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Executive Summary	November 25, 2011

The Economy The US economy is continuing to prove remarkably resilient, as it pushes forward through some very strong headwinds at home and abroad. Now, if only political leaders could get their act together the way that businesses have, the economy could really begin to gain some traction. Since our last newsletter, several economic reports have continued to show that the economy is expanding. Industrial production, for example, increased by 0.7% in October, according to new data from the Federal Reserve. The manufacturing and mining sectors showed solid growth, gaining 0.5% and 2.3%, respectively, while the utility sector was basically flat for the month. Capacity utilization is now 10.5 percentage points above the 2009 low, though it remains 2.6 percentage points below the long-term historical average. The American consumer, meanwhile, continues to show resilience. Retail and food service sales increased 0.5% in October, according to a new Commerce Department report. It was the 5th straight month that sales have increased. They reached a new all-time high, and now stand 19.5% above their 2009 low. We also got some decent news from the housing sector. Housing starts were close to flat in October, according to new Commerce Department data, but building permits for new housing jumped 10.9% in the month. Permit issuance is now 17.7% above year-ago levels, while housing starts are 16.5% above their year-ago levels. The National Association of Realtors also reported that existing-home sales rose 1.4% in October, while total housing inventory dropped 2.2% as we continue to eat away at the huge overhang of supply caused by the housing bubble. Median home prices were down 4.7% from year-ago levels, however. On the employment front, the data continues to be better than many have expected. Despite all of the worries about Europe and the U.S.'s own debt troubles, new claims for unemployment have now been below 400,000 for three straight weeks, the first time that has happened since April. They're still high by historical standards, but we're continuing to see slow improvement. Finally, regional manufacturing reports are indicating that the sector has continued to grow in November. The Federal Reserve Bank of Philadelphia said its manufacturing index remained in positive territory for the second straight month, and its six-month indicator of future activity jumped sharply. And the New York Fed's manufacturing index edged slightly back into expansion territory after five straight months of contraction. But while the fundamentals of the economy continue to improve, investors continue to focus on two broader issues: the European debt crisis and the U.S.' own debt issues. In Europe, the situation drags on, and questions have arisen not only about the debt problem itself, but also about the political will to fix it. In the U.S., meanwhile, politics continues to get in the way of solutions. In what sadly was not much of a surprise, the deficit (not-so) "super committee" failed to come to a compromise on a plan to cut the nation's deficit. By not reaching a deal before its deadline, the committee will trigger fairly drastic automatic spending cuts in defense and domestic programs. There is still hope that a more palatable resolution will be reached before the automatic cuts go into effect in 2013. Regardless, yet another failure of our elected leaders to put the country's needs above politics has unnerved investors and the market. Since our last newsletter, the S&P 500 returned -5.5%, while the Hot List returned -6.8%. So far in 2011, the portfolio has returned -21.6% vs. -7.6% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 111.5% vs. the S&P's 16.1% gain. New Research from a Market Guru As Hot List readers know, our investment process is driven by data -- particularly long-term historical data. We don't invest based on short-term trends, the latest big macroeconomic headlines, or gut feelings on a particular day. History has shown that such emotional, short-term thinking is a recipe for failure. The gurus whose approaches inspired the Hot List, meanwhile, have proven that a rational, long-term, stick-to-the-numbers approach often leads to success in the market. One of the gurus who has compiled the most data on long-term investment strategy is James O'Shaughnessy, whose book What Works on Wall Street forms the basis of two of my strategies. O'Shaughnessy recently released an updated version of that excellent book, and this one includes a plethora of new data on long-term stock returns and strategies. I'd like to share some of the more intriguing observations with you now. For O'Shaughnessy, one of the biggest problems investors face is the tendency to focus on recent events. In the introduction to his book, he discusses how some began calling the "abysmal" returns of the past decade the "new normal", even though it wasn't that long ago that commentators were declaring that the Internet had ushered in a "new era" of perpetually rising stock returns -- a declaration that proved to be horribly wrong. "It seems that the one thing that doesn't change is people's reaction to short-term conditions and their axiomatic ability to perpetuate them far into the future," O'Shaughnessy writes. But while many investors are assuming that the poor performance of stocks during the 2000s is the start of a new era of poor returns, O'Shaughnessy says history shows something entirely different. He looks at the worst rolling ten-year returns for equities since 1900; the period ending in February 2009 was the second-worst over that span, with 10 other 10-year spans ending in 2008, 2009, or 2010 cracking the top 50 (his data goes through 2010). What did he find? Well, he found that equity returns following those awful 10-year periods tended to be outstanding. In the year following the 50 worst 10-year periods, stocks averaged a real return of 20.47%. The average three-year real compound return following the bad decades was 14.53%; the average five-year compound return was 15.78%, and the average ten-year compound return was 14.55%. Since stocks bottomed in early 