggish growth at home and crisis in Europe. But the dire predictions we've been hearing have yet to play out, and the data coming in is far better than many have feared.

Take, for example, consumer spending and the retail sector. Consumer spending makes up about 70% of the U.S. economy, and U.S. consumers are continuing to show that they are far from dead. In July, personal consumption expenditures rose 0.8%, according to a new Bureau of Economic Analysis report. Personal income increased 0.3%.

Retailers also have been reporting strong August sales numbers, despite Hurricane Irene's impact. Costco's same-store sales rose 11%, more than analysts expected. While you might be able to attribute some of that to customers buying up batteries and other emergency supplies in advance of the storm, other retailers that sell non-essential items also saw strong growth. Limited Brands' sales rose 11%, beating estimates, and Macy's sales were up a greater-than-expected 5% -- despite the fact that the chain closed more than 100 stores the Saturday afternoon that Irene was making her way up the coast, according to Reuters.

The manufacturing picture also remains better than many expected. The sector expanded in August, according to the Institute for Supply Management, and while the expansion was slight, it was better than many anticipated. It also marked the 25th straight month that the sector expanded, a remarkable run.

Unemployment, meanwhile, remains quite high by historical standards. But we haven't seen the sort of layoffs and job cuts that many feared would accompany this summer's market and economic turbulence. According to Challenger, Gray & Christmas, layoffs fell 23% in August, and hiring plans jumped 42% (albeit from a low July total). Less than two-thirds of the layoffs came from the private sector, as government job cuts jumped.

ADP's August jobs report confirmed that the private sector employment picture improved in August. The group said the sector added 91,000 jobs for the month. New claims for unemployment, meanwhile, have dipped slightly since our last newsletter, according to the Labor Department. They remain high by historical standards, but are about 13% lower than they were a year ago.

As for the housing market, it continues to struggle. Pending home sales fell 1.3% in July, according to the National Association of Realtors. The figure was, however, 14.4% above year-ago levels, which offers some encouragement. And good news came on housing prices. The S&P/Case-Shiller home price index jumped 3.6 percent in the second quarter (vs. the first quarter), new data showed. The increase was just 0.1% when seasonally adjusted, however.

All in all, investors seem to be beginning to think that their early summer fears were overblown. Since our last newsletter, the S&P 500 returned 5.6%, while the Hot List returned 6.2%. So far in 2011, the portfolio has returned -10.5% vs. -4.2% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 141.5% vs. the S&P's 20.4% gain.

Volatility = Opportunity

Over the past month, we've seen stock market volatility reach levels that, with the exception of late 2008/early 2009, were the highest since 1990 (and it may be longer than that -- the Chicago Board Options Exchange Volatility Index started using its current methodology back in 1990, so data prior to that is hard to use as a comparison).

What's interesting about the recent market volatility (which appears to have peaked in early to mid-August) and market declines is that they weren't precipitated by a major downward shift in the economy -- nor have they been followed by one. Remember, while macroeconomic factors -- i.e., the financial crisis and the fear that the global economy was going to be obliterated -- were a huge factor in the late-2008/early-2009 market plunge, the economy had started to scuffle well before the September 2008 collapse of Lehman Brothers triggered the major market plunge. In the year leading up to September 2008, new claims for unemployment surged 41%. ISM's manufacturing index began to signal a contraction in the sector in February 2008, and remained in slight contraction territory right up until September, when the index really tumbled. And home prices had been dropping rapidly for more than two years. Then, once the macro fears exploded in September 2008, the economy really took it on the chin. Unemployment claims surged, manufacturing data was dismal, and home prices kept plummeting.

Today, we have none of that. New claims for unemployment are actually below where they were in mid-June, and are about 13% below where they were a year ago. The manufacturing sector is continuing to expand -- granted, the expansion has now slowed quite a bit, but it's still growth. And home prices have been bouncing around the same level since 2009, and actually jumped in the second quarter.

