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Executive Summary	September 27, 2013

The Economy While some big macro factors -- the Federal Reserve's no-taper decision and the looming federal budget impasse -- have been pushing and pulling on investors' psyches, the U.S. economy has continued to perform fairly well in recent weeks. Industrial production rose, for example, 0.4% in August, according to a new Federal Reserve report. The report showed that manufacturing output jumped 0.7%, the biggest increase since last December. Mining activity rose 0.3%, while utility output, which is very dependent on weather, fell 1.5%. Overall, the increase in industrial production was the biggest since February. The housing market, meanwhile, continues to be a driving factor behind the economy. New home sales jumped 7.9% in August, according to the Commerce Department, putting them about 13% above where they stood last August. The median sales price was slightly higher than it was a year ago (+0.6%). Existing home prices jumped more, however, rising 1.7% during the month to reach their highest level in six-and-a-half years, according to the National Association of Realtors. Existing home sales now stand 10.5% above where they were a year ago, with median sale prices nearly 15% above their year-ago level. Housing starts increased slightly in August, rising by about 1%, according to a new government report. That put them 17.7% above where they stood last August, showing strong year-over-year gains. Permit issuance for new construction was down 3.8%, but still remains 5.4% above its year-ago pace. Consumer data has been decent. Retail and food service sales increased 0.2% in August, according to the Commerce Department. The increase was led by a nice jump in auto sales. Retail and food service sales are now 4.8% above where they stood a year ago. Inflation, meanwhile, lessened a bit in August, according to another government report. The Consumer Price Index rose just 0.1%, making for a year-over-year inflation rate of just 1.5%, down from the 2.0% figure we had seen in July. Core inflation, which takes out volatile food and energy prices, was also up 0.1%, and has risen 1.8% over the past year. Some speculated that the weak inflation numbers were one reason behind the Federal Reserve's decision not to start tapering its giant asset purchasing plans. Another major macro event on investors' minds that may well have impacted the no-taper decision: the looming federal budget standoff between Republicans and Democrats. In remarks that followed the Fed's decision not to taper, Fed Chairman Ben Bernanke spoke a good deal on the dangers involved if a budget standoff shuts down the government. I would say that hopefully we'll see some sort of resolution, but given our legislators' track records, I wouldn't count on it. That could make for some short-term bumps for the stock market, though it shouldn't affect one's long-term investing strategy. All in all, these issues have made for an up-and-down fortnight for the stock market. Since our last newsletter, the S&P 500 returned 0.9%, while the Hot List returned 4.1%. So far in 2013, the portfolio has returned 31.0% vs. 19.1% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 255.3% vs. the S&P's 69.8% gain. The Ever-Present "Stock-Picker's Market" Since the 2008 financial crisis, one of the main investing themes you've probably heard is that of high correlations. Many have talked about the "risk-on, risk-off" environment that has existed, one in which stocks (and a number of other assets) tend to rise and fall en masse based on macroeconomic news. The presumption is that in such an environment, stock-picking isn't particularly useful. The trick is less about picking the right stocks than it is about picking the right time to be in the market and the right time to be out, the conventional wisdom goes. At first glance, then, it seemed like very good news when correlations dropped sharply last month. As The Wall Street Journal noted, correlation among the 10 large-cap sectors in the S&P 500 fell to 69.9%, the lowest level in two years. The figure had been at nearly 90% a month earlier. Stock-picking, it seemed, was back in focus, and those who focused on fundamentals could well reap the rewards -- for now, at least. I say for now because, with macro factors like the Federal Reserve's tapering plans and Washington's budget impasse looming, it would also seem that a return to a high-correlation environment might not be too far away. But while the talk of "stock-picker's markets" (or lack thereof) has been prominent over the past several years (I myself have brought up the issue in the past), it's a bit of a fallacy. That's because the truth is that it's always a stock-picker's market. "The problem," Investment News' Jason Kephart recently explained, "is that correlation, which measures how stocks move in relation to each other, doesn't actually tell you anything about the opportunities available to portfolio managers. Even though correlations between stocks historically have been high, meaning stocks generally have moved in one direction -- up -- since the market bottomed, that doesn't mean they're moving [up] at the same speed." According to Kephart (citing Vanguard