2009, we've seen that pattern play out, to an even greater degree. The S&P 500 gained 68.57% in the first year after its March 9, 2009 bottom; it averaged 39.68% gains in the first two years. (These S&P figures are before inflation is factored in, but the main idea should hold true.) "Historically, we have always seen reversion to the mean," O'Shaughnessy explains. "After stocks have had an unusually great 10 or 20 years, they typically turn in subpar results over the next 10 or 20, and after bad 10- to 20-year stretches, the next 10 to 20 tend to be above average." Why is that? O'Shaughnessy astutely notes that it's largely about valuation -- stocks get overvalued after good decades, and undervalued after bad decades. Undervaluation is certainly what appears to have happened after the 2008-09 market crash. And nearly three years later, even after stocks have risen significantly, valuations remain attractive. Sentiment, however, remains low, which is not surprising after having had two big market crashes in a decade. With all of the negative headlines, it's hard to stay focused on the valuations, but O'Shaughnessy's research shows that that's what good investors have to do. A New Valuation Equation That brings us to another very interesting new piece of O'Shaughnessy's research. In past editions of What Works on Wall Street, he found that, when it comes to valuation, the price/sales ratio (PSR) was the best predictor of future performance. That's why the growth model I base on his writings requires that a stock have a PSR below 1.5. In the book's updated version, however, O'Shaughnessy taps into expanded historical data that leads him to a different conclusion. Using return data from 1964 through 2009, he looks at how stocks that were in the top decile based on a number of valuation metrics have fared historically. Here are the average annual compound returns for some of the more popular measures: Top Decile Based On Enterprise Value/EBITDA -- 16.58% Price/earnings -- 16.25% Price/operating cash flow -- 16.25% Buyback Yield -- 15.81% Shareholder Yield -- 15.56% Price/book value -- 14.53% PSR -- 14.49% Dividend Yield -- 13.30% (A few definitions may be necessary here: Enterprise value is equal to common equity at market value, plus debt, minority interest, and preferred equity at market value, and minus associate company at market value and all cash and cash equivalents; EBITDA is earnings before interest, taxes, depreciation, and amortization; buyback yield is the change, percentage-wise, between the amount of shares outstanding now and a year ago; shareholder yield is buyback yield plus dividend yield.) Of course, raw returns aren't everything; risk is also a big factor to consider, so O'Shaughnessy looks at factors like standard deviation of returns, biggest annual declines, percentage of years in which returns were positive, and consistency of returns. One measure that takes into account both risk and return is the Sortino ratio. Here's a look at how the various valuation metrics stacked up on that basis. Top Decile Based On Enterprise Value/EBITDA --0.50 Shareholder Yield -- 0.47 Price/earnings -- 0.46 Price/operating cash flow -- 0.45 Buyback Yield -- 0.44 Dividend Yield -- 0.31 Price/book value -- 0.30 PSR -- 0.29 So, which valuation does O'Shaughnessy recommend? None, in a manner of speaking. As the data above shows, the higher-returning strategies aren't always the best when you factor in risk. On top of that, different approaches fare better in different environments. So O'Shaughnessy decided to find out how stocks that had the best composite valuation based on a number of metrics fared. He found that combining value metrics could produce even better results. An approach that incorporated the price/book, price/earnings, price/sales, EBITDA/EV, and price/cash flow ratios as well as buyback yield was a top performer, for example. To do this, he ranked all stocks by percentile in each of those categories, with those with the worst of a particular ratio (say, the PSR) getting 1, and those with the best getting 100. Then he simply added up the six scores, and split the results into deciles. He found that stocks in the top decile based on those six factors historically averaged a compound annual return of 17.30%, with a Sortino ratio of 57 -- much better than any of the individual metrics. O'Shaughnessy's finding about multiple valuation metrics being used in concert is significant, but it doesn't surprise me. In a sense, it's the same general approach we use with the Hot List. Because a number of different strategies go into the Hot List's stock-selection method, so too do a number of different valuation metrics. Current Hot List holding Forest Laboratories, for example, gets approval from my Joel Greenblatt-based approach in part because of its strong earnings yield (which is essentially the inverse of the Enterprise value/EBITDA ratio), strong interest from my Benjamin Graham-based model in part because of its strong P/E and price/book ratios, and strong interest from my Peter Lynch-based model in part because of its strong yield-adjusted P/E-to-growth ratio. As I've noted before, stocks that are strong across a variety of different valuation metrics and fundamentals tend to perform well over time, and O'Shaughnessy's exceptional research is more proof of that. Core Tenets Finally, I'd like to leave you with a brief summary of some of the keys to investing success that O'Shaughnessy references in the final chapter of his book. Some of these should look very familiar, as they are right in line with the tenets we use to manage the Hot List. Always Use Strategies: "You'll get nowhere buying stocks just because they have a great story," O'Shaughnessy writes. These stocks usually come with huge price tags, and usually go down in flames. "You must avoid them," he says. "Always think in terms of overall strategies and not individual stocks." Ignore the Short Term: "When you look only at how your investment portfolio has performed for the last quarter, year, and three- and five-year period, you are looking at a tiny snapshot of time," he writes, saying that that snapshot can be very misleading. He recommends focusing on rolling