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Executive Summary	February 27, 2015

The Economy The economy appears to be taking a breather after several strong months, with the past fortnight's economic data being a mixed bag. On the positive side, new orders for nondefense capital goods spending excluding aircraft, which is considered a good gauge of business investment, bounced back after four months of declines, rising 0.6 percent in January. Overall, durable goods orders were up 2.8%. New claims for unemployment rose slightly since our last newsletter, but are 10.4% below year-ago levels. Continuing claims, the data for which lag new claims by a week, moved slightly lower since our last newsletter and are 18.4% below year-ago levels. Retail sales tumbled 0.8% in January, according to a new report from the Census Bureau, the second straight big monthly drop. That's 2.8% higher than they were in the year-ago period, one of the smaller year-over-year increases we've seen recently. It's worth noting that gasoline station sales are included in retail sales -- in January, they were 24% below year-ago levels. So while retail sales were down 0.9% in December and 0.8% in January, they're down just 0.2% over that period if you strip out gas station sales. Given the growth in employment and wages recently, the December and January declines may well be a case of consumers not yet spending the money they're saving at the pump, rather than a sign of any sort of economic trouble. New home sales, meanwhile, were just about flat in January compared to December, according to the Census Bureau. They were about 9% above year-ago levels. Median sale prices were about 9.5% above where they were a year ago. Housing starts slipped by 2.0% in January, according to the Census Bureau, but are more than 18% above year-ago levels. Permit issuance for new construction dipped 0.7%, but is about 2.4% above where it stood a year ago. Elsewhere, oil prices seem to have stabilized in the $50 range, for now at least. Gas prices, on the other hand, are rebounding. A gallon of regular unleaded on average cost $2.33 as of Feb. 25, up 29 cents from a month earlier, according to AAA. Still, that's more than 30% below where it was a year ago. Since our last newsletter, the S&P 500 returned 1.1%, while the Hot List returned 1.4%. So far in 2015, the portfolio has returned 9.3% vs. 2.5% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 253.4% vs. the S&P's 111.0% gain. Portfolio Update It's been another good fortnight for the Hot List. As of midday trading on Thursday, 7 of the portfolio's 10 holdings were in the black since our last newsletter. Leading the way was generic drugmaker Lannett Company, which was up 10.5%. Lannett still appears to be riding the wave that it caught earlier this month when it announced stellar earnings. Reports have also been circulating that the firm is on the hunt for acquisitions. Not far behind Lannett was Sanderson Farms, which was up 9.7% since our last newsletter. Its rise seemed to be driven partly by its announcement of strong fiscal first quarter earnings and revenues. But much of its gains occurred before its Feb. 24 earnings release. It's not clear what the catalyst was for the stock's gains prior to the earnings announcement. On the downside, petrochemical firm Sasol was down 8%. The South African firm said the negative impact of lower oil prices on its earnings is causing it to change its dividend policy. Previously, the company's policy was to maintain or raise dividends, but now the firm has adopted a more flexible approach that will give it the option to decrease dividends, according to Reuters. Investors were not pleased, and shares fell sharply. With almost two months of 2015 now in the books, the Hot List has bounced back strongly from its 2014 struggles. We'll check back in on the portfolio's performance in two weeks, at which time we will perform our regularly scheduled rebalancing.		Editor-in-Chief: John Reese Since Inception   Hot List 253.4% S&P 500 111.0% Accuracy 55.4% Beta 1.2 YTD   Hot List 9.3% S&P 500 2.5% Since Last Issue   Hot List 1.4% S&P 500 1.1% Avg. Fundamentals   Market Cap (mil) $81,379 PE Ratio 16.4 5 Yr EPS Growth 26.1% Yield 1.8% Rel. Strength 71 Portfolio Sectors Services 3 Financial 2 Healthcare 1 Basic Materials 1 Capital Goods 1 Consumer/Non-Cyclical 1 Technology 1
