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Executive Summary	April 16, 2010

The Economy The economic recovery is continuing, with slow and steady improvement in some areas and stronger gains in others, though some trouble spots remain. On the positive side, consumers are spending -- something many analysts said they would not do in the supposed "new normal". Retail sales increased an impressive 1.6% in March, and were also revised upward for February. Retail figures have increased in each month of 2010, and the March figures were up 7.6% over March 2009 levels. That's very good news given that about 70% of the economy is made up of consumer spending. The rise in consumer spending may have been in part related to long-awaited good news in another area: unemployment. Earlier this month, the Labor Department announced that the economy added 162,000 non-farm jobs in March -- the third month of job growth in the last five, and by far the greatest increase in that period. It was the most significant growth in more than three years. We also got some strong regional manufacturing numbers this week, with the Federal Reserve Bank of Philadelphia reporting that its business conditions index improved for the eighth straight month in April. And the New York Federal Reserve Bank said its manufacturing index jumped almost 40% in April. Much more modest gains came from the latest national industrial sector report. U.S. industrial production rose 0.1% in March, the Federal Reserve reported this week, with major storms likely holding back factory output. It was still the ninth straight month the figure has increased, following 18 straight months of losses, however, another good sign. Areas of particular strength included business equipment and construction supplies. Speaking of construction, homebuilder sentiment jumped sharply this month, reaching its highest level since last September. The figure was apparently driven by the looming expiration of the government's homebuyer tax credits, however, and it remains to be seen how the construction industry -- and housing market -- will fare once those carrots are removed. What is clear, however, is that the housing market is far from healthy. Pending home sales did rise 8.2% in February (vs. January), the National Association of Realtors reported last week, but foreclosures remain a big problem. Foreclosure filings rose 19% in March (vs. February), according to RealtyTrac, which also said that lenders repossessed more than a quarter of a million properties in the first quarter, setting a new record and representing a 35% increase over the year-ago quarter. A weak housing market impacts not only the broader economy, but also the financial institutions that still hold significant amounts of mortgage-backed securities. The problems still facing the economy are putting "restraints" on growth, Federal Reserve Chairman Ben Bernanke told Congress this week. While those restraints -- including high unemployment levels -- are troubling, they also have one positive impact on the stock market: Bernanke indicated the Fed will continue with its pledge to keep interest rates extremely low to help spur growth, and those low rates have been one reason for the stock market's big rally. The continued low rates and generally positive economic news have helped the market push higher since our last newsletter, with the S&P 500 returning 2.8%. The Hot List has also fared well, jumping 4.6%. It's now up 14.1% in 2010 vs. 8.7% for the S&P, and since its July 2003 inception the portfolio has gained 175.0%, while the index is up just 21.1%. The Return of Winners & Losers The Hot List is shaking up the portfolio a bit this rebalancing, saying goodbye to four stocks and welcoming four new firms that my Guru Strategies are keen on. The newcomers are a varied bunch, coming from several industries -- auto & truck parts (China Automotive Systems), communications services (Telestone Technologies and Telefonica S.A.), and retail apparel (lululemon athletica). And while two of those newcomers do come from the same industry, their differences are striking: Telestone is a very small ($151 million market cap) China-based tech company that focuses on developing wireless equipment and network solutions; Spain-based Telefonica is one of the largest companies in the world ($113 billion market cap), and is a major provider of landline and cellular phone service in Latin America and Europe. As has been the case with other recent Hot List additions, however, one similarity these firms share is a history of strong earnings growth. Three of the four grew earnings per share in both 2008 and 2009, both of which were marred by a global recession. And the fourth, Telefonica, had a dip in 2008 but a rebound in 2009, and has over the past five years almost doubled earnings. That's important because in the past couple years we've seen (first) an ebbing tide pull almost all stock-boats lower, and (second) a rising tide lift them back upward. To be sure, the magnitude of the