returns vs. a benchmark over time. Use Only Strategies Proven Over The Long Term: O'Shaughnessy says to make sure you use an approach that has proven its worth over several different market environments. Short-term performance, or even the fact that a strategy might make intuitive sense, are no match for a long-term track record. "Stocks change. Industries change," he says. "But the underlying reasons certain stocks are good investments remain the same. Only the fullness of time reveals which are the most sound." Invest Consistently: "If you use even a mediocre strategy consistently, you'll beat almost all investors who jump in and out of the market, change tactics in midstream, and forever second-guess their decisions," O'Shaughnessy writes. Always Bet With The Base Rate: "Base rates are essentially the odds of beating the market over the time period you plan to invest," O'Shaughnessy says. "If you pay attention to the odds, you can put them on your side." Never Use The Riskiest Strategies: O'Shaughnessy says to always focus on strategies with the highest risk-adjusted returns. Always Use More Than One Strategy: O'Shaughnessy says that combining strategies that focus on different types of stocks (i.e., growth, value, large-cap, small-cap, geographic regions) can allow you to do much better than the broader market while not taking on more risk. Use Multifactor Models: "You should always make a stock pass several hurdles before investing in it," O'Shaughnessy says. I couldn't agree more -- all of my models use multiple variables, and most use at least four or five. To paraphrase Warren Buffett, investing is simple, but it's not easy. It's simple because we know what we need to do -- buy stock in good companies selling at good prices. And gurus like O'Shaughnessy have shown us strategies that identify good companies, and attractively priced shares. The hard part -- and O'Shaughnessy stresses this in his book -- is sticking to your strategy when times get tough. A bad quarter or half-year or year can wreak havoc on investors' psyches, particularly in today's world of 24-hour financial news, when we are continually reminded of every potential danger or negative in the market and economy. But history has shown that sticking with fundamental-focused strategies with good track records -- even when it seems the whole world is running away from stocks -- is a recipe for success. And making emotional decisions based on today's headlines or your gut feelings is a recipe for failure. That's why we'll continue to stick with the Hot List, even during a rough year like this one has been. Over the long haul, the strategies that underlie the portfolio have been exceptionally successful -- both for us and for the gurus who developed them. Even if it ends up lagging the S&P 500 this year, the Hot List will still have beaten the index 67% of the years since its inception, and it's done so by a huge margin -- the portfolio's gains are more than six-fold the S&P's gains since inception. I'm confident that by continuing to focus on fundamentals and staying disciplined, the portfolio will bounce back strong.		Editor-in-Chief: John Reese Since Inception   Hot List 111.5% S&P 500 16.1% Accuracy 55.6% Beta 1.2 YTD   Hot List -21.6% S&P 500 -7.6% Since Last Issue   Hot List -6.8% S&P 500 -5.5% Avg. Fundamentals   Market Cap (mil) $23,788 PE Ratio 7.6 5 Yr EPS Growth 19.5% Yield 4.6% Rel. Strength 51 Portfolio Sectors Services 4 Healthcare 2 Technology 1 Basic Materials 1 Energy 1 Financial 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. The Fallen As we rebalance the Validea Hot List, 4 stocks leave our portfolio. These include: Asiainfo-linkage, Inc. (ASIA), Telecom Argentina S.a. (Adr) (TEO), Bank Of The Ozarks, Inc. (OZRK) and Stamps.com Inc. (STMP). The Keepers 6 stocks remain in the portfolio. They are: Forest Laboratories, Inc. (FRX), Petroleo Brasileiro Sa (Adr) (PBR), Aeropostale, Inc. (ARO), Ternium S.a. (Adr) (TX), Capella Education Company (CPLA) and Bridgepoint Education, Inc. (BPI). The Newbies We are adding 4 stocks to the portfolio. These include: Kulicke And Soffa Industries Inc. (KLIC), Interpublic Group Of Companies, Inc. (IPG), World Acceptance Corp. (WRLD) and Astrazeneca Plc (Adr) (AZN). Portfolio Changes Additions   KULICKE AND SOFFA INDUSTRIES INC. KLIC INTERPUBLIC GROUP OF COMPANIES, INC. IPG WORLD ACCEPTANCE CORP. WRLD ASTRAZENECA PLC (ADR) AZN Deletions   ASIAINFO-LINKAGE, INC. ASIA TELECOM ARGENTINA S.A. (ADR) TEO BANK OF THE OZARKS, INC. OZRK STAMPS.COM INC. STMP Newcomers to the Validea Hot List AstraZeneca PLC (AZN): Based in London, AstraZeneca is one of the world's largest drugmakers. The $57-billion-market-cap firm is active in more than 100 countries, and makes a variety of well-known medications, including Crestor, Symbicort, and Nexium. AstraZeneca gets strong interest from my Peter Lynch-, David Dreman-, and James O'Shaughnessy-based models. See the "Detailed Stock Analysis" section below to learn more about the stock. Kulicke and Soffa Industries (KLIC): This firm designs, manufactures and sells capital equipment and expendable tools used to assemble semiconductor devices, including integrated circuits (IC), high and low powered discrete devices, light-emitting diodes (LEDs), and power modules. It gets strong interest from my Peter Lynch- and Kenneth Fisher-based models. To read more about its fundamentals, see the "Detailed Stock Analysis" section below. World Acceptance Corp. (WRLD): Based in Greenville, S.C., World Acceptance ($936 million market cap) specializes in small, short-term loans, and has close to 1,000 offices in the southern and central U.S., and Mexico. Its loans are generally under $3,000 and have durations of less than 24 months, and much of its business comes from repeat customers. World Acceptance gets approval from my Peter Lynch- and Warren Buffett-based models and my Momentum Investor strategy. See the "Detailed Stock Analysis" section below to learn more about the stock. Interpublic Group of Companies, Inc. (IPG): This New York City-based firm is an organization of advertising agencies and marketing services companies. It has a market cap of about $4 billion, and in the past year