Executive Summary  |   Portfolio  |   Guru Analysis  |   Watch List

Executive Summary	January 16, 2015

The Economy Despite a couple minor hiccups over the past week or two, the US economy is continuing to look quite strong as we head into 2015 -- particularly in comparison to the rest of the world. The private sector added 240,000 jobs in December, for example, the Labor Department said, with total nonfarm payrolls rising by 252,000. The October and December jobs-added figures were also revised upwards to indicate a total of 50,000 more jobs were added in those months than previously thought. The unemployment rate fell to 5.6% in December, the lowest it has been since June 2008; the broader "U-6" rate (which unlike the headline number takes into account those working part-time who want full-time work, and discouraged workers who have given up looking for a job) fell two-tenths of a point to 11.2%, lowest it has been since the financial crisis exploded in September 2008. On the downside, the number of people not in the labor force jumped by 456,000, and average hourly earnings dipped by 0.2%. New claims for unemployment rose slightly since our last newsletter, and are now just a bit below where they were one year ago, according to new Labor Department data. Continuing claims, the data for which lags new claims by one week, also rose slightly, but are 17% below their year-ago level. Job openings, meanwhile, rose 2.9% to 4.97 million in November -- the most since January 2001, according to another Labor Department report. Elsewhere, retail sales tumbled 0.9% in December, according to a new report from the Census Bureau. But, they were up a solid 4.6% vs. the year-ago period. That may be an indication that some seasonal factors were in play in the monthly decline. Oil and gas prices just keep falling. As of Jan. 14, the average price for a gallon of regular unleaded was just $2.10, according to AAA. That's down 46 cents over the past month. Globally, the big news was the Swiss National Bank's decision to end its three-year policy of keeping the Swiss franc pegged at 1.20 per euro. It had fixed the rate to promote exchange rate stability, given that Switzerland does not use the euro. But it now appears that, with the European Central Bank having engaged in significant quantitative easing that has lowered the value of the euro, the Swiss didn't want their own currency to be debased anymore. Some have conjectured that this means more easing is coming from the ECB, though that remains to be seen. Since our last newsletter, the S&P 500 returned -3.2%, while the Hot List returned -3.0%. So far in 2015, the portfolio has returned -3.0% vs. -3.2% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 213.7% vs. the S&P's 99.2% gain. Reasons for Optimism There's no getting around it: 2014 was a rough year for the Hot List. While the S&P 500 returned 11.4% for the year, the Hot List lost 11.1%. A good portion of the underperformance was a result of smaller stocks struggling in 2014. My models, as you may know, tend to focus more on small- and mid-cap stocks than larger picks. Over the long haul that has helped us, but last year it weighed on performance. Looking forward, however, I remain optimistic on stocks and optimistic that the Hot List will beat the market over the long haul. Of course, in the short term, no one knows what is going to happen; there are simply too many factors that move the market from day to day. But while I don't know exactly what 2015 will hold for the portfolio, there are a number of reasons that I think now is a good time to be investing in stocks and in fundamental-focused strategies like ours. Here are a handful of those reasons. Small-Cap Valuations As a group, smaller stocks were pricier a year ago than they are today. At the start of 2014, small- and mid-caps were trading at a 26% premium to mega-caps. At the start of 2015, however, the premium was down to 23%. That's good news for strategies that tend to key on smaller stocks, like ours. Since the end of 2005, when the small stock premium has been below 25% at the start of the year, small stocks have significantly outperformed. In such years, the Russell 2000 index of smaller stocks has beaten the S&P 500 each time, doing so by an average of nearly 5 percentage points. Oil Prices Oil prices are now down about 60% from their 2014 highs, and their rapid decline has created some worry among investors who fear that it is a sign of coming economic weakness across the globe. To be sure, growth has slowed in China and other big emerging markets, which has decreased demand. But it appears that other factors -- the dollar's ascent and a glut of supply -- are more significant catalysts for oil's drop. With all that in mind, cheaper oil is a big benefit to businesses and consumers alike. When businesses have more cash, they can use it to pay dividends, buy back shares, or reinvest in their businesses, all of which