Guru Spotlight: Martin Zweig Martin Zweig is known as one of the greatest growth investors of all-time, and when it came to picking stocks, he said there were two main ways to go about it: the rifle approach and the shotgun method. The rifle approach involves investing in a small number of company's whose prospects, fundamentals, and businesses you've analyzed thoroughly. The shotgun approach, meanwhile, involves systematically screening large numbers of stocks to find those that have specific quantitative characteristics -- that's what we do with the Hot List. Which did Zweig prefer? The shotgun method. In this passage of Winning on Wall Street, he explained why, talking first about the rifle method and then about the shotgun approach: For some, the shotgun approach can be a difficult one to adopt because you're basically acknowledging upfront that you're going to pick some losing stocks. The rifle method offers the illusion of more control, the idea that by getting as much information as possible on a limited number of firms you can always (or almost always) make the right decision. But the truth is that there are just too many moving parts in the stock market for anyone to be right anywhere close to all the time, whether you use a rifle or shotgun approach. Even the most famous and perhaps the best rifle method stock picker ever, Warren Buffett, makes mistakes -- in his 2008 letter to Berkshire Hathaway shareholders, Buffett said that he had cost the firm billions by investing in ConocoPhillips at the wrong time earlier that year, for example. (In fact, in my latest article for Seeking Alpha, I talked a bit about how Buffett's letters are often filled with his acknowledgments of his own errors.) The reality is also that you don't need to be right all the time. As Zweig said, "If you are right 60% of the time, ride your profits, and rein in your losses, you'll find that when you're right you're very right, and when you're wrong you're only moderately wrong. In the long run, a 60% success rate translates into huge gains, a 50% rate into solid gains, and even a 40% rate can beat the market." My Guru Strategies are proof of that. In the chart below, you can see the accuracy rates (that is, the percentage of stocks that they made money on) for each of my 10-stock portfolios since their inceptions. As you can see, none of these portfolios has made money on more than 61.3% of its picks, and yet all but two of them are beating the S&P 500 since their inceptions, most by pretty wide margins. The strategy with the lowest accuracy rate -- my Momentum Investor portfolio -- has been right on just 47% of its picks, but it has beaten the S&P by 3.2 percentage points annually since its inception nearly 12 years ago. I think one of the greatest benefits of the shotgun approach is that it lends itself to systematic, unemotional investing. Since you are just screening for stocks that have particular fundamental qualities, there's no hunch playing or guesswork. If the stock meets your criteria, you buy it; if not, you pass. With a rifle approach, you're going to get into more subjective analyses of the firm's products and business. Rare investors like Buffett, who have exceptional business acumen and the ability to keep their emotions at bay, can have great success doing that. But most individual investors lack the discipline (and time, frankly) needed to thoroughly analyze a business and not be swayed by what the rest of the world thinks. As I noted earlier, you're not going to be right on 100% of their stock picks, or anything close to that. No one can do that. But what you can do is set up an investment framework that helps limit the behavioral mistakes and emotional decision-making that so many investors fall prey to. To me, using a shotgun approach is a key part of doing that. News about Validea Hot List Stocks Sanderson Farms (SAFM): Sanderson said on Feb. 24 that it posted fiscal first-quarter profit of $2.87 per share, beating analysts estimates of $2.76 per share, according to the Associated Press. Sanderson posted revenue of $667.4 million in the period. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will rebalance the portfolio. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score LCI LANNETT COMPANY, INC. Biotechnology & Drugs 97 SSL SASOL LIMITED (ADR) Chemical Manufacturing 86 SAFM SANDERSON FARMS, INC. Food Processing 81 ZUMZ ZUMIEZ INC. Retail (Apparel) 80 JLL JONES LANG LASALLE INC Real Estate Operations 78 AAPL APPLE INC. Communications Equipment 68 HIBB HIBBETT SPORTS, INC. Retail (Specialty) 60 STWD STARWOOD PROPERTY TRUST, INC. Consumer Financial Services 55 AFSI AMTRUST FINANCIAL SERVICES INC Insurance (Prop. & Casualty) 42 MIDD MIDDLEBY CORP Misc. Capital Goods 35 Ticker Market Cap Date Added Start Price Current Price Return LCI $2,333 2/13/2015 $57.78 $65.17 12.8% SSL $24,218 12/19/2014 $38.95 $36.82 -5.5% SAFM $1,985 1/16/2015 $80.96 $85.67 5.8% ZUMZ $1,135 10/24/2014 $32.97 $38.84 17.8% JLL $7,262 2/13/2015 $161.15 $161.99 0.5% AAPL $759,634 2/13/2015 $127.08 $130.42 2.6% HIBB $1,220 2/13/2015 $49.60 $48.78 -1.7% STWD $5,441 1/16/2015 $23.72 $24.34 2.6% AFSI $4,417 10/24/2014 $49.37 $54.71 10.8% MIDD $6,144 2/13/2015 $105.62 $107.29 1.6%

