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Executive Summary	November 21, 2014

The Economy After several weeks of very strong economic data, the news was more mixed over the past fortnight. But overall, the economy appears to be relatively healthy and continuing to improve. New government data, for example, supported the solid ADP jobs data we discussed last newsletter. The Labor Department said the private sector added 209,000 jobs in October, with total nonfarm payrolls rising by 214,000. It also revised its August and September jobs-added figures to indicate a total of 31,000 more jobs were added in those months than previously thought. The unemployment rate fell to 5.8% in October, the lowest it has been since July 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 three-tenths of a point to 11.5%, the lowest it has been since September 2008. The number of people not in the labor force also declined by more than 200,000. New claims for unemployment, which had been falling to levels not seen in nearly a decade-and-a-half, rose slightly over the past couple weeks. But despite the minor increase, new claims remain about 13% below year-ago levels. Continuing claims are 19% below where they stood a year ago, and are at their lowest level since 2000. Industrial production slipped 0.1% in October, meanwhile, according to a new Federal Reserve report. Manufacturing output rose 0.2%, the Fed said, but mining output fell 0.9% as oil prices continued to fall, impacting US oil shale operations. Utility output, which tends to be seasonally driven, also fell, declining 0.7%. Housing starts fell slightly, by 2.8%, in October, according to the Census Bureau. They still stand 7.7% above year-ago levels, however. Permit issuance for new construction rose 4.8%, meanwhile, putting it about 2.7% above its year-ago pace. Retail sales bounced back from a September decline, rising 0.3% in October, according to another government report. They are a solid 4.6% above year-ago levels. Elsewhere, inflation was flat in October, according to the Labor Department. That put it just 1.7% ahead of its year-ago pace. Part of the reason is gas prices, which continue to deflate. As of Nov. 19, the price for a gallon of regular unleaded was just $2.86, according to AAA. That's down 25 cents over the past month. If you strip out food and gas prices, so-called core inflation was up 0.2% in October, however, according to the Labor Department. Since our last newsletter, the S&P 500 returned 1.1%, while the Hot List returned 0.2%. So far in 2014, the portfolio has returned -12.5% vs. 11.1% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 218.5% vs. the S&P's 105.2% gain. Staying Active While 2014 has thus far turned out to be another good -- albeit very choppy -- year for stocks, it's been another rough one for mutual fund managers. As of late October, more than 75% of large-cap funds were lagging their benchmarks, according to Bloomberg (citing Morningstar data). Nearly 90% of mid-cap funds lagged their benchmarks, meanwhile, and about half of small-cap funds lagged theirs. That's nothing new, of course. Numerous studies show that the vast majority of mutual funds fail to beat their benchmarks over the long term. Part of that is because of fees and trading costs. Part of it is due to plain old bad management -- buying high and selling low. Of course, individuals don't do any better. I've often cited in these pages the data from Dalbar, Inc., which shows how individual investors continually underperform the broader market because they fall prey to the same behavioral biases that trip up the pros. Given how much data shows that pros and amateurs alike fail to outperform the major benchmark indices, should anyone practice active management anymore? Or is passive index investing the only real way to go? Well, I certainly believe that active management can be a very successful approach -- if it's truly active. The numbers bear that out. Consider a study that Patrick O'Shaughnessy (the son of James O'Shaughnessy, one of the gurus upon whose writings I base my strategies) recently highlighted in a piece for the American Association of Individual Investors. "A study by Yale professor Martijn Cremers and BlackRock portfolio manager Antti Petajisto showed that being different is the way to win," he wrote. "They concluded that the best way to predict how a fund manager would perform is to look at how unique their portfolio is versus the index; the more unique, the higher the average excess returns. The authors coined the term 'active share' to measure a portfolio's uniqueness. Active share is a score between 0 and 100: A score of 100 means that the portfolio is entirely different than the index (no overlap in holdings), whereas a score of 0 indicates an index fund, meaning the fund has perfect holdings overlap with the market. The authors found that even though the average manager loses to the index, those with the highest active share (top 20%) have historically outperformed by 2.4% before fees and 1.13% after fees. The message is clear: If you want to beat an index, you have to be very different than the index." It makes sense. On a gross return basis, a "closet indexer" -- a fund or portfolio that largely mirrors its benchmark's holdings -- should perform like the benchmark index, because their holdings