benefit shareholders. And when consumers have more disposable income, it's good for our economy, about two thirds of which is composed of consumer spending. There are possible downsides to cheaper oil, like job cutbacks in the energy industry and possible defaults on loans by overextended oil and gas companies, which could have some impact on the financial sector. But it appears that the positives outweigh the negatives right now. The Strong Dollar While the relationship between stocks and the dollar is a very complex one, a stronger dollar should benefit smaller firms, which tend to do more of their business at home in the US than larger companies, which often get a good deal of their profits from overseas in weaker currencies. Again, that's a plus for our models. US Strength Over the past 6 to 12 months, the US economy has been as strong as we've seen it at any time in this recovery. In fact, by some measures, it has been as strong as it has been in well over a decade. Overall in 2014, for example, payrolls rose by an average of 246,000 -- the best yearly average since 1999. The unemployment rate has fallen 1.1 percentage points since the end of 2013, with December's 5.6% reading the best since June 2008. The broader "U-6" rate (which unlike the headline number takes into account those working part-time who want full-time work, and discouraged workers who have given up looking for a job) has fallen nearly 2 full percentage points since the end of 2013, and is now the lowest it has been since the financial crisis exploded in September 2008. A big part of all this has been the US's manufacturing boom. Through November, industrial production had increased by 5.2% over the past year (December figures aren't yet available). If that held up through December, it would make for the highest annual gain since 2010, and the second highest since 1998. The manufacturing sector expanded in each month of 2014, according to the Institute for Supply Management, with output really picking up in the summer and fall. The service sector also expanded in each month of the year, in most months by a significant amount. That makes it 59 straight months that the sector has expanded, according to ISM. All of this helped the US post gross domestic product growth of 5.0% in the third quarter -- its strongest quarterly growth rate since 2003. The improvements in the US have come at a time when Europe and emerging markets are struggling. While the economy and stock market are not always attached at the hip, the US's relative strength versus the rest of the world should continue to keep money flowing into US stocks, especially given that ... Valuations & Sentiment Conditions Are Still Attractive Over the past year or two, many pundits have continue to say that stocks have gotten significantly overvalued, and that sentiment has gotten far too bullish. The data just does not back them up. A survey done by Yale that asks investors how confident they are about the stock market over the next year, for example, shows that individual investors confidence levels have recently been at or near 25-year lows. Institutional investors' confidence levels have been at their lowest level since about 2000. In addition, consider what Charles Schwab Chief Investment Strategist Liz Ann Sonders recently had to say about valuations. "S&P earnings have tripled since March of 2009, while the stock market is up [about] 245%," she wrote. "From the negative low in earnings, the E in the market's P/E has appreciated well more than the P, which is why valuation is no worse than about neutral now. In fact, both on a trailing and forward basis, the market is about at historic median P/Es; while most of the macro conditions supporting higher valuations remain in place." As for claims that valuations have risen artificially thanks to quantitative easing and ultralow interest rates, Sonders adds, "Interestingly though, the multiple expansion in this bull market has been about average for bull markets since 1957. So if valuation expansion has been average, why have stock market returns been so high? Earnings! Earnings growth in the current bull market has been 20% above the average level of growth for all bull markets since 1957." When valuations are reasonable and sentiment is relatively sour, you often get a good environment for stocks -- one in which the market can avoid getting overheated and can keep climbing a wall of worry. Staying Disciplined In the end, no one knows exactly what 2015 has in store for investors. But as I noted above, a number of factors bode well for our models going forward. More importantly, these strategies have proven to be winners over the long haul, and they've done so by picking attractively priced shares of solid companies. While doing so doesn't always work (nothing always works), that approach has been a winning one for long-term investors since the stock market was created. The worst thing an investor can do is ditch a solid strategy because of short-term struggles -- it's the equivalent of buying high and selling low. So we'll stay disciplined and stick to the gurus' strategies, and over three long haul I'm confident that will lead to significant outperformance.		Editor-in-Chief: John Reese Since Inception   Hot List 213.7% S&P 500 99.2% Accuracy 54.5% Beta 1.2 YTD   Hot List -3.0% S&P 500 -3.2% Since Last Issue   Hot List -3.0% S&P 500 -3.2% Avg. Fundamentals   Market Cap (mil) $10,902 PE Ratio 13.0 5 Yr EPS Growth 24.6% Yield 2.6% Rel. Strength 73 Portfolio Sectors Financial 4 Technology 2 Services 1 Basic Materials 1 Capital Goods 1 Consumer/Non-Cyclical 1
