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Executive Summary	November 9, 2012

The Economy While the elections -- and their impact on how the U.S. will deal with the looming "fiscal cliff" -- were foremost on many investors' minds over the past two weeks, the economy was continuing to flash some positive signals. The October jobs report, for example, was one of the best we've seen in a while, with 184,000 private sector jobs created during the month, according to the Labor Department. The unemployment rate rose slightly, to 7.9%, but that appeared to be because more people were looking for jobs -- the number of people not in the labor force declined by 369,000. The "U-6" rate (which unlike the headline number includes discouraged workers who've given up looking for work and part-time workers who can't get full-time jobs) declined slightly to 14.6%. That's still very elevated, but it's down from 16.0% last year at this time. Manufacturing activity, meanwhile, increased for the second straight month in October, doing so at a slightly faster pace than it did in September, according to the Institute for Supply Management. The group's New Orders sub-index also increased at an accelerating rate, and the employment sub-index showed that employment conditions continue to improve. ISM's non-manufacturing index showed that the service sector also expanded in October, for the 34th straight month. Its employment sub-index indicated that hiring was improving for the third straight month, while its prices sub-index remained quite elevated -- a sign that inflationary pressures are something to keep an eye on. The housing market is continuing to show signs of recovery. Home prices in 20 major cities rose on average by 0.9% in August, according to the latest S&P/Case-Shiller Home Price Indices data. Prices were up 2.0% over the year-ago period. While the market isn't booming, it has now been improving for several months, a great sign. Housing was a major factor in a better-than-expected third-quarter gross domestic product report. GDP was up 2.0% for the quarter, showing that growth accelerated after the second quarter's 1.3% growth. Residential investment accounted for about a sixth of the increase, according to the Commerce Department. Government spending was also a big factor; it jumped nearly 10% in real terms during the quarter, driven by an increase in defense spending. The big driver behind the growth, however, was the U.S. consumer -- personal consumption expenditures accounted for about 70% of the GDP increase. Speaking of consumers, the Commerce Department's latest monthly consumer data showed that disposable personal income increased 0.4% in September. But real disposable personal income actually declined, by less than 0.1%. Personal consumption expenditures, meanwhile, jumped 0.8%, or 0.4% in real terms. Of course, the data are somewhat of a double-edged sword -- increased spending boosts the economy, at least in the short term, but it seems that Americans are dipping into their savings in order to increase their spending. The personal savings rate fell from 3.7% in August to 3.3% in September, the third lowest monthly reading since the start of 2008. Since our last newsletter, the S&P 500 returned -2.5%, while the Hot List returned -0.3%. So far in 2012, the portfolio has returned 8.8% vs. 9.5% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 146.0% vs. the S&P's 37.7% gain. Peering over the Precipice Following Tuesday's elections, stocks plummeted, with the Dow Jones Industrial Average posting its biggest loss of the year and the S&P 500 enduring its biggest decline in about five months. A number of factors sparked the plunge. Wall Street no doubt was disappointed that President Obama was re-elected instead of Mitt Romney, who was perceived to be more pro-business, and negative debt-related news coming out of Europe didn't help. Perhaps the biggest reason for the sharp market declines, however, was the fact that the President/Senate/House dynamic was unchanged by the election. We still have a Democratic President and Senate, and a Republican House of Representatives, and, while some of the players have changed, the ideologies on both sides don't seem to have shifted much. With the "fiscal cliff" -- the combination of tax hikes and budget cuts that will go into effect in 2013 if no action is taken -- looming, confidence isn't too high that legisRobotors will finally be able to reach a compromise and put the U.S. on a better fiscal path. I for one am optimistic -- albeit very cautiously so -- that Congress and the President can get their acts together. But what if they don't? Based on how investors fled the market after the election, and the dire prognostications many pundits have been making, it's easy to think that falling off the cliff will mean disaster for the economy and market. And, no doubt, it would have some big short-term ramifications. But a look at history shows that failure to avoid the cliff doesn't mean disaster. That's what O'Shaughnessy Asset Management, the firm headed by James O'Shaughnessy (one of the gurus upon whom I base my strategies) found in a recent study. Looking at data going back to 1926, OSAM looked at how the stock market has fared during times of varying tax levels, since tax increases are one of the biggest concerns surrounding the cliff. "Our analysis suggests that, across history, tax rates and changes to