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Executive Summary	April 3, 2009

The Economy Make no mistake: The economy is still in bad shape. But as April begins, signs of improvement -- or, at least, signs that things are "less bad" than many expected -- are continuing to trickle in. For starters, new orders for manufactured goods rose 1.8 percent in February, the first increase in six months, according to a preliminary report from the Commerce Department. Businesses appeared to be more optimistic about the future, with durable goods orders -- which include big-ticket, plan-ahead items like machinery and computers, jumped 3.4 percent. That increase also followed six months of declines, and was far better than economists' forecasts of a 2.5 percent decrease. The much-maligned housing market also offered some slivers of hope. The National Association of Realtors reported that its Pending Home Sales Index increased 2.1 percent in February. While the housing market remains weak, the Realtor group's chief economist said more buyers are getting into the market to take advantage of stimulus incentives and lower prices, though he said it could take a few months before a really meaningful increase occurs. But reminders of how rough the economy is remain. Yesterday, the Labor Department reported that initial unemployment claims jumped by 12,000 -- almost 2 percent -- in the week ending March 28, the largest increase since 1982. And a new report showed that continuing claims rose again in the week before that (the most recent week the data covers), this time by almost 3 percent. Keep in mind, however, that the overall unemployment rate still remains below the levels associated with the 1973-74 and 1980-82 recessions. And, as JPMorgan Chase noted in its quarterly update, unemployment traditionally remains higher even after the economy turns. "Businesses typically are very cautious about adding to their staff levels in the early years of recovery," the banking giant stated. "That hiring caution in the early expansion years usually generates talk about jobless recoveries. Unemployment is likely to move higher into early next year, even if the economy gains momentum late this year, as expected." JPM -- which was ahead of the curve when it came to the subprime crisis -- expects the economy to stabilize and move into recovery over the next six months. Finally, there is, of course, the financial sector. Things are still grim, but the Treasury Department is revealing more and more details about its plan to help financial firms deal with the toxic debt that has burdened their balance sheets. The latest plan calls for the use of $75 billion to $100 billion in TARP funds and funds from private investors, which will generate $500 billion to $1 trillion that will be used to buy up the financial firms' bad debt. The debt will then be auctioned off to the highest bidder. How the plan works out remains to be seen, but investors were certainly heartened. Stocks surged the day the plan was announced, and they've continued a choppy climb upward. That bullish run was punctuated by yesterday's solid gains, which were driven in part by news that market-to-market policies would be eased, and reports that the G20 summit was resulting in another trillion dollars in rescue and stimulus funding for the global economy. One issue to keep an eye on: how the Treasury's plan to buy up toxic debt is impacted (perhaps hampered) but the relaxing of mark-to-market rules, which could give banks reason to hold onto those same assets. Since our last newsletter, the S&P 500 is up 6.4 percent, while the Hot List has risen an even-better 13.2 percent. For the year, the portfolio is in the red but ahead of the S&P, having lost 3.6 percent compared to the index's 7.6 percent loss. Since its inception almost six years ago, the Hot List remains well in the black, up 58.1 percent, while the S&P is well in the red, down 16.6 percent. Stay Focused -- Bear or Bull The market's surge over the past four weeks -- the S&P 500 is up more than 23 percent since March 9 -- is certainly a welcomed development, as has been the less-than-terrible economic news that has accompanied it. But don't assume that we're out of the woods yet. While this may well be the start of a lengthy bull market, it could be another head-fake -- no one knows for sure. While we all hope we have seen the bottom, be prepared just in case this isn't the real deal -- and definitely be prepared for more volatility, at the very least. If this run doesn't hold, keep in mind that valuations are still low using even the most conservative metrics (like the 10-year P/E ratio), so don't be scared out of the market. There's another side to this coin, however. Just as it's important not to let a downturn scare you out of stocks, so too is it important not to let your emotions run wild when things are looking up. With the market breathing some sighs of relief in recent weeks (most notably the announcement that Citigroup and some other troubled financials are turning profits, and the disclosure of the Treasury's plan to deal with toxic assets), it can be tempting to dive back into stocks that have been crushed in the past year or two -- especially given the urge to make up big recent losses -- with the hope that they'll rebound as quickly as they fell. But be careful. Take, for example, financials. Citigroup, Bank of America, UBS, U.S. Bancorp, Lloyds, Credit Suisse, JPMorgan, Goldman Sachs -- none of these beaten-down big names, many of which have gotten a nice bounce in recent weeks, get the least bit of interest from my models right now. That means that, despite the sudden burst of optimism, these firms' long-term prospects remain highly