gains and declines of specific stocks varied, but, generally, if you were invested in stocks in 2008 you lost money, and if you were invested in stocks in 2009 you made money. In 2008, every sector of the S&P 500 lost money, as did more than 95% of stocks in the index, according to The New York Times. In 2009, every sector gained ground, and more than 90% of S&P stocks pushed higher. But that's changing. The Times' Paul Lim noted earlier this month that while the S&P is well in the black in 2010, about a quarter of its component stocks were in the red. And that's not unusual, Oppenheimer Chief Investment Strategist for Equities Brian Belski told Lim. He said that's what usually happens in the year after a recession -- and it seems there's a good chance the recession ended sometime in 2009. This would seem to go hand in hand with the research of James O'Shaughnessy (one of the gurus upon whom I base my models), which I highlighted earlier this year. O'Shaughnessy found that while "junk"-type stocks tend to lead in the first year after severe bear markets, fundamentals start to matter much more in the second year. Both that trend and the trend cited by Belski, if they continue, bode very well for my guru-based models, which key in on only the strongest companies with the most fundamentally sound stocks in the market. Blending Strategies With fundamentals in mind, I wanted to touch on one of the reasons that I think the Hot List has fared so well over the long haul. It's a reason that came to mind recently when reading a very interesting report from Tweedy, Browne Company entitled "What Has Worked in Investing". The report includes a compilation of various studies performed by many different researchers over the years on how stocks with certain fundamental characteristics perform. Among the studies analyzed are those that look at the historical performance of stocks with high price/book ratios vs. those with lower price/book values; stocks with strong dividend yields vs. those with lower yields; stocks with low price/cash flow ratios vs. those with high price/cash flow ratios; and stocks with high market caps vs. those with lower market caps. The studies also covered a variety of different countries and timeframes. In general, the dozens of different studies showed that over the longer term, fundamentals get rewarded. Stocks with low price/book ratios tend to outperform those with high price/book ratios. Those with high yields tend to outperform those with low yields. Stocks with low P/E ratios tend to outperform those with high P/Es. Of course there are exceptions, but the general trend appears pretty clear. What struck me about the report was that most of the studies looked at how one or two variables impacted returns. And, as I noted, the results show that even using just one or two variables can help improve investment returns. But for the most part, each of my Guru Strategies use a much wider array of variables (the exception being the two-variable Joel Greenblatt-based model). Most use between five and ten fundamental criteria, ranging from market cap to various earnings assessments to several different valuation metrics to analyses of debt levels. Because of that, they really put a company through the wringer, assessing its health and prospects on a number of different levels. The Hot List then goes a step further, looking for consensus from about a dozen different strategies to find its favorite picks. As you've probably seen, most of the Hot List picks get approval from more than one of my models, which means that they have really made it through a gauntlet of fundamental tests. To me, that's one of the biggest reasons the portfolio has fared so well. If fundamentals do matter in stock-picking -- and both my own experience and the studies I referenced earlier show that they do -- then an approach that assesses a stock on several different fundamental levels is more often than not going to find winners. As we move forward, I expect the market will continue to show lower levels of correlation. (This would figure to be particularly true as the government pulls away the stimulus efforts and low interest rates that have thrown life preservers to struggling companies.) And as that happens, I expect that fundamentals -- and the Hot List -- will be rewarded.		