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer LCI   |   SSL   |   SAFM   |   ZUMZ   |   JLL   |   AAPL   |   HIBB   |   STWD   |   AFSI   |   MIDD   |   LANNETT COMPANY, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool Lannett Company, Inc. develops, manufactures, packages, markets and distributes solid oral (tablets and capsules), extended release, topical and oral solution finished dosage forms of drugs. The Company also manufactures active pharmaceutical ingredients through its Cody Laboratories, Inc. (Cody Labs) subsidiary. The Company operates pharmaceutical manufacturing plants in Philadelphia, Pennsylvania and Cody, Wyoming. Customers of the Company's pharmaceutical products include generic pharmaceutical distributors, drug wholesalers, chain drug stores, private label distributors, mail-order pharmacies, other pharmaceutical manufacturers, managed care organizations, hospital buying groups, Governmental entities and health maintenance organizations. The Company's products include Levothyroxine Sodium tablets, Digoxin tablets, Butalbital, Cocaine Topical Solution and Morphine Sulfate Oral Solution. 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. LCI's profit margin of 34.25% 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. LCI, with a relative strength of 90, 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 LCI (146.94% for EPS, and 70.53% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] LCI's insiders should own at least 10% (they own 17.09% ) of the company's outstanding shares which is the minimum required. A high percentage typically 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. LCI's free cash flow of $0.54 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] LCI's profit margin has been consistent or even increasing over the past three years (Current year: 20.86%, Last year: 8.82%, Two years ago: 3.21%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. R&D AS A PERCENTAGE OF SALES: [FAIL] LCI has reduced their R&D expenditures(currently $27.7 million) over the past two years which is unacceptable. LCI is jeopardizing the future in order to boost current EPS numbers. This criterion is particularly important for high-tech and medical stocks because they are so R&D dependant. CASH AND CASH EQUIVALENTS: [PASS] LCI's level of cash $146.3 million passes this criteria. If a company is a cash generator, like LCI, 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 LCI was 21.54% last year, while for this year it is 16.38%. Since the inventory to sales is decreasing by -5.16% 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 LCI was 17.48% last year, while for this year it is 22.40%. Although the AR to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive. LONG TERM DEBT/EQUITY RATIO: [PASS] LCI's trailing twelve-month Debt/Equity ratio (0.25%) is a little higher than what this methodology is looking for, but is still at an acceptable level. The superior companies that you are looking for don't need to borrow money in order to grow. This company has borrowed very little which is still OK. "THE FOOL RATIO" (P/E TO GROWTH): [PASS] The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (LCI's is 0.40), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. LCI passes this test. The following criteria for LCI are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] LCI has not been significantly increasing the number of shares outstanding within recent years which is a good sign. LCI currently has 37.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock. SALES: [PASS] Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. LCI's sales of $368.8 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". LCI passes the sales test. DAILY DOLLAR VOLUME: [FAIL] LCI does not pass the Daily Dollar Volume (DDV of $47.0 million) test. It exceeds the maximum requirement of $25 million. Stocks that fail the test are too liquid for a small individual investor and many institutions have already discovered it. 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. LCI with a price of $65.17 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] LCI's income tax paid expressed as a percentage of pretax income this year was (36.50%) and last year (35.30%) 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.   SASOL LIMITED (ADR) Profile Strategy: Patient Investor Based on: Warren Buffett Sasol Limited (Sasol) is an integrated energy and chemicals company. Sasol mines coal in South Africa and produce natural gas and condensate in Mozambique, oil in Gabon and shale gas in Canada. In South Africa it refines imported crude oil and retail liquid fuels. It has chemical manufacturing and marketing operations in South Africa, Europe, the Middle East, Asia and the Americas. It operates in four segments: South African energy cluster, International Energy Cluster, Chemical Cluster and Other businesses. Effective March 31, 2013, Sasol Olefins & Surfactants sold G.D. Portbury Ltd. On 16 August 2013, Sasol Investment Company (Pty) Limited, a wholly owned subsidiary of Sasol, entered into a definitive sale and share purchase agreement pursuant to which Main Street 1095 (Pty) Limited, completed the acquisition of 100% of the interest of SPI International (Pty) Limited (SPII). SPII is the indirect owner of a 50% interest in the Iranian joint venture, Arya Sasol Polymer Company. 