The recent volatility thus seems tied not to major economic deterioration, but instead to fear -- fear of the European debt crisis, fear of a tapped-out consumer, fear of ... well, fear itself, which (merited or not) can cause consumers and businesses to tighten their wallets, leading to economic downturns of the self-fulfilling-prophecy sort.

Any serious volatility is tough to stomach as an investor. But this sort of volatility -- that is, volatility that is not tied to fundamentals -- is also exciting for long-term investors. That's because, as equity prices swing wildly without much regard to intrinsic value, mispricings become rampant. And disciplined investors with long-term horizons (really, should there be any other kind?) can jump on the myriad of opportunities that present themselves.

There's no better example of that than the Hot List, which, following all of this recent volatility, is undergoing a huge shakeup in today's rebalancing. The portfolio is selling 9 of its 10 holdings and replacing them with new stocks that, after the market's big moves, now look more attractive. It's the first time in the portfolio's eight-plus year history that it's changed that many of its holdings at one time.

Five of the departing stocks leave as winners (as of Wednesday's close), while four leave as losers. Most of the new holdings are smaller-sized stocks, with six of the nine having market caps of $3 billion or less, and the other three all under $10 billion. It's not surprising -- as is the case in most significant downdrafts, small-caps were hit harder than larger stocks in the recent market decline. Many were likely hit too hard as investors fled to the perceived safety of larger stocks, and now look like bargains to my strategies.

One area of the market that the portfolio is particularly high on: for-profit education companies. It's adding three to the fold today: Capella Education, DeVry, and Career Education. They join Bridgepoint -- the portfolio's lone holdover this month -- in composing 40% of the Hot List's holdings.

These for-profits have been much-maligned over the past year-and-a-half, as regulators questioned and cracked down on their loan practices. And they were hit hard this summer as the market shifted toward stocks that appeared less risky. But even amid the regulatory scrutiny, which has caused many for-profits to alter their recruiting practices, many are putting up solid results. Capella increased earnings per share 7% in the first half of 2011, and its revenues also grew. Career Education increased EPS 15% in the first half, as revenues remained stable; Bridgepoint upped EPS 68% and revenues 42% in the first half; and DeVry significantly upped both earnings and revenues in the first half.

These companies are a microcosm of the broader economy recently: surrounded by fear, but performing better than expected -- though few investors seem to be able to see reality amid all the sky-is-falling talk. That's why I think it's so important to use a disciplined, unemotional system like the Hot List. It acts on facts, not fear; data, not speculation. That's how gurus like Warren Buffett, Peter Lynch, and Joel Greenblatt made their fortunes, and it's how the Hot List has stayed so far ahead of the market since its inception more than eight years ago.
Editor-in-Chief: John Reese

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The Fallen

As we rebalance the Validea Hot List, 9 stocks leave our portfolio. These include: Amtech Systems, Inc. (ASYS), Amtrust Financial Services, Inc. (AFSI), Banco Macro Sa (Adr) (BMA), Astrazeneca Plc (Adr) (AZN), Cash America International, Inc. (CSH), Acme Packet, Inc. (APKT), Dollar Tree, Inc. (DLTR), Conocophillips (COP) and Quality Systems, Inc. (QSII).

The Keepers

1 stocks remain in the portfolio. They are: Bridgepoint Education, Inc. (BPI).

The Newbies

We are adding 9 stocks to the portfolio. These include: Forest Laboratories, Inc. (FRX), Micron Technology, Inc. (MU), Devry Inc. (DV), Career Education Corp. (CECO), Asiainfo-linkage, Inc. (ASIA), Marketaxess Holdings Inc. (MKTX), Ternium S.a. (Adr) (TX), Capella Education Company (CPLA) and Gt Advanced Technologies Inc (GTAT).

