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Executive Summary	May 9, 2014

The Economy While the recent GDP report showed that the economy barely grew at all in the first quarter, more recent data shows that the second quarter is a much better story. In April, for example, the private sector added 273,000 jobs, according to the Labor Department. The unemployment rate fell from 6.7% to 6.3%, the lowest it has been since September 2008. The so-called "U-6" rate, which also includes part-time workers seeking full-time work and discouraged workers who have given up looking for a job, fell to 12.3%, the lowest it's been since November 2008. The number of people not in the labor force, which had fallen by nearly 800,000 in the year's first three months, jumped by close to 1 million in April, however. Bears fixed on that, and it's true that that isn't a good sign. But it's also true that the not-in-the-labor-force number can be quite volatile, and is close to its December 2013 level, when the unemployment rate was nearly half a percentage point higher. In other words, while the April report may not have been as strong as the headline jobs-added number indicated, the general trend of improvement does seem to be continuing in the labor market, and that's a big positive. The manufacturing sector, meanwhile, expanded in April for the 11th straight month, and did so at an accelerating pace for the third straight month, according to the Institute for Supply Management. The survey's New Orders sub-index remained at a very healthy level, and the Employment sub-index made a nice jump. The prices sub-index, which has been quite high, fell a bit to its lowest reading of 2014, which would seem to be a good sign inflation-wise. The service sector also expanded in April at an accelerating rate, the 51st straight month that it has grown. The New Orders sub-index made a big jump, hitting its highest level since last September. The Employment sub-index fell a bit, but still indicated that employment conditions in the sector were improving. Respondents indicated a sharp jump in inventory, however, which is something to keep an eye on. Personal income made another nice jump in March, rising 0.5%, according to a new government report. Real disposable personal income rose 0.3%. Consumers increased their spending rather sharply during the month, with real personal consumption expenditures jumping 0.7%, similar to what we saw in the March retail sales report. With spending outpacing income gains, the personal savings rate fell from 4.2% to 3.8%. That's on the low side, though not alarmingly so. As for that first quarter GDP number, it was weak and may be headed lower upon revision -- subsequent reports in areas like construction spending and factory inventories were weaker than the government had assumed in the advance GDP report. Though disappointing, a good deal of the first quarter weakness seems to have been a result of bad weather, which at times significantly impacted production around the country. So the data is neither surprising nor too alarming, especially given that things seem to have picked up over the past month or two. Since our last newsletter, the S&P 500 returned -0.2%, while the Hot List returned -1.9%. So far in 2014, the portfolio has returned -12.0% vs. 1.5% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 220.0% vs. the S&P's 87.5% gain. Re-evaluating Value Over the long-term, small-cap value stocks have well outperformed larger growth stocks. For decades, that notion has been a pretty widely known one in the investing world, thanks in large part to the research of highly regarded finance professors Kenneth French and Eugene Fama. Fama and French's research found, for example, that from 1927-2009, small value stocks beat large growth stocks by an average of more than five percentage points annually. In addition, large value stocks beat large growth stocks and small growth stocks by about two percentage points each annually. That data would seem to indicate that simply buying stocks with low price/book ratios -- the metric Fama and French used to assess value -- should be a good investment strategy. And many analysts have supported the idea of such a strategy by contending that the market must reward investors who buy value stocks (which are often in some kind of distress) for taking on additional risk -- that, at least, is what efficient market hypothesis supporters usually say. But new data -- from none other than Fama and French themselves -- seems to turn that notion on its head. In a working paper that was released last year, Fama and French analyzed historical stock returns again, this time adding in two new factors: profitability and investment intensity (the level of capital investment a company makes). While the paper didn't get a whole lot of attention, one of its initial findings appears to be quite significant: The profitability and investment factors made redundant the value factor. "In other words, value stocks -- defined as those with low price/book -- only beat growth stocks because they historically tended to be more profitable and less voracious users of capital," wrote Morningstar's Samuel Lee in a recent piece discussing Fama and French's new paper. The redundancy of the value factor might seem to be contrary to what many of the value-focused gurus I follow preach. In reality, the takeaways from French and Fama's new data fit quite well in a several key ways with the gurus' teachings, and I think they are well worth touching on. First, it's important to note that the value gauge French and Fama use is the price/book ratio, which is not one of the more used gauges by the gurus. In fact, in