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Executive Summary	July 5, 2013

The Economy After a month or two stretch in which economic data softened and the stock market stumbled, the economy and market appear to be strengthening. The big driver continues to be the housing market, with strong reports coming in from multiple sources since our last newsletter. In April, a new report showed, the S&P/Case-Shiller Home Price Indices notched the biggest year-over-year gains in their history, with the 10-city composite up 11.6% and the 20-city composite up 12.1%. The gains were broad-based, with 19 of the 20 metro areas posting gains for the month (vs. March); the lone city not to was Detroit, where prices were flat. More good housing news came from the National Association of Realtors, which said that its Pending Home Sales Index jumped 6.7% in May, reaching its highest level in more than six years. The index is 12.5% above where it was a year ago. The housing market's effects can be broad-based, and we're seeing that right now. Auto sales jumped in June, in part because of a nice gain in the sale of pickup trucks -- part of which is likely attributable to increased construction activity. The month was the best in at least six years for Ford and Chrysler and the best for General Motors since September 2008, the New York Times said. On the jobs front, payroll processing firm ADP said the private sector added 188,000 jobs in June, the second-strongest gain of 2013. Today, the Labor Department is scheduled to release its data for June, and investors will no doubt be watching closely. The manufacturing sector also seems to be improving. The sector expanded in June after having contracted in May, according to the Institute for Supply Management. It wasn't a particularly strong showing, with ISM's manufacturing index coming in at 50.8, just above the 50 mark that separates expansion from contraction, and the group's employment sub-index showing that manufacturing employment conditions worsened for the month. Still, the report was on the whole better than the previous month's. The service sector, meanwhile, expanded for the 42nd straight month in June, according to ISM, though the pace of expansion slowed slightly. The service sector report showed that employment conditions improved significantly for the month. Data for U.S. consumers was also encouraging. Real disposable personal income rose 0.4% in May, according to a government report, while real personal consumption expenditures were up 0.2%. That meant that the personal savings rate increased to 3.2%, the highest it has been this year. As far as inflation, it continues to be quite meager. The personal consumption expenditure price index increased just 0.1% in May, making for a 1.0% year-over-year gain. That's better than April's 0.7% year-over-year gain, but nowhere near the 2% to 3% figure policymakers target. Since our last newsletter, the S&P 500 returned -0.8%, while the Hot List returned -2.4%. So far in 2013, the portfolio has returned 19.8% vs. 13.3% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 224.8% vs. the S&P's 61.5% gain. The Cash Conundrum Whether it's a slowdown and housing bubble in China, lingering problems in Europe, or the unknown landscape of a post-QE environment, the investment world seems to be teeming with frightening risk factors these days. All this, combined with a hangover from 2007-2009 bear market, is enough to make you want to pull your money out of stocks and shove it under your mattress, where it is seemingly safe from the unwinding of the Federal Reserve's quantitative easing policies, China's troubles, and Europe's woes. The problem is that, while those risks grab the headlines, the biggest risk of all may lie underneath that proverbial mattress. I realize this sounds like the kind of thing investment advisors say when trying to sell you something. But the data backs it up. A quick look at historical returns shows just how dangerous holding too much cash can be for an investor -- and the reasons involve inflation and taxes. According to data from BlackRock, Morningstar, and the Tax Foundation, stocks averaged annual compound returns of 9.8% from 1926 through 2012. After inflation, however, the return fell to 6.7%. And after taxes are also factored in, the average returns were 4.5%. (Thanks to Josh Brown of The Reformed Broker blog for highlighting the data). But if you think that's disappointing, look at bonds. They averaged a compound annual return of 5.4% over that period -- not bad at all. After inflation, however, the figure dips to just 2.3%. After taxes? A paltry 0.6%. Still, at least that paltry 0.6% means bond investors took home something after inflation and taxes. While conventional wisdom is that you can't lose money you