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Executive Summary May 13, 2011

The Economy

The economy keeps plugging along, slowly and steadily continuing its recovery despite several concerns that have weighed on the market over the past fortnight.

The manufacturing sector continues to be a bright spot. It grew for the 21st straight month in April, according to the Institute for Supply Management. And while the rate of expansion wasn't quite as great as it was in the first three months of the year, it was still as great as any other month since June 2004.

Growth in the service sector, on the other hand, slowed significantly, according to ISM. Its service sector index indicated that the sector expanded for the 17th straight month in April, but at a significantly slower pace than the past several months. The group's New Orders sub-index fell sharply from March, though it still indicated growth in new orders.

The jobs market, meanwhile, continues to be a mixed bag. New claims for unemployment, which had fallen below 400,000 through most of February and March, jumped to 478,000 in the last week of April, before falling back down to 434,000 in the first week of May. That's still well below the recessionary high of 650,000-plus, however.

The latest monthly employment report was somewhat more encouraging, showing that the private sector added 268,000 jobs in April, according to the Labor Department, the most since February 2006. That didn't translate into a decrease in the unemployment rate, however, which rose to 9.0%, up from 8.8% in March. As I've noted before, the jobs created number and unemployment rate are calculated from different surveys -- the jobs created from a survey of about 140,000 businesses and government agencies, and the unemployment rate from a survey of about 60,000 households. Discrepancies often occur, therefore. The bottom line for the longer-term trend, however, seems to be that the private sector is creating a decent amount of new jobs, but overall unemployment remains quite high by historical standards.

The lingering high unemployment rate hasn't stopped consumers from spending, a good sign for our consumer-driven economy. Retail and food service sales rose 0.5% in April, according to the Commerce Department, the 10th straight month they've increased. The March figures were also revised upward to a 0.9% gain, more than twice the initial 0.4% estimate. Retail and food service sales now stand nearly 3% above pre-recession highs.

Commodities have been a big story over the past couple weeks. Oil prices, which had climbed up around $115 a week or two ago, had tumbled to below $99 by Thursday. Other commodities, like gold, silver, and copper, dropped, too. A big part of the commodities slump seems to be that investors are growing concerned that inflation will soon cause some central banks around the world to start (or continue) to tighten monetary policy, with interest rates moving upward. Two examples: China, whose inflation rate stayed above 5% in April, according to Bloomberg, and England, where officials said inflation is "uncomfortably high", and indicated rates could be increased later in 2011.

Finally, first-quarter earnings reports continue to roll in, and thus far the results have been strong. As of Thursday, 324 of the S&P 500 companies had reported, with 73% beating analysts' expectations, according to Thomson Reuters.

As for the market, it's been a volatile couple weeks. Overall for the fortnight, the S&P 500 returned -0.9%, while the Hot List returned -1.3%. For the year, the portfolio is up 11.0% vs. 7.2% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 199.4% vs. the S&P's 34.8% gain.

Sell in May and Go Away?

Since ending April at 1,363.61, the S&P 500 has been in the red, leaving many investors wondering whether the old adage "Sell in May and go away" is playing out.

If you're not familiar with it, the adage's basic tenet is that the stock market fares best from the start of November through the end of April, and then generates much weaker returns for the warmer months. (The idea is thus also referred to as the "Halloween Indicator".) There are a variety of theories as to why this is, including that many investors head off on vacation in the warmer months and are less likely to be putting money into the market.

Whatever the reason, history shows that the phenomenon is real. According to Stock Trader's Almanac, from 1950-2008, the Dow Jones Industrial Average gained an average of 7.3% during the November-through-April period; in the May-through-October period, it averaged gains of just 0.1%. (The trend reversed in 2008-09, with the market falling sharply from November through April and then soaring from May through October. In 2009-10, it held true, rising sharply from November through April and being slightly in the red from May through October.)