Editor-in-Chief: John Reese Since Inception   Hot List 175.0% S&P 500 21.1% Accuracy 57.3% Beta 1.2 YTD   Hot List 14.1% S&P 500 8.7% Since Last Issue   Hot List 4.6% S&P 500 2.8% Avg. Fundamentals   Market Cap (mil) $22,628 PE Ratio 17.3 5 Yr EPS Growth 25.3% Yield 5.1% Rel. Strength 61 Portfolio Sectors Services 5 Consumer Cyclical 2 Financial 1 Healthcare 1 Capital Goods 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. The Fallen As we rebalance the Validea Hot List, 4 stocks leave our portfolio. These include: Amedisys, Inc. (AMED), Jos. A. Bank Clothiers, Inc. (JOSB), Triumph Group, Inc. (TGI) and Raytheon Company (RTN). The Keepers 6 stocks remain in the portfolio. They are: Itt Educational Services, Inc. (ESI), Emcor Group, Inc. (EME), Aeropostale, Inc. (ARO), Sanofi-aventis Sa (Adr) (SNY), The Brink's Company (BCO) and Ares Capital Corporation (ARCC). The Newbies We are adding 4 stocks to the portfolio. These include: Telefonica S.a. (Adr) (TEF), China Automotive Systems, Inc. (CAAS), Telestone Technologies Corporation (TSTC) and Lululemon Athletica Inc. (LULU). Portfolio Changes Additions   TELEFONICA S.A. (ADR) TEF CHINA AUTOMOTIVE SYSTEMS, INC. CAAS TELESTONE TECHNOLOGIES CORPORATION TSTC LULULEMON ATHLETICA INC. LULU Deletions   AMEDISYS, INC. AMED JOS. A. BANK CLOTHIERS, INC. JOSB TRIUMPH GROUP, INC. TGI RAYTHEON COMPANY RTN Newcomers to the Validea Hot List China Automotive Systems (CAAS): This small-cap, which is based in Hubei province, about 500 miles west of Shanghai, supplies an array of power steering systems and components to the Chinese automobile market. It has a market cap of about $600 million, and it's been growing earnings rapidly, even through the global recession in 2008 and 2009. China Automotive gets strong interest from my Peter Lynch-based model. To see why, check out the "Detailed Stock Analysis" section below. lululemon athletica inc. (LULU): This Vancouver-based firm makes clothing for a variety of athletics, focusing largely on technical athletic apparel for yoga, running, and dancing. It has more than 100 stores across Canada, the U.S., Australia, and Hong Kong. lululemon, which has a market cap of about $3.1 billion, has been growing earnings rapidly, nearly tripling them in its 2009 fiscal fourth-quarter (ending Jan. 31). It gets strong interest from two of my growth strategies, my Momentum Investor model and the model I base on the writings of Tom and David Gardner, the creators of The Motley Fool investment web site. The "Detailed Stock Analysis" section below explains why. Telefonica (TEF): Based in Madrid, this telecom firm operates in 25 countries and has almost 270 million customers. Its main markets are Latin America and Europe. Over the past year, the $113 billion market cap firm has taken in almost $80 billion in sales. Telefonica gets strong interest from my James O'Shaughnessy-based value strategy. To see what the O'Shaughnessy approach likes about it, check out the "Detailed Stock Analysis" section below Telestone Technologies Corporation (TSTC): Headquartered in Beijing, this Chinese tech firm is involved in the development of wireless equipment and network solutions. The company, which holds intellectual property rights to 400 types of products, is a small-cap ($151 million), which means it could be subject to more volatility than larger stocks. But my Peter Lynch- and Martin Zweig-based models both think it's worth it, as both give the stock their approval. To see why these strategies like Telestone, see the "Detailed Stock Analysis" section below. News about Validea Hot List Stocks Sanofi-Aventis (SNY): On April 8, Sanofi announced that it will enter a $335 million licensing deal with CureDM Group Holdings for the CureDM's experimental diabetes treatment Pancreate, The Wall Street Journal reported. Sanofi will be able to develop, manufacture and commercialize the treatment, which is a human peptide scheduled for phase 1 studies later this year, the Journal reported. Aeropostale (ARO): Aeropostale posted strong March sales, with same-store sales up 19% from March 2009, the Associated Press reported. The figures include sales at stores that have been open at least one year. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will take an in-depth look at one of my individual guru-based strategies. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score LULU LULULEMON ATHLETICA INC. Apparel/Accessories 88 TSTC TELESTONE TECHNOLOGIES CORPORATION Communications Services 73 ARO AEROPOSTALE, INC. Retail (Apparel) 71 TEF TELEFONICA S.A. (ADR) Communications Services 70 CAAS CHINA AUTOMOTIVE SYSTEMS, INC. Auto & Truck Parts 67 EME EMCOR GROUP, INC. Construction Services 63 SNY SANOFI-AVENTIS SA (ADR) Biotechnology & Drugs 52 ARCC ARES CAPITAL CORPORATION Misc. Financial Services 50 ESI ITT EDUCATIONAL SERVICES, INC. Schools 49 BCO THE BRINK'S COMPANY Security Systems & Services 48 Ticker Market Cap Date Added Start Price Current Price Return LULU $3,178 4/16/2010 TBD $45.07 TBD TSTC $148 4/16/2010 TBD $14.06 TBD ARO $2,927 11/27/2009 $20.99 $31.07 48.0% TEF $111,666 4/16/2010 TBD $73.40 TBD CAAS $589 4/16/2010 TBD $21.79 TBD EME $1,753 1/22/2010 $24.55 $26.47 7.8% SNY $98,491 3/19/2010 $38.45 $37.35 -2.9% ARCC $2,130 3/19/2010 $13.51 $16.03 18.7% ESI $3,998 10/30/2009 $90.35 $112.77 24.8% BCO $1,402 3/19/2010 $27.86 $29.29 5.1%