The Fallen As we rebalance the Validea Hot List, 3 stocks leave our portfolio. These include: United Insurance Holdings Corp.(Nda) (UIHC), Williams-sonoma, Inc. (WSM) and Jones Lang Lasalle Inc (JLL). The Keepers 7 stocks remain in the portfolio. They are: Agco Corporation (AGCO), Blackrock, Inc. (BLK), Sasol Limited (Adr) (SSL), Universal Insurance Holdings, Inc. (UVE), Zumiez Inc. (ZUMZ), Silicon Motion Technology Corp. (Adr) (SIMO) and Amtrust Financial Services Inc (AFSI). The Newbies We are adding 3 stocks to the portfolio. These include: Sanderson Farms, Inc. (SAFM), Skyworks Solutions Inc (SWKS) and Starwood Property Trust, Inc. (STWD). Portfolio Changes Additions   SANDERSON FARMS, INC. SAFM SKYWORKS SOLUTIONS INC SWKS STARWOOD PROPERTY TRUST, INC. STWD Deletions   UNITED INSURANCE HOLDINGS CORP.(NDA) UIHC WILLIAMS-SONOMA, INC. WSM JONES LANG LASALLE INC JLL Newcomers to the Validea Hot List Sanderson Farms (SAFM): Mississippi-based Sanderson, founded in 1947, is engaged in the production, processing, marketing and distribution of fresh and frozen chicken and other prepared food items. It has more than 11,000 employees in operations spanning five states and 13 different cities, and is the third largest poultry producer in the United States. Sanderson ($1.8 billion market cap) gets strong interest from my Peter Lynch-, Joel Greenblatt- and Kenneth Fisher-based models. To read more about its fundamentals, check out the "Detailed Stock Analysis" section below. Skyworks Solutions, Inc. (SWKS): Created in 2002 when Alpha Industries and the wireless communications business of Conexant merged, Skyworks makes high performance analog semiconductors for a range of applications, ranging from automotive to broadband to medical to smartphones and tablets. Massachusetts-based Skyworks ($14 billion market cap) gets strong interest from my Peter Lynch- and Joel Greenblatt-based models. To read more about it, scroll down to the "Detailed Stock Analysis" section. Starwood Property Trust (STWD): Connecticut-based Starwood is the nation's largest commercial mortgage Real Estate Investment Trust, with more than 500 employees worldwide. It is managed by Starwood Capital Group, a real estate finance company that employs an additional 260 people and manages more than $29 billion in assets. Starwood ($5.3 billion market cap) gets strong interest from my Martin Zweig-, David Dreman-, and John Neff-based models. To read more about it, scroll down to the "Detailed Stock Analysis" section below. News about Validea Hot List Stocks Universal Insurance (UVE): Universal declared a quarterly dividend of $0.12 per share, or $0.48 annualized, a 20% increase from its prior dividend of $0.10, according to StreetInsider.com. The dividend will be payable on March 2, 2015, to stockholders of record on February 18, 2015, with an ex-dividend date of February 13, 2015. The annual yield on the dividend is 2.3 percent. Silicon Motion Technology Corporation (SIMO): SIMO said on Jan. 8 that based upon its preliminary fourth quarter financial results, revenue is expected to decline 7 to 8% sequentially, at the midpoint of its original guidance range of a decline of 5 to 10% that the company issued on October 30. Gross margin (non-GAAP) is expected to be 51.5 to 52.5%, above the company's original guidance range of 50 to 52%. SIMO will release its full fourth quarter 2014 results after the market closes on January 26. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will take a deeper look at my investment strategies. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score UVE UNIVERSAL INSURANCE HOLDINGS, INC. Insurance (Prop. & Casualty) 82 SAFM SANDERSON FARMS, INC. Food Processing 76 ZUMZ ZUMIEZ INC. Retail (Apparel) 72 AFSI AMTRUST FINANCIAL SERVICES INC Insurance (Prop. & Casualty) 61 SWKS SKYWORKS SOLUTIONS INC Semiconductors 54 SSL SASOL LIMITED (ADR) Chemical Manufacturing 50 AGCO AGCO CORPORATION Constr. & Agric. Machinery 49 STWD STARWOOD PROPERTY TRUST, INC. Consumer Financial Services 47 SIMO SILICON MOTION TECHNOLOGY CORP. (ADR) Semiconductors 39 BLK BLACKROCK, INC. Investment Services 38 Ticker Market Cap Date Added Start Price Current Price Return UVE $715 11/21/2014 $19.30 $20.88 8.2% SAFM $1,869 1/16/2015 TBD $80.73 TBD ZUMZ $1,119 10/24/2014 $32.97 $38.28 16.1% AFSI $4,037 10/24/2014 $49.37 $50.00 1.3% SWKS $13,598 1/16/2015 TBD $71.32 TBD SSL $21,072 12/19/2014 $38.95 $32.21 -17.3% AGCO $3,954 12/20/2013 $57.62 $42.99 -25.4% STWD $5,266 1/16/2015 TBD $23.68 TBD SIMO $808 12/19/2014 $24.09 $23.96 -0.5% BLK $56,578 12/19/2014 $360.15 $342.45 -4.9%