questionable. Yes, some of the big banks, like Wells Fargo and Barclays, do get approval from one or two of my strategies, and yes, the bailout money could end up lifting some less-than-stellar stocks out of the doldrums. But overall, the sector is still looking somewhat dangerous, even with all those single-digit or low-teen prices, and no one is sure just how the bailout will impact these firms in the long run. Pouring speculative money into those that don't have strong fundamentals is asking for trouble. Keep in mind the research of James O'Shaughnessy, the growth/value guru I examine below in this week's Guru Spotlight. Earlier this year, O'Shaughnessy's firm examined which stocks have excelled coming out of every recession since 1962. What they found was that stocks with the best fundamentals -- not speculative stocks -- enjoyed the biggest gains, particularly in the first year after the recession. Stocks in the best decile ranked by price/sales ratio (meaning those with the lowest P/S ratios), for example, outperformed the highest decile of P/S stocks by an average of almost 22 percentage points in the first post-recession year, 16.57 points (annualized) in the first three years, and 13.95 points (annualized) in the first five years. The bottom line is that it is critical to pick a good strategy and stick to it -- through bad times, through good times, through any times. O'Shaughnessy was a staunch believer in that concept. He knew that many investors allow their emotions to push them off their investment strategy track, far more often than not for the worse. "We are a bundle of inconsistencies," he writes in What Works on Wall Street, "and while that may make us interesting, it plays havoc with our ability to invest our money successfully." His advice: "Consistently, patiently, and slavishly stick with a strategy, even when it's performing poorly relative to other methods." There are certainly critics of such a mindset, many of whom have popped up as the market has tanked in the past year. They will say that quantitative strategies tell you what worked on Wall Street, not what will work. Their premise is correct -- even quantitative methods that have been highly successful for lengthy periods of time don't come with a guarantee of strong future results. But those critics are missing two key points. The first is simple: that hunch-based, emotional stock-picking doesn't come with a guarantee of success, either. The second point involves the issue of why certain strategies have performed well over time. To say that successful quantitative strategies simply tell you what has previously worked well implies that such methods used some sort of hocus-pocus, gimmicky approach. In reality, nothing could be further from the truth. The quantitative methods used by people like O'Shaughnessy, Peter Lynch, Marty Zweig, John Neff, and the other gurus I follow measure concepts that are, when it comes to the world of business, both critical and timeless. Debt levels, profit margins, consistency of earnings, sales volume -- it's hard to imagine an economy and stock market that wouldn't over the long term value companies that scored well in these areas. Joel Greenblatt, who inspired my most recently developed Guru Strategy, does a great job of succinctly explaining the notion of why a good quantitative strategy like his works in The Little Book that Beats the Market. In the book, Greenblatt refers to his two-variable strategy "The Magic Formula", but he makes it clear that the formula is anything but "magic". The two variables he uses -- return on capital and earnings yield -- serve two simple purposes: Return on capital identifies strong companies, and earnings yield identifies which of those strong companies' shares are selling at a discount. In doing so, the variables help Greenblatt follow a simple, timeless tenet: "Buying good companies at bargain prices makes sense." In one way or another, that's just what all the gurus I follow do. Their quantitative criteria measure how strong a company's balance sheet is -- that's the "good companies" part of Greenblatt's mantra -- and then use any of several valuation measures (price/earnings, price/sales, price/book, etc.) to compare the firm's financial position to its stock's market value. Yes, this concept of investing in firms with strong balance sheets and low valuation ratios will sometimes falter in the short term. But over the long haul it will endure, because it is based not on trickery or "magic", but on concepts that are at the heart of how business and markets inherently function. That's a point not to be forgotten, no matter whether you think we're at the start of a new bull run, or merely at the top of another bear market rally.		Editor-in-Chief: John Reese Since Inception   Hot List 58.1% S&P 500 -16.6% Accuracy 55.5% Beta 1.2 YTD   Hot List -3.6% S&P 500 -7.6% Since Last Issue   Hot List 13.2% S&P 500 6.4% Avg. Fundamentals   Market Cap (mil) $35,397 PE Ratio 8.0 5 Yr EPS Growth 35.4% Yield 1.6% Rel. Strength 66 Portfolio Sectors Energy 4 Services 2 Capital Goods 2 Consumer Cyclical 1 Basic Materials 1