those rates generally have not meaningfully impacted equity returns," Travis Fairchild and Patrick O'Shaughnessy wrote in a paper detailing the study. The analysis included tax rates involved with dividends -- which are set to jump dramatically if we go off the cliff. "Surprisingly, dividend-paying stocks performed best when taxes were highest," Fairchild and O'Shaughnessy wrote. Here's what OSAM did: It separated all years from 1926-2011 into three categories -- high, middle, low -- based on the average effective tax rate for a family earning $250,000. It found that in the one-third of years with the lowest effective tax rate, the S&P 500 gained just 3.7% annualized, and produced an average dividend yield of 3.7%. In the third of years with the highest tax rate, the index gained 11.3% annualized, with a yield of 4.5%. In the middle third of years, it gained 13.9%, and yielded 3.3%. The group also looked at how the market performed during the 10 years when taxes increased the most from the prior year, and the 10 years when taxes decreased the most. On average, in the year after the 10 highest increases occurred, stocks gained 8.4%; the average three-year annualized return was 7.9%, and the average five-year annualized return was 15.7%. Following the largest decreases, one-year returns averaged 13.0%; three-year annualized returns were 8.4%; and five-year annualized returns averaged 13.4%. "Put simply," Fairchild and O'Shaughnessy wrote, "large tax increases or decreases have not foretold doom or boom for equity returns." OSAM found a similar situation with dividends. The outperformance of high-dividend stocks was basically the same, on average, during periods when dividends were taxed as regular income, periods when dividends were exempt from taxation, and periods when dividends were taxed at 15%. They found just one example of a dividend tax increase in the neighborhood of what the fiscal cliff could cause (1954-55), and found that high-dividend stocks outperformed following that increase as well. Fairchild and O'Shaughnessy say they aren't arguing that large tax hikes are good for stocks, or that there is a causal relationship between high taxes and strong dividend stock returns. "But it does contradict the projections of those calling for a sell off in dividend-paying stocks as the fiscal cliff nears," they say, adding that they think valuation declines in high-dividend stocks "should be short-term and unsustainable" and would likely lead to a big buying opportunity. They say now is not a time to panic, and that what should drive stock returns in the future is the quality of companies and the price of their shares -- not tax rates. I wholeheartedly agree. But What About Obama? For those concerned with the loss of the Presidential candidate who was presumed to be more business-friendly, history paints a similar picture. While the Republican party is generally considered to be more business and market friendly than the Democratic party, the market has actually performed significantly better with Democratic Commanders-in-Chief in charge. Since 1901, the market has averaged 12.1% annual returns under Democratic Presidents, and just 5.1% under Republican Presidents, according to S&P Capital IQ. GDP and corporate profits have also fared better under Democratic Presidents than Republicans. Of course, there are plenty of examples of Republican Presidents whose terms involved strong market gains. The market averaged nearly 11% annual returns during President Eisenhower's eight years, and more than 10% annually during President Reagan's two terms. And Democratic Presidents have seen sub-par markets, with both John F. Kennedy and Jimmy Carter in office while the market posted annualized returns of less than 7% (all those figures according to Bloomberg Financial Markets data, via The New York Times). So what does all of that mean? Are Democrats better stewards of the economy and financial markets than Republicans? Trying to answer such a question is nearly impossible. For one thing, no two Democrats are the same, and no two Republicans are the same (no matter what one party will try to tell you about the other). Often, in fact, a President's actions will play against stereotypes. Kennedy, a Democrat, oversaw sharp tax cuts for high-income Americans during his tenure, while the first President Bush raised taxes during his. Clinton's actions showed far more fiscal conservativeness than those of the second President Bush, as he balance the budget while Bush spent far beyond the nation's means. In addition, a President needs to have a friendly enough Congress to carry out his plans. And, if that's the case, the impact of those plans may not be felt immediately. Some policies championed by one President may not have their full effect until a new President is in office, making it very hard to judge the cause-and-effect relationship a President's policies have on the economy and market? Even if you could judge the impact of a President's policies on the market with a great degree of accuracy, I'm not sure you'd find much of a pattern. Economic and financial cycles are simply more powerful than any one elected official, and perhaps even more powerful than Congress and the President combined. Does anyone, for example, really believe that the Internet bubble would not have burst, and the country not gone through a recession, had Clinton been able to serve a third