are so similar. Factor in fees and trading costs, and their net returns are likely to lag those of the benchmark. To offset the fees and costs, a fund has to beat a benchmark on a gross basis, and to beat it, the fund has to be different from it. (If you're managing your own portfolio, you don't have to deal with management fees, but trading costs can certainly still be a drag on performance. So if you are "closet indexing", with your portfolio, the same logic holds.) The outperformance of funds with high active share also makes sense on an intuitive level because stocks that aren't in the major benchmark indices tend to be flying under the radar and getting a lot less attention from Wall Street than those that aren't in the major benchmarks. That means such stocks provide opportunities for significant mispricings, and fundamental-focused investors can exploit those inefficiencies. So, what is the Hot List's active share rate? Currently, it's quite high. Only one of its holdings -- Valero Energy -- is a member of the S&P 500, the benchmark we use. To see if this is typical or anomalous, I looked at what the portfolio's active share percentage has been at a few different points over the past couple years. I found that, while our active share at times has been lower than its current level, it has generally been quite high: Six months ago, in May 2014, four of the Hot List's ten holdings were in the S&P 500; six months prior to that, in November 2013, only one of the ten was in the S&P; and six months before that, in May 2013, only three of its ten holdings were S&P members. Given that my models often key on smaller and mid-cap stocks (as I discussed in one of last month's newsletters), I thought it would be interesting to also see how the Hot List's active share score looks when using the Russell 2000 index (which is composed of 2,000 smaller US stocks) as a benchmark. While the portfolio's active share doesn't appear quite as high on that basis, it is still pretty high: On average, only four of the Hot List's ten holdings were Russell 2000 members in those same four months that I examined above. Size Matters When it comes to constructing a portfolio that's different from a benchmark, size can certainly play a big role. The more holdings you have, the more likely it is that your returns are going to start to resemble broader market indices. Mutual funds that hold several hundred stocks must start to look quite a bit like their benchmarks. Because it only holds 10 stocks, that's not an issue for the Hot List. But in a concentrated portfolio with high active share, the difficulty is that your returns fairly often will veer quite sharply from the broader market or your benchmark -- and not always in a positive way. That's been the case with the Hot List this year. In such times, you can't take solace in the idea that, "Well, it's been a tough stretch for everyone," the way that you could if you were closet indexing and your benchmark was down a lot, too. We don't have a problem with that. After years of studying history's best investors and all sorts of academic research, we are confident that a concentrated portfolio of 10 stocks can do very well over the long haul, with the price being that there will be a lot of short-term ups and downs. Given the rewards, we are content to pay that price. (Incidentally, recent research from Patrick O'Shaughnessy supported this belief. He took a look at how different sized portfolios of the cheapest value stocks would have fared over the past 50 years or so. O'Shaughnessy found that the best returns came from a five-stock portfolio; the best risk-adjusted returns came from a 15-stock portfolio.) It's important to remember, however, that most investors probably don't have the stomach to deal with concentrated funds with high active share. Joel Greenblatt, another of the gurus upon whom I base a strategy, told WealthTrack last week that he abandoned a highly concentrated approach that had been extremely successful for him for one that involves investing in a few hundred stocks on the long side and a few hundred stocks on the short side. The reason: Most clients just can't handle big swings in performance that come with a concentrated portfolio, he said. They will bail on a good strategy if it is struggling in the short term, which defeats the purpose of following it to begin with. A broader portfolio decreases short-term volatility. In the end, I think investors should focus on the best opportunities in the market based on fundamentals and financials. But it's not always as simple as loading up your portfolio with a small number of the most fundamentally and financially sound stocks. There's a real-world, practical aspect of investing that you have to deal with, too. Going after only the best of the best -- a very limited number of the absolute most fundamentally and financially sound stocks -- often means having high active share and returns that differ significantly from the market or a benchmark. You thus have to know yourself, to understand how much of the bad times you can handle and how you'll respond when things get tough. If you don't have good answers to those questions, the specific stock-picking strategy used may well become moot. As Greenblatt so wisely said, "The best strategy for most people is the one they can stick with."		Editor-in-Chief: John Reese Since Inception   Hot List 218.5% S&P 500 105.2% Accuracy 54.7% Beta 1.2 YTD   Hot List -12.5% S&P 500 11.1% Since Last Issue   Hot List 0.2% S&P 500 1.1% Avg. Fundamentals   Market Cap (mil) $5,974 PE Ratio 14.7 5 Yr EPS Growth 19.7% Yield 0.9% Rel. Strength 77 Portfolio Sectors Financial 4 Services 3 Capital Goods 2 Energy 1