Portfolio Changes

Newcomers to the Validea Hot List

AsiaInfo-Linkage, Inc. (ASIA): Based in Beijing, this company provides software solutions and I/T services that help China's telecom operators improve efficiency. The small-cap ($820 million market cap) has taken in about $455 million in sales in the past year.

AsiaInfo gets a perfect 100% score from my Peter Lynch-inspired strategy. To read more about it, see the "Detailed Stock Analysis" section below.

Capella Education Company (CPLA): Minneapolis-based Capella is the parent of Capella University, a regionally accredited online school that offers bachelor's and graduate degree programs in numerous areas. It has almost 40,000 students from across the U.S. and dozens of other countries.

Capella has a market cap of about $500 million, and has taken in close to $440 million in sales in the past year. It gets strong interest from the strategies I base on the writings of Peter Lynch and Joel Greenblatt. To learn more about it, scroll down to the "Detailed Stock Analysis" section below.

Career Education Corp. (CECO): Another for-profit education firm, this Illinois-based company has more than 90 campuses across the U.S., France, Italy and the United Kingdom and Monaco. It serves more than 116,000 students in a variety of career-oriented disciplines.

Career Education ($1.3 billion market cap) has taken in more than $2.1 billion in sales in the past 12 months. It gets strong interest from my Peter Lynch- and Joel Greenblatt-based models. To read more about its fundamentals, see the "Detailed Stock Analysis" section below.

DeVry Inc. (DV): The third and final for-profit education stock added to the portfolio this week, DeVry is also based in Illinois. It's the parent of several universities that focus on business, healthcare, and technology, and it also offers programs for middle and high schoolers.

DeVry ($3 billion market cap) gets strong interest from my Peter Lynch, Joel Greenblatt-, and James O'Shaughnessy-based models. For more on the stock, see the "Detailed Stock Analysis" section below.

Forest Laboratories, Inc. (FRX): Forest partners with biotech and pharma companies to develop pharmaceutical products. Its offerings focus on the central nervous and cardiovascular systems.

New York City-based Forest ($9.4 billion market cap) has taken in more than $4.5 billion in sales in the past 12 months. It gets strong interest from my Benjamin Graham-, Peter Lynch-, and Joel Greenblatt-based models. To read more about its fundamentals, see the "Detailed Stock Analysis" section below.

GT Advanced Technologies (GTAT): Based in Merrimack, New Hampshire, GT recently changed its name from GT Solar International. It has been in the solar power business for 17 years now, and is a leader in polysilicon production technology, and sapphire and silicon crystalline growth systems. Its products might not ring a bell, but they are key technologies involved in solar cell and panel and LED production. The firm has taken in almost $1 billion in sales in the past year.

GT ($1.5 billion market cap) surged 33% while in the Hot List from June 10-July 8, and my models are bringing it back this rebalancing. It gets very high marks from my Peter Lynch- and Joel Greenblatt-inspired models. See the "Detailed Stock Analysis" section below to learn more about the stock.

MarketAxess Holdings Inc. (MKTX): New York City-based MarketAxess operates an electronic trading platform that lets investment industry professionals trade corporate bonds and other fixed-income instruments. It has a $1.1 billion market cap, and has taken in about $165 million in sales in the past year.

MarketAxess gets strong interest from my Peter Lynch-based model, and high scores from several of my other models. See the "Detailed Stock Analysis" section below to learn more about the stock.

Micron Technology Inc. (MU): Based in Boise, Idaho, Micron is a semiconductor company that makes DRAM components, modules, and flash memory products used in a variety of applications. It's raked in more than $9 billion in sales in the past 12 months.

Micron ($5.9 billion market cap) gets strong interest from my Peter Lynch- and Joseph Piotroski-based models. To read more about its fundamentals, see the "Detailed Stock Analysis" section below.

