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Executive Summary	August 20, 2010

The Economy While the pundits and many investors have focused on the negatives, several positive signs have emerged in the economy since our last newsletter -- offering indications that the recent slowdown wasn't the start of another recession, but instead part of the normal fluctuations seen in most recoveries. One of the positives: Industrial production jumped 1.0% in July, according to new Federal Reserve data. That followed a decrease of 0.1% in June, which many had pointed to as a sign that the recovery was in trouble. But the July number was strong -- since industrial production turned positive in July 2009, only three months have featured a bigger gain. Industrial production now stands at its highest mark since October 2008; the same goes for capacity usage, which hasn't declined in 13 months. Mixed news came from the manufacturing sector, where a deceleration in growth had recently raised fears among many investors. On the positive side, the New York Federal Reserve announced that its regional manufacturing index rose in August. And, the sub-index for employment nearly doubled from July, while the employee workweek index turned positive after being negative in July. The Philadelphia Federal Reserve's manufacturing index, which covers the middle Atlantic region, turned negative, however, for the first time in 13 months. The index's employment component also declined. A major problem for the economy remains unemployment, and there was bad news this week on that front. The government announced that in the most recent week, new claims for unemployment rose to their highest level in nine months. While weekly data can be quite volatile, that certainly isn't good news. Since our last newsletter, the Federal Reserve has also announced its plan to use proceeds from its mortgage-backed securities portfolio to buy up Treasury bonds. The move was a sign that the Fed sees the recovery as weaker than previously hoped. That didn't help skittish investors, who have been piling into Treasuries -- and out of stocks -- for some time. (This week, the yield on the 10-year Treasury fell to about 2.6%, down from about 2.9% a month ago and 3.5% a year ago.) Investors are piling into other bonds, too. According to the Investment Company Institute, bond funds took in more than $7 billion in the most recent week for which data is available; investors removed $1.43 billion from equity funds, meanwhile. Against a backdrop of low rates and crowded bond funds, the stocks of many financially sound companies look particularly attractive. And the majority of firms continue to beat expectations in both earnings and revenue. In the second quarter, about 66% of firms beat earnings estimates, while about 63% beat revenue estimates, according to Bespoke Investment Group. Dealmaking activity has also been better, with big names like Dell and BHP Billiton making headlines with proposed takeovers. That's a sign that companies have cash to spend -- according to FactSet Research, publicly traded firms in the U.S. have more than $2 trillion in cash and short-term investments on their balance sheets. While corporations have a lot of cash on hand, a big question for the U.S.' service-driven economy is whether consumers will spend enough to spur growth. Reports from some big consumer stocks were mixed in the past week -- Wal-Mart, Home Depot, and Target all posted strong second-quarter profit figures, but their sales numbers weren't great. A consumer spending boost could come from the real estate market, however. Mortgage refinancings surged 17% in the most recent week, the Mortgage Bankers Association reported, reaching their highest level in over a year. Economists from Morgan Stanley estimate that, if 50% of mortgages in mortgage-backed bonds are refinanced, $46 billion a year would be freed up for consumers, according to The Wall Street Journal. On the downside, a wave of refinancings could hamper the mortgage-backed-security market, which is still recovering from the 2008 crisis. Despite some positives that emerged for the economy, fear seemed to win out for the fortnight. The S&P returned -4.5%, while the Hot List returned -6.4%. For the year, the portfolio stands at -9.9% vs. -3.5% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 117.2% vs. the S&P's 7.5% gain. The Unemployment Question One of the reasons fear continues to have the edge in the market is the employment situation. And make no bones about it -- while encouraging signs have been sprinkled here and there in recent months, the overall employment situation is not good. The unemployment rate is close to 10% -- and that doesn't include those who've gotten discouraged and have stopped looking for work, or those whose benefits have run out. Last newsletter, I looked at how the current recovery compared to past recoveries in terms of manufacturing and gross domestic product. This week, I thought it would be good to take a look at how it compares to past recoveries in terms of unemployment. To