Have Your Portfolio Managed Using Validea's Investing System Many users know about our research services but are unaware that money management services based on our system are also offered through a separate registered investment advisory firm, Validea Capital Management. If you are thinking about switching advisors or no longer have the time or inclination to manage your investments yourself, find out more about Validea Capital, its portfolio offerings, and its performance below. Request an Investment Consultation Today! ** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. The information above is not intended as personal investment advice and should not be interpreted as such. The Fallen As we rebalance the Validea Hot List, 4 stocks leave our portfolio. These include: Omnivision Technologies, Inc. (OVTI), Anika Therapeutics, Inc. (ANIK), Lannett Company, Inc. (LCI) and Monster Beverage Corp (MNST). The Keepers 6 stocks remain in the portfolio. They are: Agco Corporation (AGCO), Valero Energy Corporation (VLO), Credit Acceptance Corp. (CACC), Jones Lang Lasalle Inc (JLL), Zumiez Inc. (ZUMZ) and Amtrust Financial Services Inc (AFSI). The Newbies We are adding 4 stocks to the portfolio. These include: Middleby Corp (MIDD), Universal Insurance Holdings, Inc. (UVE), Foot Locker, Inc. (FL) and Piper Jaffray Companies (PJC). Portfolio Changes Additions   MIDDLEBY CORP MIDD UNIVERSAL INSURANCE HOLDINGS, INC. UVE FOOT LOCKER, INC. FL PIPER JAFFRAY COMPANIES PJC Deletions   OMNIVISION TECHNOLOGIES, INC. OVTI ANIKA THERAPEUTICS, INC. ANIK LANNETT COMPANY, INC. LCI MONSTER BEVERAGE CORP MNST Newcomers to the Validea Hot List Foot Locker (FL): This specialty athletic retailer operates nearly 3,500 stores in 23 countries in North America, Europe, Australia, and New Zealand, offering athletic footwear and apparel. Foot Locker ($8 billion market cap) gets strong interest from my James O'Shaughnessy-based model. To read more about its fundamentals, check out the "Detailed Stock Analysis" section below. Piper Jaffray Companies (PJR): Piper Jaffray is an investment bank and asset management firm serving corporations, private equity groups, public entities, non-profit entities and institutional investors in the United States and internationally. The company operates in two segments: Capital Markets and Asset Management. It has a $900 million market cap. Piper gets strong interest from my Peter Lynch-based model and high marks from several other strategies. To read more about it, scroll down to the "Detailed Stock Analysis" section. The Middleby Corporation (MIDD): This commercial cooking equipment manufacturer was a pretty amazing growth story 10 to 15 years ago -- from 1998 to late-2002, Middleby more than doubled its market share in the U.S. commercial cooking equipment market, from 11% to 26%, according to U.S. Business Review. That helped the stock become one of the best-performing stocks of the 2000s, with its shares jumping about 1,700%. Growth has slowed, of course, but it's still strong (23% over the long term), and my Warren Buffett-based model is high on the mid-cap ($5 billion). For more on Middleby, see the "Detailed Stock Analysis" section below. Universal Insurance Holdings, Inc. (UVE): Universal is a vertically integrated insurance holding company involved in insurance underwriting, distribution and claims. Its subsidiaries offer homeowners insurance in Florida, North Carolina, South Carolina, Hawaii, Georgia, Massachusetts and Maryland. Universal ($650 million market cap) gets strong interest from my Motley Fool-based model, inspired by an approach outlined by Fool co-creators Tom and David Gardner. Scroll down to the "Detailed Stock Analysis" section to learn more about the stock. News about Validea Hot List Stocks Monster Beverage Corp. (MNST): Monster reported third-quarter earnings of $121.6 million, or 70 cents per share, beating analyst expectations of 68 cents per share, the Associated Press reported. Monster said revenues were $636 million, short of the $641.7 million analysts expected. Shares jumped nearly 8% the day after the announcement. That may have been due to Credit Suisse raising the company's price target and EPS estimates, TheStreet.com reported. CS increased the price target for Monster to $115 from $98, and increased annual EPS estimates to $2.62 from $2.50 for fiscal 2014, $3.03 (from $2.95) for fiscal 2015, and $3.49 (from $3.46) for fiscal 2016, TheStreet said. Credit Suisse said it raised the estimates because of Monster's better than expected operating margins. Through Nov. 19, Monster shares were up 12.7% since joining the portfolio four weeks ago, and the Hot List is taking the profits and selling the stock on today's rebalancing. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will take a closer look at my strategies and investment approach. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score VLO VALERO ENERGY CORPORATION Oil & Gas Operations 96 JLL JONES LANG LASALLE INC Real Estate Operations 87 UVE UNIVERSAL INSURANCE HOLDINGS, INC. Insurance (Prop. & Casualty) 82 ZUMZ ZUMIEZ INC. Retail (Apparel) 72 AFSI AMTRUST FINANCIAL SERVICES INC Insurance (Prop. & Casualty) 61 CACC CREDIT ACCEPTANCE CORP. Consumer Financial Services 58 FL FOOT LOCKER, INC. Retail (Apparel) 53 PJC PIPER JAFFRAY COMPANIES Investment Services 50 AGCO AGCO CORPORATION Constr. & Agric. Machinery 49 MIDD MIDDLEBY CORP Misc. Capital Goods 48 Ticker Market Cap Date Added Start Price Current Price Return VLO $26,198 4/11/2014 $50.96 $50.26 -1.4% JLL $6,413 9/26/2014 $126.57 $143.08 13.0% UVE $646 11/21/2014 TBD $18.84 TBD ZUMZ $1,037 10/24/2014 $32.97 $35.52 7.7% AFSI $3,865 10/24/2014 $49.37 $51.66 4.6% CACC $3,075 10/24/2014 $135.39 $149.29 10.3% FL $8,192 11/21/2014 TBD $57.00 TBD PJC $938 11/21/2014 TBD $57.61 TBD AGCO $4,063 12/20/2013 $57.62 $44.17 -23.3% MIDD $5,316 11/21/2014 TBD $92.83 TBD

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 VLO   |   JLL   |   UVE   |   ZUMZ   |   AFSI   |   CACC   |   FL   |   PJC   |   AGCO   |   MIDD   |   VALERO ENERGY CORPORATION Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Valero Energy Corporation (Valero) is an independent petroleum refining and marketing company. Valero's refineries can produce conventional gasoline's, distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products, as well as a slate of premium products, including conventional blendstock for oxygenate blending and reformulated gasoline blendstock for oxygenate blending, gasoline meeting the specifications of the California Air Resources Board, a diesel fuel, and low-sulfur and ultra-low-sulfur diesel fuel. It also owns 10 ethanol plants in the central plains region of the United States with a combined ethanol nameplate production capacity of about 1.1 billion gallons per year. It operates in three business segments: refining, ethanol, and retail. In May 2013, CST Brands Inc announced that the Company which includes Corner Store and Depanneur du Coin, spun off from Valero Energy Corporation. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider VLO a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (7.06) relative to the growth rate (27.44%), based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, 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 VLO (0.26) 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. VLO, whose sales are $137,414.0 million, needs to have a P/E below 40 to pass this criterion. VLO's P/E of (7.06) 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 VLO was 4.28% last year, while for this year it is 4.17%. Since inventory to sales has decreased from last year by -0.11%, VLO 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 VLO is 27.4%, based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for VLO (31.06%) 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 VLO (10.82%) 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 VLO (-5.60%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.   JONES LANG LASALLE INC Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Jones Lang LaSalle Incorporated (Jones Lang LaSalle), is a financial and professional services firm specializing in real estate. Jones Lang LaSalle has over 200 corporate offices worldwide and operations in more than 1,000 locations in 70 countries. The Company offers integrated real estate and investment management services on a local, regional and global basis to owner, occupier and investor clients. It delivers an array of Real Estate Services (RES) across its three geographic business segments: the Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific. LaSalle Investment Management, a wholly owned member of the Jones Lang LaSalle group that consists of its fourth business segment, is a diversified real estate investment management company. In July 2014, Jones Lang LaSalle Inc acquired CLEO Construction Management (CLEO), a construction project management services firm that specializes in medical facilities. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: JLL is considered a "True Stalwart", according to this methodology, as its earnings growth of 19.60% lies within a moderate 10%-19% range and its annual sales of $5,190 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. JLL is attractive if JLL can hold its own during a recession. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for JLL (0.96), based on the average of the 3 and 5 year historical eps growth rates, is O.K. EARNINGS PER SHARE: [PASS] The EPS for a stalwart company must be positive. JLL's EPS ($7.50) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for JLL (24.46%) to be acceptable (equity is three to ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for JLL (4.24%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for JLL (-5.78%) 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.   UNIVERSAL INSURANCE HOLDINGS, INC. Profile Strategy: Growth Investor Based on: Martin Zweig 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: 85% 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. UVE's P/E is 9.85, based on trailing 12 month earnings, while the current market PE is 17.00. 