has taken in nearly $7 billion in sales. Interpublic gets strong interest from my Joel Greenblatt- and Peter Lynch-based models. To read more about its fundamentals, see the "Detailed Stock Analysis" section below. News about Validea Hot List Stocks Aeropostale, Inc. (ARO): The teen retailer announced that it has signed a licensing agreement with FiBA Group to open about 30 stores in Turkey over the next five years. The first store is scheduled to open in summer 2012. Ternium SA (TX): Shares of the steelmaker fell sharply last week on news that it is in talks to buy a stake in industry rival Usiminas, according to Reuters. Brazilian magazine Exame reported that Ternium has offered 40 reais a share for the combined stake that Brazilian conglomerates Camargo Correa and Grupo Votorantim have in Usiminas, Reuters stated, which would be a 72% premium on Usiminas shares as of Wednesday. Investors seemed very leery of the deal's potential benefits, as Ternium shares fell 18% last Thursday on the news. 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 Ticker Company Name Industry Guru Score BPI BRIDGEPOINT EDUCATION, INC. Schools 83 FRX FOREST LABORATORIES, INC. Biotechnology & Drugs 74 ARO AEROPOSTALE, INC. Retail (Apparel) 71 TX TERNIUM S.A. (ADR) Iron & Steel 68 IPG INTERPUBLIC GROUP OF COMPANIES, INC. Advertising 68 CPLA CAPELLA EDUCATION COMPANY Schools 67 WRLD WORLD ACCEPTANCE CORP. Consumer Financial Services 65 AZN ASTRAZENECA PLC (ADR) Biotechnology & Drugs 61 KLIC KULICKE AND SOFFA INDUSTRIES INC. Semiconductors 60 PBR PETROLEO BRASILEIRO SA (ADR) Oil & Gas - Integrated 60 Ticker Market Cap Date Added Start Price Return BPI $1,088 3/18/2011 $18.02 $21.20 17.6% FRX $7,686 9/2/2011 $33.10 $28.77 -13.1% ARO $1,212 10/28/2011 $14.30 $15.01 5.0% TX $3,739 9/2/2011 $24.48 $18.65 -23.8% IPG $3,837 11/25/2011 TBD $8.32 TBD CPLA $463 9/2/2011 $30.42 $32.00 5.2% WRLD $928 11/25/2011 TBD $63.35 TBD AZN $56,396 11/25/2011 TBD $42.85 TBD KLIC $631 11/25/2011 TBD $8.68 TBD PBR $161,901 9/30/2011 $22.45 $24.99 11.3%

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   |   ARO   |   TX   |   IPG   |   CPLA   |   WRLD   |   AZN   |   KLIC   |   PBR   |   BRIDGEPOINT EDUCATION, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool Bridgepoint Education, Inc. (Bridgepoint) is a provider of postsecondary education services. The Company's wholly owned subsidiaries, Ashford University and the University of the Rockies, are regionally accredited academic institutions that offer associate's, bachelor's, master's and doctoral programs in the disciplines of business, education, psychology, social sciences and health sciences. These institutions deliver programs online, as well as at its traditional campuses located in Clinton, Iowa, and Colorado Springs, Colorado. As of December 31, 2010, it offered approximately 1,345 courses, 71 degree programs and 134 specializations. As of December 31, 2010, it had 77,892 students enrolled in its institutions, 99% of whom were attending classes online. Analysis Guru Score: 91% 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. BPI's profit margin of 19.48% 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. BPI, with a relative strength of 91, 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 BPI (27.87% for EPS, and 27.16% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] BPI's insiders should own at least 10% (they own 66.22% ) 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. BPI's free cash flow of $2.74 per share passes this test. PROFIT MARGIN CONSISTENCY: [FAIL] The profit margin in the past must be consistently increasing. The profit margin of BPI has been inconsistent in the past three years (Current year: 17.89%, Last year: 10.37%, Two years ago: 12.11%), which is unacceptable. This inconsistency will carryover directly to the company's bottom line, or earnings per share. 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 BPI's case. CASH AND CASH EQUIVALENTS: [PASS] BPI's level of cash $279.1 million passes this criteria. If a company is a cash generator, like BPI, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. 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 BPI was 9.52% last year, while for this year it is 8.19%. Since the AR to sales is decreasing by -1.32% the stock passes this criterion. LONG TERM DEBT/EQUITY RATIO: [PASS] BPI'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): [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 (BPI's is 0.19), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. BPI passes this test. The following criteria for BPI are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] BPI has not been significantly increasing the number of shares outstanding within recent years which is a good sign. BPI currently has 56.0 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. BPI's sales of $904.5 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] BPI passes the Daily Dollar Volume (DDV of $8.6 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. BPI with a price of $21.20 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] BPI's income tax paid expressed as a percentage of pretax income this year was (41.42%) and last year (42.73%) 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.   FOREST LABORATORIES, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Forest Laboratories, Inc. (Forest) develops, manufactures and sells branded forms of ethical drug products, most of which requires a physician's prescription. The Company also focuses on the development and introduction of new products, including products developed in collaboration with licensing partners. Its products include those developed by the Company and those acquired from other pharmaceutical companies and integrated into its marketing and distribution systems. The Company's principal products include Lexapro, Namenda, Bystolic, Savella and Teflaro. On April 13, 2011, the Company acquired Clinical Data Inc. (Clinical Data), a specialty pharmaceutical company. Analysis Guru Score: 100% DETERMINE THE CLASSIFICATION: FRX is considered a "True Stalwart", according to this methodology, as its earnings growth of 14.50% lies within a moderate 10%-19% range and its annual sales of $4,586 million are greater than the multi billion dollar level. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. FRX is attractive if FRX can hold its own during a recession. 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 FRX was 11.16% last year, while for this year it is 10.21%. Since inventory to sales has decreased from last year by -0.94%, FRX passes this test. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for FRX (0.49), based on the average of the 3, 4 and 5 year historical eps growth rates, is excellent. EARNINGS PER SHARE: [PASS] The EPS for a stalwart company must be positive. FRX's EPS ($4.04) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for FRX (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 FRX (9.80%) 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 FRX (48.85%) is considered favorable.   AEROPOSTALE, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Aeropostale, Inc. is a mall-based, specialty retailer of casual apparel and accessories, principally targeting 14 to 17 year-old young women and men through its Aeropostale stores and 7 to 12 year-old kids through its P.S. from Aeropostale stores. The Company designs, sources, markets and sells all of its own merchandise. P.S. from Aeropostale products can be purchased in P.S. from Aeropostale stores, in certain Aeropostale stores, including its new Times Square store in New York City and online at www.ps4u.com. As of January 29, 2011, it operated 965 Aeropostale stores, consisting of 906 stores in 49 states and Puerto Rico, 59 stores in Canada, as well as 47 P.S. from Aeropostale stores in 13 states. In addition, pursuant to a Licensing Agreement, one of its international licensees operated 10 Aeropostale stores in the United Arab Emirates as of January 29, 2011. During March 2011, it announced that it had signed a second licensing agreement. Analysis Guru Score: 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. ARO, with a market cap of $1,212 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. ARO, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.88, 1.15, 1.47, 2.27 and 2.49, 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. ARO's Price/Sales ratio of 0.51, 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. ARO 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.   TERNIUM S.A. (ADR) Profile Strategy: Book/Market Investor Based on: Joseph Piotroski Ternium SA is a steel company in Latin America that manufactures and processes flat and long steel products for the construction, home appliances, capital goods, container, food, energy and automotive industries. The Company operates in three segments: Flat Steel Products, comprising the manufacturing and marketing of hot rolled coils and sheets, cold rolled coils and sheets, tin plate, welded pipes, hot dipped galvanized and electro-galvanized sheets and pre-painted sheets; Long Steel Products, comprising the manufacturing and marketing of billets (steel in its basic, semi-finished state), wire rod and bars; Others, comprising mainly pig iron, pellets and pre-engineered metal buildings. During the year ended December 31, 2010, Flat Steel Products accounted to 86% of the Company's overall revenues. Approximately 57% of Ternium's sales were generated in North America and 41% in South and Central America. Analysis Guru Score: 90% BOOK/MARKET RATIO: [PASS] The first criteria of this strategy requires that a company be in the top 20% of the market based on the Book/Market ratio (which is the inverse of the Price/Book ratio). TX, which has a book to market ratio of 1.56, meets this criterion and thus this strategy will use the following rules to determine if it is a financially distressed firm or is unfairly trading at a discount to its book value. The study conducted by Piotroski found that excess returns can be earned by holding a portfolio of high Book/Market stocks. He also found, however, that it is very important to separate companies that trade at a discount because they are financially distressed from companies that are unfairly trading at a discount. The following criteria are used to help provide this distinction. RETURN ON ASSETS: [PASS] As a first step to determining whether a firm is not financially distressed, this methodology requires that the return on assets for the most recent fiscal year be positive. TX's return on assets was 5.59% in the most recent year, therefore it passes this test. CHANGE IN RETURN ON ASSETS: [PASS] The next requirement is that the return on assets for the most recent fiscal year must be greater than the return on assets for the previous fiscal year. TX's return on assets was 5.59% in the most recent year and 2.80% in the previous year, therefore it passes this test. CASH FLOW FROM OPERATIONS: [PASS] In addition to the return on assets, the cash flow from operations for the most recent fiscal year must also be positive. This eliminates companies that are burning cash and therefore are more likely to be financially distressed. TX's cash flow from operations was $806.82 million in the most recent year, therefore it passes this test. CASH COMPARED TO NET INCOME: [PASS] This methodology requires that cash from operations for the most current fiscal year must be greater than net income for the most current fiscal year. TX's cash from operations was $806.82 million in the most recent year, while its net income was $621.47 million, therefore it passes this test. CHANGE IN LONG TERM DEBT/ASSETS: [PASS] The long term debt to assets ratio for the most recent fiscal year must be less than or equal to the previous fiscal year. TX's LTD/Assets was 0.13 in the most recent year and 0.17 in the previous year, therefore it passes this test. CHANGE IN CURRENT RATIO: [FAIL] As an additional test of firm solvency, the current ratio for the most recent fiscal year must be greater than the current ratio for the previous fiscal year. TX's current ratio was 3.55 in the most recent year and 4.34 in the previous year, therefore it fails this test. CHANGE IN SHARES OUTSTANDING: [PASS] The issuance of new stock is considered by this methodology to be a sign that a company is not able to generate enough internal