Ternium S.A. (TX): Ternium is a Luxembourg-based steel company that makes and processes flat and long steel products for the construction, home appliances, capital goods, container, food, energy and automotive industries. About 57% of its sales are generated in North America, with about 41% generated in Latin America. In the past year, the $5.1-billion-market-cap firm has taken in $8.3 billion in sales.

Ternium gets strong interest from my Peter Lynch- and Kenneth Fisher-based strategies. See the "Detailed Stock Analysis" section below to learn more about the stock.

News about Validea Hot List Stocks

Forest Laboratories Inc. (FRX): Forest has thwarted activist investor Carl Icahn's bid to restructure its board. Shareholders elected the firm's full slate of board candidates at its annual meeting "by a significant margin" based on preliminary estimates, Bloomberg reported on Aug. 18, adding that three new directors were among the 10-member slate. Icahn, who is the firm's second-largest investor, had nominated four directors to the board.

The Next Issue

In two weeks, we will publish another issue of the Hot List, at which time we will take a closer look at my strategies and investment approach. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio

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

BPI   |   FRX   |   TX   |   CPLA   |   GTAT   |   DV   |   MU   |   ASIA   |   CECO   |   MKTX   |  

Bridgepoint Education, Inc. (Bridgepoint) is a provider of postsecondary education services. The Company's wholly owned subsidiaries, Ashford University and the University of the Rockies, are regionally accredited academic institutions that offer associate's, bachelor's, master's and doctoral programs in the disciplines of business, education, psychology, social sciences and health sciences. These institutions deliver programs online, as well as at its traditional campuses located in Clinton, Iowa, and Colorado Springs, Colorado. As of December 31, 2010, it offered approximately 1,345 courses, 71 degree programs and 134 specializations. As of December 31, 2010, it had 77,892 students enrolled in its institutions, 99% of whom were attending classes online.

Forest Laboratories, Inc. (Forest) develops, manufactures and sells branded forms of ethical drug products, most of which requires a physician's prescription. The Company also focuses on the development and introduction of new products, including products developed in collaboration with licensing partners. Its products include those developed by the Company and those acquired from other pharmaceutical companies and integrated into its marketing and distribution systems. The Company's principal products include Lexapro, Namenda, Bystolic, Savella and Teflaro. On April 13, 2011, the Company acquired Clinical Data Inc. (Clinical Data), a specialty pharmaceutical company.

Ternium SA is a steel company in Latin America that manufactures and processes flat and long steel products for the construction, home appliances, capital goods, container, food, energy and automotive industries. The Company operates in three segments: Flat Steel Products, comprising the manufacturing and marketing of hot rolled coils and sheets, cold rolled coils and sheets, tin plate, welded pipes, hot dipped galvanized and electro-galvanized sheets and pre-painted sheets; Long Steel Products, comprising the manufacturing and marketing of billets (steel in its basic, semi-finished state), wire rod and bars; Others, comprising mainly pig iron, pellets and pre-engineered metal buildings. During the year ended December 31, 2010, Flat Steel Products accounted to 86% of the Company's overall revenues. Approximately 57% of Ternium's sales were generated in North America and 41% in South and Central America.

Capella Education Company is an online postsecondary education services company. Through its wholly owned subsidiary, Capella University, the Company offers a range of doctoral, master's and bachelor's programs. As December 31, 2010, it offered over 1,250 online courses and 43 academic programs with 136 specializations to over 39,000 learners. It also offers certificate programs, which consist of a series of courses focused on a particular area of study. In addition, Capella Education Company also offers academic services, such as new learner orientation, technical support, academic advising, research services (particularly for doctoral degree candidates), writing services and online tutoring. It also provides appropriate educational accommodations to learners with documented disabilities through its disability support services team. During the year ended December 31, 2010, it formed the joint-venture Sophia Learning, LLC, as majority owner.