Group data), in every year since 2008, more than half the stocks in the S&P 500 have finished the year with a return either 10% greater or 10% lower than the index. This year (through Aug. 19), 262 of the S&P's 500 firms had returned 10% more or less than the index. That means that, while correlations have been high, there has been -- and continues to be -- plenty of opportunity for stock-pickers to distinguish themselves from the crowd. Keep in mind, however, that distinguishing yourself from the crowd means you have to be willing to go through some periods when your returns vary significantly from the market -- on the downside. No one beats the market every month, or quarter, or even every year. That's because while you may be able to find undervalued stocks, you never know exactly how long they'll stay undervalued. Sometimes you can get lucky, and an attractively valued stock you buy will jump the week you buy it; other times, it can take months for investors to come around to recognizing the value in the stock. Still other times, they may never come around. More often than not, however, they do come around -- you just have to stay disciplined. It can be painstaking sometimes, to watch as your portfolio takes short-term hits. But all of the gurus I follow have experienced that. And they've succeeded over the long haul by staying disciplined and sticking to their strategies during these short-term troubles. Mutual fund legend Peter Lynch, for example, was hit hard by the 1980-82 bear market, with his Magellan Fund losing 22.6% -- more than four times the S&P 500's loss -- in 1981. At times during the rough 1973-74 bear market, both Warren Buffett and John Neff took a pounding. Neff's fund lost 25% in '73 when the S&P was down 14.7%; Buffett lost 43.7% in '74 when the index fell 26.4%. It wasn't just during bear markets that the gurus had down years. In 1989, in the middle of a lengthy bull market, the S&P gained 31.7%. Neff, however, gained just 15.0%. Martin Zweig's fund lagged by nine percentage points that year, while Lynch's Magellan lagged by nearly 8 points. In 1995, when the S&P surged 37.6%, Zweig's fund lagged by nearly 20 percentage points. Then there was the tech bubble, when value-oriented investors like Buffett had downright awful years even though the broader market surged. In 1999, when the S&P was up 21%, Buffett was down nearly 20%. While it's been on the winning side more than the losing side, the Hot List has also had some flat-out bad years. In 2007 it lost 11.6% while the S&P rose 3.5%. In 2011, it lost 16.2% while the index was flat. But despite those hiccups, it has performed remarkably well over the long term. If you'd invested $10,000 in the Hot List on its July 15, 2003 inception, you'd have $34,850 today. The same investment in the S&P 500? You'd have less than half of that, $17,010 (both figures are through last week, not including dividends). The gap hasn't changed since the "lock-step" environment supposedly began in 2008. Since the start of that year, the Hot List is up 38.3%, while the S&P is up just 15.9%. Clearly, some stocks have been better than others -- a lot better -- despite the high-correlation environment. The bottom line is that it's always a stock-picker's market. Yes, the general direction (up or down) of stocks may be highly correlated at times, but the degree to which individual stocks rise or fall will vary significantly. The things you need to do to be a good stock-picker -- use a fundamental-focused approach, stay disciplined, think long-term -- are thus always important. Lose sight of them for even just a bit, and the market will very likely make you wish you hadn't.		Editor-in-Chief: John Reese Since Inception   Hot List 255.3% S&P 500 69.8% Accuracy 57.0% Beta 1.2 YTD   Hot List 31.0% S&P 500 19.1% Since Last Issue   Hot List 4.1% S&P 500 0.9% Avg. Fundamentals   Market Cap (mil) $11,765 PE Ratio 12.6 5 Yr EPS Growth 29.3% Yield 1.3% Rel. Strength 71 Portfolio Sectors Services 4 Energy 2 Financial 2 Conglomerates 1 Consumer Cyclical 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, 3 stocks leave our portfolio. These include: Joy Global Inc. (JOY), Jpmorgan Chase & Co (JPM) and Ross Stores, Inc. (ROST). The Keepers 7 stocks remain in the portfolio. They are: Usana Health Sciences, Inc. (USNA), Stamps.com Inc. (STMP), Amtrust Financial Services, Inc. (AFSI), Bridgepoint Education Inc (BPI), Lear Corporation (LEA), Hollyfrontier Corp (HFC) and Hci Group Inc (HCI). The Newbies We are adding 3 stocks to the portfolio. These include: The Tjx Companies, Inc. (TJX), Lukoil (Adr) (LUKOY) and Hibbett Sports, Inc. (HIBB). Portfolio Changes Additions   THE TJX COMPANIES, INC. TJX LUKOIL (ADR) LUKOY HIBBETT SPORTS, INC. HIBB Deletions   JOY GLOBAL INC. JOY JPMORGAN CHASE & CO JPM ROSS STORES, INC. ROST Newcomers to the Validea Hot List The TJX Companies (TJX): The parent of Marshalls, T.J. Maxx, and HomeGoods, this frequent Hot List favorite offers brand-named clothing and merchandise at discount prices -- making it attractive when times are good or bad. The $40-billion-market-cap firm has taken in about $27 billion in sales in the past year. TJX gets approval from my Peter Lynch- and Warren Buffett-based models. To read more about the stock, scroll