a research report earlier this year, James O'Shaughnessy's firm wrote that "Despite its popularity, we do not use price-to-book in [the] OSAM Value [composite] because of several problems with the factor." The price/book ratio "consistently has one of the lowest annualized returns of all value factors," O'Shaughnessy Asset Management said in the paper. "Also, in half of the time periods shown, price-to-book underperforms the market." While that particular paper was looking at the Canadian stock market, OSAM said the issue was not isolated to Canada. "In the U.S., price-to-book has been a very inconsistent value ratio with prolonged periods of underperformance," the group said. "From 1927 to 1963 the cheapest ten percent of stocks by price-to-book underperformed the U.S. market by an annualized 205 bps; and over the next 36 years by more than 200 bps." O'Shaughnessy, for the record, initially found the price/sales ratio to be the best value factor -- that's what I use in my O'Shaughnessy-based growth model, which has been one of my better performers over the long haul. (Today O'Shaughnessy actually uses a "value composite" that includes several value gauges, similar, in effect, to what the Hot List does.) What I find interesting about OSAM's work in relation to Fama and French's work is that in almost all cases, the gurus upon whom I base my strategies used valuation metrics that focused on earnings, sales, or cash flow -- in other words, the concept of profitability was at work within the value metrics. The price/book ratio, in contrast, is based on the value of the company's assets, not its ability to generate profits -- and Wall Street is less concerned with what a company already is than with what it could grow into in the future. It's also worth noting that of the three guru-inspired models I run that do use the price/book ratio, two of them (the David Dreman and Benjamin Graham approaches) use other value metrics (the price/earnings, price/cash flow and price/dividend ratios for Dreman, and the P/E for Graham) as well. The one strategy that uses price/book (actually its inverse, the book/market ratio) as its sole valuation gauge -- the Joseph Piotroski-based approach -- includes among its other variables the return on assets rate and gross profit margin, both of which get at a firm's profitability, as well as cash flow from operations, which is designed to eliminate firms that are burning through cash. Those three variables jive quite well with the profitability and investment factors that French and Fama added to their analysis in their paper. Then there's Warren Buffett. Of all of the guru-inspired strategies I use, the Buffett-based approach probably has the least stringent valuation measure -- it simply requires that the company's earnings yield be higher than the yield on long-term treasury bonds. It focuses a great deal on earnings persistence, return on equity, return on retained earnings, and return on capital -- profitability. In addition, it looks for companies that have good free cash flows, the idea being that that will weed out firms that require a high amount of capital investment. High profitability, low investment requirements -- that's exactly what French and Fama's study found made the value factor redundant. So what does all this mean? Does it mean that value no longer matters? Most definitely not, in my opinion. Price is always important when you are buying anything, stocks included. As O'Shaughnessy's research has shown, a number of non-price/book ratio valuation metrics have been great ways to identify winning stocks throughout history (metrics like the Price/sales and price/earnings ratios). Just as importantly, I think French and Fama's new research highlights the importance of using a well-rounded strategy that looks at a company and its shares from a number of different angles. Profitability, balance sheet, valuation -- you should consider all of those factors when analyzing a stock. As Kenneth Fisher, another of the gurus I follow, wrote, "Never assume you have found the one silver bullet." My Guru Strategies do not look for a silver bullet. Most of the strategies use between seven and 10 different variables; the Motley Fool-based approach uses no fewer than 17. And those are just individual models. With a consensus approach like the Hot List, which gets input from all 12 of my models, you're talking about putting a stock through dozens and dozens of financial and fundamental tests. Those that make the grade are thus some of the most fundamentally sound stocks in the market, showing strength across a number of different levels. Take Hot List newcomer NetEase, which is being added to the portfolio today. The $9-billion-market-cap tech firm has grown earnings at a 24% pace over the long term, and much more rapidly in the most recent quarter. It has no long-term debt and a 5.4 current ratio, indicating a very strong balance sheet, and it has been extremely profitable, averaging a 10-year return on equity north of 28% and a return on retained earnings over that period of more than 20%. All of that, and it trades for about 12 times earnings and has a free cash flow yield of close to 8%. Of course that's no guarantee that the stock will be a huge winner for the portfolio. But over the long term, stocks with those kind of well-rounded fundamentals and financials tend to perform quite well. By investing in baskets of stocks like those, we stack the odds greatly in our favor over the long haul. The proof is in the pudding -- the Hot List's stellar long-term track record is in large part due to its deep, thorough fundamental analysis of companies and their shares. Moving forward, I'm confident that this approach will continue to pay off with returns well ahead of the market average.		Editor-in-Chief: John Reese Since Inception   Hot List 220.0% S&P 500 87.5% Accuracy 55.5% Beta 1.2 YTD   Hot List -12.0% S&P 500 1.5% Since Last Issue   Hot List -1.9% S&P 500 -0.2% Avg. Fundamentals   Market Cap (mil) $9,265 PE Ratio 15.9 5 Yr EPS Growth 25.9% Yield 0.6% Rel. Strength 72 Portfolio Sectors Services 3 Capital Goods 2 Consumer Cyclical 1 Energy 1 Financial 1 Healthcare 1 Technology 1