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 1.35, 1.43, 2.34, 3.18, 1.92, 2.30, 2.84, 3.31, 3.70, 4.18. Buffett would consider SSL's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 6 years ago. The dips have totaled 39.6%. SSL's long term historical EPS growth rate is 15.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 1.9% 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. SSL has a debt of 2,032.7 million and earnings of 2,603.8 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 SSL, over the last ten years, is 21.1%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 23.6%, 19.6%, 26.9%, 30.0%, 17.4%, 17.8%, 19.4%, 19.4%, 18.8%, 18.4%, and the average ROE over the last 3 years is 18.9%, 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 SSL, over the last ten years, is 17.8% and the average ROTC over the past 3 years is 16.8%, 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 18.1%, 15.2%, 22.1%, 24.9%, 15.0%, 15.5%, 17.1%, 17.8%, 16.5%, 16.2%, 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. SSL's free cash flow per share of $0.72 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 $15.92 and compares it to the gain in EPS over the same period of $2.83. SSL's management has proven it can earn shareholders a 17.8% 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. SSL's shares outstanding have fallen over the past three years from 636,020,020 to 632,000,000, 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 SSL 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 $4.12 and divide it by the current market price of $36.82. An investor, purchasing SSL, could expect to receive a 11.19% initial rate of return. Furthermore, he or she could expect the rate to increase 1.9% 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 2.75%. Compare this with SSL's initial yield of 11.19%, which will expand at an annual rate of 1.9%, 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] SSL currently has a book value of $21.79. It is safe to say that if SSL can preserve its average rate of return on equity of 18.9% and continues to retain 58.23% of its earnings, it will be able to sustain an earnings growth rate of 11.0% and it will have a book value of $61.79 in ten years. If it can still earn 18.9% on equity in ten years, then expected EPS will be $11.66. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $11.66 and multiply them by the lower of the 5 year average P/E ratio (10.8) or current P/E ratio (current P/E in this case), which is 8.9 and you get SSL's projected future stock price of $104.12. 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 $19.12. This gives you a total dollar amount of $123.24. These numbers indicate that one could expect to make a 12.8% average annual return on SSL'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 1.9%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $4.97. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (10.8) or current P/E ratio (current P/E in this case), which is 8.9. This equals the future stock price of $44.41. Add in the total expected dividend pool of $19.12 to get a total dollar amount of $63.53. CALCULATE THE EXPECTED RETURN USING THE AVERAGE EPS GROWTH METHOD: [No Pass/Fail] Now you can figure out your expected return based on a current price of $36.82 and the future expected stock price, including the dividend pool, of $63.53. If you were to invest in SSL at this time, you could expect a 5.61% 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 5.6% and 12.8%. 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 9.2% on SSL 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.   SANDERSON FARMS, INC. Profile Strategy: Value Investor Based on: Benjamin Graham Sanderson Farms, Inc. is a poultry processing company which is engaged in the production, processing, marketing and distribution of fresh and frozen chicken and other prepared chicken items. In addition, the Company is engaged in the processing, marketing and distribution of prepared chicken through its wholly owned subsidiary, Sanderson Farms, Inc. (Foods Division). It produces a range of processed chicken products and prepared chicken items. It sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, under the Sanderson Farms brand name to retailers, distributors, and casual dining operators in the south-eastern, south-western, north-eastern and western United States and to customers who resell frozen chicken into export markets. During the fiscal year ended October 31, 2013 (fiscal 2013), it processed 452 million chickens, or over 3.0 billion dressed pounds. Analysis Guru Score: 71% SECTOR: [PASS] SAFM is neither a technology nor financial Company, and therefore this methodology is applicable. SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. SAFM's sales of $2,857.3 million, based on trailing 12 month sales, pass this test. CURRENT RATIO: [PASS] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. SAFM's current ratio of 3.73 passes the test. LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for SAFM is $10.0 million, while the net current assets are $398.0 million. SAFM passes this test. LONG-TERM EPS GROWTH: [FAIL] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for SAFM were negative within the last 5 years and therefore the company fails this criterion. P/E RATIO: [PASS] The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. SAFM's P/E of 13.60 (using the 3 year PE) passes this test. PRICE/BOOK RATIO: [FAIL] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. SAFM's Price/Book ratio is 2.06, while the P/E is 13.60. SAFM fails the Price/Book test.   