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 UVE   |   SAFM   |   ZUMZ   |   AFSI   |   SWKS   |   SSL   |   AGCO   |   STWD   |   SIMO   |   BLK   |   UNIVERSAL INSURANCE HOLDINGS, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Universal Insurance Holdings, Inc. (UIH) is a vertically integrated insurance company. The Company's insurance products are offered to the Company's customers through Universal Property & Casualty Insurance Company (UPCIC) and American Platinum Property and Casualty Insurance Company (APPCIC), (collectively the Insurance Entities). Substantially all aspects of insurance underwriting, distribution and claims processing are covered through the Company's subsidiaries. Blue Atlantic Reinsurance Corporation (BARC), a wholly owned subsidiary of UIH, is a reinsurance intermediary broker. The Insurance Entities generate revenues primarily from the collection of premiums. Universal Risk Advisors, Inc. (URA), the Company's managing general agent, generates revenue through policy fee income and other administrative fees from the marketing of the Insurance Entities' insurance products through its distribution network of independent agents. Analysis Guru Score: 72% DETERMINE THE CLASSIFICATION: UVE is considered a "Stalwart", according to this methodology, for its earnings growth of 16.77%. This is based on based on the average of the 3, 4 and 5 year historical eps growth rates, which lies within a moderate 10%-19% range. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. However, UVE is not considered a "True Stalwart" for its sales of $342 million are less than the multi-billion dollar level. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for UVE (0.57), based on the average of the 3, 4 and 5 year historical eps growth rates, is O.K. EARNINGS PER SHARE: [PASS] The EPS for a stalwart company must be positive. UVE's EPS ($1.91) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] UVE 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. UVE's Equity/Assets ratio (20.00%) 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. UVE's ROA (7.07%) is above the minimum 1% that this methodology looks for, thus passing the criterion. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for UVE (17.48%) 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 UVE (-3.59%) 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.   SANDERSON FARMS, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Sanderson Farms, Inc. is a poultry processing company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products. 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 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 434 million chickens, or over 3.0 billion dressed pounds. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: SAFM is considered a "True Stalwart", according to this methodology, as its earnings growth of 18.92% lies within a moderate 10%-19% range and its annual sales of $2,775 million are greater than the multi billion dollar level. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. SAFM is attractive if SAFM can hold its own during a recession. INVENTORY TO SALES: [PASS] When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for SAFM was 7.67% last year, while for this year it is 6.88%. Since inventory to sales has decreased from last year by -0.80%, SAFM passes this test. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for SAFM (0.37), based on the average of the 4 and 5 year historical eps growth rates, is excellent. EARNINGS PER SHARE: [PASS] The EPS for a stalwart company must be positive. SAFM's EPS ($10.79) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for SAFM (2.23%) 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 SAFM (5.76%) 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 SAFM (8.76%) 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.   ZUMIEZ INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Zumiez Inc. (Zumiez) is a specialty retailer of action sports related apparel, footwear, equipment and accessories operating under the Zumiez brand name. As of January 28, 2012, the Company operated 434 stores in the United States and 10 stores in Canada. In addition, the Company operates a Website that sells merchandise online. At January 28, 2012, its stores averaged approximately 2,900 square feet. 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 also offers a selection of other items, such as miscellaneous novelties. 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 (21.58) 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 (0.68) 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 (2.66%) 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 (10.55%) 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.   