But while the pattern seems to be strong, it's not one that we use in managing the Hot List. And perhaps the greatest reason is a critical one for investors to remember: The stock market is a market of individual stocks, not a monolithic entity. So while the broader market may historically struggle in the warmer months, there are almost always individual stocks that can still produce excellent gains.

Look no further than last year for proof. On May 14, the Hot List picked up shares of HealthSpring, Inc., a Medicare-focused managed care firm. From then through the end of October, the stock soared 69.9%. It then slid a bit before being sold in late November for a 61% profit.

Another example: AstraZeneca. The portfolio also picked up shares of the pharma giant on May 14, and, when it sold them on Aug. 6, had earned a 24.4% profit.

Of course, there are examples of stocks that lost ground for the portfolio during the warmer months last year and in other years. But since its July 2003 inception, the Hot List has been well in the black during the May through October months, generating annualized returns in the 6.5% range. (Take away the May-October period from 2008, and the annualized returns are in the 17% range.)

That's too much money to leave on the table, especially when the rationale for doing so involves theories about investors' vacation habits.

The broader point here is you should always remember that "the market" is not your portfolio -- regardless of what month it happens to be. In fact, what most people call "the market" isn't really "the market" While most refer to the S&P 500 or the Dow Jones Industrial Average as "the market" (I myself may at times be guilty of that), those indices are far, far from the complete spectrum of stocks in which you can invest. The S&P holds 500 stocks; the Dow just 30.

Our database, meanwhile, includes more than 6,000 stocks listed in the U.S. With that many opportunities, good strategies that focus on financially solid, fundamentally sound companies can produce very strong returns during very rough periods for the broader market indices. Just look at the Hot List. Had someone told you back in July 2003 that it was likely that the next eight or so years would involve a terrible recession and near-collapse of the global financial system, and that the S&P 500 would likely return about 4% per year during that period, you'd probably have steered clear of stocks, or at the least significantly cut back your equity exposure.

But since then, the Hot List has gained an average of about 15% per year. In fact, all but one of my original 10-stock portfolios has gained at least 9% annualized (with the lone exception, the Momentum Investor portfolio, gaining about 5% per year).

Results like that are why the Hot List won't be selling in May and going anywhere. Instead, we'll continue to search for the best opportunities out there, whether they're big, steady value plays like Hot List newcomer AT&T, or lesser-known, fast-growing (but still reasonably priced) smaller stocks like fellow newcomer Tech Data Corporation. These types of stocks are good investments, whether it's January, July, or any other month of the year.

Editor-in-Chief: John Reese

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The Fallen

As we rebalance the Validea Hot List, 5 stocks leave our portfolio. These include: Zhongpin Inc. (HOGS), Astrazeneca Plc (Adr) (AZN), Pre-paid Legal Services, Inc. (PPD), Acme Packet, Inc. (APKT) and Opentable Inc (OPEN).

The Keepers

5 stocks remain in the portfolio. They are: Skechers Usa, Inc. (SKX), Aeropostale, Inc. (ARO), Sanofi-aventis Sa (Adr) (SNY), Gamestop Corp. (GME) and Bridgepoint Education, Inc. (BPI).

The Newbies

We are adding 5 stocks to the portfolio. These include: Humana Inc. (HUM), Amtech Systems, Inc. (ASYS), Tech Data Corporation (TECD), Research In Motion Limited (Usa) (RIMM) and At&t Inc. (T).

Portfolio Changes

Newcomers to the Validea Hot List

AT&T Inc. (T): This Dallas-based telecom giant ($186 billion market cap) recently purchased T-Mobile in a deal that would make it the largest wireless company in the U.S. The firm has taken in about $125 billion in sales in the past year.

Telecoms have really lagged during the market rebound as investors have turned to smaller growth-type stocks, and that's making AT&T a bargain. It gets high marks from my James O'Shaughnessy-, Peter Lynch-, David Dreman-, and John Neff-based models To read more about it, check out the "Detailed Stock Analysis" section below.