Have Your Portfolio Managed Using Validea's Investing System Many users know about our research services but are unaware that money management services based on our system are also offered through a separate registered investment advisory firm, Validea Capital Management. If you are thinking about switching advisors or no longer have the time or inclination to manage your investments yourself, find out more about Validea Capital, its portfolio offerings, and its performance below. Request an Investment Consultation Today! ** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. The information above is not intended as personal investment advice and should not be interpreted as such. The Fallen As we rebalance the Validea Hot List, 6 stocks leave our portfolio. These include: Trueblue Inc (TBI), Foot Locker, Inc. (FL), Hollyfrontier Corp (HFC), Dorman Products Inc. (DORM), Hyster-yale Materials Handling Inc (HY) and Cnooc Ltd (Adr) (CEO). The Keepers 4 stocks remain in the portfolio. They are: Agco Corporation (AGCO), Valero Energy Corporation (VLO), Smith & Wesson Holding Corp (SWHC) and Bofi Holding, Inc. (BOFI). The Newbies We are adding 6 stocks to the portfolio. These include: Bed Bath & Beyond Inc. (BBBY), Robert Half International Inc. (RHI), Anika Therapeutics, Inc. (ANIK), Drew Industries, Inc. (DW), Northrop Grumman Corporation (NOC) and Netease, Inc (Adr) (NTES). Portfolio Changes Additions   BED BATH & BEYOND INC. BBBY ROBERT HALF INTERNATIONAL INC. RHI ANIKA THERAPEUTICS, INC. ANIK DREW INDUSTRIES, INC. DW NORTHROP GRUMMAN CORPORATION NOC NETEASE, INC (ADR) NTES Deletions   TRUEBLUE INC TBI FOOT LOCKER, INC. FL HOLLYFRONTIER CORP HFC DORMAN PRODUCTS INC. DORM HYSTER-YALE MATERIALS HANDLING INC HY CNOOC LTD (ADR) CEO Newcomers to the Validea Hot List Bed Bath & Beyond Inc. (BBBY): This New Jersey-based home goods and furnishings retailer ($12 billion market cap) has stores in the U.S., Canada, and Mexico, and has taken in about $11.5 billion in sales in the past 12 months. It gets some interest from my Warren Buffett-inspired strategy, in part because it has upped EPS in all but one year of the past decade. Bed Bath & Beyond also gets strong interest from my Peter Lynch-based model. To read more about it, check out the "Detailed Stock Analysis" section below. Northrop Grumman Corporation (NOC): One of the country's largest defense contractors, this Virginia-based firm is involved in the aerospace, electronics, information systems, and technical services arenas, serving government and commercial customers across the globe. Its products include unmanned aircraft systems, B-2 stealth bombers, the James Webb space telescope, radar systems, 911 public safety systems, and cybersecurity solutions, to name just a few. Grumman has a $26 billion market cap, and gets strong interest from my Peter Lynch- and James O'Shaughnessy-based models. To read more about it, see the "Detailed Stock Analysis" section below. Drew Industries Inc. (DW): Indiana-based Drew is a supplier to the recreational vehicle and manufactured homes industries. Through its subsidiaries, Lippert Components, Inc. and Kinro, Inc., it produces a range of components, including windows, doors, chassis, chassis parts, bath and shower units, axles, upholstered furniture, awnings and slide-out mechanisms for RVs. It also makes components for modular housing, truck caps and buses, and for trailers used to haul boats, livestock, equipment, and cargo. Drew ($1.2 billion market cap) gets strong interest from my Peter Lynch- and James O'Shaughnessy-based models. To read more about it, check out the "Detailed Stock Analysis" section below. NetEase, Inc. (NTES): This $9-billion-market-cap Chinese tech firm offers a number of popular online games, including World of Warcraft, as well as e-mail services, advertising services and web portals. It's been a rapid grower, increasing EPS at a 24% rate over the long haul and revenues at a 23% rate. NetEase gets high marks from my Peter Lynch- and Warren Buffett-based models. For more on its fundamentals, see the "Detailed Stock Analysis" section below. Anika Therapeutics: This Massachusetts-based firm develops therapeutic products for tissue protection, healing and repair based on hyaluronic acid, a naturally occurring polymer found throughout the body that enhances joint function and coats, protects, cushions and lubricates soft tissues. Shares have bucked the downward biotech tend this year, thanks to better than expected first quarter earnings and the FDA's approval of Monovisc, its single injection treatment for osteoarthritis knee pain. Anika gets strong interest from my Peter Lynch-, Motley Fool-, and Martin Zweig-based models. To read more about its fundamentals, check out the "Detailed Stock Analysis" section below. Robert Half International (RHI): California-based RHI, founded in 1948, was the world's first specialized staffing firm, and today is its largest. It offers professional consulting and staffing services, and is the parent company of Protiviti, a global consulting firm that helps companies solve problems in finance, technology, operations, governance, risk and internal audit. RHI has staffing and consulting