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 LULU   |   TSTC   |   ARO   |   TEF   |   CAAS   |   EME   |   SNY   |   ARCC   |   ESI   |   BCO   |   LULULEMON ATHLETICA INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool 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: 96% PROFIT MARGIN: [PASS] This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. LULU's profit margin of 12.87% passes this test. RELATIVE STRENGTH: [PASS] The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. LULU, with a relative strength of 93, satisfies this test. COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: [PASS] Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for LULU (150.00% for EPS, and 54.55% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] LULU's insiders should own at least 10% (they own 35.54% ) of the company's outstanding shares which is extremely attractive since the minimum requirement is 10%. A high percentage indicates that the insiders are confident that the company will do well. CASH FLOW FROM OPERATIONS: [PASS] A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. LULU's free cash flow of $1.44 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] LULU's profit margin has been consistent or even increasing over the past three years (Current year: 12.87%, Last year: 11.13%, Two years ago: 11.42%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. R&D AS A PERCENTAGE OF SALES: [NEUTRAL] This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in LULU's case. CASH AND CASH EQUIVALENTS: [PASS] LULU's level of cash $159.6 million passes this criteria. If a company is a cash generator, like LULU, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. INVENTORY TO SALES: [PASS] This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for LULU was 14.72% last year, while for this year it is 9.73%. Since the inventory to sales is decreasing by -4.99% the stock passes this criterion. ACCOUNT RECEIVABLE TO SALES: [PASS] This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for LULU was 1.14% last year, while for this year it is 1.82%. Although the AR to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive. LONG TERM DEBT/EQUITY RATIO: [PASS] LULU's trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don't need to borrow money in order to grow. "THE FOOL RATIO" (P/E TO GROWTH): [PASS] The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (LULU's is 0.45), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. LULU passes this test. The following criteria for LULU are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] LULU has not been significantly increasing the number of shares outstanding within recent years which is a good sign. LULU currently has 71.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock. SALES: [PASS] Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. LULU's sales of $452.9 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". LULU passes the sales test. DAILY DOLLAR VOLUME: [FAIL] LULU does not pass the Daily Dollar Volume (DDV of $39.7 million) test. It exceeds the maximum requirement of $25 million. Stocks that fail the test are too liquid for a small individual investor and many institutions have already discovered it. PRICE: [PASS] This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. LULU with a price of $45.07 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions. INCOME TAX PERCENTAGE: [PASS] LULU's income tax paid expressed as a percentage of pretax income this year was (32.79%) and last year (29.42%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.   TELESTONE TECHNOLOGIES CORPORATION Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Telestone Technologies Corporation (Telestone) is a wireless communications coverage solutions provider. The Company's wireless coverage solutions include research and development and application of wireless communications technology. In addition to its homegrown wireless communications equipment, which includes repeaters, antennas and radio frequency peripherals, it also offers project design, project management, installation, maintenance and other after-sales services, which are required by its customers. Telestone's wireless coverage solutions are created to enhance the coverage of mobile telecommunications networks. These solutions it provides to the telecommunications industry cover indoor and outdoor environments, including hotels, residential estates, office buildings, airports, underground stations, highways and tunnels. During the year ended December 31, 2008, The Company launched a new generation of wireless distribution system, weight factor display system (WFDS). Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider TSTC a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (11.67) relative to the growth rate (20.41%), 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 TSTC (0.57) makes it favorable. SALES AND P/E RATIO: [NEUTRAL] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. TSTC, whose sales are $71.9 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. 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 TSTC is 20.4%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for TSTC (8.99%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for TSTC (0.28%) 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 TSTC (7.99%) 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.   