cash to fund its business. Therefore, shares outstanding for the most recent fiscal year must be less than or equal to shares outstanding for the previous fiscal year. TX's shares outstanding was 2,004.7 million in the most recent year and 2,004.7 million in the previous year, therefore it passes this test. CHANGE IN GROSS MARGIN: [PASS] As a sign that a company is expanding its profitability, this strategy requires that gross margin for the most recent fiscal year be greater than gross margin for the previous fiscal year. TX's gross margin was 23.00% in the most recent year and 17.00% in the previous year, therefore it passes this test. CHANGE IN ASSET TURNOVER: [PASS] The final criterion of this strategy requires that asset turnover for the most recent fiscal year be greater than asset turnover for the previous fiscal year. TX's asset turnover was 0.66 in the most recent year and 0.48 in the previous year, therefore it passes this test.   INTERPUBLIC GROUP OF COMPANIES, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch The Interpublic Group of Companies, Inc. (Interpublic) is a global advertising and marketing services company. Its companies specialize in consumer advertising, digital marketing, media planning and buying, public relations and specialized communications disciplines. The work it produces for its clients is specific to their needs. Its solutions vary from project-based activity involving one agency and its client to long-term, fully integrated campaigns created by a group of its companies working together on behalf of a client. Its holding company sets company-wide financial objectives and corporate strategy, directs collaborative inter-agency programs, establishes financial management and operational controls, oversees agency's compliance, guides personnel policy, conducts investor relations and oversees mergers and acquisitions. In Mach 2010, the Company completed the acquisition of CuboCC. In September 2011, the Company acquired S2Publicom. Analysis Guru Score: 100% DETERMINE THE CLASSIFICATION: IPG is considered a "True Stalwart", according to this methodology, as its earnings growth of 17.20% lies within a moderate 10%-19% range and its annual sales of $6,954 million are greater than the multi billion dollar level. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. IPG is attractive if IPG can hold its own during a recession. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for IPG (0.49), based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, is excellent. EARNINGS PER SHARE: [PASS] The EPS for a stalwart company must be positive. IPG's EPS ($0.85) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for IPG (72.50%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for IPG 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 IPG (15.50%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [BONUS PASS] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for IPG (34.03%) is high enough to add to the attractiveness of this company.   CAPELLA EDUCATION COMPANY Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Capella Education Company is an online postsecondary education services company. Through its wholly owned subsidiary, Capella University, the Company offers a range of doctoral, master's and bachelor's programs. As December 31, 2010, it offered over 1,250 online courses and 43 academic programs with 136 specializations to over 39,000 learners. It also offers certificate programs, which consist of a series of courses focused on a particular area of study. In addition, Capella Education Company also offers academic services, such as new learner orientation, technical support, academic advising, research services (particularly for doctoral degree candidates), writing services and online tutoring. It also provides appropriate educational accommodations to learners with documented disabilities through its disability support services team. During the year ended December 31, 2010, it formed the joint-venture Sophia Learning, LLC, as majority owner. Analysis Guru Score: 100% DETERMINE THE CLASSIFICATION: This methodology would consider CPLA a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (8.79) relative to the growth rate (36.33%), 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 CPLA (0.24) is very favorable. SALES AND P/E RATIO: [NEUTRAL] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. CPLA, whose sales are $434.8 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 CPLA is 36.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for CPLA (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 CPLA (11.69%) 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 CPLA (40.26%) is considered favorable.   WORLD ACCEPTANCE CORP. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch World Acceptance Corporation is engaged in the small-loan consumer finance business, offering short-term small loans, medium-term larger loans, related credit insurance and ancillary products and services to individuals. The Company offered standardized installment loans, through 1,067 offices in South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee, Illinois, Missouri, New Mexico, Kentucky, Alabama, Wisconsin, and Mexico as of March 31, 2011. The Company serves individuals with limited access to consumer credit from banks, savings and loans, other consumer finance businesses and credit card lenders. In the United States offices, the Company also offers income tax return preparation services to its customers and others. During the fiscal year ended March 31, 2011(fiscal 2011), the Company opened 73 new offices. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider WRLD a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (10.53) relative to the growth rate (23.25%), 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 WRLD (0.45) 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. WRLD, whose sales are $518.3 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 WRLD is 23.2%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] WRLD 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. WRLD's Equity/Assets ratio (51.00%) 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. WRLD's ROA (13.12%) 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 WRLD (18.77%) 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 WRLD (-37.00%) 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.   