AMTRUST FINANCIAL SERVICES INC Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool 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: 81% 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. AFSI's profit margin of 11.03% 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. AFSI, 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 AFSI (166.22% for EPS, and 47.15% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] AFSI's insiders should own at least 10% (they own 46.86% ) of the company's outstanding shares which is extremely attractive since the minimum requirement is 10%. A high percentage indicates that the insiders are confident that the company will do well. CASH FLOW FROM OPERATIONS: [PASS] A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. AFSI's free cash flow of $10.80 per share passes this test. PROFIT MARGIN CONSISTENCY: [FAIL] The profit margin in the past must be consistently increasing. The profit margin of AFSI has been inconsistent in the past three years (Current year: 10.78%, Last year: 10.67%, Two years ago: 14.16%), which is unacceptable. This inconsistency will carryover directly to the company's bottom line, or earnings per share. R&D AS A PERCENTAGE OF SALES: [NEUTRAL] This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in AFSI's case. CASH AND CASH EQUIVALENTS: [PASS] AFSI's level of cash $830.0 million passes this criteria. If a company is a cash generator, like AFSI, 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): [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 (AFSI's is 0.39), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. AFSI passes this test. The following criteria for AFSI are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] AFSI has not been significantly increasing the number of shares outstanding within recent years which is a good sign. AFSI currently has 79.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock. SALES: [FAIL] Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. AFSI's sales of $3,653.6 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years. DAILY DOLLAR VOLUME: [FAIL] AFSI does not pass the Daily Dollar Volume (DDV of $52.1 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. AFSI with a price of $50.00 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: [FAIL] AFSI's income tax paid expressed as a percentage of pretax income either this year (26.09%) or last year (10.81%) is below 20% which is cause for concern. Because the tax rate is below 20% this could mean that the earnings that were reported are unrealistically inflated due to the lower level of income tax paid. However, we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%).   SKYWORKS SOLUTIONS INC Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Skyworks Solutions, Inc. (Skyworks) is a producer of analog semiconductors. The Company offers custom linear products automotive, broadband, cellular infrastructure, energy management, global positioning system (GPS), industrial, medical, military, wireless networking, smartphone and tablet applications. Its portfolio consists of amplifiers, attenuators, battery chargers, circuRobotors, demoduRobotors, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isoRobotors, light emitting diode (LED) drivers, mixers, moduRobotors, optocouplers, optoisoRobotors, phase shifters, phase locked loops (PLLs)/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches, voltage reguRobotors and technical ceramics. Its customers include Cisco, Ericsson, Foxconn, Fujitsu, General Electric, Google, Honeywell, LG Electronics, Nest, Netgear, Nokia, Northrop Grumman, Rockwell Collins, Samsung, Sensus and ZTE. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider SWKS a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (30.01) relative to the growth rate (30.91%), 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 SWKS (0.97) 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. SWKS, whose sales are $2,291.5 million, needs to have a P/E below 40 to pass this criterion. SWKS's P/E of (30.01) 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 SWKS was 12.81% last year, while for this year it is 11.82%. Since inventory to sales has decreased from last year by -0.99%, SWKS 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 SWKS is 30.9%, 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 SWKS (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 SWKS (3.80%) 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 SWKS (5.82%) 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.   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: 100% 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 1.42, 1.50, 2.45, 3.33, 2.01, 2.40, 2.98, 3.47, 3.87, 4.37. 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. 