AEROPOSTALE, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch 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: 93% DETERMINE THE CLASSIFICATION: This methodology would consider ARO a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (13.58) relative to the growth rate (33.60%), 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 ARO (0.40) 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. ARO, whose sales are $2,230.1 million, needs to have a P/E below 40 to pass this criterion. ARO's P/E of (13.58) 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 ARO is 33.6%, 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 ARO (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 ARO (8.95%) 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 ARO (11.40%) 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.   TELEFONICA S.A. (ADR) Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Telefonica S.A. (Telefonica) together with its subsidiaries and investees operates in the telecommunications, media and contact center industries. Telefonica basic purpose is the provision of all manner of public or private telecommunications services, including ancillary or complementary telecommunications services or related services. The Company operates in three business areas: Telefonica Spain, Telefonica Latin America and Telefonica Europe. During the year ended December 31, 2009, Telefonica Moviles Espana, S.A.U., a wholly owned subsidiary of the Company completed the sale of its 32.18% stake in Medi Telecom, S.A. In January 2010, the Telefonica Group, through its wholly owned subsidiary, Telef=nica Europe plc completed the acquisition of JAJAH. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: This methodology would consider TEF a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (10.58) relative to the growth rate (22.32%), 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 TEF (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. TEF, whose sales are $76,961.0 million, needs to have a P/E below 40 to pass this criterion. TEF's P/E of (10.58) 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 TEF is 22.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good. TOTAL DEBT/EQUITY RATIO: [FAIL] TEF's Debt/Equity (261.30%) is above 80% and is considered very weak. Therefore, TEF fails this test. 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 TEF (4.52%) 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 TEF (-39.48%) 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.   CHINA AUTOMOTIVE SYSTEMS, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool 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: 83% PROFIT MARGIN: [PASS] This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. CAAS's profit margin of 12.20% passes this test. RELATIVE STRENGTH: [PASS] The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. CAAS, with a relative strength of 96, satisfies this test. COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: [PASS] Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for CAAS (1,050.00% for EPS, and 118.90% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] CAAS's insiders should own at least 10% (they own 69.80% ) of the company's outstanding shares which is extremely attractive since the minimum requirement is 10%. A high percentage indicates that the insiders are confident that the company will do well. CASH FLOW FROM OPERATIONS: [PASS] A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. CAAS's free cash flow of $0.54 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] CAAS's profit margin has been consistent or even increasing over the past three years (Current year: 9.13%, Last year: 7.58%, Two years ago: 6.60%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. R&D AS A PERCENTAGE OF SALES: [NEUTRAL] This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in CAAS's case. CASH AND CASH EQUIVALENTS: [FAIL] CAAS's level of cash and cash equivalents per sales, 16.96 %, does not pass this criteria of roughly 20%(a number we determined to be appropriate based on various examples). CAAS will have a more difficult time paying off debt (if it has any) or acquiring other companies than a company that passes this criteria. INVENTORY TO SALES: [PASS] This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for CAAS was 17.09% last year, while for this year it is 11.63%. Since the inventory to sales is decreasing by -5.46% the stock passes this criterion. ACCOUNT RECEIVABLE TO SALES: [PASS] This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for CAAS was 58.82% last year, while for this year it is 60.39%. Although the AR to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive. LONG TERM DEBT/EQUITY RATIO: [PASS] CAAS's trailing twelve-month Debt/Equity ratio (0.22%) is a little higher than what this methodology is looking for, but is still at an acceptable level. The superior companies that you are looking for don't need to borrow money in order to grow. This company has borrowed very little which is still OK. "THE FOOL RATIO" (P/E TO GROWTH): [FAIL] The "Fool Ratio" is an extremely important aspect of this analysis. The methodology says consider holding the shares when the company's Fool Ratio is greater than 0.65 (CAAS's is 0.66), but initial purchases in this range are unfavorable. The following criteria for CAAS are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] CAAS has not been significantly increasing the number of shares outstanding within recent years which is a good sign. CAAS currently has 32.