do so, let's look at two of the past recessions most often compared to the recent one -- the one that occurred in 1973-75, and the "double-dip" recession that occurred in 1980-82. The former ended in March of 1975, at which time the unemployment rate was 8.6%. (All figures are from the U.S. Labor Department.) Unemployment actually continued to rise for two months after the recession technically ended, peaking at 9.0% in May 1975. Six months after that peak, in November 1975, unemployment remained elevated -- it was 8.3%. Nine months after, it was at 7.7% A year after the May '75 peak, it remained much higher than normal, at 7.4%. By May 1977 -- a full two years after unemployment had peaked -- it still stood at 7.0%. It wasn't until the second half of that year that it finally fell below 7%. How about the recession that ended in November 1982? Unemployment peaked at 10.8% in November of 1982. Six months after the unemployment peak, the rate stood at 10.1% -- still extremely high. Nine months after the peak, it was at 9.5%. By November 1983 -- a year after peaking -- it had fallen substantially, but was still elevated, at 8.5%. Two years later, it was still higher than we're accustomed to, at 7.2%. Now, on to the current rebound. Unemployment hit its high of 10.1% back in October of 2009. Six months later, it was at 9.9%; nine months later -- in July (the most recent data available) -- it was 9.5%. So, a quick recap: 1975 Peak: 9.0% 6 months after peak: 8.3% 9 months after peak: 7.7% 12 months after peak: 7.4% 24 months after peak: 7.0% 1982 Peak: 10.8% 6 months after peak: 10.1% 9 months after peak: 9.5% 12 months after peak: 8.5% 24 months after peak: 7.2% 2009 Peak: 10.1% 6 months after peak: 9.9% 9 months after peak: 9.5% 12 months after peak: N/A 24 months after peak: N/A As you can see, in the current recovery, employment has rebounded a bit more slowly than it did following its 1975 and 1982 peaks. Both those recoveries saw the unemployment rate drop 0.7 percentage points in the first six months, and another 0.6 percentage points in the next three months; the current recovery involved corresponding drops of 0.2 points and 0.4 points, respectively. That difference, however, isn't jaw-dropping; in fact, I don't think it's significant enough to draw any real conclusions from -- and I certainly don't think it's a big enough difference to indicate that "this time it's different", as some pundits say. To me, the bigger point to take from those sets of numbers is that following very difficult recessions, the employment picture doesn't snap back overnight. In the case of both the 1973-75 and 1980-82 recessions, unemployment peaked shortly after the recession ended, and then made its way downward slowly. As you can see from the figures above, the unemployment rate was still quite elevated even two years after the recessions were over. What's also very important to note is that in both those two-year periods following the 1975 and 1982 unemployment peaks, the market gained ground despite unemployment remaining elevated. A Not-So-New Normal? These figures also put the "New Normal" concept that many on Wall Street have embraced in a different context. As you probably know, part of the "New Normal" theory is that we are going to see an extended period of high unemployment. But there's a crucial piece of the New Normal theory that seems to get distorted. While the media has made it seem like an "extended period" could be a decade or two (or more), some of the New Normal's staunchest proponents haven't been nearly as dire. Bond giant PIMCO, for example, has been at the forefront of the New Normal prognostications, and its chief, Mohamed El-Erian, has said the New Normal will be a 3- to 5-year phenomenon. We're almost two years into the alleged "New Normal" right now, meaning that -- if you buy the New Normal argument -- there's somewhere around 2 years left. The point: When you look at the time it took for unemployment to get back to moderate levels after the 1973-75 and 1980-82 recessions, the notion that unemployment will remain elevated for a couple more years hardly seems "new" at all. All of this isn't to downplay to severity of the current employment situation, or to cast aside the very real, very awful impact that the U.S.'s employment troubles are having on millions of Americans. But as an investor, it's important to separate the emotional impact of high unemployment figures from the reality of the investing environment. And the reality is that it can take quite a while for unemployment to fall significantly following tough recessions -- and that the stock market can post big gains even during those lingering periods of elevated unemployment. That doesn't mean the market is going to take off today or next week; what it means is that the lingering high unemployment numbers aren't unprecedented, and they aren't in and of themselves reason to avoid stocks. Indeed, with valuations reasonable and many firms sporting exceptional balance sheets, earnings and revenue growth, and profit margins, there are plenty of reasons for long-term investors to be bullish.		Editor-in-Chief: John Reese Since Inception   Hot List 117.2% S&P 500 7.5% Accuracy 55.5% Beta 1.2 YTD   Hot List -9.9% S&P 500 -3.5% Since Last Issue   Hot List -6.4% S&P 500 -4.5% Avg. Fundamentals   Market Cap (mil) $17,334 PE Ratio 12.8 5 Yr EPS Growth 27.4% Yield 1.8% Rel. Strength 68 Portfolio Sectors Financial 3 Services 3 Consumer Cyclical 2 Energy 1 Technology 1