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. UVE's revenue growth is 9.22%, while it's earnings growth rate is 16.77%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, UVE 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 (32.1%) 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 UVE 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. UVE's EPS ($0.61) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. UVE's EPS for this quarter last year ($0.40) 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. UVE's growth rate of 52.50% 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 UVE is 8.39%. This should be less than the growth rates for the 3 previous quarters, which are 290.91%, 31.03%, and 11.36%. UVE 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, 54.76%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 52.50%, (versus the same quarter one year ago) then the stock fails, with one exception: if the growth rate in earnings between the current quarter and the same quarter one year ago is greater than 30%, then the stock would pass. The growth rate over this period for UVE is 52.5%, and it would therefore pass this test. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: [PASS] The EPS growth rate for the current quarter, 52.50% must be greater than or equal to the historical growth which is 16.77%. UVE would therefore pass this test. EARNINGS PERSISTENCE: [FAIL] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. UVE, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.71, 0.92, 0.50, 0.74, and 1.56, fails 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. UVE's long-term growth rate of 16.77%, 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 UVE, this criterion has not been met (insider sell transactions are 115, while insiders buying number 40). 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.   ZUMIEZ INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy 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: 100% MARKET CAP: [PASS] The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. ZUMZ, with a market cap of $1,037 million, passes this criterion. EARNINGS PER SHARE PERSISTENCE: [PASS] The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. ZUMZ, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.30, 0.79, 1.20, 1.35 and 1.52, passes this test. PRICE/SALES RATIO: [PASS] The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. ZUMZ's Price/Sales ratio of 1.37, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [PASS] The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. ZUMZ, whose relative strength is 73, is in the top 50 and would pass this last criterion.   AMTRUST FINANCIAL SERVICES INC Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Amtrust Financial Services, Inc. is a holding company. The Company is a multinational specialty property and casualty insurer focused on generating consistent underwriting profits. The Company operates in four business segments: small commercial business, specialty program and personal lines reinsurance. The Company transacts business through 11 insurance company subsidiaries: Technology Insurance Company, Inc. (TIC), Rochdale Insurance Company (RIC), Wesco Insurance Company (WIC), Associated Industries Insurance Company, Inc. (AIIC), Milwaukee Casualty Insurance Company (MCIC), Security National Insurance Company (SNIC), AmTrust Insurance Company of Kansas, Inc. (AICK) and AmTrust Lloyd's Insurance Company of Texas (ALIC). In December 2013, the Company announced that it its wholly owned subsidiary completed the acquisition of Sagicor Europe Limited. In January 2014, the Company acquired Insco Dico Group. Analysis Guru Score: 100% MARKET CAP: [PASS] The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. AFSI, with a market cap of $3,865 million, passes this criterion. EARNINGS PER SHARE PERSISTENCE: [PASS] The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. AFSI, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.56, 1.95, 2.29, 2.34 and 3.67, passes this test. PRICE/SALES RATIO: [PASS] The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. AFSI's Price/Sales ratio of 1.06, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [PASS] The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. AFSI, whose relative strength is 79, is in the top 50 and would pass this last criterion.   CREDIT ACCEPTANCE CORP. Profile Strategy: Patient Investor Based on: Warren Buffett Credit Acceptance Corporation (Credit Acceptance) is a provider of auto loans to consumers. The Company offers auto loans and related products and services to consumers through its network of Dealer-Partners. It refers to dealers who participate in the Company's programs as Dealer-Partners. Credit Acceptance has two programs: the Portfolio Program and the Purchase Program. Under the Portfolio Program, it advances money to Dealer-Partners (referred to as a Dealer Loan) in exchange for the right to service the underlying Consumer Loans. Under the Purchase Program, Credit Acceptance buys the Consumer Loans from the Dealer-Partners (referred to as a Purchased Loan) and keeps all amounts collected from the consumer. Dealer Loans and Purchased Loans are collectively referred to as Loans. 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 1.37, 1.74, 1.67, 1.72, 2.16, 4.61, 5.67, 7.07, 8.58, 10.54. Buffett would consider CACC's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 8 years ago. The dips have totaled 4.0%. CACC's long term historical EPS growth rate is 27.