operations in more than 400 locations across the globe. RHI ($6.2 billion market cap) gets strong interest from my Peter Lynch- and James O'Shaughnessy-based models. For more on its fundamentals, see the "Detailed Stock Analysis" section below. News about Validea Hot List Stocks BofI Holding (BOFI): BofI reported record third fiscal quarter net income of $14.6 million, an increase of 40.5% over net income of $10.4 million for the quarter ended March 31, 2013. Earnings attributable to BofI's common stockholders were $1.00 per diluted share, up 44.6% from $0.74 per diluted share for the third quarter a year earlier. Core earnings, which exclude the after-tax impact of gains and losses associated with the firm's securities portfolio, increased 47.1% to $15.0 million. HollyFrontier (HFC): HollyFrontier reported first quarter net income attributable to stockholders of $152.1 million or $0.76 per diluted share, down from $333.7 million or $1.63 per diluted share for the year-ago quarter, principally reflecting lower first quarter refining margins. The firm said that refined product margins, although lower than the first quarter of 2013, showed nice improvement versus the back half of 2013. 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 ANIK ANIKA THERAPEUTICS, INC. Biotechnology & Drugs 100 VLO VALERO ENERGY CORPORATION Oil & Gas Operations 96 SWHC SMITH & WESSON HOLDING CORP Recreational Products 89 DW DREW INDUSTRIES, INC. Mobile Homes & RVs 65 RHI ROBERT HALF INTERNATIONAL INC. Business Services 64 NOC NORTHROP GRUMMAN CORPORATION Communications Equipment 59 NTES NETEASE, INC (ADR) Business Services 57 BBBY BED BATH & BEYOND INC. Retail (Specialty) 56 BOFI BOFI HOLDING, INC. Regional Banks 54 AGCO AGCO CORPORATION Constr. & Agric. Machinery 49 Ticker Market Cap Date Added Start Price Current Price Return ANIK $671 5/9/2014 TBD $46.53 TBD VLO $30,263 4/11/2014 $50.96 $56.81 11.5% SWHC $851 4/11/2014 $13.91 $15.48 11.3% DW $1,174 5/9/2014 TBD $49.70 TBD RHI $6,186 5/9/2014 TBD $45.00 TBD NOC $25,960 5/9/2014 TBD $121.23 TBD NTES $8,802 5/9/2014 TBD $67.63 TBD BBBY $12,423 5/9/2014 TBD $60.89 TBD BOFI $1,135 1/17/2014 $80.22 $79.96 -0.3% AGCO $5,181 12/20/2013 $57.62 $55.17 -4.3%

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 ANIK   |   VLO   |   SWHC   |   DW   |   RHI   |   NOC   |   NTES   |   BBBY   |   BOFI   |   AGCO   |   ANIKA THERAPEUTICS, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool Anika Therapeutics, Inc. (Anika) develops, manufactures and commercializes therapeutic products for tissue protection, healing and repair. These products are based on hyaluronic acid (HA), a naturally occurring, biocompatible polymer found throughout the body. As of December 31, 2011, Anika's wholly owned subsidiary, Anika Therapeutics S.r.l., had over 20 products commercialized, primarily in Europe. These products are also all made from hyaluronic acid, based on two technologies: HYAFF, which is a solid form of HA, and ACP gel, an autocross-linked polymer of HA. Analysis Guru Score: 93% PROFIT MARGIN: [PASS] This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. ANIK's profit margin of 34.67% 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. ANIK, with a relative strength of 95, 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 ANIK (361.90% for EPS, and 123.02% for Sales) are good enough to pass. INSIDER HOLDINGS: [FAIL] ANIK's insiders should own at least 10% (they own 3.78%) 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. ANIK's free cash flow of $1.67 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] ANIK's profit margin has been consistent or even increasing over the past three years (Current year: 27.41%, Last year: 16.48%, Two years ago: 13.08%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. R&D AS A PERCENTAGE OF SALES: [PASS] ANIK is either maintaining the same levels of R&D expenditures(currently $7.1 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] ANIK's level of cash $63.3 million passes this criteria. If a company is a cash generator, like ANIK, 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 ANIK was 11.60% last year, while for this year it is 14.65%. Although the inventory 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. 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 ANIK was 30.07% last year, while for this year it is 24.96%. Since the AR to sales is decreasing by -5.11% the stock passes this criterion. LONG TERM DEBT/EQUITY RATIO: [PASS] ANIK'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 (ANIK's is 0.46), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. ANIK passes this test. The following criteria for ANIK are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] ANIK has not been significantly increasing the number of shares outstanding within recent years which is a good sign. ANIK currently has 16.0 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. ANIK's sales of $93.8 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". ANIK passes the sales test. DAILY DOLLAR VOLUME: [PASS] ANIK passes the Daily Dollar Volume (DDV of $22.2 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. ANIK with a price of $46.53 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] ANIK's income tax paid expressed as a percentage of pretax income this year was (36.64%) and last year (39.78%) 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.   