put in the bank, that is exactly what has happened to cash holders over the long haul. In that 1926-2012 period, cash earned a nominal average compound return of 3.5%. After inflation, they earned just 0.5%. Throw in taxes, and the return on cash turns negative, at -0.8%. If, as contrarian guru David Dreman has said, risk is not short-term volatility, but instead "the probability your investment will preserve your capital over your investment time horizon [and] the probability your investments will outperform alternative investments during the period," it's clear that cash has been a risky choice over the long term. It's a hard concept to wrap your mind around. "Indeed," Dreman wrote in Contrarian Investment Strategies, "it goes against the principle we were taught from childhood -- that the safest way to save was putting our money in the bank." All this isn't to say that having a lot of cash in the bank is inherently bad. It can be a very good thing, and a very wise move -- the key is why you're holding it, and what your time horizon is. If you need to use that money in the shorter term -- you're retiring next year, or your child is heading off to college, or you're buying a house, etc. -- then the bank is probably a good place for it, because the risk of cash losing value in the short term is far smaller than stocks or bonds or gold losing value. And, of course, you should always have some cash available in case emergencies (job loss, health issues, etc.) pop up. But if you are trying to build wealth for the long haul, holding excess cash becomes risky. And if the "why" behind your decision to hold a lot of cash has anything to do with a belief that the market is going down in the short term, you're really asking for trouble. Sure, it's easy now to look back and think how much money you'd have saved if you'd moved out of stocks and into cash anytime between late 2007 and early 2009. But think back to that period. Could you really have predicted that there would be such a huge decline -- and could you have gotten the timing right? Long-term data shows investors who try to make such calls far more often than not fail. Dalbar Inc., for example, found that in the 20 years ending at the end of 2012, the S&P 500 averaged 8.21% annual returns, and the Barclays Aggregate Bond Index averaged 6.34%. Average equity fund investors, meanwhile, earned just 4.25% annualized, while average fixed-income fund investors earned just 0.98%. The reason: Investors tend to exercise terrible timing in their decisions about jumping in and out of both equity and bond funds. (I'd also note that Dalbar said inflation averaged 2.43% over that period, which would have brought actual returns to less than 2% for stock fund investors and well into the red for fixed-income investors -- and that's before taxes). But what about Warren Buffett, you might be thinking. Perhaps the greatest investor ever, Buffett and his Berkshire Hathaway tend to carry a good amount of cash -- it had nearly $50 billion on hand at the end of the first quarter. But Buffett doesn't use cash as a way to side-step market downturns. He keeps cash on hand in case excellent new opportunities pop up. If the opportunity is there -- that is, if he can buy the stock of a good company, or the company itself, at a good price, he'll do it regardless of what the broader market is doing. But I think it's important to remember that Buffett's opportunities are limited by the size of Berkshire Hathaway. You won't see Berkshire buy shares in, say, a $250-million-market-cap company, because even if it bought all of the firm's shares it would be just a drop in the bucket for a $275-billion-market-cap company like Berkshire. Part of the reason why Buffett sometimes holds a good amount of cash likely has to do with the fact that he's thus forced to wait for legitimate opportunities to arise. (I'd also note that while Berkshire had close to $50 billion in cash on hand at the end of Q1, it also had almost $90 billion of stock in its portfolio, and hundreds of billions more invested in companies that it has purchased and taken private, like Burlington Northern Santa Fe. In that context, $50 billion doesn't seem so huge.) Individual investors, meanwhile, have far more opportunities available to them. (Buffett himself has said that he would invest a lot differently if he were managing a $1 million portfolio rather than Berkshire's enormous portfolio.) There are almost always opportunities out there to buy strong, undervalued stocks, no matter what the economic or market environment. That's one advantage that individuals have over Buffett and other gurus who manage large funds. To me, the most important thing is to determine an asset allocation plan that takes into account all of the things I've discussed