ASTRAZENECA PLC (ADR) Profile Strategy: Patient Investor Based on: Warren Buffett AstraZeneca PLC (AstraZeneca) is a global biopharmaceutical company. AstraZeneca discovers, develops and commercializes prescription medicines for six areas of healthcare: Cardiovascular, Gastrointestinal, Infection, Neuroscience, Oncology, and Respiratory and Inflammation. It has a range of medicines that includes treatments for illnesses, such as its antibiotic, Merrem/Meronem and Losec/Prilosec for acid related diseases. AstraZeneca's products include Crestor, Seloken/Toprol-XL, Atacand, Nexium, Synagis, Seroquel IR, Seroquel XR, Arimidex, Zoladex and Symbicort. The Company owns and operates a range of research and development (R&D), production and marketing facilities worldwide. AstraZeneca operates in over 100 countries, including China, Mexico, Brazil and Russia. On March 3, 2010, AstraZeneca completed the acquisition of Novexel S.A. Novexel is a France-based research company focused on the infection therapy area. Analysis Guru Score: 86% STAGE 1: "Is this a Buffett type company?" A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage. LOOK FOR EARNINGS PREDICTABILITY: [PASS] Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.78, 1.33, 1.25, 1.76, 2.91, 3.85, 3.74, 4.20, 5.19, 5.57. Buffett would consider AZN's earnings predictable, although earnings have declined 2 time(s) in the past seven years, with the most recent decline 4 years ago. The dips have totaled 8.9%. AZN's long term historical EPS growth rate is 12.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 0.8% 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. AZN has a debt of 7,394.0 million and earnings of 9,907.1 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 AZN, over the last ten years, is 28.9%, 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 14.1%, 20.5%, 16.2%, 20.1%, 33.8%, 38.5%, 36.8%, 38.2%, 36.4%, 33.8%, and the average ROE over the last 3 years is 36.1%, 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 AZN, over the last ten years, is 22.8% and the average ROTC over the past 3 years is 24.1%, 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 13.0%, 19.8%, 15.8%, 18.7%, 31.3%, 36.0%, 21.2%, 22.7%, 25.3%, 24.3%, 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. AZN's free cash flow per share of $3.55 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 $15.70 and compares it to the gain in EPS over the same period of $4.79. AZN's management has proven it can earn shareholders a 30.5% 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. AZN's shares outstanding have fallen over the past five years from 1,532,000,000 to 1,359,000,000, 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 AZN 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 $7.29 and divide it by the current market price of $42.85. An investor, purchasing AZN, could expect to receive a 17.01% initial rate of return. Furthermore, he or she could expect the rate to increase 0.8% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 3.47%. Compare this with AZN's initial yield of 17.01%, which will expand at an annual rate of 0.8%, 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] AZN currently has a book value of $18.00. It is safe to say that if AZN can preserve its average rate of return on equity of 28.9% and continues to retain 50.48% of its earnings, it will be able to sustain an earnings growth rate of 14.6% and it will have a book value of $70.13 in ten years. If it can still earn 28.9% on equity in ten years, then expected EPS will be $20.23. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $20.23 and multiply them by the lower of the 5 year average P/E ratio (10.2) or current P/E ratio (current P/E in this case), which is 5.9 and you get AZN's projected future stock price of $118.98. 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 $37.62. This gives you a total dollar amount of $156.60. These numbers indicate that one could expect to make a 13.8% average annual return on AZN's stock at the present time. Although, the return is slightly below the liking of Buffett, the return would still be somewhat acceptable. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 0.8%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $7.86. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (10.2) or current P/E ratio (current P/E in this case), which is 5.9. This equals the future stock price of $46.19. Add in the total expected dividend pool of $37.62 to get a total dollar amount of $83.81. 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 $42.85 and the future expected stock price, including the dividend pool, of $83.81. If you were to invest in AZN at this time, you could expect a 6.9% average annual return on your money. Buffett likes to see a 15% return, and would even go down to 12%. LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [FAIL] Based on the two different methods, you could expect an annual compounding rate of return somewhere between 6.9% and 13.8%. 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 10.4% on AZN stock for the next ten years, based on the current fundamentals. Buffett accepts a 12% return, although 15% is preferable. This return is unacceptable to Buffett, thus failing the criterion.   