ZUMIEZ INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Zumiez Inc. is a multi-channel specialty retailer of action sports related apparel, footwear, accessories and hardgoods, focusing on skateboarding, snowboarding, surfing, motocross and bicycle motocross for young men and women. The Company operates under the names Zumiez and Blue Tomato. The Company operates ecommerce Websites at www.zumiez.com and www.blue-tomato.com. Its apparel offerings include tops, bottoms, outerwear and accessories, such as caps, bags and backpacks, belts, jewelry and sunglasses. Zumiez's footwear offerings primarily consist of action sports related athletic shoes and sandals. Its equipment offerings, or hardgoods, include skateboards, snowboards and ancillary gear, such as boots and bindings. The Company sources its private label merchandise from primarily foreign manufacturers around the world. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider ZUMZ a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (21.90) relative to the growth rate (31.79%), 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 ZUMZ (0.69) makes it favorable. SALES AND P/E RATIO: [NEUTRAL] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. ZUMZ, whose sales are $779.8 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 ZUMZ is 31.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for ZUMZ (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 ZUMZ (2.63%) 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 ZUMZ (10.40%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.   JONES LANG LASALLE INC Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Jones Lang LaSalle Incorporated (Jones Lang LaSalle), is a financial and professional services firm specializing in real estate. Jones Lang LaSalle has over 200 corporate offices worldwide and operations in more than 1,000 locations in 70 countries. The Company offers integrated real estate and investment management services on a local, regional and global basis to owner, occupier and investor clients. It delivers an array of Real Estate Services (RES) across its three geographic business segments: the Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific. LaSalle Investment Management, a wholly owned member of the Jones Lang LaSalle group that consists of its fourth business segment, is a diversified real estate investment management company. In July 2014, Jones Lang LaSalle Inc acquired CLEO Construction Management (CLEO), a construction project management services firm that specializes in medical facilities. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider JLL a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (19.02) relative to the growth rate (28.39%), based on the average of the 3 and 4 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 JLL (0.67) makes it favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. JLL, whose sales are $5,429.6 million, needs to have a P/E below 40 to pass this criterion. JLL's P/E of (19.02) is considered acceptable. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for JLL is 28.4%, based on the average of the 3 and 4 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for JLL (12.34%) to be acceptable (equity is three to ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for JLL (6.80%) 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: [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 JLL (-0.34%) 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.   APPLE INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Apple Inc. designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players and sells a variety of related software, services, peripherals, networking solutions and third-party digital content and applications. The Company's products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud and a variety of accessory, service and support offerings. The Company offers a range of mobile communication and media devices, personal computing products and portable digital music players, as well as a variety of related software, services, peripherals, networking solutions and third-party hardware and software products. The Company's primary products include iPhone, iPad, Mac, iPod, iTunes, Mac App Store, iCloud, Operating System Software, Application Software and Other Application Software. Analysis Guru Score: 80% MARKET CAP: [PASS] The Cornerstone Value Strategy looks for large, well known companies whose