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 2,027.3 million and earnings of 2,597.5 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 $16.67 and compares it to the gain in EPS over the same period of $2.95. SSL's management has proven it can earn shareholders a 17.7% 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 $4.11 and divide it by the current market price of $32.21. An investor, purchasing SSL, could expect to receive a 12.76% initial rate of return. Furthermore, he or she could expect the rate to increase 15.5% per year, based on the average of the 3, 4 and 5 year historical eps growth rates, 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 12.76%, which will expand at an annual rate of 15.5%, based on the average of the 3, 4 and 5 year historical eps growth rates. 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 $21.76. 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 $61.73 in ten years. If it can still earn 18.9% on equity in ten years, then expected EPS will be $11.65. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $11.65 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 7.8 and you get SSL's projected future stock price of $91.20. 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 $41.20. This gives you a total dollar amount of $132.40. These numbers indicate that one could expect to make a 15.2% average annual return on SSL'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 15.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, you can project EPS in ten years to be $17.33. 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 7.8. This equals the future stock price of $135.69. Add in the total expected dividend pool of $41.20 to get a total dollar amount of $176.89. 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 $32.21 and the future expected stock price, including the dividend pool, of $176.89. If you were to invest in SSL at this time, you could expect a 18.57% average annual return on your money. Buffett would consider this a great return. 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 15.2% and 18.6%. 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 16.9% on SSL stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   AGCO CORPORATION Profile Strategy: P/E/Growth Investor Based on: Peter Lynch AGCO Corporation is engaged in manufacturing and distributing agricultural equipment and related replacement parts throughout the world. The Company sells a range of agricultural equipment, including tractors, combines, self-propelled sprayers, application equipment, hay tools, forage equipment, tillage, implements, engines, precision farming technologies, grain storage and protein production systems, and replacement parts. Its products are used in the agricultural equipment industry and are marketed under a number of brands, including Challenger, Fendt, GSI, Massey Ferguson and Valtra. The Company distributes most of its products through a combination of approximately 3,100 independent dealers and distributors in more than 140 countries. In addition, the Company provides retail financing, through its retail finance joint ventures with Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank). Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider AGCO a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (8.79) relative to the growth rate (29.73%), 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 AGCO (0.30) 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. AGCO, whose sales are $10,098.2 million, needs to have a P/E below 40 to pass this criterion. AGCO's P/E of (8.79) 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 AGCO was 17.10% last year, while for this year it is 18.69%. 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 (1.59%) 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 AGCO is 29.7%, 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 AGCO (37.80%) to be normal (equity is approximately twice debt). FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for AGCO (8.56%) 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 AGCO (-7.07%) 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.   STARWOOD PROPERTY TRUST, INC. Profile Strategy: Contrarian Investor Based on: David Dreman Starwood Property Trust, Inc. is a holding company and conducts its business through its subsidiaries. The Company is focused on originating, investing in, 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 addition, it also invests in residential mortgage loans and residential mortgage-backed securities (RMBS). It makes certain investments in RMBS, which it uses as an alternative investment for its available cash. In April 2013, Starwood Property Trust Inc acquired LNR Property LLC from Vornado Realty Trust, iStar Financial Inc (24%), Cerebrus, and Oaktree Capital Management LP. In February 2014, Starwood Property Trust, Inc. spun off Starwood Waypoint Residential Trust. Analysis Guru Score: 