Advertisement Guru Spotlight: James O'Shaughnessy To say that James O'Shaughnessy has written the book on quantitative investing strategies might be an exaggeration -- but not much of one. Over the years, O'Shaughnessy has compiled an anthology of research on the historical performance of various stock selection strategies rivaling that of just about anyone. He first published his findings back in 1996, in the first edition of his bestselling What Works on Wall Street, using Standard & Poor's Compustat database to back-test a myriad of quantitative approaches. He has continued to periodically update his findings since then, and today he also serves as a money manager and the manager of several Canadian mutual funds. In addition to finding out how certain strategies had performed in terms of returns over the long term, O'Shaughnessy's study also allowed him to find out how risky or volatile each strategy he examined was. So after looking at all sorts of different approaches, he was thus able to find the one that produced the best risk-adjusted returns -- what he called his "United Cornerstone" strategy. The United Cornerstone approach, the basis for my O'Shaughnessy-based Guru Strategy, is actually a combination of two separate models that O'Shaughnessy tested, one growth-focused and one value-focused. His growth method -- "Cornerstone Growth" -- produced better returns than his "Cornerstone Value" approach, and was a little more risky. The Cornerstone Value strategy, meanwhile, produced returns that were a bit lower, but with less volatility. Together, they formed an exceptional one-two punch, averaging a compound return of 17.1 percent from 1954 through 1996, easily beating the S&P 500s 11.5 percent compound return during that time while maintaining relatively low levels of risk. That 5.6 percent spread is enormous when compounded over 42 years: If you'd invested $10,000 using the United Cornerstone approach on the first day of the period covered by O'Shaughnessy's study, you'd have had almost $7.6 million by the end of 1996 -- more than $6.6 million more than you'd have ended up with if you'd invested $10,000 in the S&P for the same period! That seems powerful evidence that stock prices do not -- as efficient market believers suggest -- move in a "random walk," but instead, as O'Shaughnessy writes, with a "purposeful stride." The Two-Pronged O'Shaughnessy Attack Let's start with O'Shaughnessy's value stock strategy. His Cornerstone Value approach targeted "market leaders" -- large, well-known firms with sales well above those of the average company -- because he found that these firms' stocks are considerably less volatile than the broader market. He believed that all investors-even the youngest of the bunch -- should hold some value stocks. To find these firms, O'Shaughnessy required stocks to have a market cap greater than $1 billion, a number of shares outstanding greater than the market mean, and trailing 12-month sales that were at least 1.5 times the market mean. Size and market position weren't enough to make a value stock attractive for O'Shaughnessy, however. Another key factor that was a great predictor of a stock's future, he found, was cash flow. My O'Shaughnessy-based value model calls for companies to have cash flows per share greater than the market average. O'Shaughnessy found that, when it came to market leaders, another criterion was even more important than cash flow: dividend yield. He found that high dividend yields were an excellent predictor of success for large, well-known stocks (though not for smaller stocks); large market-leaders with high dividends tended to outperform during bull markets, and didn't fall as far as other stocks during bear markets. The Cornerstone Value model takes all of the stocks that pass the four aforementioned criteria (market cap, shares outstanding, sales, and cash flow) and ranks them according to dividend yield. The 50 stocks with the highest dividend yields get final approval. The Cornerstone Growth approach, meanwhile, isn't strictly a growth approach. That's because one of the interesting things O'Shaughnessy found in his back-testing was that all of the successful strategies he studied -- even growth approaches -- included at least one value-based criterion. The value component of his Cornerstone Growth strategy was the price/sales ratio, a variable that O'Shaughnessy found -- much to the surprise of Wall Street -- was the single best indication of a stock's value, and predictor of its future. The Cornerstone Growth model allows for smaller stocks, using a market cap minimum of $150 million, and requires stocks to have price/sales ratios below 1.5. To avoid outright dogs, the strategy also looks at a company's last five years of earnings, requiring that its earnings per share have increased each year since the first year of that period. The final criterion of this approach is relative strength, the measure of how a stock has performed compared to all other stocks over the past year. A key part of why the growth stock model works so well, according to O'Shaughnessy, is the combination of high relative strengths and low P/S ratios. By targeting stocks with high relative strengths, you're looking for companies that the market is embracing. But by also making sure that a firm has a low P/S ratio, you're ensuring that you're not getting in too late on these popular stocks, after they've become too expensive. "This strategy will never buy a Netscape or Genentech or Polaroid at 165 times earnings," O'Shaughnessy wrote, referring to some of history's well-known momentum-driven, overpriced stocks. "It forces you to buy stocks just when the market realizes the companies have been overlooked." To apply the RS criterion, the Cornerstone Growth model takes all the stocks that pass the three growth criteria I mentioned (market cap, earnings persistence, P/S ratio) and ranks them by RS. The top 50 stocks then get final approval. The Growth/Value Investor model I base on O'Shaughnessy's two-pronged approach has been a solid performer since its inception back in 2003, though it's been hit hard by the market's plunge. My 10-stock O'Shaughnessy-based portfolio has gained 6.9 percent since inception, while the S&P 500 has lost about 19 percent. My 20-stock O'Shaughnessy portfolio has fared