Advertisement Validea Capital Management - Private Portfolio Management Based on Strategies of Legends Are you looking for an alternative to your underperforming mutual funds or financial advisor? Click here to download Validea Capital's investment kit and learn more about the firm's guru-based portfolios. Get More Information on Validea Capital! ** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. Thre information above in not intended as personal investment advice and should not be interpreted as such. 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. My O'Shaughnessy-based model also has a very strong track record; in fact, in 2010 it's been one of my best performers, gaining nearly 7% while the S&P 500 is down about 2%. 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, with my 10-stock O'Shaughnessy-based portfolio gaining 67.8% (7.6% annualized) since inception, while the S&P 500 has gained just 9.4% (1.3% annualized). The O'Shaughnessy-based portfolio will pick stocks using both the growth and value methods I described above. It picks 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 eight of the stocks in the 10-stock portfolio. Here's a look at the 10-stock portfolio's holdings (growth/value distinction in parentheses): ROST -- Ross Stores, Inc. (Growth) HS -- HealthSpring, Inc. Growth) JOSB -- Jos. A. Bank Clothiers (Growth) INT -- World Fuel Services Corporation (Growth) WRLD -- World Acceptance Corp. (Growth) PSMT -- PriceSmart, Inc. (Growth) MWIV -- MWIV Veterinary Supply Inc. (Growth) ABC -- AmerisourceBergen Corporation (Growth) JNJ -- Johnson & Johnson (Value) CVX -- Chevron Corporation (Value) 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 Jos. A. Bank Clothiers (JOSB): Bank's shares underwent a 3-for-2 split on Aug. 18. Each shareholder of record as of July 30, 2010 was to receive one additional share of common stock for every two shares then owned. The company said it was recognizing the increase in the value of its shares since its last stock dividend, which was due primarily to growth in sales, earnings and cash flows. It also said the split should enhance the firm's liquidity by making shares available to more investors. Ross Stores (ROST): On Aug. 19, Ross reported net second-quarter income of $129.3 million ($1.07 per share), up 25% from $103.4 million ($0.82 per share) in the year-ago period. The company said the higher earnings were driven in large part by leaner inventory, according to Reuters, which added that the per-share profit was in line with analysts' expectations. Sales increased 8% to $1.91 billion. 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 ARO AEROPOSTALE, INC. Retail (Apparel) 93 ROST ROSS STORES, INC. Retail (Apparel) 78 WDC WESTERN DIGITAL CORP. Computer Storage Devices 74 HS HEALTHSPRING, INC Insurance (Accident & Health) 71 JOSB JOS. A. BANK CLOTHIERS, INC. Retail (Apparel) 70 CSH CASH AMERICA INTERNATIONAL, INC. Misc. Financial Services 69 CAAS CHINA AUTOMOTIVE SYSTEMS, INC. Auto & Truck Parts 67 EZPW EZCORP, INC. Consumer Financial Services 55 LULU LULULEMON ATHLETICA INC. Apparel/Accessories 55 CVX CHEVRON CORPORATION Oil & Gas - Integrated 47 Ticker Market Cap Date Added Start Price Current Price Return ARO $2,173 8/6/2010 $24.86 $23.23 -6.6% ROST $6,139 8/6/2010 $50.22 $50.28 0.1% WDC $5,511 7/9/2010 $31.59 $24.03 -23.9% HS $1,057 5/14/2010 $17.18 $18.48 7.6% JOSB $1,045 6/11/2010 $40.16 $37.98 -5.4% CSH $902 8/6/2010 $32.74 $30.68 -6.3% CAAS $443 4/16/2010 $21.39 $16.38 -23.4% EZPW $914 8/6/2010 $19.53 $18.57 -4.9% LULU $2,672 8/6/2010 $40.06 $37.76 -5.7% CVX $152,483 8/6/2010 $78.73 $75.84 -3.7%

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer ARO   |   ROST   |   WDC   |   HS   |   JOSB   |   CSH   |   CAAS   |   EZPW   |   LULU   |   CVX   |   AEROPOSTALE, INC. Profile Strategy: Patient Investor Based on: Warren Buffett Aeropostale, Inc. is a mall-based specialty retailer of casual apparel and accessories. The Company designs, markets and sells its own brand of merchandise principally targeting 14 to 17 year-old young women and young men. The Company also sells Aropostale merchandise through its e-commerce Website, www.aeropostale.com. During the fiscal year ended January 30, 2010 (fiscal 2009), the Company launched P.S. from Aeropostale, which offers casual clothing and accessories focused on elementary school children between the ages of 7 and 12. During fiscal 2009, the Company completed the closure of its 14 store Jimmy'Z concept. Jimmy'Z Surf Co., Inc., a wholly owned subsidiary of Aeropostale, Inc., was a contemporary lifestyle brand targeting young women and men aged 18 to 25. 