VALERO ENERGY CORPORATION Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Valero Energy Corporation (Valero) is an independent petroleum refining and marketing company. Valero's refineries can produce conventional gasoline's, distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products, as well as a slate of premium products, including conventional blendstock for oxygenate blending and reformulated gasoline blendstock for oxygenate blending, gasoline meeting the specifications of the California Air Resources Board, a diesel fuel, and low-sulfur and ultra-low-sulfur diesel fuel. It also owns 10 ethanol plants in the central plains region of the United States with a combined ethanol nameplate production capacity of about 1.1 billion gallons per year. It operates in three business segments: refining, ethanol, and retail. In May 2013, CST Brands Inc announced that the Company which includes Corner Store and Depanneur du Coin, spun off from Valero Energy Corporation. Analysis Guru Score: 100% MARKET CAP: [PASS] The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. VLO, with a market cap of $30,263 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. VLO, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were -0.51, 1.62, 3.68, 3.74 and 4.96, 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. VLO's Price/Sales ratio of 0.22, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [PASS] The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. VLO, whose relative strength is 80, is in the top 50 and would pass this last criterion.   SMITH & WESSON HOLDING CORP Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Smith & Wesson Holding Corporation (Smith & Wesson) is a manufacturer of firearms. The Company manufactures a range of handguns, modern sporting rifles, hunting rifles, black powder firearms, handcuffs, and firearm-related products and accessories for sale to a range of customers, including gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, individuals desiring home and personal protection, law enforcement and security agencies and officers, and military agencies in the United States and globally. It sells its products under the Smith & Wesson brand, the M&P brand, the Thompson/Center Arms brand, and the Performance Center brand. The Company manufactures its firearm products at its facilities in Springfield, Massachusetts and Houlton, Maine. In May 2014, the Company through Deep River Plastics LLC, subsidiary purchased substantially all of assets of Tri Town Precision Plastics Inc. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider SWHC a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (10.18) relative to the growth rate (44.56%), based on the average of the 3 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 SWHC (0.23) 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. SWHC, whose sales are $634.9 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. 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 SWHC was 13.42% last year, while for this year it is 10.72%. Since inventory to sales has decreased from last year by -2.70%, SWHC passes this test. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for SWHC is 44.6%, based on the average of the 3 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 SWHC (72.54%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for SWHC 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 SWHC (5.49%) 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 SWHC (-0.32%) 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.   DREW INDUSTRIES, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Drew Industries, is a supplier of components for recreational vehicle (RVs) and manufactured housing. The Company operates in two segments: the RV products segment (RV Segment), and the manufactured housing products segment (MH Segment). The Company's operations are conducted through its wholly owned subsidiaries, Lippert Components, Inc. and its subsidiaries (Lippert) and Kinro, Inc. and its subsidiaries (Kinro), each of which has operations in both the RV Segment and the MH Segment. During the year ended December 31, 2012, the RV Segment accounted for 87% of net sales and the MH segment accounted for 13% of net sales. In February 2014, the Company's wholly-owned subsidiary, Lippert Components, Inc has acquired Innovative Design Solutions, Inc. (IDS). In March 2014, the Company's subsidiary Lippert Components, Inc, completed the acquisition of certain assets and the business of Star Design, LLC. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider DW a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (20.54) relative to the growth rate (25.19%), based on the average of the 3 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 DW (0.82) 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. DW, whose sales are $1,048.4 million, needs to have a P/E below 40 to pass this criterion. DW's P/E of (20.54) 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 DW was 10.81% last year, while for this year it is 9.97%. Since inventory to sales has decreased from last year by -0.84%, DW passes this test. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for DW is 25.2%, based on the average of the 3 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for DW (2.96%) to be exceptionally 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 DW (4.25%) 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 DW (4.72%) 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.   