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 12.3% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers. LOOK 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 CACC, over the last ten years, is 25.8%, 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 16.8%, 17.3%, 23.9%, 19.6%, 19.6%, 28.7%, 32.7%, 33.6%, 33.3%, 32.2%, and the average ROE over the last 3 years is 33.0%, thus passing this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON ASSETS: [PASS] Buffett also requires, for financial companies, that the average Return On Assets (ROA) be at least 1% and consistent. Return On Assets is defined as the net earnings of the business divided by the total assets of the business. The average ROA for CACC, over the last ten years, is 9.1%, which is high enough to pass. It is not enough that the average be at least 1%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROA must be at least 1% for Buffett to feel comfortable that the ROA is consistent. The ROA for the last 10 years, from earliest to latest, is 8.6%, 10.4%, 6.9%, 5.5%, 5.8%, 12.2%, 11.5%, 10.3%, 9.7%, 9.9%, thus passing this criterion. LOOK AT CAPITAL EXPENDITURES: [PASS] Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. CACC's free cash flow per share of $13.33 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 $45.13 and compares it to the gain in EPS over the same period of $9.17. CACC's management has proven it can earn shareholders a 20.3% 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. CACC's shares outstanding have fallen over the past five years from 31,040,001 to 22,000,000, 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 CACC 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 $11.35 and divide it by the current market price of $149.29. An investor, purchasing CACC, could expect to receive a 7.60% initial rate of return. Furthermore, he or she could expect the rate to increase 12.3% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 2.75%. Compare this with CACC's initial yield of 7.60%, which will expand at an annual rate of 12.3%, based on the analysts' consensus estimated long term growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding. CALCULATE THE FUTURE EPS: [No Pass/Fail] CACC currently has a book value of $34.64. It is safe to say that if CACC can preserve its average rate of return on equity of 25.8% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 25.8% and it will have a book value of $342.86 in ten years. If it can still earn 25.8% on equity in ten years, then expected EPS will be $88.33. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $88.33 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (13.1) (5 year average P/E in this case), which is 11.5 and you get CACC's projected future stock price of $1,014.08. CALCULATE THE EXPECTED RATE OF RETURN BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now add in the total expected dividend pool to be paid over the next ten years, which is $0.00. This gives you a total dollar amount of $1,014.08. These numbers indicate that one could expect to make a 21.1% average annual return on CACC'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 12.3%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $36.05. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (13.1) (5 year average P/E in this case), which is 11.5. This equals the future stock price of $413.81. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $413.81. CALCULATE THE EXPECTED RETURN USING THE AVERAGE EPS GROWTH METHOD: [No Pass/Fail] Now you can figure out your expected return based on a current price of $149.29 and the future expected stock price, including the dividend pool, of $413.81. If you were to invest in CACC at this time, you could expect a 10.73% average annual return on your money. Buffett likes to see a 15% return, and would even go down to 12%. LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [PASS] Based on the two different methods, you could expect an annual compounding rate of return somewhere between 10.7% and 21.1%. 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 15.9% on CACC stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   FOOT LOCKER, INC. Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Foot Locker, Inc. is a global retailer of athletic shoes and apparel. As of August 02, 2014, the Company operated 3,460 stores, including 74 franchised stores. The Company operates in two segments. The Athletic Stores segment is an athletic footwear and apparel retailer whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction and SIX:02, as well as the retail stores of Runners Point Group, including Runners Point, Sidestep and Run2. The Direct-to-Customers segment operates the websites for eastbay.com, final-score.com, eastbayteamsales.com, ccs.com, as well as websites aligned with the brand names of its store banners (footlocker.com, ladyfootlocker.com, kidsfootlocker.com, champssports.com, footaction.com, and six02.com). Additionally, this segment includes the direct-to-customer subsidiary of Runners Point Group, which operates the websites for runnerspoint.com, sidestep-shoes.com, and sp24.com. Analysis Guru Score: 90% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratio between .75 and 1.5 are good values. FL's P/S ratio of 1.18 based on trailing 12 month sales, falls within the "good values" range for non-cyclical companies and is considered attractive. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. FL's Debt/Equity of 5.31% is acceptable, thus passing the test. PRICE/RESEARCH RATIO: [PASS] This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. FL is neither a Technology nor Medical company. Therefore the Price/Research ratio is not available and, hence, not much emphasis should be placed on this particular variable. PRELIMINARY GRADE: Some Interest in FL At this Point Is FL a "Super Stock"? NO PRICE/SALES RATIO: [FAIL] The prospective company should have a low Price/Sales ratio. To be considered a "Super Stock", non-cyclical (non-Smokestack) companies should have Price/Sales ratios below .75. However, FL, who has a P/S of 1.18, does not fall within the "Super Stock" range. It does fall between 0.75 and 1.5, which is considered the "good values" range for non-cyclical companies. Nonetheless, it does not pass this "Super Stock" criterion. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. FL's inflation adjusted EPS growth rate of 54.33% passes the test. FREE CASH PER SHARE: [PASS] This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. FL's free cash per share of 1.37 passes this criterion. THREE YEAR AVERAGE NET PROFIT MARGIN: [PASS] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. FL, whose three year net profit margin averages 5.98%, passes this evaluation.   PIPER JAFFRAY COMPANIES Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Piper Jaffray Companies is an investment bank and asset management firm, serving the needs of corporations, private equity groups, public entities, non-profit entities and institutional investors in the United States and internationally. The Company operates in two segments: Capital Markets and Asset Management. The Capital Markets segment provides investment banking and institutional sales, trading and research services for various equity and fixed income products. The Asset Management segment includes traditional asset management activities and related services. The Company markets the investment banking and institutional securities business under Piper Jaffray name. Its asset management business is marketed under Advisory Research, Inc. In July 2013, Piper Jaffray Companies announced that it has completed its purchase of Seattle-Northwest Securities Corporation. In July 2013, the Company announced that it has completed its purchase of Edgeview Partners L.P. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider PJC a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (11.92) relative to the growth rate (29.68%), based on the average of the 3 and 4 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for PJC (0.40) 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. PJC, whose sales are $709.7 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 PJC is 29.7%, based on the average of the 3 and 4 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] PJC 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. PJC's Equity/Assets ratio (31.00%) 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. PJC's ROA (3.62%) 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 PJC (4.81%) 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 PJC (-39.36%) 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.   AGCO CORPORATION Profile Strategy: Value Investor Based on: Benjamin Graham AGCO Corporation (AGCO) is a manufacturer and distributor of agricultural equipment and related replacement parts globally. The Company sells a range of agricultural equipment, including tractors, combines, self-propelled sprayers, hay tools, forage equipment and implements. It also manufactures and distributes grain storage and handling equipment systems, as well as protein production systems. Its products are recognized in the agricultural equipment industry and are marketed under a range of brands, including Challenger, Fendt, Massey Ferguson and Valtra. The Company distributes its products through a combination of approximately 3,100 independent dealers and distributors in more than 140 countries. In September 2013, Grain Systems, Inc. (GSI), a global brand of the Company announced that it has purchased Johnson System Inc. (JSI), manufacturer of catwalks, towers and support structures based in Marshall, Michigan. Analysis Guru Score: 86% SECTOR: [PASS] AGCO is neither a technology nor financial Company, and therefore this methodology is applicable. SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. AGCO's sales of $10,098.2 million, based on trailing 12 month sales, pass this test. CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. AGCO's current ratio of 1.78 fails the test. LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for AGCO is $1,332.8 million, while the net current assets are $1,841.8 million. AGCO passes this test. LONG-TERM EPS GROWTH: [PASS] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. AGCO's EPS growth over that period of 467.8% passes the EPS growth test. P/E RATIO: [PASS] The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. AGCO's P/E of 9.03 (using the current PE) passes this test. PRICE/BOOK RATIO: [PASS] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. AGCO's Price/Book ratio is 1.09, while the P/E is 9.03. AGCO passes the Price/Book test.   