Humana Inc. (HUM): A health benefits company might not seem like good growth fodder, but Louisville-based Humana ($13.2 billion market cap) has been growing earnings at a 20.4% clip over the long term, and 2008 was the only year it hasn't upped EPS in the past decade. The company has a lot of cash on hand -- its net cash/price ratio is an impressive 51.6% -- part of the reason it gets a perfect 100% score from my Peter Lynch-based model. It's also got momentum behind it, earning a solid 89% score from my Momentum Investor model. See the "Detailed Stock Analysis" section below to learn more about the stock.

Research in Motion Limited (RIMM): Ontario-based Research in Motion ($23 billion market cap) is the creator of the BlackBerry smartphone and its operating system. It's been producing tremendous growth in recent years, increasing EPS at a 51% rate over the long term and sales at a 55% rate. But it's been losing some market share to Google's Android smartphone and the iPhone recently, which has spooked many investors and driven shares down in recent months.

But my models don't think RIMM was a flash in the pan. It's upped EPS in eight straight years and has no long-term debt, and the recent price declines have made it a big-time bargain, according to my Joel Greenblatt- and David Dreman-inspired models. Scroll down to the "Detailed Stock Analysis" section to learn more about the stock.

Tech Data Corporation (TECD): Based in Clearwater, Fla., Tech Data is one of the largest wholesale I/T distributors in the U.S. It works as a sort of middle man, bringing products from such tech giants as Apple, Cisco, IBM, and Microsoft to the market. It's a smaller mid-cap ($2.5 billion), but does a high-volume, low-margin business -- last year it took in nearly $25 billion in sales.

Tech Data has the combination of high growth and cheap shares that catches the eyes of my James O'Shaughnessy- and Peter Lynch-based models. Read more about its fundamentals in the "Detailed Stock Analysis" section below.

Amtech Systems, Inc. (ASYS): Based in Tempe, Ariz., Amtech makes capital equipment used in fabricating solar cells and semiconductor devices. It supplies horizontal diffusion furnace systems, related automation, and polishing supplies that are used in the manufacturing process for both solar cells and semiconductor chips. It's a small-cap, with a market capitalization just over $200 million, and it's been growing rapidly, more than doubling its sales in its last fiscal year (ended Sept. 30), and more than tripling sales in the first two quarters of its 2011 fiscal year (vs. the year-ago quarters).

Amtech's strong growth earns it strong interest from my Martin Zweig-based growth model and my Peter Lynch-based strategy, but it also gets solid scores from my John Neff-inspired value model. To find out more about the stock, see the "Detailed Stock Analysis" section below.

News about Validea Hot List Stocks

Sanofi-Aventis (SNY): Sanofi said Tuesday that it has gained U.S. approval to market its Fluzone Intradermal vaccine for adults, which can be delivered in needles one-tenth the size of normal needles, according to Reuters. The vaccine was created in concert with syringe maker Becton Dickinson. Sanofi says it may hurt less than standard vaccines, and do a better job of stimulating protection against influenza while requiring one-fifth of the active ingredient, Reuters reported. The vaccine will be available to U.S. healthcare providers for the 2011-2012 flu season, Sanofi said

Aeropostale Inc. (ARO): Aeropostale cut earnings guidance for the first quarter last week, causing shares to tumble. The firm said same-store revenue fell 7% in the February to April period, though overall net sales increased 1% from the year-ago period. Analysts were expecting same-store revenue to fall 3.2%, according to data provided by FactSet, the Associated Press reported. The firm also cut first-quarter guidance to 20 cents per share, down sharply from its March forecast of 35 to 38 cents per share. Shares tumbled about 15% on the news, but bounced back a bit in the subsequent days. My models remain quite high on the stock, which has an exceptional long-term track record and has found a way to up EPS in every year of the past decade (even throughout the Great Recession).