ROBERT HALF INTERNATIONAL INC. Profile Strategy: Value Investor Based on: Benjamin Graham Robert Half International Inc. provides specialized staffing and risk consulting services. The Company operates in three segments: temporary and consultant staffing, permanent placement staffing, and risk consulting and internal audit services. The Company, through its Accountemps, Robert Half Finance & Accounting, and Robert Half Management Resources divisions, is a specialized provider of temporary, full-time, and project professionals in the fields of accounting and finance. OfficeTeam specializes in skilled temporary administrative support personnel. Robert Half Technology provides information technology professionals. Robert Half Legal provides temporary, project, and full-time staffing of attorneys and specialized support personnel within law firms and corporate legal departments. The Creative Group provides project staffing in the advertising, marketing, and Web design fields. Protiviti is a global business consulting and internal audit firm. Analysis Guru Score: 71% SECTOR: [PASS] RHI 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. RHI's sales of $4,306.6 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. RHI's current ratio of 2.19 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 RHI is $1.3 million, while the net current assets are $636.7 million. RHI passes this test. LONG-TERM EPS GROWTH: [PASS] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. RHI's EPS growth over that period of 98.6% passes the EPS growth test. P/E RATIO: [FAIL] The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. RHI's P/E of 23.87 (using the current PE) fails this test. PRICE/BOOK RATIO: [FAIL] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. RHI's Price/Book ratio is 6.65, while the P/E is 23.87. RHI fails the Price/Book test.   NORTHROP GRUMMAN CORPORATION Profile Strategy: Growth Investor Based on: Martin Zweig Northrop Grumman Corporation (Northrop Grumman) provides products, services, and integrated solutions in aerospace, electronics, information and services to its global customers. As of December 31, 2011, the Company operated in four segments: Aerospace Systems, Electronic Systems, Information Systems and Technical Services. The Company conducts most of its business with the United States Government, principally the Department of Defense (DoD) and intelligence community. It also conducts business with local, state, and foreign Governments and domestic and international commercial customers. Effective as of March 31, 2011, the company completed the spin-off of Huntington Ingalls Industries, Inc. (HII). HII operates the Company's former shipbuilding business. In September 2012, it acquired M5 Network Security Pty Ltd. In February 2014, Northrop Grumman Corp completed the acquisition of Qantas Defence Services Pty Limited. Analysis Guru Score: 77% 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. NOC's P/E is 13.55, based on trailing 12 month earnings, while the current market PE is 16.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [FAIL] 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. NOC's revenue growth is -2.57%, while it's earnings growth rate is 16.37%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, NOC fails this criterion. SALES GROWTH RATE: [PASS] 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 (-4.2%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-4.9%) of the current year. Sales growth for the prior must be greater than the latter. For NOC this criterion has been met. 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. NOC's EPS ($2.63) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. NOC's EPS for this quarter last year ($2.03) 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. NOC's growth rate of 29.56% passes this test. EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: [FAIL] 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 NOC is 8.18%. This should be less than the growth rates for the 3 previous quarters which are 9.57%, 17.58% and -0.47%. NOC does not pass this test, which means that it does not have 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, 8.39%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 29.56%, (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, 29.56% must be greater than or equal to the historical growth which is 16.37%. NOC 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. NOC, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 4.44, 6.41, 7.41, 7.81 and 8.35, 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. NOC's long-term growth rate of 16.37%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. TOTAL DEBT/EQUITY RATIO: [PASS] A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. NOC's Debt/Equity (56.08%) is not considered high relative to its industry (74.09%) and 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 NOC, this criterion has not been met (insider sell transactions are 207, while insiders buying number 270). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.   NETEASE, INC (ADR) Profile Strategy: Value Investor Based on: Benjamin Graham NetEase, Inc. is a holding company. The Company is an Internet technology company. The Company operates in three segments: Online Game Services, Advertising Services and E-mail, Wireless Value-added Services and Others. The Company provides its Internet and wireless value-added applications, services and technologies and advertising services to Guangzhou NetEase and Guangyitong Advertising and they operate the NetEase Websites and the online advertising business. Guangzhou NetEase has two majority-owned subsidiaries, Youdao Computer (a search business operator) and Wangyibao (the operator of its Wangyibao payment system). Through its subsidiaries and contracts with its affiliates Guangzhou NetEase, Guangyitong Advertising and Shanghai EaseNet and their respective shareholders, it operates an interactive online community in China and is a provider of Chinese language content and services through its online games, Internet portal and wireless value-added services businesses. Analysis Guru Score: 71% SECTOR: [PASS] NTES 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. NTES's sales of $1,476.6 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. NTES's current ratio of 5.38 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 NTES is $0.0 million, while the net current assets are $2,980.9 million. NTES passes this test. LONG-TERM EPS GROWTH: [PASS] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. NTES's EPS growth over that period of 600.0% passes the EPS growth test. P/E RATIO: [FAIL] The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. NTES's P/E of 362.30 (using the 3 year PE) fails this test. PRICE/BOOK RATIO: [FAIL] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. NTES's Price/Book ratio is 2.71, while the P/E is 362.30. NTES fails the Price/Book test.   