down to the "Detailed Stock Analysis" section below. Lukoil OAO (LUKOY): Another past Hot List favorite, Russia-based Lukoil ($55 billion market cap) is the world's largest privately owned oil and gas company based on proved oil reserves, and is responsible for about 17% of Russian crude oil production. Its products are sold in Russia and former USSR republics, as well as Europe, Asia, and the U.S. Lukoil gets approval from my James O'Shaughnessy- and Peter Lynch-based models. To read more about it, check out the "Detailed Stock Analysis" section below. Hibbett Sports (HIBB): This Alabama-based sporting goods retailer is also no stranger to the Hot List, having appeared earlier this year. It focuses on small and mid-sized markets, mostly in the South, Southwest, Mid-Atlantic and Midwest. It has about 850 retail stores across 26 states, mostly under the Hibbett Sports name but with some also under the Sports Additions and Sports & Co. names. Hibbett gets strong interest from my Warren Buffett- and Peter Lynch-based models and high marks from some other strategies as well. To read more about it, scroll down to the "Detailed Stock Analysis" section. News about Validea Hot List Stocks JPMorgan Chase & Co. (JPM): Chase expanded its settlement talks with the Justice Department regarding a number of federal probes into the financial firm,The Wall Street Journal reported on Sept. 24. Chase has offered to pay about $3 billion to resolve the investigations, the Journal reported, but the Justice Department maintains the dollar amount should be much higher. The Hot List is selling the stock on today's rebalancing, as its Guru Strategy scores have been surpassed by those of other stocks. AmTrust Financial Services (AFSI): AmTrust announced on Sept. 18 that it has reached an agreement to buy The Insco Dico Group for approximately $85 million. The company said the acquisition is to be funded through existing working capital, and should close within the next six months pending regulatory approval. Insco Dico's subsidiaries include Developers Surety and Indemnity Company and Indemnity Company of California, which offer surety insurance to developers and contractors in all 50 states with California as the largest state. Another Insco Dico subsidiary, Builders Insurance Services, markets general liability insurance policies to contractors in several western states. 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 BPI BRIDGEPOINT EDUCATION INC Schools 83 HCI HCI GROUP INC Insurance (Prop. & Casualty) 76 STMP STAMPS.COM INC. Retail (Catalog & Mail Order) 74 LUKOY LUKOIL (ADR) Oil & Gas - Integrated 66 LEA LEAR CORPORATION Auto & Truck Parts 61 AFSI AMTRUST FINANCIAL SERVICES, INC. Insurance (Prop. & Casualty) 60 HFC HOLLYFRONTIER CORP Oil & Gas Operations 60 TJX THE TJX COMPANIES, INC. Retail (Apparel) 58 HIBB HIBBETT SPORTS, INC. Retail (Specialty) 56 Ticker Market Cap Date Added Start Price Current Price Return USNA $1,189 12/21/2012 $33.83 $86.25 155.0% BPI $969 8/2/2013 $16.59 $17.89 7.8% HCI $466 6/7/2013 $34.20 $40.79 19.3% STMP $708 8/30/2013 $41.88 $45.28 8.1% LUKOY $55,203 9/27/2013 TBD $64.31 TBD LEA $5,833 5/10/2013 $60.48 $72.33 19.6% AFSI $2,954 7/5/2013 $35.78 $39.68 10.9% HFC $8,514 4/12/2013 $46.83 $42.60 -9.0% TJX $40,389 9/27/2013 TBD $56.47 TBD HIBB $1,429 9/27/2013 TBD $54.99 TBD

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer USNA   |   BPI   |   HCI   |   STMP   |   LUKOY   |   LEA   |   AFSI   |   HFC   |   TJX   |   HIBB   |   USANA HEALTH SCIENCES, INC. Profile Strategy: Value Investor Based on: Benjamin Graham 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: 71% SECTOR: [PASS] USNA 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. USNA's sales of $691.9 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. USNA's current ratio of 2.22 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 USNA is $0.0 million, while the net current assets are $91.4 million. USNA 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. USNA's EPS growth over that period of 265.7% passes the EPS growth test. P/E RATIO: [FAIL] 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. USNA's P/E of 15.83 (using the current PE) fails this test. PRICE/BOOK RATIO: [FAIL] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. USNA's Price/Book ratio is 5.48, while the P/E is 15.83. USNA fails the Price/Book test.   BRIDGEPOINT EDUCATION INC Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Bridgepoint Education, Inc. (Bridgepoint) is a provider of postsecondary education services. The Company's academic institutions include Ashford University and University of the Rockies. Its institutions deliver programs primarily online, as well as at their traditional campuses. As of December 31, 2011, the Company had 86,642 total students enrolled in its institutions. Bridgepoint's institutions conduct ongoing faculty and student assessment processes and provide a range of student services. The Company is also focused on developing new technologies, such as through Waypoint Outcomes, Constellation, and the development of its institutions' mobile learning platforms. The Company has developed Constellation to replace third party textbooks with digital course materials. Constellation materials are displayed in a browser-based platform. In January 2012, Bridgepoint introduced Thuze. Analysis Guru Score: 90% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratio between .75 and 1.5 are good values. BPI's P/S ratio of 1.10 based on trailing 12 month sales, falls within the "good values" range for non-cyclical companies and is considered attractive. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. BPI's Debt/Equity of 0.00% is exceptional, 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. BPI 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 BPI At this Point Is BPI a "Super Stock"? NO PRICE/SALES RATIO: [FAIL] The prospective company should have a low Price/Sales ratio. To be considered a "Super Stock", non-cyclical (non-Smokestack) companies should have Price/Sales ratios below .75. However, BPI, who has a P/S of 1.10, does not fall within the "Super Stock" range. It does fall between 0.75 and 1.5, which is considered the "good values" range for non-cyclical companies. Nonetheless, it does not pass this "Super Stock" criterion. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. BPI's inflation adjusted EPS growth rate of 26.74% 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. BPI's free cash per share of 2.11 passes this criterion. THREE YEAR AVERAGE NET PROFIT MARGIN: [PASS] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. BPI, whose three year net profit margin averages 16.54%, passes this evaluation.   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 25.80% 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 86 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 (89.19% for EPS, and 52.72% 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 0.28), 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 $203.7 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 $6.3 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 $40.79 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: [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.   STAMPS.COM INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool 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: 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. STMP's profit margin of 26.58% 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 STMP's relative strength of 89 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: [FAIL] 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 STMP (55.88% for EPS, and 13.74% for Sales) are not good enough to pass. INSIDER HOLDINGS: [PASS] STMP's insiders should own at least 10% (they own 11.03% ) 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. STMP's free cash flow of $0.05 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] STMP's profit margin has been consistent or even increasing over the past three years (Current year: 33.34%, Last year: 25.85%, Two years ago: 6.46%), 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 STMP's case. CASH AND CASH EQUIVALENTS: [PASS] STMP's level of cash $35.9 million passes this criteria. If a company is a cash generator, like STMP, 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 STMP was 2.17% last year, while for this year it is 2.94%. Although the inventory 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. 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 STMP was 10.31% last year, while for this year it is 12.48%. 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] STMP'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 (STMP's is 0.42), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. STMP passes this test. The following criteria for STMP are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] STMP has not been significantly increasing the number of shares outstanding within recent years which is a good sign. STMP currently has 16.0 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. STMP's sales of $123.4 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". STMP passes the sales test. DAILY DOLLAR VOLUME: [PASS] STMP passes the Daily Dollar Volume (DDV of $5.5 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. STMP with a price of $45.28 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] STMP's income tax paid expressed as a percentage of pretax income either this year (-56.11%) or last year (-47.67%) 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%).   LUKOIL (ADR) Profile Strategy: P/E/Growth Investor Based on: Peter Lynch NK Lukoil OAO (Neftyanaya Kompaniya LUKOIL OAO or NK LUKOIL OJSC) is a Russia-based integrated oil and gas company. The Company is engaged in the business of oil exploration, production, refining, marketing and distribution. It is an owner of refineries, gas processing, petrochemical plants and gas stations network located in Russia, Eastern and Western Europe, as well as Africa. The Company's petroleum products are sold in the Russian Federation, the Commonwealth of Independent States (CIS) countries, Eastern and Western Europe, Asia and the United States. NK Lukoil OAO operates through numerous subsidiaries and affiliated companies. In April 2013, the Company acquired a 100% of Samara-Nafta ZAO and completed acquisition of CJSC Kama-Oil. In June 2013, it sold a 99.57% stake in Lukoil Odes'kyi NPZ PAT. The Company's major shareholder is NKO ZAO NRD with a stake of 91.60%. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: LUKOY is considered a "True Stalwart", according to this methodology, as its earnings growth of 10.18% lies within a moderate 10%-19% range and its annual sales of $140,336 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. LUKOY is attractive if LUKOY can hold its own during a recession. 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 LUKOY was 5.64% last year, while for this year it is 5.82%. 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 (0.18%) is below 5%. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for LUKOY (0.31), based on the average of the 3, 4 and 5 year historical eps growth rates, is excellent. EARNINGS PER SHARE: [PASS] The EPS for a stalwart company must be positive. LUKOY's EPS ($14.09) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for LUKOY (12.17%) 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 LUKOY (7.23%) 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 LUKOY (-11.17%) 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.   LEAR CORPORATION Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy 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: 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. LEA, with a market cap of $5,833 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. LEA, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were -4.47, -2.66, 4.05, 5.08 and 12.85, 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. LEA's Price/Sales ratio of 0.38, 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. LEA, whose relative strength is 88, is in the top 50 and would pass this last criterion.   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 14.38% lies within a moderate 10%-19% range and its annual sales of $2,305 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 (0.73), 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 ($3.45) 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 (3.33%) 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 (15.62%) 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 (4.19%) 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: Price/Sales Investor Based on: Kenneth Fisher 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: 100% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. HFC's P/S of 0.42 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. HFC's Debt/Equity of 15.80% 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. HFC 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 HFC At this Point Is HFC a "Super Stock"? YES PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.HFC's P/S ratio of 0.42 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%. HFC's inflation adjusted EPS growth rate of 207.14% 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. HFC's free cash per share of 3.25 passes this criterion. THREE YEAR AVERAGE NET PROFIT MARGIN: [PASS] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. HFC, whose three year net profit margin averages 5.49%, passes this evaluation.   THE TJX COMPANIES, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch The TJX Companies, Inc. (TJX) is the off-price apparel and home fashions retailer in the United States and worldwide. As of January 28, 2012, the Company operated in four business segments. It has two segments in the United States, Marmaxx (T.J. Maxx and Marshalls) and HomeGoods; one in Canada, TJX Canada (Winners, Marshalls and HomeSense) and one in Europe, TJX Europe (T.K. Maxx and HomeSense). As a result of the consolidation of the A.J. Wright chain, all A.J. Wright stores ceased operations by the end of February 2011. It completed the consolidation of A.J. Wright, converting 90 of the A.J. Wright stores to T.J. Maxx, Marshalls or HomeGoods banners and closed the remaining 72 stores, two distribution centers and home office. In December 2012, the Company acquired Sierra Trading Post, an off-price Internet retailer. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider TJX a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (20.80) relative to the growth rate (23.77%), 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 TJX (0.88) makes it 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. TJX, whose sales are $26,766.8 million, needs to have a P/E below 40 to pass this criterion. TJX's P/E of (20.80) 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 TJX is 23.8%, 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 TJX (33.09%) 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 TJX (4.13%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for TJX (1.88%) 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.   HIBBETT SPORTS, INC. Profile Strategy: Patient Investor Based on: Warren Buffett Hibbett Sports, Inc. is an operator of sporting goods retail stores in small to mid-sized markets predominately in the Southeast, Southwest, Mid-Atlantic and Midwest regions of the United States. The Company offers a range of athletic equipment, footwear and apparel. Its stores concepts are Hibbett Sports, Sports Additions, Sports & Co. and Hibbett Team Sales, Inc. As of January 28, 2012, it operated 832 stores in 26 states, which consisted of 812 Hibbett Sports stores, as well as 19 smaller-format Sports Additions athletic shoe stores and one larger-format Sports & Co. superstore. Of 832 stores, 203 were located in enclosed malls and 629 are located in strip-shopping centers. During the fiscal year ended January 28, 2012 (fiscal 2012), it opened 49 Hibbett Sports stores and three Sports Addition stores while closing 17 Hibbett Sports stores and one Sports & Co. stores. In fiscal 2012, it expanded or remodeled 18 stores and converted one Sports & Co. store to a Hibbett Sports store. 