90% MARKET CAP: [PASS] Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. STWD has a market cap of $5,266 million, therefore passing the test. EARNINGS TREND: [PASS] A company should show a rising trend in the reported earnings for the most recent quarters. STWD's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.52, 0.73 have been increasing, and therefore the company passes this test. EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: [PASS] This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. STWD passes this test as its EPS growth rate over the past 6 months (30.35%) has beaten that of the S&P (11.88%). STWD's estimated EPS growth for the current year is (19.34%), which indicates the company is expected to experience positive earnings growth. As a result, STWD passes this test. This methodology would utilize four separate criteria to determine if STWD is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest". P/E RATIO: [PASS] The P/E of a company should be in the bottom 20% of the overall market. STWD's P/E of 10.41, based on trailing 12 month earnings, meets the bottom 20% criterion (below 11.52), and therefore passes this test. PRICE/CASH FLOW (P/CF) RATIO: [FAIL] The P/CF of a company should be in the bottom 20% of the overall market. STWD's P/CF of 10.07 does not meet the bottom 20% criterion (below 6.57), and therefore fails this test. PRICE/BOOK (P/B) VALUE: [FAIL] The P/B value of a company should be in the bottom 20% of the overall market. STWD's P/B is currently 1.37, which does not meet the bottom 20% criterion (below 0.95), and it therefore fails this test. PRICE/DIVIDEND (P/D) RATIO: [PASS] The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). STWD's P/D of 12.33 meets the bottom 20% criterion (below 20.00), and it therefore passes this test. This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below. PAYOUT RATIO: [PASS] A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for STWD is 81.89%, while its historical payout ratio has been 87.57%. Therefore, it passes the payout criterion. RETURN ON EQUITY: [FAIL] The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 largest cap stocks, which is 17.39%, and would consider anything over 27% to be staggering. The ROE for STWD of 12.08% is not high enough to pass this criterion. PRE-TAX PROFIT MARGINS: [PASS] This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. STWD's pre-tax profit margin is 72.22%, thus passing this criterion. YIELD: [PASS] The company in question should have a yield that is high and that can be maintained or increased. STWD's current yield is 8.11%, while the market yield is 2.67%. STWD passes this test.   SILICON MOTION TECHNOLOGY CORP. (ADR) Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Silicon Motion Technology Corporation is a Taiwan-based holding company. The Company develops microcontroller ICs for NAND flash storage devices and specialty RF ICs for mobile devices. The Company designs, develops and markets, low-power semiconductor solutions to OEMs and other customers in the mobile storage and mobile communications markets. For the mobile storage market, the Company's key products are microcontrollers used in solid state storage devices such as SSDs, eMMCs and other embedded flash applications, as well as removable storage products. For the mobile communications market, the Company's key products are handset transceivers and mobile TV IC solutions. The Company's products are used in smartphones, tablets, and industrial and commercial applications. Analysis Guru Score: 100% DETERMINE THE CLASSIFICATION: This methodology would consider SIMO a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (6.19) relative to the growth rate (46.91%), based on the average of the 2 and 5 year historical and the current year eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for SIMO (0.13) 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. SIMO, whose sales are $231.9 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 SIMO was 11.42% last year, while for this year it is 14.94%. 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 (3.52%) 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 SIMO is 46.9%, based on the average of the 2 and 5 year historical and the current year 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 SIMO (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 SIMO (8.18%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [BONUS PASS] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for SIMO (75.34%) is considered very favorable.   