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 0.08, 0.23, 0.24, 0.41, 0.65, 0.67, 0.88, 1.15, 1.47, 2.27. Buffett would consider ARO's earnings predictable. In fact EPS have increased every year. ARO's long term historical EPS growth rate is 33.6%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 14.8% 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. ARO has no long term debt and therefore would pass this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [PASS] Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for ARO, over the last ten years, is 32.9%, 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 24.3%, 34.7%, 22.5%, 28.0%, 34.1%, 28.5%, 32.8%, 58.4%, 41.7%, 49.1%, and the average ROE over the last 3 years is 49.7%, thus passing this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: [PASS] Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for ARO, over the last ten years, is 35.4% and the average ROTC over the past 3 years is 49.7%, which is high enough to pass. It is not enough that the average be at least 12%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROTC must be at least 9% for Buffett to feel comfortable that the ROTC is consistent. The ROTC for the last 10 years, from earliest to latest, is 24.3%, 34.7%, 22.5%, 28.0%, 34.1%, 28.5%, 32.8%, 58.4%, 41.7%, 49.1%, 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. ARO's free cash flow per share of $2.78 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 $8.05 and compares it to the gain in EPS over the same period of $2.19. ARO's management has proven it can earn shareholders a 27.2% 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. ARO's shares outstanding have fallen over the past five years from 121,610,001 to 95,000,000, 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 ARO 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 $2.45 and divide it by the current market price of $23.23. An investor, purchasing ARO, could expect to receive a 10.55% initial rate of return. Furthermore, he or she could expect the rate to increase 14.8% 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 3.47%. Compare this with ARO's initial yield of 10.55%, which will expand at an annual rate of 14.8%, 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] ARO currently has a book value of $4.84. It is safe to say that if ARO can preserve its average rate of return on equity of 32.9% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 32.9% and it will have a book value of $82.99 in ten years. If it can still earn 32.9% on equity in ten years, then expected EPS will be $27.28. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $27.28 and multiply them by the lower of the 5 year average P/E ratio (13.2) or current P/E ratio (current P/E in this case), which is 9.5 and you get ARO's projected future stock price of $258.06. 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 $258.06. These numbers indicate that one could expect to make a 27.2% average annual return on ARO's stock at the present time. Buffett would consider this an absolutely fantastic expected return. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 14.8%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $9.74. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (13.2) or current P/E ratio (current P/E in this case), which is 9.5. This equals the future stock price of $92.15. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $92.15. 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 $23.23 and the future expected stock price, including the dividend pool, of $92.15. If you were to invest in ARO at this time, you could expect a 14.8% average annual return on your money. Buffett likes to see a 15% return, but nonetheless would accept this 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 14.8% and 27.2%. 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 21.0% on ARO stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   ROSS STORES, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Ross Stores, Inc. operates two chains of off-price retail apparel and home accessories stores. As of January 30, 2010, the Company operated a total of 1,005 stores, of which 953 were Ross Dress for Less (Ross) locations in 27 states and Guam and 52 were dd's DISCOUNTS stores in four states. Both chains target women and men between the ages of 18 and 54. Ross target customers are primarily from middle income households, while the dd's DISCOUNTS target customer is from more moderate income households. Ross offers name brand and designer apparel, accessories, footwear, and home fashions for the entire family at everyday savings of 20% to 60% off department and specialty store regular prices. dd's DISCOUNTS features a moderately-priced assortment of name brand apparel, accessories, footwear, and home fashions for the entire family at everyday savings of 20% to 70% off moderate department and discount store regular prices. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider ROST a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (12.61) relative to the growth rate (26.69%), 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 ROST (0.47) 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. ROST, whose sales are $7,427.4 million, needs to have a P/E below 40 to pass this criterion. ROST's P/E of (12.61) 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 ROST is 26.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for ROST (12.20%) 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 ROST (10.74%) 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 ROST (10.11%) 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.   WESTERN DIGITAL CORP. Profile Strategy: Contrarian Investor Based on: David Dreman Western Digital Corporation (WD) designs, develops, manufactures and sells hard drives. It sells its products worldwide to original equipment manufacturers (OEMs) and original design manufacturers (ODMs) for use in computer systems, subsystems or consumer electronics (CE) devices, and to distributors, resellers and retailers. Its hard drives are used in desktop computers, notebook computers, and enterprise applications such as servers, workstations, network attached storage, storage area networks and video surveillance equipment. Its hard drives are used in CE applications, such as digital video recorders (DVRs), and satellite and cable set-top boxes (STBs). It also sells its hard drives as stand-alone storage products by integrating them into finished enclosures, embedding application software and offering the products as WD-branded external storage appliances for personal data backup and portable or expanded storage of digital music, video and other digital data. Analysis Guru Score: 76% MARKET CAP: [PASS] Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. WDC has a market cap of $5,511 million, therefore passing the test. EARNINGS TREND: [FAIL] A company should show a rising trend in the reported earnings for the most recent quarters. WDC's EPS for the latest quarter is not greater than the prior quarter, (from earliest to most recent quarter) 1.71, 1.13. Hence the stock fails this test, but the investor should evaluate this company qualitatively to see if it qualifies under this methodology's "exception rule". EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: [FAIL] This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. WDC fails this test as its EPS growth rate for the past 6 months (-38.91%) does not beat that of the S&P (25.48%). This methodology would utilize four separate criteria to determine if WDC is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest". P/E RATIO: [PASS] The P/E of a company should be in the bottom 20% of the overall market. WDC's P/E of 4.05, based on trailing 12 month earnings, meets the bottom 20% criterion (below 9.03), and therefore passes this test. PRICE/CASH FLOW (P/CF) RATIO: [PASS] The P/CF of a company should be in the bottom 20% of the overall market. WDC's P/CF of 2.91 meets the bottom 20% criterion (below 5.25) and therefore passes this test. PRICE/BOOK (P/B) VALUE: [FAIL] The P/B value of a company should be in the bottom 20% of the overall market. WDC's P/B is currently 1.18, which does not meet the bottom 20% criterion (below 0.73), and it therefore fails this test. PRICE/DIVIDEND (P/D) RATIO: [FAIL] The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). WDC's P/D is not available, and hence an opinion cannot be rendered at this time. This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below. CURRENT RATIO: [PASS] A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [5.43] or greater than 2). This is one identifier of financially strong companies, according to this methodology. WDC's current ratio of 2.33 passes the test. PAYOUT RATIO: [PASS] A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for WDC is 0.00%. Unfortunately, its historical payout ratio is not available. Nonetheless it passes the payout criterion, as this is a very low payout. RETURN ON EQUITY: [PASS] The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 16.86%, and would consider anything over 27% to be staggering. The ROE for WDC of 34.98% is high enough to pass this criterion. PRE-TAX PROFIT MARGINS: [PASS] This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. WDC's pre-tax profit margin is 15.43%, thus passing this criterion. YIELD: [FAIL] The company in question should have a yield that is high and that can be maintained or increased. WDC's current yield is not available (or one is not paid) at the present time, while the market yield is 2.91%. Hence, this criterion cannot be evaluated. LOOK AT THE TOTAL DEBT/EQUITY: [PASS] The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 15.93%. WDC's Total Debt/Equity of 8.49% is considered acceptable.   