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 0.56, 0.70, 0.98, 1.17, 0.96, 1.02, 1.12, 1.60, 2.15, 2.72. Buffett would consider HIBB's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 6 years ago. The dips have totaled 17.9%. HIBB's long term historical EPS growth rate is 20.8%, based on the 10 year average EPS growth rate, and it is expected to grow earnings 14.0% 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. HIBB has no long term debt and therefore would pass this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [PASS] Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for HIBB, over the last ten years, is 23.0%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 16.1%, 18.4%, 25.6%, 27.1%, 23.8%, 21.3%, 18.3%, 22.3%, 27.8%, 29.4%, and the average ROE over the last 3 years is 26.5%, 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 HIBB, over the last ten years, is 22.9% and the average ROTC over the past 3 years is 26.2%, 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 16.1%, 18.4%, 25.6%, 27.1%, 23.8%, 21.3%, 18.3%, 22.0%, 27.5%, 29.2%, 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. HIBB's free cash flow per share of $2.45 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 $12.98 and compares it to the gain in EPS over the same period of $2.16. HIBB's management has proven it can earn shareholders a 16.6% 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. HIBB's shares outstanding have fallen over the past five years from 28,540,001 to 26,000,000, 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 HIBB quantitatively. STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return. CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail] Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $2.84 and divide it by the current market price of $54.99. An investor, purchasing HIBB, could expect to receive a 5.16% initial rate of return. Furthermore, he or she could expect the rate to increase 14.0% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 2.20%. Compare this with HIBB's initial yield of 5.16%, which will expand at an annual rate of 14.0%, 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] HIBB currently has a book value of $10.55. It is safe to say that if HIBB can preserve its average rate of return on equity of 23.0% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 23.0% and it will have a book value of $83.68 in ten years. If it can still earn 23.0% on equity in ten years, then expected EPS will be $19.25. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $19.25 and multiply them by the lower of the 5 year average P/E ratio (19.7) or current P/E ratio (current P/E in this case), which is 19.3 and you get HIBB's projected future stock price of $372.26. 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 $372.26. These numbers indicate that one could expect to make a 21.1% average annual return on HIBB'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 14.0%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $10.53. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (19.7) or current P/E ratio (current P/E in this case), which is 19.3. This equals the future stock price of $203.62. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $203.62. 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 $54.99 and the future expected stock price, including the dividend pool, of $203.62. If you were to invest in HIBB at this time, you could expect a 13.99% average annual return on your money. Buffett likes to see a 15% return, but nonetheless would accept this return. LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [PASS] Based on the two different methods, you could expect an annual compounding rate of return somewhere between 14.0% and 21.1%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 17.5% on HIBB stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   Watch List The Watch List contains the highest scoring stocks according to our guru consensus system that are not currently in the Hot List portfolio. We provide this list both for informational purposes and for investors who are not comfortable with a portfolio of ten stocks. Ticker Company Name Industry Guru Score AFOP ALLIANCE FIBER OPTIC PRODUCTS INC Semiconductors 60 JPM JPMORGAN CHASE & CO Money Center Banks 54 DORM DORMAN PRODUCTS INC. Auto & Truck Parts 53 JOY JOY GLOBAL INC. Constr. & Agric. Machinery 52 CVX CHEVRON CORPORATION Oil & Gas - Integrated 52 MPC MARATHON PETROLEUM CORP Oil & Gas Operations 51 SIG SIGNET JEWELERS LTD. Retail (Specialty) 49 WOR WORTHINGTON INDUSTRIES, INC. Iron & Steel 48 ACAT ARCTIC CAT INC Auto & Truck Manufacturers 47 TBI TRUEBLUE INC Business Services 46

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