KULICKE AND SOFFA INDUSTRIES INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool Kulicke and Soffa Industries, Inc. (K&S) designs, manufactures and sells capital equipment and expendable tools used to assemble semiconductor devices, including integrated circuits (IC), high and low powered discrete devices, light-emitting diodes (LEDs), and power modules. The Company also services, maintains, repairs and upgrades its equipment. Its customers primarily consist of semiconductor device manufacturers, outsourced semiconductor assembly and test providers (OSAT), other electronics manufacturers and automotive electronics suppliers. K&S operates in two main business segments: Equipment and Expendable Tools. K&S manufactures and sells a line of ball bonders, heavy wire wedge bonders, stud bumpers, and die bonders. The Company manufactures and sells a variety of expendable tools for a range of semiconductor packaging applications. Analysis Guru Score: 79% 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. KLIC's profit margin of 15.37% 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. KLIC, 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 KLIC (-96.15% for EPS, and -30.43% for Sales) are not good enough to pass. INSIDER HOLDINGS: [FAIL] KLIC's insiders should own at least 10% (they own 1.97%) 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. KLIC's free cash flow of $2.73 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] KLIC's profit margin has been consistent or even increasing over the past three years (Current year: 15.37%, Last year: 18.63%, Two years ago: -18.47%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. R&D AS A PERCENTAGE OF SALES: [PASS] KLIC is either maintaining the same levels of R&D expenditures(currently $65.1 million) or increasing these levels which is a good sign. This allows the company to develop the superior technology and new products that will put everyone else out of business. This criterion is particularly important for high-tech and medical stocks because they are so R&D dependant. CASH AND CASH EQUIVALENTS: [PASS] KLIC's level of cash $384.6 million passes this criteria. If a company is a cash generator, like KLIC, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. 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 KLIC was 9.69% last year, while for this year it is 8.80%. Since the inventory to sales is decreasing by -0.89% 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 KLIC was 25.70% last year, while for this year it is 16.70%. Since the AR to sales is decreasing by -9.00% the stock passes this criterion. LONG TERM DEBT/EQUITY RATIO: [PASS] KLIC'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): [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 (KLIC's is 0.14), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. KLIC passes this test. The following criteria for KLIC are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] KLIC has not been significantly increasing the number of shares outstanding within recent years which is a good sign. KLIC currently has 74.0 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. KLIC's sales of $830.4 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] KLIC passes the Daily Dollar Volume (DDV of $12.2 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. KLIC with a price of $8.68 passes the price test. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions. INCOME TAX PERCENTAGE: [FAIL] KLIC's income tax paid expressed as a percentage of pretax income either this year (21.44%) or last year (-1.46%) is below 20% which is cause for concern. Because the tax rate is below 20% this could mean that the earnings that were reported are unrealistically inflated due to the lower level of income tax paid. However, we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%).   PETROLEO BRASILEIRO SA (ADR) Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Petroleo Brasileiro SA Petrobras (Petrobras) is a Brazilian integrated oil and gas company. It operates in five segments: exploration and production; refining, commercialization and transport of oil and natural gas; petrochemicals; distribution of derivatives, electrical energy, biofuels and other renewable energy sources. Directly or through its subsidiaries, Petrobras is engaged in the research, extraction, refining, processing, commercialization and transport of oil from wells, shales and other rocks, its derivatives, natural gas and other liquid hydrocarbons, as well as in activities related to energy, promoting research, development, production, transport, distribution and commercialization of all forms of energy. As of December 31, 2010, it had 132 production platforms, 16 refineries, 291 vessels, 29,398 kilometers of pipelines, six biofuel plants, 16 thermoelectric plants, one pilot wind farm, 8,477 service stations and two fertilizer plants, as well as presence in 30 countries. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: According to this methodology, PBR is a "Slow Grower", based on its single digit earnings growth of 9.02%, based on the average of the 3, 4 and 5 year historical eps growth rates. SALES: [PASS] PBR would fall into the "Dividend Payers" category according to this methodology. The first requirement of a Slow Grower is that its sales exceed one billion. PBR's sales are $133,691 million. It passes the test. 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 PBR was 12.10% last year, while for this year it is 9.86%. Since inventory to sales has decreased from last year by -2.24%, PBR passes this test. YIELD COMPARED TO THE S&P 500: [PASS] This methodology also maintains that the Yield of a "Slow Grower" should be high, which includes being higher than the S&P average (currently 2.68%), and at least 3%. This yield is required because dividends are the main reason for investing in "Slow Growers". The yield for PBR is 5.25% so it passes this test. YIELD ADJUSTED P/E/GROWTH (PEG) RATIO: [PASS] This methodology would consider the Yield-adjusted P/E/G ratio for PBR of 0.44, based on the average of the 3, 4 and 5 year historical eps growth rates, to be excellent. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for PBR (39.72%) 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 PBR (-17.73%) 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 PBR (-22.95%) 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 HITK HI-TECH PHARMACAL CO. Biotechnology & Drugs 59 CSH CASH AMERICA INTERNATIONAL, INC. Misc. Financial Services 58 DV DEVRY INC. Schools 58 DECK DECKERS OUTDOOR CORPORATION Footwear 54 DCM NTT DOCOMO, INC. (ADR) Communications Services 54 LULU LULULEMON ATHLETICA INC. Retail (Apparel) 54 SWI SOLARWINDS, INC. Software & Programming 54 CACI CACI INTERNATIONAL INC Software & Programming 52 MOS THE MOSAIC COMPANY Non-Metallic Mining 51 GPS THE GAP INC. Retail (Apparel) 48

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