better, gaining almost 21 percent in that time. The O'Shaughnessy-based portfolios will pick stocks using both the growth and value methods I described above. They pick whatever the best-rated stocks are at the time, regardless of growth/value distinction, meaning the portion of the portfolios made up of growth and value stocks can vary over time. Currently, the strategy is finding more buys using the growth approach, which is responsible for picking nine of the stocks in the 10-stock portfolio and 14 of the stocks in the 20-stock portfolio. Here's a look at the 10-stock portfolio's holdings (growth/value distinction in parentheses): NPK -- National Presto Industries (Growth) JOSB -- Jos. A. Bank Clothiers (Growth) GWW -- W.W. Grainger, Inc. (Growth) EZPW -- EZCorp, Inc. (Growth) INT -- World Fuel Services Corporation (Growth ) WW -- Watson Wyatt Worldwide Inc. (Growth) ASF -- Administaff, Inc. (Growth) PTR -- Petrochina Company Limited (Value) ACN -- Accenture Ltd. (Growth) ATR -- AptarGroup (Growth) Beyond The Numbers O'Shaughnessy is a pure quant, but you should be aware that some of his most critical lessons are less about specific criteria and numbers than they are about the general mindset an investor must have. Perhaps more than anything else, O'Shaughnessy believes in picking a good strategy and sticking with it -- no matter what. In What Works on Wall Street, he writes that in order to beat the market, it is crucial that you stay disciplined: "[C]onsistently, patiently, and slavishly stick with a strategy, even when it's performing poorly relative to other methods." The reason involved human emotions, which cause many investors to bail on a good approach and jump onto hot stocks or strategies that are often overhyped and overpriced. "We are a bundle of inconsistencies," he writes, "and while that may make us interesting, it plays havoc with our ability to invest our money successfully. Disciplined implementation of active strategies is the key to performance." Wise words, whether you follow O'Shaughnessy's approach or another proven method. News about Validea Hot List Stocks Schnitzer Steel Industries Inc. (SCHN): Hurt by the troubled global economy, Schnitzer on Thursday reported a fiscal second-quarter loss of about $7 million, or 25 cents per share, compared with a profit of $35.9 million, or $1.25 per share, in the year-ago period, the Associated Press reported. Revenue for the quarter, which ended Feb. 28, was $433.6 million, down 42 percent from the year-ago period. Analysts had expected earnings of 5 cents per share on revenue of $426.6 million, AP stated. World Fuel Services (INT): On April 2, World Fuel announced that it had completed its previously announced acquisition of select assets of TGS Petroleum, Inc., which distributes gasoline and diesel fuel under long-term contracts to over 160 retail petroleum operators. The deal is expected to be $0.03 to $0.05 accretive to earnings in the first full year, World Fuel stated. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will rebalance the portfolio. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score LUFK LUFKIN INDUSTRIES, INC. Oil Well Services & Equipment 70 FOSL FOSSIL, INC. Jewelry & Silverware 54 INT WORLD FUEL SERVICES CORPORATION Oil & Gas Operations 53 CRDN CERADYNE, INC. Aerospace & Defense 51 AMN AMERON INTERNATIONAL CORPORATION Constr. - Supplies & Fixtures 51 OIS OIL STATES INTERNATIONAL, INC. Oil Well Services & Equipment 51 DBRN THE DRESS BARN, INC. Retail (Apparel) 51 SCHN SCHNITZER STEEL INDUSTRIES, INC. Iron & Steel 51 XOM EXXON MOBIL CORPORATION Oil & Gas Operations 51 JOSB JOS. A. BANK CLOTHIERS, INC. Retail (Apparel) 32 Ticker Market Cap Date Added Start Price Current Price Return LUFK $584 3/20/2009 $34.86 $39.30 12.7% FOSL $1,140 3/20/2009 $15.60 $17.13 9.8% INT $955 3/20/2009 $30.89 $32.54 5.3% CRDN $510 3/20/2009 $18.41 $19.73 7.2% AMN $520 12/26/2008 $56.33 $56.46 0.2% OIS $743 3/20/2009 $13.29 $15.00 12.9% DBRN $756 1/23/2009 $8.89 $12.60 41.7% SCHN $1,066 1/23/2009 $37.18 $37.83 1.7% XOM $347,150 3/20/2009 $66.09 $70.25 6.3% JOSB $542 2/20/2009 $23.85 $29.68 24.4%

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 LUFK   |   FOSL   |   INT   |   CRDN   |   AMN   |   OIS   |   DBRN   |   SCHN   |   XOM   |   JOSB   |   LUFKIN INDUSTRIES, INC. Profile Strategy: Growth Investor Based on: Martin Zweig Lufkin Industries, Inc., is a supplier of oil field and power transmission products. The Company is divided into two operating segments: Oil Field and Power Transmission. Through its Oil Field segment, the Company manufactures and services artificial reciprocating rod lift equipment and related products, which are used to extract crude oil and other fluids from wells. Through its Power Transmission segment, the Company manufactures and services high-speed and low-speed increasing and reducing gearboxes for industrial applications. In January 2008, the Company announced the decision to suspend its participation in the commercial trailer markets and to develop a plan to run-out existing inventories, fulfil contractual obligations and close all trailer facilities. In March 2009, the Company acquired International Lift Systems, LLC (ILS), a manufacturer of artificial lift systems serving oil and gas companies. 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. LUFK's P/E is 6.66, based on trailing 12 month earnings, while the current market PE is 12.00. 