BED BATH & BEYOND INC. Profile Strategy: Patient Investor Based on: Warren Buffett Bed Bath & Beyond Inc. is a chain of retail stores, operating under the names Bed Bath & Beyond (BBB), Christmas Tree Shops (CTS), Harmon and Harmon Face Values (Harmon), buybuy BABY and World Market or Cost Plus World Market (World Market). In addition, it is a partner in a joint venture, which operates three stores in the Mexico City market under the name Bed Bath & Beyond. The Company sells a range of domestics merchandise and home furnishings. Domestics merchandise includes categories, such as bed linens and related items, bath items and kitchen textiles. Home furnishings include categories, such as kitchen and tabletop items, fine tabletop, basic housewares and general home. During fiscal year ended March 2, 2013 (fiscal 2012), the Company opened a total of 38 stores, including 12 BBB stores throughout the United States and Canada, five CTS stores, one Harmon store and 18 buybuy BABY stores, and six World Market stores throughout the United States and closed one BBB store. Analysis Guru Score: 79% 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 1.65, 1.92, 2.08, 2.10, 1.64, 2.31, 3.07, 4.06, 4.56, 4.79. Buffett would consider BBBY'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 21.9%. BBBY's long term historical EPS growth rate is 13.8%, based on the 10 year average EPS growth rate, and it is expected to grow earnings 9.3% 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. BBBY 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 BBBY, over the last ten years, is 21.3%, 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 22.0%, 23.8%, 21.8%, 21.2%, 14.2%, 16.6%, 19.6%, 24.4%, 24.7%, 25.0%, and the average ROE over the last 3 years is 24.7%, 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 BBBY, over the last ten years, is 21.3% and the average ROTC over the past 3 years is 24.7%, 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 22.0%, 23.8%, 21.8%, 21.2%, 14.2%, 16.6%, 19.6%, 24.4%, 24.7%, 25.0%, 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. BBBY's free cash flow per share of $5.00 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: [FAIL] 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 $28.18 and compares it to the gain in EPS over the same period of $3.14. BBBY's management has earned shareholders a 11.1% return on the earnings they kept. This is unacceptable to Buffett, as management is not profitably allocating retained earnings. Essentially, investors would be better off if the company paid all earnings out to shareholders and let them invest the earnings on their own. 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. BBBY's shares outstanding have fallen over the past five years from 262,899,994 to 208,000,000, 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 BBBY 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 $4.81 and divide it by the current market price of $60.89. An investor, purchasing BBBY, could expect to receive a 7.90% initial rate of return. Furthermore, he or she could expect the rate to increase 9.3% 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 BBBY's initial yield of 7.90%, which will expand at an annual rate of 9.3%, 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] BBBY currently has a book value of $19.21. It is safe to say that if BBBY can preserve its average rate of return on equity of 21.3% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 21.3% and it will have a book value of $132.79 in ten years. If it can still earn 21.3% on equity in ten years, then expected EPS will be $28.32. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $28.32 and multiply them by the lower of the 5 year average P/E ratio (14.6) or current P/E ratio (current P/E in this case), which is 12.7 and you get BBBY's projected future stock price of $358.87. 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 $358.87. These numbers indicate that one could expect to make a 19.4% average annual return on BBBY's stock at the present time. Buffett would consider this a great return. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 9.3%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $11.75. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (14.6) or current P/E ratio (current P/E in this case), which is 12.7. This equals the future stock price of $148.84. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $148.84. 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 $60.89 and the future expected stock price, including the dividend pool, of $148.84. If you were to invest in BBBY at this time, you could expect a 9.35% 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 9.3% and 19.4%. 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 14.4% on BBBY stock for the next ten years, based on the current fundamentals. Buffett likes to see a 15% return, but nonetheless would accept this return, thus passing the criterion.   