above when it comes to cash -- short-term expenses, emergency funds, and whatever other sort of cushion you need to feel comfortable. Then, stick to that allocation mix and your investing strategy. If something changes in your life where you will need more cash (or less cash) in the short term, you can adjust your mix. But don't adjust it because the market is up this month or down this month, or because Europe's having problems, or because you are worried about all of the post-quantitative-easing uncertainty. As you earn new cash, one way to keep yourself disciplined is dollar-cost averaging. By putting a fixed amount of money into stocks and other assets (as per your pre-set allocation mix) at a regular interval (such as every month), you force yourself to stay disciplined, regardless of what is happening in the short term. You also buy more shares when prices are low and fewer shares when prices are high, decreasing the risk that you'll deploy a big sum of cash at a time when stocks are overvalued. The bottom line, to me, is that stocks have proven to be the best long-term investment vehicle -- if you stick with them. Because of that, investors who have long time horizons and don't have special circumstances are wise to focus on them, and not get scared into cash when short-term trouble arises. That's hard to do at times like these, when a number of different fears are prominent in investors' minds. But if you forget what history has shown and get too cash-happy, you may leave yourself exposed to far more risk of not reaching your long-term goals than you realize.		Editor-in-Chief: John Reese Since Inception   Hot List 224.8% S&P 500 61.5% Accuracy 56.2% Beta 1.2 YTD   Hot List 19.8% S&P 500 13.3% Since Last Issue   Hot List -2.4% S&P 500 -0.8% Avg. Fundamentals   Market Cap (mil) $47,341 PE Ratio 11.2 5 Yr EPS Growth 22.8% Yield 2.1% Rel. Strength 75 Portfolio Sectors Energy 3 Financial 2 Consumer Cyclical 2 Conglomerates 1 Services 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. The Fallen As we rebalance the Validea Hot List, 2 stocks leave our portfolio. These include: Patterson Companies, Inc. (PDCO) and Valero Energy Corporation (VLO). The Keepers 8 stocks remain in the portfolio. They are: Williams-sonoma, Inc. (WSM), Usana Health Sciences, Inc. (USNA), Chevron Corporation (CVX), Stamps.com Inc. (STMP), Royal Dutch Shell Plc (Adr) (RDS.A), Lear Corporation (LEA), Hollyfrontier Corp (HFC) and Hci Group Inc (HCI). The Newbies We are adding 2 stocks to the portfolio. These include: Western Digital Corp (WDC) and Amtrust Financial Services, Inc. (AFSI). Portfolio Changes Additions   WESTERN DIGITAL CORP WDC AMTRUST FINANCIAL SERVICES, INC. AFSI Deletions   PATTERSON COMPANIES, INC. PDCO VALERO ENERGY CORPORATION VLO Newcomers to the Validea Hot List Western Digital Corp. (WDC): This California-based firm is a leader in the hard drive and digital storage business. The 40-year-old company has a market cap of about $15 billion, and has raked in $16.4 billion in sales in the past year. It gets approval from my Peter Lynch-based model. For more on the stock, see the "Detailed Stock Analysis" section below. AmTrust Financial Services (AFSI): Founded as a workers' compensation insurance firm, this New York City-based company has expanded into a multi-national property and casualty insurer. It specializes in coverage for small businesses. AmTrust ($2.5 billion market cap) gets strong interest from my Peter Lynch- and James O'Shaughnessy-based models. To read more about its fundamentals, see the "Detailed Stock Analysis" section below. News about Validea Hot List Stocks Lear Corporation (LEA): Lear hit a 52-week high on July 2, with the catalyst seeming to be data showing continuing strength in the auto industry. Shares were up 4.5% since our last newsletter through July 4. Chevron Corporation (CVX): Chevron announced that it will be expanding its Houston facilities, creating 1,752 new jobs and a new 50-story office tower, the Associated Press reported. The investment in part involves $12 million Chevron will receive from the Texas Enterprise Fund, which is used to attract outside firms and businesses to Texas, AP said. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will take a closer look at my strategies and investment approach. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score USNA USANA HEALTH SCIENCES, INC. Conglomerates 85 HCI HCI GROUP INC Insurance (Prop. & Casualty) 76 LEA LEAR CORPORATION Auto & Truck Parts 61 WDC WESTERN DIGITAL CORP Computer Storage Devices 61 RDS.A ROYAL DUTCH SHELL PLC (ADR) Oil & Gas - Integrated 61 AFSI AMTRUST FINANCIAL SERVICES, INC. Insurance (Prop. & Casualty) 60 HFC HOLLYFRONTIER CORP Oil & Gas Operations 60 CVX CHEVRON CORPORATION Oil & Gas - Integrated 47 WSM WILLIAMS-SONOMA, INC. Furniture & Fixtures 45 STMP STAMPS.COM INC. Retail (Catalog & Mail Order) 43 Ticker Market Cap Date Added Start Price Current Price Return USNA $987 12/21/2012 $33.83 $73.23 116.5% HCI $327 6/7/2013 $34.20 $29.99 -12.3% LEA $5,658 5/10/2013 $60.48 $61.19 1.2% WDC $14,942 7/5/2013 TBD $63.21 TBD RDS.A $203,760 3/15/2013 $66.20 $63.41 -4.2% AFSI $2,524 7/5/2013 TBD $37.45 TBD HFC $8,244 4/12/2013 $46.83 $40.59 -13.3% CVX $230,837 5/10/2013 $123.23 $119.08 -3.4% WSM $5,509 5/10/2013 $56.93 $56.69 -0.4% STMP $618 6/7/2013 $38.96 $40.02 2.7%