The Next Issue

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

Current Portfolio

Detailed Stock Analysis

Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer

ARO   |   ASYS   |   BPI   |   T   |   TECD   |   RIMM   |   SNY   |   GME   |   SKX   |   HUM   |  

Aeropostale, Inc. is a mall-based specialty retailer of casual apparel and accessories. The Company designs, markets and sells its own brand of merchandise principally targeting 14 to 17 year-old young women and young men. The Company also sells Aropostale merchandise through its e-commerce Website, www.aeropostale.com. During the fiscal year ended January 30, 2010 (fiscal 2009), the Company launched P.S. from Aeropostale, which offers casual clothing and accessories focused on elementary school children between the ages of 7 and 12. During fiscal 2009, the Company completed the closure of its 14 store Jimmy'Z concept. Jimmy'Z Surf Co., Inc., a wholly owned subsidiary of Aeropostale, Inc., was a contemporary lifestyle brand targeting young women and men aged 18 to 25.

Amtech Systems, Inc. (Amtech), incorporated in October 1981, through its wholly owned subsidiaries, supplies horizontal diffusion furnace systems used for solar (photovoltaic) cell and semiconductor manufacturing. The Company provides products and services to two industries: the solar industry and the semiconductor industry. The Company's solar and semiconductor equipment is sold under brand names of Tempress Systems and Bruce Technologies, which have customers in both the solar industry and the semiconductor industry. Within the solar industry, its provide diffusion and automation equipment to solar cell manufacturers and it also offers plasma enhanced chemical vapor deposition (PECVD) and phosphocilicate glass (PSG) equipment. Within the semiconductor industry, it provides equipment to manufacturers of analog, power, automotive and microcontroller chips with geometries greater than 0.3 micron.

Bridgepoint Education, Inc. (Bridgepoint) is a accredited provider of postsecondary education services. The Company offers associate's, bachelor's, master's and doctoral programs in the disciplines of business, education, psychology, social sciences and health sciences. It delivers its programs online, as well as at its traditional campuses located in Clinton, Iowa, and Colorado Springs, Colorado. As of December 31, 2009, it offered approximately 1,150 courses, 60 degree programs and 125 specializations and concentrations. As of December 31, 2009, it had 53,688 students enrolled in its institutions, 99% of whom were attending classes online.

AT&T Inc. is a holding company. The Company is a provider of telecommunications services in the United States and worldwide. These include wireless communications, local exchange services, long-distance services, data/broadband and Internet services, video services, managed networking, wholesale services and directory advertising and publishing. It operates in four segments: wireless, which provides both wireless voice and data communications services across the United States and, through roaming agreements, in foreign countries; wireline, which provides landline voice and data communication services, AT&T U-Verse TV, high-speed broadband and voice services (U-Verse) and managed networking to business customers; advertising solutions, which publishes Yellow and White Pages directories and sells directory advertising and Internet-based advertising and local search, and other, which provides results from customer information services and all corporate and other operations.

Tech Data Corporation (Tech Data) is a distributor of information technology (IT) products, logistics management and other value-added services. The Company serves approximately 125,000 value-added resellers (VARs), direct marketers, retailers and corporate resellers in more than 100 countries throughout North America, Latin America and Europe. During the fiscal year ended January 31, 2010 (fiscal 2009), the Company acquired certain assets of Scribona, AB. In February 2011, the Company announced that it had created two new business divisions: HP Solutions Division And Networking Solutions Group.

Research In Motion Limited (RIM) is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software and services that support multiple wireless network standards, RIM provides platforms and solutions for seamless access to time-sensitive information, including e-mail, phone, short message service (SMS), Internet and intranet-based applications. RIM's portfolio of products, services and embedded technologies are used by organizations worldwide and include the BlackBerry wireless solution, the RIM Wireless Handheld product line, software development tools and other software and hardware. Its subsidiaries include Research In Motion Corporation, Research In Motion UK Limited and RIM Finance, LLC. On June 2, 2010, Harman International sold its software operating systems unit, QNX Software Systems, to the Company.