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock. SALES: [PASS] Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. CAAS's sales of $256.4 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". CAAS passes the sales test. DAILY DOLLAR VOLUME: [PASS] CAAS passes the Daily Dollar Volume (DDV of $23.4 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf." PRICE: [PASS] This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. CAAS with a price of $21.79 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions. INCOME TAX PERCENTAGE: [FAIL] CAAS's income tax paid expressed as a percentage of pretax income either this year (14.04%) or last year (1.07%) is below 20% which is cause for concern. Because the tax rate is below 20% this could mean that the earnings that were reported are unrealistically inflated due to the lower level of income tax paid. However, we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%).   EMCOR GROUP, INC. Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher EMCOR Group, Inc. is an electrical and mechanical construction and facilities services company. It has six segments: United States electrical construction and facilities services, which involves systems for electrical power transmission and distribution, premises electrical and lighting systems, low-voltage systems, such as fire alarm, security and process control, voice and data communication, and fiber optic lines); United States mechanical construction and facilities services, which involves systems for heating, ventilation, air conditioning, refrigeration and clean-room process ventilation, fire protection, plumbing, process and high-purity piping, water and wastewater treatment, and central plant heating and cooling; United States facilities services; Canada construction and facilities services; United Kingdom construction and facilities services, and other international construction and facilities services. In February 2010, the Company acquired Scalise Industries. Analysis Guru Score: 90% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. EME's P/S of 0.32 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. EME's Debt/Equity of 16.04% 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. EME 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 EME At this Point Is EME a "Super Stock"? NO 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.EME's P/S ratio of 0.32 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%. EME's inflation adjusted EPS growth rate of 25.55% 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. EME's free cash per share of 4.97 passes this criterion. THREE YEAR AVERAGE NET PROFIT MARGIN: [FAIL] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. EME, whose three year net profit margin averages 2.58%, fails this evaluation.   SANOFI-AVENTIS SA (ADR) Profile Strategy: Value Investor Based on: Benjamin Graham Sanofi-Aventis is a pharmaceutical group engaged in the research, development, manufacture and marketing of healthcare products. The Company's business includes two main activities: pharmaceuticals and human vaccines through sanofi pasteur. The Company is also present in animal health products through Merial Limited (Merial). In its pharmaceutical activity, the Company specializes in six therapeutic areas: diabetes, oncology, thrombosis and cardiovascular, central nervous system (CNS), and internal medicine. The global portfolio of sanofi-aventis also consists of a range of other pharmaceutical products in Consumer Health Care (CHC) and other prescription drugs, including generics. It offers vaccines in five areas: pediatric combination vaccines, influenza vaccines, adult and adolescent booster vaccines, meningitis vaccines and travel and endemic vaccines. Analysis Guru Score: 100% SECTOR: [PASS] SNY 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. SNY's sales of $41,713.9 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. SNY's current ratio of 2.18 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 SNY is $8,086.7 million, while the net current assets are $17,512.3 million. SNY 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. SNY's EPS growth over that period of 179.7% 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. SNY's P/E of 13.65 (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. SNY's Price/Book ratio is 1.51, while the P/E is 13.65. SNY passes the Price/Book test.   