BOFI HOLDING, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool BofI Holding, Inc. is a holding company for BofI Federal Bank, a diversified financial services company. The Bank operate its bank from a single location in San Diego, California, serving approximately 40,000 retail deposit and loan customers across all 50 states. As of June 30, 2012, it had total assets of $2,386.8 million, loans of $1,799.7 million, mortgage-backed and other investment securities of $483.0 million, total deposits of $1,615.1 million and borrowings of $547.2 million. It distributes its deposit products through a range of retail distributions channels, and its deposits consist of demand, savings and time deposits accounts. It distributes its loan products through its retail, correspondent and wholesale channels, and the loans it retains are primarily first mortgages secured by single family real property and by multifamily real property. Analysis Guru Score: 80% 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. BOFI's profit margin of 32.99% 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. BOFI, with a relative strength of 90, 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 BOFI (31.43% for EPS, and 22.82% for Sales) are not good enough to pass. INSIDER HOLDINGS: [FAIL] BOFI's insiders should own at least 10% (they own 9.72%) 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. BOFI's free cash flow of $0.77 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] BOFI's profit margin has been consistent or even increasing over the past three years (Current year: 29.70%, Last year: 25.47%, Two years ago: 22.14%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. R&D AS A PERCENTAGE OF SALES: [NEUTRAL] This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in BOFI's case. CASH AND CASH EQUIVALENTS: [PASS] BOFI's level of cash $196.3 million passes this criteria. If a company is a cash generator, like BOFI, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. "THE FOOL RATIO" (P/E TO GROWTH): [FAIL] The "Fool Ratio" is an extremely important aspect of this analysis. The methodology says consider holding the shares when the company's Fool Ratio is greater than 0.65 (BOFI's is 0.79), but initial purchases in this range are unfavorable. The following criteria for BOFI are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] BOFI has not been significantly increasing the number of shares outstanding within recent years which is a good sign. BOFI currently has 14.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock. SALES: [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. BOFI's sales of $148.7 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". BOFI passes the sales test. DAILY DOLLAR VOLUME: [PASS] BOFI passes the Daily Dollar Volume (DDV of $21.6 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. BOFI with a price of $79.96 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] BOFI's income tax paid expressed as a percentage of pretax income this year was (40.92%) and last year (40.49%) 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.   AGCO CORPORATION Profile Strategy: Value Investor Based on: Benjamin Graham AGCO Corporation (AGCO) is a manufacturer and distributor of agricultural equipment and related replacement parts globally. The Company sells a range of agricultural equipment, including tractors, combines, self-propelled sprayers, hay tools, forage equipment and implements. It also manufactures and distributes grain storage and handling equipment systems, as well as protein production systems. Its products are recognized in the agricultural equipment industry and are marketed under a range of brands, including Challenger, Fendt, Massey Ferguson and Valtra. The Company distributes its products through a combination of approximately 3,100 independent dealers and distributors in more than 140 countries. In September 2013, Grain Systems, Inc. (GSI), a global brand of the Company announced that it has purchased Johnson System Inc. (JSI), manufacturer of catwalks, towers and support structures based in Marshall, Michigan. Analysis Guru Score: 86% SECTOR: [PASS] AGCO 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. AGCO's sales of $10,717.2 million, based on trailing 12 month sales, pass this test. CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. AGCO's current ratio of 1.58 fails 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 AGCO is $1,014.3 million, while the net current assets are $1,610.6 million. AGCO passes this test. LONG-TERM EPS GROWTH: [PASS] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. AGCO's EPS growth over that period of 467.8% passes the EPS growth test. 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. AGCO's P/E of 9.60 (using the 3 year PE) passes this test. PRICE/BOOK RATIO: [PASS] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. AGCO's Price/Book ratio is 1.40, while the P/E is 9.60. AGCO passes the Price/Book test.   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 LQDT LIQUIDITY SERVICES, INC. Retail (Catalog & Mail Order) 100 USNA USANA HEALTH SCIENCES, INC. Conglomerates 53 COH COACH INC Retail (Apparel) 53 HY HYSTER-YALE MATERIALS HANDLING INC Auto & Truck Manufacturers 53 AFSI AMTRUST FINANCIAL SERVICES, INC. Insurance (Prop. & Casualty) 48 EC ECOPETROL S.A. (ADR) Oil & Gas Operations 47 BWLD BUFFALO WILD WINGS Restaurants 46 MNST MONSTER BEVERAGE CORP Beverages (Non-Alcoholic) 45 TJX THE TJX COMPANIES, INC. Retail (Apparel) 44 ROST ROSS STORES, INC. Retail (Apparel) 42

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