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 USNA   |   HCI   |   LEA   |   WDC   |   RDS.A   |   AFSI   |   HFC   |   CVX   |   WSM   |   STMP   |   USANA HEALTH SCIENCES, INC. Profile Strategy: Growth Investor Based on: Martin Zweig USANA Health Sciences, Inc. develops and manufactures science-based nutritional and personal care products. The Company has operations in 15 markets worldwide, where it distributes and sells its products by way of direct selling. The Company reports operations in two geographic regions: North America and Asia Pacific, which is further divided into three sub-regions; Southeast Asia/Pacific, Greater China, and North Asia. North America includes the United States, Canada, Mexico, and direct sales from the United States to the United Kingdom and the Netherlands. Southeast Asia/Pacific includes Australia, New Zealand, Singapore, Malaysia, and the Philippines; Greater China includes Hong Kong, Taiwan and China; and North Asia includes Japan and South Korea. The Company's customer base consists of two types of customers: Associates and Preferred Customers. As of December 31, 2011, the Company had 222,000 active Associates and 64,000 active Preferred Customers worldwide. 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. USNA's P/E is 15.12, based on trailing 12 month earnings, while the current market PE is 17.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [FAIL] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. USNA's revenue growth is 11.25%, while it's earnings growth rate is 20.73%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, USNA fails 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 (9.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (15.5%) of the current year. Sales growth for the prior must be greater than the latter. For USNA 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. USNA's EPS ($1.28) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. USNA's EPS for this quarter last year ($0.90) 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. USNA's growth rate of 42.22% 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 USNA is 10.37%. This should be less than the growth rates for the 3 previous quarters, which are 26.14%, 43.90%, and 47.13%. USNA 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, 38.91%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 42.22%, (versus the same quarter one year ago) then the stock passes. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: [PASS] The EPS growth rate for the current quarter, 42.22% must be greater than or equal to the historical growth which is 20.73%. USNA 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. USNA, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.85, 2.17, 2.86, 3.26 and 4.45, 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. USNA's long-term growth rate of 20.73%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. TOTAL DEBT/EQUITY RATIO: [PASS] A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. USNA's Debt/Equity (0.00%) is not considered high relative to its industry (103.53%) and passes this test. INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For USNA, this criterion has not been met (insider sell transactions are 137, while insiders buying number 83). 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.   HCI GROUP INC Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool HCI Group Inc, formerly Homeowners Choice, Inc., is a holding company. The Company, through its subsidiaries, is engaged in the property and casualty insurance business. Through Homeowners Choice Property & Casualty Insurance Company, Inc. (HCPC) and subsidiaries, primarily Homeowners Choice Managers, Inc. (HCM), Southern Administration, Inc., Claddaugh Casualty Insurance Company, Ltd., and its subsidiary, HCPCI Holdings LLC, it provides property and casualty homeowners' insurance, condominium-owners' insurance and tenants' insurance to individuals owning property in Florida. Its subsidiaries also include TV Investment Holdings LLC, which owns and operates a marina facility located in Florida; Unthink Technologies Private Limited. During the year ended December 31, 2011, it organized TV Investment Holdings LLC, HCI Holdings LLC and HCI Technical Resources, Inc. Analysis Guru Score: 93% 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. HCI's profit margin of 23.78% passes this test. RELATIVE STRENGTH: [FAIL] 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. Although HCI's relative strength of 87 is below the acceptable level, yet it is very close. Keep an eye on the stock as it could move into the acceptable range. 