ARES CAPITAL CORPORATION Profile Strategy: Growth Investor Based on: Martin Zweig Ares Capital Corporation (Ares Capital) is a specialty finance company, which is a closed-end, non-diversified management investment company. Ares Capital's investment objective is to generate both current income and capital appreciation through debt and equity investments. It invests in United States middle-market companies. It invests primarily in first and second lien senior loans and mezzanine debt, which in some cases includes an equity component like warrants. First and second lien senior loans generally are senior debt instruments that rank ahead of subordinated debt of a given portfolio company. Its investments have ranged between $10 million and $100 million each, although the investment sizes may be more or less than the targeted range. The Company's investment adviser is Ares Capital Management LLC. In April 2010, Ares Capital Corporation completed its merger with Allied Capital Corporation. 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. ARCC's P/E is 8.02, based on trailing 12 month earnings, while the current market PE is 22.00. 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. ARCC's revenue growth is 68.62%, while it's earnings growth rate is 19.24%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, ARCC passes 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 (10.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-1.9%) of the current year. Sales growth for the prior must be greater than the latter. For ARCC 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. ARCC's EPS ($0.65) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [FAIL] The EPS for the quarter one year ago must be positive. ARCC's EPS for this quarter last year ($-1.17) fail 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. ARCC's growth rate of 155.56% 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 ARCC is 9.62%. This should be less than the growth rates for the 3 previous quarters, which are 200.00%, 825.00%, and 244.19%. ARCC passes this test, which means that it has good, reasonably steady earnings. This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: [PASS] If the growth rate of the prior three quarter's earnings, 600.00%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 155.56%, (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 ARCC is 155.6%, and it would therefore pass this test. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: [PASS] The EPS growth rate for the current quarter, 155.56% must be greater than or equal to the historical growth which is 19.24%. ARCC would therefore pass this test. EARNINGS PERSISTENCE: [FAIL] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. ARCC, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.78, 1.58, 1.34, -1.56, and 1.99, fails this test. LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. ARCC's long-term growth rate of 19.24%, 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 ARCC, this criterion has not been met (insider sell transactions are 0, while insiders buying number 1). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.   ITT EDUCATIONAL SERVICES, INC. Profile Strategy: Patient Investor Based on: Warren Buffett ITT Educational Services, Inc. (ITT/ESI) is a provider of postsecondary degree programs in the United States. As of December 31, 2009, the Company offered master, bachelor and associate degree programs to approximately 80,000 students. As of December 31, 2009, it had 125 locations (including 121 campuses and four learning sites) in 38 states. All of its institutions are authorized by the applicable education authorities of the states, in which they operate, and are accredited by an accrediting commission recognized by the United States Department of Education (ED). It designs its education programs, after consultation with employers and other constituents, to help graduates prepare for careers in various fields involving their areas of study. On June 10, 2009, it acquired Daniel Webster College (DWC). DWC offers programs of study at the master, bachelor and associate degree levels both in residence and through distance education. 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 0.57, 0.70, 0.94, 1.27, 1.61, 2.33, 2.72, 3.72, 5.14, 7.91. Buffett would consider ESI's earnings predictable. In fact EPS have increased every year. ESI's long term historical EPS growth rate is 32.3%, based on the 10 year average EPS growth rate, and it is expected to grow earnings 17.1% 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. ESI has a debt of 150.0 million and earnings of 289.3 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 ESI, over the last ten years, is 39.3%, 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 41.3%, 41.4%, 47.5%, 39.6%, 31.5%, 34.5%, 107.2%, 209.5%, 114.4%, 179.2%, and the average ROE over the last 3 years is 167.7%, 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 ESI, over the last ten years, is 49.9% and the average ROTC over the past 3 years is 73.3%, 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 41.3%, 41.4%, 47.5%, 39.6%, 31.5%, 