Sanofi-Aventis is a pharmaceutical group engaged in the research, development, manufacture and marketing of healthcare products. The Company's business includes two main activities: pharmaceuticals and human vaccines through sanofi pasteur. It is also present in animal health products through Merial Limited (Merial). In its pharmaceutical activity, it specializes in six therapeutic areas: diabetes, oncology, thrombosis and cardiovascular, central nervous system (CNS), and internal medicine. The global portfolio of sanofi-aventis also consists of a range of other pharmaceutical products. It offers vaccines in five areas: pediatric combination vaccines, influenza vaccines, adult and adolescent booster vaccines, meningitis vaccines and travel and endemic vaccines. In October 2010, Siegfried Holding AG sold its PulmoJet Inhalation Project to the Company. In February 2011, the Company acquired BMP Sunstone Corp. In April 2011, the Company acquired Genzyme Corporation.

GameStop Corp. (GameStop) is a retailer of video game products and personal computer (PC) entertainment software. The Company sells new and used video game hardware, video game software and accessories, as well as PC entertainment software, and related accessories and other merchandise. As of January 30, 2010, the Company operated 6,450 stores in the United States, Australia, Canada and Europe, primarily under the names GameStop and EB Games. GameStop also operates the electronic commerce Website www.gamestop.com and publish Game Informer, a multi-platform video game magazine in the United States based on circulation, with approximately 4 million subscribers. During the fiscal year ended January 30, 2010 (fiscal 2009), GameStop operated its business in four segments: United States, Canada, Australia and Europe.

Skechers U.S.A., Inc. (Skechers) design and market Skechers-branded contemporary footwear for men, women and children under several lines. addition to Skechers-branded lines, the Company also offers several designer, fashion and street-focused footwear lines for men, women and children. These lines are branded and marketed separately from Skechers and appeal to specific audiences. Its brands are sold through department stores, specialty stores, athletic retailers, and boutiques as well as catalog and Internet retailers. Along with wholesale distribution, its footwear is available at its e-commerce Website and its own retail stores. Skechers operates 90 concept stores, 92 factory outlet stores and 37 warehouse outlet stores in the United States, and 22 concept stores and five factory outlets internationally. The Company operates in four reportable segments: domestic wholesale sales, international wholesale sales, retail sales, and e-commerce sales.

Humana Inc. (Humana) is a health and supplemental benefits company. The Company provides full-service benefits and wellness solutions, offering an array of health, pharmacy and supplemental benefit products for employer groups, Government benefit programs, and individuals, as well as primary and workplace care, through its medical centers and worksite medical facilities. Humana manages its business with two segments: Government and Commercial. The Government segment consists of beneficiaries of Government benefit programs, and includes three lines of business: Medicare, Military, and Medicaid. The Commercial segment consists of members enrolled in its medical and specialty products marketed to employer groups and individuals. The Company provides health insurance benefits under health maintenance organization (HMO), private fee-for-service (PFFS) and preferred provider organization (PPO) plans. On December 21, 2010, the Company acquired Concentra Inc.

Watch List

The Watch List contains the highest scoring stocks according to our guru consensus system that are not currently in the Hot List portfolio. We provide this list both for informational purposes and for investors who are not comfortable with a portfolio of ten stocks.


The names of individuals (i.e., the 'gurus') appearing in this report are for identification purposes of his methodology only, as derived by Validea.com from published sources, and are not intended to suggest or imply any affiliation with or endorsement or even agreement with this report personally by such gurus, or any knowledge or approval by such persons of the content of this report. All trademarks, service marks and tradenames appearing in this report are the property of their respective owners, and are likewise used for identification purposes only.

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Performance results are based on model portfolios and do not reflect actual trading. Actual performance will vary based on a variety of factors, including market conditions and trading costs. Past performance is not necessarily indicative of future results. Individual stocks mentioned throughout this web site may be holdings in the managed portfolios of Validea Capital Management, a separate asset management firm founded by Validea.com founder John Reese. Validea Capital Management, which is a separate legal entity and an SEC registered investment advisory firm, uses, in part, the strategies on the web site to select stocks for its clients.