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 HCI (105.68% for EPS, and 48.40% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] HCI's insiders should own at least 10% (they own 29.08% ) of the company's outstanding shares which is the minimum required. A high percentage typically 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. HCI's free cash flow of $9.84 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] HCI's profit margin has been consistent or even increasing over the past three years (Current year: 18.50%, Last year: 10.62%, Two years ago: 7.90%), 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 HCI's case. CASH AND CASH EQUIVALENTS: [PASS] HCI's level of cash $230.2 million passes this criteria. If a company is a cash generator, like HCI, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. "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 (HCI's is 0.23), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. HCI passes this test. The following criteria for HCI are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] HCI has not been significantly increasing the number of shares outstanding within recent years which is a good sign. HCI currently has 11.0 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. HCI's sales of $183.2 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". HCI passes the sales test. DAILY DOLLAR VOLUME: [PASS] HCI passes the Daily Dollar Volume (DDV of $5.7 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. HCI with a price of $29.99 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] HCI's income tax paid expressed as a percentage of pretax income this year was (39.17%) and last year (39.27%) 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.   LEAR CORPORATION Profile Strategy: Value Investor Based on: Benjamin Graham Lear Corporation is a tier 1 supplier to the global automotive industry. The Company supplies its products to automotive manufacturers with automotive seat systems and related components, as well as electrical distribution systems and related components. The Company has two segments: seating and electrical power management systems (EPMS). The seating segment includes seat systems and related components, such as seat frames, recliner mechanisms, seat tracks, seat trim covers, headrests and seat foam. The EPMS segment includes electrical distribution systems for traditional powertrain vehicles, as well as for hybrid and electric vehicles. As of December 31, 2011, it had 20 joint ventures located throughout Asia, as well as five in North America, two in Europe and Africa and one with operations in all three regions. Analysis Guru Score: 71% SECTOR: [PASS] LEA 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. LEA's sales of $14,870.1 million, based on trailing 12 month sales, pass this test. CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. LEA's current ratio of 1.55 fails the test. LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for LEA is $1,056.8 million, while the net current assets are $1,972.3 million. LEA passes this test. LONG-TERM EPS GROWTH: [FAIL] 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. EPS for LEA were negative within the last 5 years and therefore the company fails this criterion. 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. LEA's P/E of 8.40 (using the 3 year PE) passes this test. PRICE/BOOK RATIO: [PASS] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. LEA's Price/Book ratio is 1.68, while the P/E is 8.40. LEA passes the Price/Book test.   WESTERN DIGITAL CORP Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Western Digital Corporation (WD) is a provider of solutions for the collection, storage, management, protection and use of digital content, including audio and video. Its principal products are hard drives, which are devices that use one or more rotating magnetic disks (magnetic media) to store and allow access to data. Its hard drives are used in desktop and notebook computers, corporate and cloud computing data centers, home entertainment equipment and stand-alone consumer storage devices. In addition to hard drives, its other products include solid-state drives and home entertainment and networking products. Effective March 8, 2012, it acquired Viviti Technologies Ltd. In May 2012, the Company completed the divestiture of certain 3.5-inch hard drive assets to Toshiba Corporation. As part of its deal with Toshiba, WD also completed its purchase of Toshiba Storage Device (Thailand) Company Limited (TSDT), which manufactured hard drives. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider WDC a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (8.02) relative to the growth rate (27.33%), 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 WDC (0.29) 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. WDC, whose sales are $16,377.0 million, needs to have a P/E below 40 to pass this criterion. WDC's P/E of (8.02) is considered acceptable. INVENTORY TO SALES: [PASS] When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for WDC was 6.06% last year, while for this year it is 9.70%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (3.64%) is below 5%. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for WDC is 27.3%, 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 WDC (23.90%) 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 WDC (15.17%) 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 WDC (9.20%) 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.   ROYAL DUTCH SHELL PLC (ADR) Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Royal Dutch Shell plc (Shell) is an independent oil and gas company. The Company owns, directly or indirectly, investments in the numerous companies constituting Shell. Shell is engaged worldwide in the principal aspects of the oil and gas industry and also has interests in chemicals and other energy-related businesses. The Company operates in three segments: Upstream, Downstream and Corporate. Upstream combines the operating segments Upstream International and Upstream Americas, which are engaged in searching for and recovering crude oil and natural gas; the liquefaction and transportation of gas; the extraction of bitumen from oil sands that is converted into synthetic crude oil, and wind energy. Downstream is engaged in manufacturing; distribution and marketing activities for oil products and chemicals. Corporate represents the key support functions, comprising holdings and treasury, headquarters, central functions and Shells self-insurance activities. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: According to this methodology, RDS.A is a "Slow Grower", based on its single digit earnings growth of 8.12%, based on the average of the 3, 4 and 5 year historical eps growth rates. SALES: [PASS] RDS.A would fall into the "Dividend Payers" category according to this methodology. The first requirement of a Slow Grower is that its sales exceed one billion. RDS.A's sales are $460,043 million. It passes the test. 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 RDS.A was 6.16% last year, while for this year it is 6.59%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (0.43%) is below 5%. YIELD COMPARED TO THE S&P 500: [PASS] This methodology also maintains that the Yield of a "Slow Grower" should be high, which includes being higher than the S&P average (currently 2.35%), and at least 3%. This yield is required because dividends are the main reason for investing in "Slow Growers". The yield for RDS.A is 5.68% so it passes this test. YIELD ADJUSTED P/E/GROWTH (PEG) RATIO: [PASS] This methodology would consider the Yield-adjusted P/E/G ratio for RDS.A of 0.55, based on the average of the 3, 4 and 5 year historical eps growth rates, to be good. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for RDS.A (19.90%) 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 RDS.A (3.11%) 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 RDS.A (-2.53%) 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.   AMTRUST FINANCIAL SERVICES, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Amtrust Financial Services, Inc. is a holding company. The Company is a multinational specialty property and casualty insurer focused on generating consistent underwriting profits. The Company operates in four segments: small commercial business, specialty program and personal lines reinsurance. In January 2013, the Company acquired First Nonprofit Companies, Inc. In February 2013, its subsidiary acquired Car Care Plan (Holdings) Limited from Ally Insurance Holdings, Inc. In April 2013, it acquired Sequoia Insurance Company and its subsidiaries, Sequoia Indemnity Company and Personal Express Insurance Company. In May 2013, the Company acquired Mutual Insurers Holding Company (MIHC) and MIHC's subsidiary, First Nonprofit Insurance Company. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: AFSI is considered a "True Stalwart", according to this methodology, as its earnings growth of 14.36% lies within a moderate 10%-19% range and its annual sales of $2,019 million are greater than the multi billion dollar level. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. AFSI is attractive if AFSI can hold its own during a recession. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for AFSI (0.76), based on the average of the 3, 4 and 5 year historical eps growth rates, is O.K. EARNINGS PER SHARE: [PASS] The EPS for a stalwart company must be positive. AFSI's EPS ($3.09) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] AFSI 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. AFSI's Equity/Assets ratio (15.00%) 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. AFSI's ROA (2.84%) 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 AFSI (18.24%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for AFSI (4.84%) 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.   HOLLYFRONTIER CORP Profile Strategy: Contrarian Investor Based on: David Dreman HollyFrontier Corporation (HollyFrontier), formerly Holly Corporation, is a petroleum refiner, which produces light products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. HollyFrontier operates in two segments: Refining and Holly Energy Partners, L.P. (HEP). The Refining segment includes the operations of its El Dorado, Tulsa, Navajo, Cheyenne and Woods Cross Refineries and NK Asphalt. The HEP segment involves all of the operations of HEP. As of December 31, 2011, it operated five refineries having a combined crude oil processing capacity of 443,000 barrels per day that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain regions of the United States. The Company merged with Frontier Oil Corporation (Frontier), on July 1, 2011. On November 9, 2011, HEP acquired from the Company certain tankage, loading rack and crude receiving assets located at its El Dorado and Cheyenne Refineries. 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. HFC has a market cap of $8,244 million, therefore passing the test. EARNINGS TREND: [FAIL] A company should show a rising trend in the reported earnings for the most recent quarters. HFC's EPS for the latest quarter is not greater than the prior quarter, (from earliest to most recent quarter) 1.92, 1.63. 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. HFC fails this test as its EPS growth rate for the past 6 months (-44.55%) does not beat that of the S&P (0.16%). This methodology would utilize four separate criteria to determine if HFC 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. HFC's P/E of 4.57, based on trailing 12 month earnings, meets the bottom 20% criterion (below 10.07), 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. HFC's P/CF of 3.90 meets the bottom 20% criterion (below 5.66) 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. HFC's P/B is currently 1.31, which does not meet the bottom 20% criterion (below 0.82), 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%). HFC's P/D of 33.78 does not meet the bottom 20% criterion (below 20.00 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 [1.03] or greater than 2). This is one identifier of financially strong companies, according to this methodology. HFC's current ratio of 2.70 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 HFC is 31.32%, while its historical payout ratio has been 49.30%. Therefore, it passes 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 16.53%, and would consider anything over 27% to be staggering. The ROE for HFC of 31.78% 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. HFC's pre-tax profit margin is 14.75%, thus passing this criterion. YIELD: [FAIL] The company in question should have a yield that is high and that can be maintained or increased. HFC's current yield is 2.96%, while the market yield is 2.66%. HFC 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 36.67%. HFC's Total Debt/Equity of 20.42% is considered acceptable.   CHEVRON CORPORATION Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Chevron Corporation (Chevron) manages its investments in subsidiaries and affiliates and provides administrative, financial, management and technology support to the United States and international subsidiaries that engage in fully integrated petroleum operations, chemicals operations, mining activities, power generation and energy services. Upstream operations consist primarily of exploring for, developing and producing crude oil and natural gas; processing, transportation and regasification associated with liquefied natural gas; transporting crude oil by international oil export pipelines; transporting, storage and marketing of natural gas, and a gas-to-liquids project. Downstream operations consist primarily of refining crude oil into petroleum products; transporting crude oil and refined products by pipeline, marine vessel, motor equipment and rail car, and manufacturing and marketing of commodity petrochemicals, plastics