market cap is greater than $1 billion. These companies exhibit solid and stable earnings. AAPL's market cap of $759,634 million passes this test. CASH FLOW PER SHARE: [PASS] The second criterion requires that the company exhibit strong cash flows. Companies with strong cash flow are typically the value oriented investments that this strategy looks for. The company's cash flow per share must be greater than the mean of the market cash flow per share ($1.81). AAPL's cash flow per share of $9.07 passes this test. SHARES OUTSTANDING: [PASS] This particular strategy looks for companies whose total number of outstanding shares are in excess of the market average (625 million shares). These are the more well known and highly traded companies. AAPL, who has 5,882 million shares outstanding, passes this test. TRAILING 12 MONTH SALES: [PASS] A company's trailing 12 month sales ($199,800 million) are required to be 1.5 times greater than the mean of the market's trailing 12 month sales ($21,634 million). AAPL passes this test. DIVIDEND: [FAIL] The final step in the Cornerstone Value strategy is to select the 50 companies from the market leaders group (those that have passed the previous four criteria) that have the highest dividend yield. AAPL's dividend yield of 1.44% fails this final criterion. Even though it did pass the previous four criteria it would fail the overall methodology.   HIBBETT SPORTS, INC. Profile Strategy: Patient Investor Based on: Warren Buffett Hibbett Sports, Inc. operates sporting goods stores in small and mid-sized markets predominantly in the South, Southwest, Mid-Atlantic and the Midwest. The Company operates 927 stores consisting of 910 Hibbett Sports stores and 17 smaller-format Sports. The Company's merchandise assortment emphasizes team sports complemented by localized apparel, footwear and accessories designed to appeal to a range of customers within each individual market. The Company's primary retail format is Hibbett Sports, an approximately 5,000 square foot store located primarily in strip centers, which are usually near a Wal-Mart store. Of these stores, 730 Hibbett Sports stores are located in strip centers, which include free-standing stores, with the remaining 180 stores located in enclosed malls, which are the only enclosed malls in their county. Analysis Guru Score: 93% 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 0.70, 0.98, 1.17, 0.96, 1.02, 1.12, 1.60, 2.15, 2.72, 2.70. Buffett would consider HIBB's earnings predictable, although earnings have declined 2 time(s) in the past seven years, with the most recent decline 1 years ago. The dips have totaled 18.7%. HIBB's long term historical EPS growth rate is 17.0%, based on the 10 year average EPS growth rate, and it is expected to grow earnings 12.0% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers. LOOK AT THE ABILITY TO PAY OFF DEBT [PASS] Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. HIBB has no long term debt and therefore would pass this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [PASS] Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for HIBB, over the last ten years, is 23.7%, 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 18.4%, 25.6%, 27.1%, 23.8%, 21.3%, 18.3%, 22.3%, 27.8%, 29.4%, 22.9%, and the average ROE over the last 3 years is 26.7%, thus passing this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: [PASS] Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for HIBB, over the last ten years, is 23.6% and the average ROTC over the past 3 years is 26.5%, 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 18.4%, 25.6%, 27.1%, 23.8%, 21.3%, 18.3%, 22.0%, 27.5%, 29.2%, 22.9%, thus passing this criterion. LOOK AT CAPITAL EXPENDITURES: [PASS] Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. HIBB's free cash flow per share of $0.11 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 $15.12 and compares it to the gain in EPS over the same period of $2.00. HIBB's management has proven it can earn shareholders a 13.2% return on the earnings they kept. This return is acceptable to Buffett, but he would prefer to see a return > 15%. Essentially, management is is doing a good 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. HIBB's shares outstanding have fallen over the past five years from 28,680,000 to 25,000,000, 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 HIBB quantitatively. STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return. CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail] Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $2.75 and divide it by the current market price of $48.78. An investor, purchasing HIBB, could expect to receive a 5.64% initial rate of return. Furthermore, he or she could expect the rate to increase 12.0% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 2.75%. Compare this with HIBB's initial yield of 5.64%, which will expand at an annual rate of 12.0%, based on the analysts' consensus estimated long term growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding. CALCULATE THE FUTURE EPS: [No Pass/Fail] HIBB currently has a book value of $12.41. It is safe to say that if HIBB can preserve its average rate of return on equity of 23.7% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 23.7% and it will have a book value of $104.02 in ten years. If it can still earn 23.7% on equity in ten years, then expected EPS will be $24.64. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $24.64 and multiply them by the lower of the 5 year average P/E ratio (21.0) or current P/E ratio (current P/E in this case), which is 17.7 and you get HIBB's projected future stock price of $436.88. CALCULATE THE EXPECTED RATE OF RETURN BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now add in the total expected dividend pool to be paid over the next ten years, which is $0.00. This gives you a total dollar amount of $436.88. These numbers indicate that one could expect to make a 24.5% average annual return on HIBB's stock at the present time. Buffett would consider this an absolutely fantastic expected return. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 12.0%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $8.52. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (21.0) or current P/E ratio (current P/E in this case), which is 17.7. This equals the future stock price of $151.03. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $151.03. 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 $48.78 and the future expected stock price, including the dividend pool, of $151.03. If you were to invest in HIBB at this time, you could expect a 11.96% average annual return on your money. Buffett likes to see a 15% return, and would even go down to 12%. LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [PASS] Based on the two different methods, you could expect an annual compounding rate of return somewhere between 12.0% and 24.5%. 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 18.2% on HIBB stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   STARWOOD PROPERTY TRUST, INC. Profile Strategy: Growth Investor Based on: Martin Zweig Starwood Property Trust, Inc. is a holding company. The Company, through its subsidiaries is focused on originating, acquiring, financing and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities (CMBS), and other commercial real estate-related debt investments in both the United States and Europe. The Company operates in two segments: Real estate investment lending (the Lending Segment) and LNR. Real estate investment includes all business activities of the Company comprising investments in real estate related loans and securities that are held-for-investment. Analysis Guru Score: 92% P/E RATIO: [PASS] The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. STWD's P/E is 10.70, based on trailing 12 month earnings, while the current market PE is 18.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [PASS] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. STWD's revenue growth is 140.85%, while it's earnings growth rate is 17.14%, based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate. Therefore, STWD passes this criterion. SALES GROWTH RATE: [FAIL] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (20.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (27%) of the current year. Sales growth for the prior must be greater than the latter. For STWD this criterion has not been met and fails this test. The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria. CURRENT QUARTER EARNINGS: [PASS] The first of these criteria is that the current EPS be positive. STWD's EPS ($0.73) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. STWD's EPS for this quarter last year ($0.53) pass this test. POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: [PASS] The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. STWD's growth rate of 37.74% passes this test. EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: [PASS] Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for STWD is 8.57%. This should be less than the growth rates for the 3 previous quarters, which are 12.20%, 36.59%, and 26.83%. STWD passes this test, which means that it has good, reasonably steady earnings. This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: [PASS] If the growth rate of the prior three quarter's earnings, 25.20%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 37.74%, (versus the same quarter one year ago) then the stock passes. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: [PASS] The EPS growth rate for the current quarter, 37.74% must be greater than or equal to the historical growth which is 17.14%. STWD would therefore pass this test. EARNINGS PERSISTENCE: [PASS] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. STWD, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were -0.06, 1.11, 1.36, 1.74 and 1.81, passes this test. LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. STWD's long-term growth rate of 17.14%, based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, passes this test. INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For STWD, this criterion has not been met (insider sell transactions are 20, while insiders buying number 6). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.   AMTRUST FINANCIAL SERVICES INC Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Amtrust Financial Services, Inc., (AmTrust) is a provider of property and casualty insurance. The Company operates in four business segments: small commercial business, Specialty Risk and Extended Warranty, specialty program and personal lines reinsurance. Small Commercial Business segment provides workers' compensation to small businesses. The Company's Specialty Risk and Extended Warranty segment provides coverage for consumer and commercial goods and custom designed coverages. The Company's Specialty Program segment provides workers' compensation, package products, general liability, commercial auto liability, excess and surplus lines programs and other specialty commercial property and casualty insurance. The Company subsidiaries include: Technology Insurance Company, Inc. (TIC), Rochdale Insurance Company (RIC), AmTrust Insurance Company of Kansas, Inc. (AICK), AmTrust Lloyd's Insurance Company of Texas (ALIC), Oryx Insurance Brokerage, Inc. and TMI Solutions, LLC. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider AFSI a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (10.05) relative to the growth rate (30.35%), 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 AFSI (0.33) is very favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. AFSI, whose sales are $4,084.3 million, needs to have a P/E below 40 to pass this criterion. AFSI's P/E of (10.05) is considered acceptable. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for AFSI is 30.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] AFSI 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. AFSI's Equity/Assets ratio (15.00%) 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. AFSI's ROA (2.37%) is above the minimum 1% that this methodology looks for, thus passing the criterion.   MIDDLEBY CORP Profile Strategy: P/E/Growth Investor Based on: Peter Lynch The Middleby Corporation (Middleby), through its operating subsidiary Middleby Marshall Inc. (Middleby Marshall) and its subsidiaries, is engaged in the design, manufacture, marketing, distribution, and service of a line of cooking and warming equipment used in all types of commercial restaurants and institutional kitchens, and food preparation, cooking and packaging equipment for food processing operations. The Company conducts its business through three principal business segments: the Commercial Foodservice Equipment Group, the Food Processing Equipment Group and the Residential Kitchen Equipment Group. The Company's commercial foodservice equipment is marketed under a portfolio of brands, including Anets, Beech, Blodgett, Blodgett Combi, Blodgett Range, Bloomfield, Britannia, CTX, Celfrost, CookTek, Doyon, frifri, Giga, Holman, Houno, IMC, Jade, Lang, Lincat, MagiKitch'n, Marsal, Middleby Marshall, MPC, Nieco, PerfectFry, TurboChef, Viking, Wells, Wunder-Bar and others. Analysis Guru Score: 87% DETERMINE THE CLASSIFICATION: This methodology would consider MIDD a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (31.87) relative to the growth rate (23.29%), 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 MIDD (1.37) is on the high side, but is acceptable if all the other tests are met. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. MIDD, whose sales are $1,579.0 million, needs to have a P/E below 40 to pass this criterion. MIDD's P/E of (31.87) is considered acceptable. INVENTORY TO SALES: [PASS] When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for MIDD was 14.78% last year, while for this year it is 15.41%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (0.62%) is below 5%. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for MIDD is 23.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for MIDD (53.52%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for MIDD 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 MIDD (2.10%) 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 MIDD (-7.68%) 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 SODA SODASTREAM INTERNATIONAL LTD Beverages (Non-Alcoholic) 100 UVE UNIVERSAL INSURANCE HOLDINGS, INC. Insurance (Prop. & Casualty) 75 CACC CREDIT ACCEPTANCE CORP. Consumer Financial Services 73 MNST MONSTER BEVERAGE CORP Beverages (Non-Alcoholic) 68 UIHC UNITED INSURANCE HOLDINGS CORP.(NDA) Insurance (Prop. & Casualty) 63 REX REX AMERICAN RESOURCES CORP Chemical Manufacturing 62 VLO VALERO ENERGY CORPORATION Oil & Gas Operations 54 PII POLARIS INDUSTRIES INC. Recreational Products 54 AAP ADVANCE AUTO PARTS, INC. Retail (Specialty) 54 HP HELMERICH & PAYNE, INC. Oil Well Services & Equipment 51

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