MIDDLEBY CORP Profile Strategy: Patient Investor Based on: Warren Buffett The Middleby Corporation (Middleby) through its operating subsidiary Middleby Marshall Inc. (Middleby Marshall) and its subsidiaries, is engaged in the design, manufacture, marketing, distribution, and service of a line of cooking and warming equipment used in all types of commercial restaurants and institutional kitchens, and food preparation, cooking and packaging equipment for food processing operations. The Company operates in two segments: the Commercial Foodservice Equipment Group and the Food Processing Equipment Group. In April 2014, Middleby Corporation acquired assets of Processing Equipment Solutions, Inc. In September 2014, Middleby Corporation acquires Concordia Coffee Company, Inc. Analysis Guru Score: 96% STAGE 1: "Is this a Buffett type company?" A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage. LOOK FOR EARNINGS PREDICTABILITY: [PASS] Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.40, 0.66, 0.86, 1.03, 1.25, 1.10, 1.32, 1.72, 2.16, 2.74. Buffett would consider MIDD's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 5 years ago. The dips have totaled 12.0%. MIDD's long term historical EPS growth rate is 23.3%, 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. MIDD has a debt of 506.6 million and earnings of 192.1 million, which could be used to pay off the debt in less than five years, thus passing this criterion. Buffett would prefer, however, for a company to have sufficient earnings to pay off its debt in less than two years. 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 MIDD, over the last ten years, is 23.6%, 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 248.5%, 64.8%, 40.6%, 28.7%, 28.0%, 17.8%, 17.3%, 18.8%, 18.8%, 18.7%, and the average ROE over the last 3 years is 18.8%, 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 MIDD, over the last ten years, is 15.7% and the average ROTC over the past 3 years is 14.4%, 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 14.9%, 20.1%, 24.5%, 19.0%, 14.0%, 10.0%, 11.6%, 18.8%, 13.4%, 11.1%, 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. MIDD's free cash flow per share of $2.25 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 $13.18 and compares it to the gain in EPS over the same period of $2.34. MIDD's management has proven it can earn shareholders a 17.8% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work. HAS THE COMPANY BEEN BUYING BACK SHARES: [BONUS PASS] Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. MIDD's shares outstanding have fallen in the current year from 57,369,999 to 57,000,000, 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 MIDD 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 $3.37 and divide it by the current market price of $92.83. An investor, purchasing MIDD, could expect to receive a 3.63% initial rate of return. Furthermore, he or she could expect the rate to increase 23.3% 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 MIDD's initial yield of 3.63%, which will expand at an annual rate of 23.3%, 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] MIDD currently has a book value of $16.82. It is safe to say that if MIDD can preserve its average rate of return on equity of 18.8% and continues to retain 99.22% of its earnings, it will be able to sustain an earnings growth rate of 18.6% and it will have a book value of $92.77 in ten years. If it can still earn 18.8% on equity in ten years, then expected EPS will be $17.41. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $17.41 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (27.6) (5 year average P/E in this case), which is 22.0 and you get MIDD's projected future stock price of $382.41. 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 $1.00. This gives you a total dollar amount of $383.40. These numbers indicate that one could expect to make a 15.2% average annual return on MIDD'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 23.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, you can project EPS in ten years to be $27.35. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (27.6) (5 year average P/E in this case), which is 22.0. This equals the future stock price of $600.70. Add in the total expected dividend pool of $1.00 to get a total dollar amount of $601.70. 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 $92.83 and the future expected stock price, including the dividend pool, of $601.70. If you were to invest in MIDD at this time, you could expect a 20.55% 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 20.6%. 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 17.9% on MIDD stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the 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 OVTI OMNIVISION TECHNOLOGIES, INC. Semiconductors 51 SIMO SILICON MOTION TECHNOLOGY CORP. (ADR) Semiconductors 48 AXS AXIS CAPITAL HOLDINGS LIMITED Insurance (Prop. & Casualty) 47 SSL SASOL LIMITED (ADR) Chemical Manufacturing 45 HIBB HIBBETT SPORTS, INC. Retail (Specialty) 45 USNA USANA HEALTH SCIENCES, INC. Conglomerates 44 MNST MONSTER BEVERAGE CORP Beverages (Non-Alcoholic) 44 PII POLARIS INDUSTRIES INC. Recreational Products 41 LCI LANNETT COMPANY, INC. Biotechnology & Drugs 41 TECD TECH DATA CORP Retail (Technology) 38

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