for industrial uses and fuel and lubricant additives. Analysis Guru Score: 100% MARKET CAP: [PASS] The Cornerstone Value Strategy looks for large, well known companies whose market cap is greater than $1 billion. These companies exhibit solid and stable earnings. CVX's market cap of $230,837 million passes this test. CASH FLOW PER SHARE: [PASS] The second criterion requires that the company exhibit strong cash flows. Companies with strong cash flow are typically the value oriented investments that this strategy looks for. The company's cash flow per share must be greater than the mean of the market cash flow per share ($1.38). CVX's cash flow per share of $20.53 passes this test. SHARES OUTSTANDING: [PASS] This particular strategy looks for companies whose total number of outstanding shares are in excess of the market average (617 million shares). These are the more well known and highly traded companies. CVX, who has 1,944 million shares outstanding, passes this test. TRAILING 12 MONTH SALES: [PASS] A company's trailing 12 month sales ($238,022 million) are required to be 1.5 times greater than the mean of the market's trailing 12 month sales ($20,794 million). CVX passes this test. DIVIDEND: [PASS] The final step in the Cornerstone Value strategy is to select the 50 companies from the market leaders group (those that have passed the previous four criteria) that have the highest dividend yield. CVX, with a dividend yield of 3.36%, is one of the 50 companies that satisfy this last criterion.   WILLIAMS-SONOMA, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Williams-Sonoma, Inc. is a multi-channel specialty retailer of products for the home. The direct-to-customer segment of the Company's business sells its products through its six e-commerce Websites (williams-sonoma.com, potterybarn.com, potterybarnkids.com, pbteen.com, westelm.com and rejuvenation.com) and seven direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed and Bath, PBteen, West Elm and Rejuvenation). Its e-commerce platform is available to customers in more than 75 countries, while its catalogs reach customers throughout the United States. The retail segment of its business sells products through its five retail store concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation). As of January 29, 2012, it operated 576 stores in 44 states, Washington, D.C., Canada and Puerto Rico. On November 1, 2011, the Company acquired Rejuvenation Inc. 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. WSM, with a market cap of $5,509 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. WSM, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.28, 0.72, 1.83, 2.22 and 2.54, 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. WSM's Price/Sales ratio of 1.34, 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. WSM, whose relative strength is 84, is in the top 50 and would pass this last criterion.   STAMPS.COM INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Stamps.com Inc. is a provider of Internet-based postage solutions. The Company's customers use its service to mail and ship a variety of mail pieces, including postcards, envelopes, flats and packages, using a range of United States Postal Service (the USPS) mail classes, including First Class Mail, Priority Mail, Express Mail, Media Mail, Parcel Post, and others. Its customers include individuals, small businesses, home offices, medium-size businesses and enterprises. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: This methodology would consider STMP a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (21.83) relative to the growth rate (53.95%), 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 STMP (0.40) is very favorable. SALES AND P/E RATIO: [NEUTRAL] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. STMP, whose sales are $119.5 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. 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 STMP is 54.0%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered too fast. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for STMP (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 STMP (0.12%) 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 STMP (5.61%) 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 SIG SIGNET JEWELERS LTD. Retail (Specialty) 49 VALE VALE SA (ADR) Metal Mining 47 VLO VALERO ENERGY CORPORATION Oil & Gas Operations 46 CMI CUMMINS INC. Misc. Capital Goods 45 ROST ROSS STORES, INC. Retail (Apparel) 43 CEO CNOOC LIMITED (ADR) Oil & Gas Operations 41 AMBA AMBARELLA INC Semiconductors 41 KORS MICHAEL KORS HOLDINGS LTD Apparel/Accessories 40 TJX THE TJX COMPANIES, INC. Retail (Apparel) 39 SWHC SMITH & WESSON HOLDING CORP Recreational Products 39

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