HEALTHSPRING, INC Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy HealthSpring, Inc. (HealthSpring) is a managed care organization with a primary focus on Medicare, the federal government-sponsored health insurance program for United States citizens aged 65 and older, qualifying disabled persons and persons suffering from end-stage renal disease. As of December 31, 2009, the Company operated coordinated care Medicare Advantage plans in Alabama, Florida, Illinois, Mississippi, Tennessee, and Texas. As of January 1, 2010, it also commenced operations of Medicare Advantage plans in three counties in Northern Georgia. As of December 31, 2009, the Company's Medicare Advantage plans had over 189,000 members. The Company also offers prescription drug benefits in accordance with Medicare Part D to its Medicare Advantage plan members, in addition to providing other medical benefits (MA-PD) plans. It also offers prescription drug benefits nationally on a stand-alone basis in accordance with Medicare Part D (PDP). 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. HS, with a market cap of $1,057 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. HS, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.24, 1.44, 1.51, 2.12 and 2.41, 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. HS's Price/Sales ratio of 0.37, 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. HS, whose relative strength is 80, is in the top 50 and would pass this last criterion.   JOS. A. BANK CLOTHIERS, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Jos. A. Bank Clothiers, Inc. (Jos. A. Bank) is a designer, manufacturer, retailer and direct marketer (through stores, catalog and Internet) of men's tailored and casual clothing and accessories. The Company sells substantially all of its products exclusively under the Jos. A. Bank label through its 473 retail stores (as of January 30, 2010, which includes seven outlet stores and 13 franchise stores) located throughout 42 states and the District of Columbia in the United States, as well as through the Company's nationwide catalog and Internet (www.josbank.com) operations. Jos. A. Bank operates through two segments: Stores and Direct Marketing. The Company's Stores segment consists of its 453 Full-line Stores. The Company opened 14 stores (and closed one store) during the fiscal year ended January 30, 2010 (fiscal 2009). The Company's Direct Marketing segment consists of its Internet and catalog channels. 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. JOSB, with a market cap of $1,045 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. JOSB, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.30, 1.57, 1.82, 2.11 and 2.56, 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. JOSB's Price/Sales ratio of 1.33, 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. JOSB, whose relative strength is 84, is in the top 50 and would pass this last criterion.   CASH AMERICA INTERNATIONAL, INC. Profile Strategy: Growth Investor Based on: Martin Zweig Cash America International, Inc. provides specialty financial services to individuals through its Company-owned and franchised lending locations, and check cashing centers and via the Internet. These services include secured non-recourse loans (pawn loans), short-term unsecured cash advances and related financial services. It operates in three segments. As of December 31, 2009, the pawn lending segment offered pawn loans through 676 total pawn lending locations operating under the names of Cash America Pawn, SuperPawn and Prenda Facil. As of December 31, 2009, the cash advance operating segment included 246 cash advance storefront locations in six states in the United States operating under the names Cash America Payday Advance and Cashland. As of December 31, 2009, the check cashing operating segment consisted of 120 unconsolidated franchised and six consolidated Company-owned check cashing locations operating in 16 states in the United States under the name Mr. Payroll. 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. CSH's P/E is 8.75, based on trailing 12 month earnings, while the current market PE is 15.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [PASS] 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. CSH's revenue growth is 17.73%, while it's earnings growth rate is 19.75%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, CSH passes this criterion. SALES GROWTH RATE: [FAIL] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (15.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (16.8%) of the current year. Sales growth for the prior must be greater than the latter. For CSH this criterion has not been met and fails this test. 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. CSH's EPS ($0.66) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. CSH's EPS for this quarter last year ($0.54) 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. CSH's growth rate of 22.22% 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 CSH is 9.87%. This should be less than the growth rates for the 3 previous quarters, which are 19.05%, 101.85%, and 27.85%. CSH 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: [FAIL] If the growth rate of the prior three quarter's earnings, 45.41%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 22.22%, (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 CSH is 22.2%, and it would therefore fail this test. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: [PASS] The EPS growth rate for the current quarter, 22.22% must be greater than or equal to the historical growth which is 19.75%. CSH 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. CSH, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.48, 2.00, 2.61, 2.70 and 3.17, 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. CSH's long-term growth rate of 19.75%, 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 CSH, this criterion has not been met (insider sell transactions are 8, while insiders buying number 4). 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.   CHINA AUTOMOTIVE SYSTEMS, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy China Automotive Systems, Inc. (China Automotive) is a holding company and has no significant business operations or assets other than its interest in Great Genesis Holdings Limited (Genesis). Through Genesis, the Company manufactures power steering systems and other component parts for automobiles. All operations are conducted through eight Sino-foreign joint ventures in China and a wholly owned subsidiary in the United States. The Company has business relations with more than 60 vehicle manufacturers, including FAW Group and Dongfeng Auto Group, automobile manufacturers in China; Shenyang Brilliance Jinbei Co., Ltd., light vehicle manufacturer in China; Chery Automobile Co., Ltd, state-owned car manufacturer in China, and Xi'an BYD Auto Co., Ltd and Zhejiang Geely Automobile Co., Ltd., car manufacturers. 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. CAAS, with a market cap of $443 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. CAAS, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.15, 0.21, 0.37, 0.46 and 0.78, 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. CAAS's Price/Sales ratio of 1.50, 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. CAAS, whose relative strength is 91, is in the top 50 and would pass this last criterion.   EZCORP, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch EZCORP, Inc. lends or provides credit services to individuals who do not have cash resources or access to credit to meet their short-term cash needs. The Company operates pawn stores in the United States under the EZPAWN and Value Pawn brands, and in Mexico under the EMPENO FACIL and EMPENE SU ORO brands. It also operates short-term consumer loan stores in the United States principally under the EZMONEY brand and in Canada under the CASHMAX brand. The Company also owns approximately 30% interest in Albemarle and Bond Holdings PLC, with 115 stores, and Cash Converters International Limited, which franchises and operates approximately 500 locations worldwide. The Company operates in three segments: U.S. Pawn Operations, Empeno Facil and EZMONEY Operations. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider EZPW a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (10.16) relative to the growth rate (37.25%), 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 EZPW (0.27) 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. EZPW, whose sales are $699.7 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 EZPW is 37.2%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] EZPW 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. EZPW's Equity/Assets ratio (86.00%) 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. EZPW's ROA (17.32%) 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 EZPW (6.89%) 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 EZPW (2.94%) 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.   LULULEMON ATHLETICA INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch lululemon athletica inc. is a designer and retailer of technical athletic apparel primarily in North America. Its yoga-inspired apparel is marketed under the lululemon athletica brand name. The Company offers a line of apparel and accessories, including fitness pants, shorts, tops and jackets designed for athletic pursuits, such as yoga, running and general fitness. As of January 31, 2010, its branded apparel was principally sold through 124 stores that are primarily located in Canada and the United States. As of January 31, 2010, its retail footprint included 45 stores in Canada, 70 stores in the United States and nine franchise stores in Australia. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: This methodology would consider LULU a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (37.69) relative to the growth rate (120.80%), 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 LULU (0.31) 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. LULU, whose sales are $509.5 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 LULU was 14.72% last year, while for this year it is 9.73%. Since inventory to sales has decreased from last year by -4.99%, LULU passes this test. EPS GROWTH RATE: [FAIL] 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 LULU is 120.8%, based on the average of the 3 and 4 year historical eps growth rates, which is considered too fast. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for LULU (0.00%) to be wonderfully low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for LULU (3.81%) 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 LULU (5.87%) 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.   CHEVRON CORPORATION Profile Strategy: Contrarian Investor Based on: David Dreman Chevron Corporation (Chevron) manages its investments in subsidiaries and affiliates, and provides administrative, financial, management and technology support to United States and international subsidiaries that engage in fully integrated petroleum operations, chemicals operations, mining operations, power generation and energy services. Exploration and production (upstream) operations consist of exploring for, developing and producing crude oil and natural gas, and also marketing natural gas. Refining, marketing and transportation (downstream) operations relate to refining crude oil and converting natural gas into finished petroleum products; marketing crude oil and the many products derived from petroleum, and transporting crude oil, natural gas and petroleum products by pipeline, marine vessel, motor equipment and rail car. Chemicals operations include the manufacture and marketing of commodity petrochemicals, plastics for industrial uses, and fuel and lubricant oil additives. Analysis Guru Score: 83% MARKET CAP: [PASS] Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. CVX has a market cap of $152,483 million, therefore passing the test. EARNINGS TREND: [PASS] A company should show a rising trend in the reported earnings for the most recent quarters. CVX's EPS for the past 2 quarters, (from earliest to most recent quarter) 2.27, 2.70 have been increasing, and therefore the company passes this test. EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: [PASS] This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. CVX passes this test as its EPS growth rate over the past 6 months (76.47%) has beaten that of the S&P (25.48%). CVX's estimated EPS growth for the current year is (76.34%), which indicates the company is expected to experience positive earnings growth. As a result, CVX passes this test. This methodology would utilize four separate criteria to determine if CVX is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest". P/E RATIO: [PASS] The P/E of a company should be in the bottom 20% of the overall market. CVX's P/E of 9.01, based on trailing 12 month earnings, meets the bottom 20% criterion (below 9.03), and therefore passes this test. PRICE/CASH FLOW (P/CF) RATIO: [PASS] The P/CF of a company should be in the bottom 20% of the overall market. CVX's P/CF of 5.20 meets the bottom 20% criterion (below 5.25) and therefore passes this test. PRICE/BOOK (P/B) VALUE: [FAIL] The P/B value of a company should be in the bottom 20% of the overall market. CVX's P/B is currently 1.53, which does not meet the bottom 20% criterion (below 0.73), and it therefore fails this test. PRICE/DIVIDEND (P/D) RATIO: [FAIL] The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). CVX's P/D of 26.32 does not meet the bottom 20% criterion (below 19.53 or yield above 3.7%), and it therefore fails this test. This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below. CURRENT RATIO: [PASS] A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.12] or greater than 2). This is one identifier of financially strong companies, according to this methodology. CVX's current ratio of 1.63 passes the test. PAYOUT RATIO: [FAIL] A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for CVX is 32.87%, while its historical payout ratio has been 29.99%. Therefore, it fails the payout criterion. RETURN ON EQUITY: [PASS] The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 16.86%, and would consider anything over 27% to be staggering. The ROE for CVX of 17.98% is high enough to pass this criterion. PRE-TAX PROFIT MARGINS: [PASS] This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. CVX's pre-tax profit margin is 14.47%, thus passing this criterion. YIELD: [FAIL] The company in question should have a yield that is high and that can be maintained or increased. CVX's current yield is 3.80%, while the market yield is 2.91%. CVX fails this test. LOOK AT THE TOTAL DEBT/EQUITY: [PASS] The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 40.22%. CVX's Total Debt/Equity of 10.52% is considered acceptable.   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 DV DEVRY INC. Schools 68 CECO CAREER EDUCATION CORP. Schools 66 SNY SANOFI-AVENTIS SA (ADR) Biotechnology & Drugs 64 DLTR DOLLAR TREE, INC. Retail (Department & Discount) 61 SLT STERLITE INDUSTRIES INDIA LIMITED (ADR) Misc. Fabricated Products 57 EDMC EDUCATION MANAGEMENT CORP Schools 55 APOL APOLLO GROUP, INC. Schools 55 EME EMCOR GROUP, INC. Construction Services 53 NOV NATIONAL-OILWELL VARCO, INC. Oil Well Services & Equipment 53 CHSI CATALYST HEALTH SOLUTIONS, INC. Insurance (Accident & Health) 52

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