BLACKROCK, INC. Profile Strategy: Growth Investor Based on: Martin Zweig BlackRock, Inc. (BlackRock) is an investment management firm. The Company provides a range of investment and risks management services. The Company's clients include retail, high net worth (HNW) and institutional investors, consists of pension funds, official institutions, endowments, insurance companies, corporations, financial institutions, central banks and sovereign wealth funds. The Company's platform enables the Company to offer active (alpha) investments with index (beta) products and risk management to develop tailored solutions for clients. Its product range includes single- and multi-asset class portfolios investing in equities, fixed income, alternatives and/or money market instruments. In October 2013, BlackRock Inc acquired Macquarie Global Property Advisors Ltd. In January 2014, Forge Group Limited announced that BlackRock Inc. and subsidiaries had ceased to be the substantial holder of Forge Group Limited. 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. BLK's P/E is 17.71, 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: [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. BLK's revenue growth is 13.99%, while it's earnings growth rate is 23.16%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, BLK 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 (15.3%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (11.9%) of the current year. Sales growth for the prior must be greater than the latter. For BLK 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. BLK's EPS ($5.37) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. BLK's EPS for this quarter last year ($4.21) 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. BLK's growth rate of 27.55% 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 BLK is 11.58%. This should be less than the growth rates for the 3 previous quarters, which are 23.41%, 21.55%, and 12.65%. BLK 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, 18.99%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 27.55%, (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, 27.55% must be greater than or equal to the historical growth which is 23.16%. BLK 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. BLK, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 6.12, 10.55, 12.37, 13.79 and 16.87, 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. BLK's long-term growth rate of 23.16%, based on the average of the 3, 4 and 5 year historical eps growth rates, 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 BLK, this criterion has not been met (insider sell transactions are 126, while insiders buying number 35). 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.   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 USNA USANA HEALTH SCIENCES, INC. Conglomerates 41 JLL JONES LANG LASALLE INC Real Estate Operations 39 MNST MONSTER BEVERAGE CORP Beverages (Non-Alcoholic) 36 PII POLARIS INDUSTRIES INC. Recreational Products 36 HP HELMERICH & PAYNE, INC. Oil Well Services & Equipment 34 EDU NEW ORIENTAL EDUCATION & TECH GRP (ADR) Schools 32 HFC HOLLYFRONTIER CORP Oil & Gas Operations 32 HIBB HIBBETT SPORTS, INC. Retail (Specialty) 32 GGAL GRUPO FINANCIERO GALICIA S.A. (ADR) S&Ls/Savings Banks 31 VDSI VASCO DATA SECURITY INTERNATIONAL, INC. Software & Programming 31

Disclaimer

The names of individuals (i.e., the 'gurus') appearing in this report are for identification purposes of his methodology only, as derived by Validea.com from published sources, and are not intended to suggest or imply any affiliation with or endorsement or even agreement with this report personally by such gurus, or any knowledge or approval by such persons of the content of this report. All trademarks, service marks and tradenames appearing in this report are the property of their respective owners, and are likewise used for identification purposes only. Validea is not registered as a securities broker-dealer or investment advisor either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. Validea is not responsible for trades executed by users of this site based on the information included herein. The information presented on this website does not represent a recommendation to buy or sell stocks or any financial instrument nor is it intended as an endorsement of any security or investment. The information on this website is generic by nature and is not personalized to the specific situation of any individual. The user therefore bears complete responsibility for their own investment research and should seek the advice of a qualified investment professional prior to making any investment decisions. Performance results are based on model portfolios and do not reflect actual trading. Actual performance will vary based on a variety of factors, including market conditions and trading costs. Past performance is not necessarily indicative of future results. Individual stocks mentioned throughout this web site may be holdings in the managed portfolios of Validea Capital Management, a separate asset management firm founded by Validea.com founder John Reese. Validea Capital Management, which is a separate legal entity and an SEC registered investment advisory firm, uses, in part, the strategies on the web site to select stocks for its clients.