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. LUFK's revenue growth is 19.22%, while it's earnings growth rate is 43.60%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, LUFK 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 (53.9%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-52%) of the current year. Sales growth for the prior must be greater than the latter. For LUFK 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. LUFK's EPS ($1.77) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. LUFK's EPS for this quarter last year ($1.23) 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. LUFK's growth rate of 43.90% passes this test. EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: [FAIL] Compare the earnings growth rate of the past four quarters with long-term EPS growth rate. Earnings growth in the past 4 quarters should be at least half of the long-term EPS growth rate. A stock should not be considered if it posted several quarters of skimpy earnings. LUFK had 2 quarters of skimpy growth in the last 2 years. 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, -28.42%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 43.90%, (versus the same quarter one year ago) then the stock passes. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: [PASS] The EPS growth rate for the current quarter, 43.90% must be greater than or equal to the historical growth which is 43.60%. LUFK would therefore pass this test. EARNINGS PERSISTENCE: [PASS] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. LUFK, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.04, 3.03, 4.71, 4.76 and 5.90, passes this test. LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. LUFK's long-term growth rate of 43.60%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. TOTAL DEBT/EQUITY RATIO: [PASS] A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. LUFK's Debt/Equity (0.00%) is not considered high relative to its industry (64.60%) and passes this test. INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For LUFK, this criterion has not been met (insider sell transactions are 0, while insiders buying number 0). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.   FOSSIL, INC. Profile Strategy: Patient Investor Based on: Warren Buffett Fossil, Inc. is a global design, marketing and distribution company that specializes in consumer fashion accessories. The Company's principal offerings include a line of men's and women's fashion watches and jewelry sold under licensed brands, handbags, small leather goods, belts, sunglasses, footwear, cold weather accessories and apparel. In the watch and jewelry product category, Fossil, Inc. has a diverse portfolio of owned and licensed brand names, under which its products are marketed. The Company's products are distributed globally through various distribution channels, including wholesale, export and direct to the consumer at varying price points to service the needs of its customers. The Company sells its products through diversified distribution networks that includes department stores, specialty retail locations, specialty watch and jewelry stores, owned retail and factory outlet stores, mass market stores, owned and affiliate Internet sites and through its FOSSIL catalog. Analysis Guru Score: 93% STAGE 1: "Is this a Buffett type company?" A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage. LOOK FOR EARNINGS PREDICTABILITY: [PASS] Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.69, 0.76, 0.62, 0.81, 0.93, 1.23, 1.04, 1.13, 1.75, 2.02. Buffett would consider FOSL's earnings predictable, although earnings have declined 2 time(s) in the past seven years, with the most recent decline 4 years ago. The dips have totaled 33.9%. FOSL's long term historical EPS growth rate is 16.5%, based on the 10 year average EPS growth rate, and it is expected to grow earnings 16.2% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers. LOOK AT THE ABILITY TO PAY OFF DEBT [PASS] Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. FOSL has a debt of 4.7 million and earnings of 134.0 million, which could be used to pay off the debt in less than two years, which is considered exceptional. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [PASS] Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for FOSL, over the last ten years, is 17.3%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 26.0%, 23.4%, 16.0%, 16.6%, 15.4%, 16.7%, 13.6%, 12.7%, 15.8%, 16.8%, and the average ROE over the last 3 years is 15.1%, 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 FOSL, over the last ten years, is 17.3% and the average ROTC over the past 3 years is 15.0%, 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 26.0%, 23.4%, 16.0%, 16.6%, 15.4%, 16.6%, 13.6%, 12.7%, 15.8%, 16.7%, 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. FOSL's free cash flow per share of $0.66 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 $10.98 and compares it to the gain in EPS over the same period of $1.33. FOSL's management has proven it can earn shareholders a 12.1% return on the earnings they kept. This return is acceptable to Buffett, but he would prefer to see a return > 15%. Essentially, management is is doing a good job putting the retained earnings to work. HAS THE COMPANY BEEN BUYING BACK SHARES: [BONUS PASS] Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. FOSL's shares outstanding have fallen over the past five years from 71,110,001 to 66,000,000, 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 FOSL quantitatively. STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return. CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail] Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $2.03 and divide it by the current market price of $17.13. An investor, purchasing FOSL, could expect to receive a 11.85% initial rate of return. Furthermore, he or she could expect the rate to increase 16.2% 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 4.60%. Compare this with FOSL's initial yield of 11.85%, which will expand at an annual rate of 16.2%, 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] FOSL currently has a book value of $12.06. It is safe to say that if FOSL can preserve its average rate of return on equity of 15.1% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 15.1% and it will have a book value of $49.19 in ten years. If it can still earn 15.1% on equity in ten years, then expected EPS will be $7.42. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $7.42 and multiply them by the lower of the 5 year average P/E ratio (17.2) or current P/E ratio (current P/E in this case), which is 8.4 and you get FOSL's projected future stock price of $62.64. 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 $62.64. These numbers indicate that one could expect to make a 13.8% average annual return on FOSL's stock at the present time. Although, the return is slightly below the liking of Buffett, the return would still be somewhat acceptable. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 16.2%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $9.09. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (17.2) or current P/E ratio (current P/E in this case), which is 8.4. This equals the future stock price of $76.70. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $76.70. 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 $17.13 and the future expected stock price, including the dividend pool, of $76.70. If you were to invest in FOSL at this time, you could expect a 16.2% 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 13.8% and 16.2%. 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 15.0% on FOSL stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   WORLD FUEL SERVICES CORPORATION Profile Strategy: Value Investor Based on: Benjamin Graham World Fuel Services Corporation is engaged in the marketing and sale of marine, aviation and land fuel products and related services on a worldwide basis. The Company operates in three segments: marine, aviation and land. In its marine segment it offers fuel and related services to maritime customers, including international container and tanker fleets, commercial cruise lines and time-charter operators. In its aviation segment, it offers fuel and related services to major commercial airlines, second and third-tier airlines, cargo carriers, regional and low-cost carriers, corporate fleets, fractional operators, private aircraft, military fleets. In its land segment, it offers fuel and related services to petroleum distributors operating in the land transportation market. In June 2008, it acquired certain assets of Texor Petroleum Company, Inc.. Analysis Guru Score: 86% SECTOR: [PASS] INT 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. INT's sales of $18,509.4 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. INT's current ratio of 1.56 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 INT is $9.5 million, while the net current assets are $421.1 million. INT 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. INT's EPS growth over that period of 639.4% 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. INT's P/E of 12.10 (using the 3 year PE) passes this test. PRICE/BOOK RATIO: [PASS] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. INT's Price/Book ratio is 1.57, while the P/E is 12.10. INT passes the Price/Book test.   CERADYNE, INC. Profile Strategy: Value Investor Based on: Benjamin Graham Ceradyne, Inc. develops, manufactures and markets advanced technical ceramic products, ceramic powders and components for defense, industrial, automotive/diesel and commercial applications. The Company's products include lightweight ceramic armor for soldiers and other military applications; ceramic industrial components for erosion and corrosion resistant applications; ceramic powders, including boron carbide, boron nitride, titanium diboride, calcium hexaboride, zirconium diboride, and fused silica, which are used in manufacture of armor and a range of industrial products and consumer products; evaporation boats for metallization of materials for food packaging and other products; reduced friction, ceramic diesel engine components; functional and frictional coatings primarily for automotive applications; translucent ceramic orthodontic brackets, and ceramic-impregnated dispenser cathodes for microwave tubes, lasers and cathode ray tubes. Analysis Guru Score: 100% SECTOR: [PASS] CRDN 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. CRDN's sales of $680.2 million, based on trailing 12 month sales, pass this test. CURRENT RATIO: [PASS] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. CRDN's current ratio of 9.92 passes the test. LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for CRDN is $121.0 million, while the net current assets are $400.8 million. CRDN 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. CRDN's EPS growth over that period of 3,557.9% 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. CRDN's P/E of 4.94 (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. CRDN's Price/Book ratio is 0.81, while the P/E is 4.94. CRDN passes the Price/Book test.   AMERON INTERNATIONAL CORPORATION Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Ameron International Corporation (Ameron) is a multinational manufacturer of engineered products and materials for the chemical, industrial, energy, transportation and infrastructure markets. It has three segments: Fiberglass-Composite Pipe Group, Water Transmission Group and Infrastructure Products Group. The Fiberglass-Composite Pipe Group manufactures and markets filament-wound and molded fiberglass pipe, tubing, fittings and well screens.The Water Transmission Group manufactures and supplies concrete and steel pressure pipe, concrete non-pressure pipe, protective linings for pipe and fabricated steel products, such as large-diameter wind towers. The Infrastructure Products Group consists of two operating segments, which are aggregated: the Hawaii Division and the Pole Products Division. In October 2007, Ameron acquired the business of Polyplaster, Ltda., a Brazilian fiberglass-pipe operation. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider AMN a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (9.85) relative to the growth rate (27.58%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for AMN (0.36) 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. AMN, whose sales are $663.8 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. 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 AMN was 15.49% last year, while for this year it is 14.33%. Since inventory to sales has decreased from last year by -1.16%, AMN 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 AMN is 27.6%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for AMN (10.95%) 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 AMN (3.31%) 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 AMN (21.27%) 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.   OIL STATES INTERNATIONAL, INC. Profile Strategy: Value Investor Based on: Benjamin Graham Oil States International, Inc. (Oil States) through its subsidiaries, is a provider of specialty products and services to oil and gas drilling and production companies worldwide. The Company operates in a number of oil and gas producing regions, including the Gulf of Mexico, United States onshore, West Africa, the North Sea, Canada, South America and Southeast and Central Asia. Its customers include many of the national oil companies, major and independent oil and gas companies and other oilfield service companies. Oil States operates in three principal business segments: offshore products, tubular services and well site services. The Company's well site services segment includes the accommodations, rental tools and drilling services businesses. On February 1, 2008, Oil States purchased all of Christina Lake Enterprises Ltd., the owners of an accommodations lodge (Christina Lake Lodge) in the Conklin area of Alberta, Canada. Analysis Guru Score: 100% SECTOR: [PASS] OIS 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. OIS's sales of $2,948.5 million, based on trailing 12 month sales, pass this test. CURRENT RATIO: [PASS] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. OIS's current ratio of 2.31 passes the test. LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for OIS is $475.0 million, while the net current assets are $701.0 million. OIS 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. We have data for 9 years, and have adjusted this requirement to be a 27% gain over the 9 year period. Companies with this type of growth tend to be financially secure and have proven themselves over time. OIS's EPS growth over that period of 1,723.9% 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. OIS's P/E of 3.70 (using the 3 year PE) passes this test. PRICE/BOOK RATIO: [PASS] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. OIS's Price/Book ratio is 0.61, while the P/E is 3.70. OIS passes the Price/Book test.   THE DRESS BARN, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch The Dress Barn, Inc. operates women's apparel specialty stores, principally under the names dressbarn, dressbarn woman and maurices. As of July 26, 2008, the Company operated 1,503 stores in 48 states and the District of Columbia, including 656 dressbarn Combo stores (a combination of its dressbarn and dressbarn woman brands), 677 maurices stores, 134 dressbarn stores and 36 dressbarn woman stores. Its dressbarn stores are typically operated as Combo stores, offering both dressbarn and larger-sized dressbarn woman merchandise. The Dress Barn, Inc. also operates stand-alone dressbarn and dressbarn woman stores in certain markets. Its dressbarn brands cater to 35 to 55 year-old women, sizes 4 to 24. The dressbarn stores offer in-season and casual fashion located primarily in convenient strip shopping centers in major trading and markets and surrounding suburban areas. As of July 26, 2008, the Company operated 1,503 stores in 48 states. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider DBRN a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (12.17) relative to the growth rate (30.83%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for DBRN (0.39) 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. DBRN, whose sales are $1,454.5 million, needs to have a P/E below 40 to pass this criterion. DBRN's P/E of (12.17) is considered acceptable. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for DBRN is 30.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for DBRN (25.10%) 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 DBRN (9.76%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for DBRN (10.34%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.   SCHNITZER STEEL INDUSTRIES, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Schnitzer Steel Industries, Inc. is a recycler of ferrous and non-ferrous metals. The Company is a recycler of used and salvaged vehicles, and a manufacturer of finished steel products. The Company provides an end of life cycle solution for a variety of products through its vertically integrated businesses, including sale of used auto parts, procuring autobodies and other metal products and manufacturing them into finished steel products. It operates in three business segments: the Metals Recycling Business (MRB), the Auto Parts Business (APB) and the Steel Manufacturing Business (SMB). In September 2007, the Company acquired a mobile metals recycling business that provides additional sources of scrap metal to the Everett, Massachusetts facility. In February 2008, it acquired the remaining 50% equity interest in Pick-N-Pull Auto Dismantlers, LLC Nevada. In August 2008, the Company acquired a self-service used auto parts business with three locations in the Southern United States. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider SCHN a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (7.47) relative to the growth rate (29.43%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for SCHN (0.25) 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. SCHN, whose sales are $3,218.4 million, needs to have a P/E below 40 to pass this criterion. SCHN's P/E of (7.47) 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 SCHN was 10.05% last year, while for this year it is 11.78%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (1.73%) is below 5%. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for SCHN is 29.4%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for SCHN (16.02%) 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 SCHN (5.13%) 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 SCHN (-10.91%) 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.   EXXON MOBIL CORPORATION Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Exxon Mobil Corporation (Exxon Mobil) through its divisions and affiliates is engaged in exploration for, and production of, crude oil and natural gas, manufacture of petroleum products and transportation and sale of crude oil, natural gas and petroleum products. ExxonMobil is a manufacturer and marketer of commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics and a wide variety of specialty products. It also has interests in electric power generation facilities. Affiliates of ExxonMobil conduct research programs in support of these businesses. Exxon Mobil Corporation has several divisions and affiliates, many with names that include Exxon Mobil, Exxon, Esso or Mobil. The Company operates in three segments: Upstream, Downstream and Chemicals. In November 2008, Sunoco Logistics Partners L.P. completed the acquisition of the MagTex refined products pipeline system located in Texas, from affiliates of Exxon Mobil Corporation. Analysis Guru Score: 100% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. XOM's P/S of 0.73 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. XOM's Debt/Equity of 8.34% 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. XOM 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 XOM At this Point Is XOM a "Super Stock"? YES PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.XOM's P/S ratio of 0.73 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. XOM's inflation adjusted EPS growth rate of 17.53% 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. XOM's free cash per share of 6.22 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. XOM, whose three year net profit margin averages 9.99%, passes this evaluation.   JOS. A. BANK CLOTHIERS, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Jos. A. Bank Clothiers, Inc. (Jos. A. Bank) is a designer, retailer and direct marketer of men's tailored and casual clothing and accessories through stores, catalog and Internet. The Company sells substantially all of its products exclusively under the Jos. A. Bank label through its retail stores, as well as through the Company's nationwide catalog and Internet (www.josbank.com) operations. As of February 2, 2008, Jos. A. Bank operated 422 retail stores, which included seven outlet stores and 12 franchise stores located throughout 42 states and the District of Columbia in the United States. The Company's product are offering include the Jos. A. Bank Executive collection, as well as the Jos. A. Bank Signature and Jos. A. Bank Signature Gold collections. The Company sources substantially all of its products through third-party suppliers, manufacturers and/or agents using Jos. A. Bank designs and specifications. Jos. A. Bank operates through two segments: Stores and Direct Marketing. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider JOSB a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (10.03) relative to the growth rate (29.42%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for JOSB (0.34) 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. JOSB, whose sales are $656.3 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 JOSB is 29.4%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for JOSB (19.00%) 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 JOSB (6.60%) 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 JOSB (5.02%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.   Watch List The Watch List contains the highest scoring stocks according to our guru consensus system that are not currently in the Hot List portfolio. We provide this list both for informational purposes and for investors who are not comfortable with a portfolio of ten stocks. Ticker Company Name Industry Guru Score CVX CHEVRON CORPORATION Oil & Gas - Integrated 60 LECO LINCOLN ELECTRIC HOLDINGS, INC. Misc. Capital Goods 51 KMT KENNAMETAL INC. Constr. & Agric. Machinery 51 BJS BJ SERVICES COMPANY Oil Well Services & Equipment 51 BHI BAKER HUGHES INCORPORATED Oil Well Services & Equipment 51 NTES NETEASE.COM, INC. (ADR) Computer Services 44 CTAS CINTAS CORPORATION Personal Services 43 UMBF UMB FINANCIAL CORPORATION Regional Banks 40 RTN RAYTHEON COMPANY Conglomerates 35 ARO AEROPOSTALE, INC. Retail (Apparel) 34

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