GT Advanced Technologies Inc., formerly GT Solar International, Inc., through its subsidiaries, is a global provider of polysilicon production technology and multicrystalline ingot growth systems and related photovoltaic manufacturing services for the solar industry, and sapphire growth systems and material for the light emitting diode (LED) and other specialty markets. The Company's customers include solar companies, as well as companies in the chemical industry. It operates in three segments: polysilicon business, photovoltaic (PV) business and sapphire business. On July 29, 2010, it acquired Crystal Systems, Inc. (Crystal Systems), a crystal growth technology company that produces sapphire material used for LED applications, as well as other specialty markets, such as medical, research, aerospace industries and defense. In August 2011, the Company acquired Confluence Solar, Inc.

DeVry Inc. (DeVry) is a provider of educational services and the parent organization of Advanced Academics, Becker Professional Education, Carrington College and Carrington College California, Chamberlain College of Nursing, DeVry Brasil, DeVry University, and Ross University. These institutions offer a range of programs in business, healthcare and technology and serve students in middle school through postsecondary education, as well as accounting and finance professionals. In August 2011, the Company acquired he business operations of privately held American University of the Caribbean.

Micron Technology, Inc. is a manufacturer and marketer of semiconductor devices, principally dynamic random access memory (DRAM), Nandi Flash memory (NAND Flash and NOR Flash memory, as well as other innovative memory technologies, packaging solutions and semiconductor systems for use in leading-edge computing, consumer, networking, embedded and mobile products. In addition, the Company manufacture semiconductor components for complementary metal-oxide semiconductor (CMOS) image sensors and other semiconductor products. During the fiscal year ended September 2, 2010, the Company had two segments: Memory and Numonyx. On May 7, 2010, the Company acquired Numonyx Holdings B.V. (Numonyx), which manufactures and sells NOR Flash, NAND Flash, DRAM and Phase Change memory technologies and products.

AsiaInfo-Linkage, Inc. (AsiaInfo-Linkage), formerly AsiaInfo Holdings, Inc., is a provider of telecommunications software solutions and information technology products and services in China. The Company's software and services enables its customers to build, maintain, operate, manage and improve their communications infrastructure. It's products and services in telecom business include business operation support systems, including billing and partnership relationship management applications; business intelligence systems, including data warehousing platforms and data mining applications; operating support systems (OSS) package, including protocol adaptor, service fulfilment, process management and service activation; service and data applications, such as mail centers, mobile device management and mobile e-commerce platforms, and network infrastructure services, including network design and implementation, integrated network management and professional maintenance and support.

Career Education Corporation (CEC), through colleges, schools and universities that are part of the CEC family, offers education to a diverse student population of over 116,000 students in a variety of career-oriented disciplines. The Company has more than 90 campuses that serve these students are located throughout the United States and in France, Italy and the United Kingdom and Monaco. Its institutions includes American InterContinental University (AIU), Brooks Institute; Colorado Technical University (CTU), Harrington College of Design, INSEEC Group (INSEEC) Schools, International University of Monaco (IUM), International Academy of Design & Technology (IADT), Istituto Marangoni, Le Cordon Bleu North America (LCB), and Sanford-Brown Institutes and Colleges. CEC organized its businesses across four segments: University, Health Education, Culinary Arts and International. On April 15, 2010, the Company acquired IUM, an international business university.

MarketAxess Holdings Inc. operates an electronic trading platform for corporate bonds and other types of fixed-income instruments, through which the Company's institutional investor clients can access the liquidity provided by its broker-dealer clients. The Company offers its clients the ability to trade the United States corporate bonds, European corporate bonds, credit default swaps, agencies, high yield and emerging markets bonds and asset-backed and preferred securities. The Company also executes certain bond transactions between and among institutional investor and broker-dealer clients on a principal basis by serving as counterparty to both the buyer and the seller in matching back-to-back trades, which then settle through a third-party clearing organization. Through its Corporate BondTicker service, the Company provides fixed-income market data, analytics and compliance tools that help its clients make trading decisions.

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.


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.

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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.