34.5%, 43.9%, 67.0%, 61.4%, 91.5%, 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. ESI's free cash flow per share of $7.20 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 $26.91 and compares it to the gain in EPS over the same period of $7.34. ESI's management has proven it can earn shareholders a 27.3% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work. HAS THE COMPANY BEEN BUYING BACK SHARES: [BONUS PASS] Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. ESI's shares outstanding have fallen over the past five years from 45,689,999 to 37,000,000, 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 ESI 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 $7.82 and divide it by the current market price of $112.77. An investor, purchasing ESI, could expect to receive a 6.93% initial rate of return. Furthermore, he or she could expect the rate to increase 17.1% 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 ESI's initial yield of 6.93%, which will expand at an annual rate of 17.1%, 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] ESI currently has a book value of $4.42. It is safe to say that if ESI can preserve its average rate of return on equity of 39.3% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 39.3% and it will have a book value of $121.25 in ten years. If it can still earn 39.3% on equity in ten years, then expected EPS will be $47.61. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $47.61 and multiply them by the lower of the 5 year average P/E ratio (18.4) or current P/E ratio (current P/E in this case), which is 14.4 and you get ESI's projected future stock price of $687.03. 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 $687.03. These numbers indicate that one could expect to make a 19.8% average annual return on ESI's stock at the present time. Buffett would consider this a great return. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 17.1%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $37.85. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (18.4) or current P/E ratio (current P/E in this case), which is 14.4. This equals the future stock price of $546.14. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $546.14. 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 $112.77 and the future expected stock price, including the dividend pool, of $546.14. If you were to invest in ESI at this time, you could expect a 17.1% 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 17.1% and 19.8%. 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 18.4% on ESI stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   THE BRINK'S COMPANY Profile Strategy: P/E/Growth Investor Based on: Peter Lynch The Brink's Company (Brink's) is a provider of secure transportation, cash logistics and other security-related services to banks and financial institutions, retailers, government agencies, mints, jewelers and other commercial operations worldwide. The Company's international network serves customers in more than 50 countries and employs approximately 59,400 people. Its operations include approximately 875 facilities and 10,500 vehicles. 71% of its revenues are from outside North America. The Company has two segments: International and North America. International operations has three regions: Europe, Middle East and Africa (EMEA); Latin America, and Asia Pacific. North American operations include 181 branches in the United States and 52 branches in Canada. Brink's EMEA operates 258 branches in 22 countries. Its main operations are in France, the Netherlands and Germany. The Company's other security services include security and guarding. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider BCO a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (7.23) relative to the growth rate (43.14%), 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 BCO (0.17) 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. BCO, whose sales are $3,135.0 million, needs to have a P/E below 40 to pass this criterion. BCO's P/E of (7.23) 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 BCO is 43.1%, 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: [PASS] This methodology would consider the Debt/Equity ratio for BCO (36.57%) to be normal (equity is approximately twice debt). FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for BCO (0.44%) 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 BCO (-2.04%) 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 AMED AMEDISYS, INC. Healthcare Facilities 53 GME GAMESTOP CORP. Retail (Technology) 52 NOV NATIONAL-OILWELL VARCO, INC. Oil Well Services & Equipment 50 ESV ENSCO PLC Oil Well Services & Equipment 50 TDW TIDEWATER INC. Water Transportation 50 LLY ELI LILLY & CO. Major Drugs 48 SYNT SYNTEL, INC. Computer Services 48 AFAM ALMOST FAMILY, INC. Healthcare Facilities 46 PHH PHH CORPORATION Consumer Financial Services 44 CSR CHINA SECURITY & SURVEILLANCE TECH. INC. Security Systems & Services 44

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