term? Would the housing crisis have been averted if John Kerry won the Presidency in 2004? Could John McCain have stopped the financial crisis in its tracks if he captured the White House in '08? I find any of those scenarios highly unlikely. The forces at play were simply too great. Listen, in the short term, there's no doubt that the emotions raised by the fiscal cliff issue can and probably will have a significant impact on the stock market. We've already seen that. But the point is that investing is about the long term. And there's little evidence showing that an election, or the sort of tax hikes involved in the fiscal cliff, will lead to a long-term destruction of wealth for investors. Regardless of what policy actions our leaders take (or don't take) in the next four years, good companies should continue to make money, and if their shares are reasonably priced, then many of those stocks will rise. New technologies, and perhaps new industries altogether, will arise and possibly have more impact on markets than any President or Congress could. (Consider, for example, whether any elected official or body has had more of an impact on the market than the invention of the automobile, or of the personal computer.) Companies will take advantage of new, blossoming markets overseas. Cyclical forces beyond the reach of any President will continue to play out. And investors who focus on strong companies with attractively valued shares should continue to fare well over the long haul, even if there are significant bumps in the road over the short term.		Editor-in-Chief: John Reese Since Inception   Hot List 146.0% S&P 500 37.7% Accuracy 55.7% Beta 1.2 YTD   Hot List 8.8% S&P 500 9.5% Since Last Issue   Hot List -0.3% S&P 500 -2.5% Avg. Fundamentals   Market Cap (mil) $8,257 PE Ratio 16.9 5 Yr EPS Growth 22.5% Yield 1.6% Rel. Strength 67 Portfolio Sectors Services 3 Technology 1 Capital Goods 1 Consumer Cyclical 1 Consumer/Non-Cyclical 1 Energy 1 Financial 1 Healthcare 1
Advertisement Validea Capital Management - Private Portfolio Management Based on Strategies of Legends Are you looking for an alternative to your underperforming mutual funds or financial advisor? Click here to download Validea Capital's investment kit and learn more about the firm's guru-based portfolios. Get More Information on Validea Capital! ** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. Thre information above in not intended as personal investment advice and should not be interpreted as such. Guru Spotlight: Martin Zweig Generally, my Guru Strategies have a distinct value bias. The majority of these models -- ranging from my Benjamin Graham approach to my Warren Buffett model to my Joseph Piotroski strategy -- are focused on finding good, often beaten-down stocks selling at bargain prices; that is, they target value stocks. But that doesn't mean that all of my gurus were cemented on the value side of the growth/value pendulum. In fact, the guru we'll examine today, Martin Zweig, used a methodology that was dominated by earnings-based criteria. He looked at a stock's earnings from a myriad of angles, wanting to ensure that he was getting stocks that had been producing strong growth over the long haul and even better growth recently -- and that their growth was coming from the right sources. Zweig's thoroughness paid off. His Zweig Forecast was one of the most highly regarded investment newsletters in the country, ranking number one for risk-adjusted returns during the 15 years that Hulbert Financial Digest monitored it. It produced an impressive 15.9 percent annualized return during that time. Zweig has also managed several mutual funds, and was co-founder of Zweig Dimenna Partners, a multibillion-dollar New York-based firm that has been ranked in the top 15 of Barron's list of the most successful hedge funds. Before we delve into Zweig's strategy, a few words about the man himself. While some of the gurus we've looked at in recent Guru Spotlights -- Buffett and John Neff in particular come to mind -- lived modest lifestyles, Zweig put his fortune to use in some pretty fun, flashy ways. He has owned what Forbes reported was the most expensive apartment in New York City, a penthouse atop Manhattan's Pierre Hotel that was at one time valued at more than $70 million. He's also an avid collector of a variety of different kinds of memorabilia. The Wall Street Journal has reported that he's owned such one-of--a-kind items as Buddy Holly's guitar, the gun from Dirty Harry, the motorcycle from Easy Rider, and Michael Jordan's jersey from his rookie season with the Chicago Bulls. A Serious Strategy Zweig may spend his cash on some flashy, fun items, but the strategy he used to compile that cash was a disciplined, methodical approach. His earnings examination of a firm spanned several categories: Trend of Earnings: Earnings should be higher in the current quarter than they were a year ago in the same quarter. Earnings Persistence: Earnings per share should have increased in each year of the past five-year period; EPS should also have grown in each of the past four quarters (vs. the respective year-ago quarters). Long-Term Growth: EPS should be growing by at least 15 percent over the long term; a growth rate over 30 percent is exceptional. Earnings Acceleration: EPS growth for the current quarter (vs. the same quarter last year) should be greater than the average growth for the previous three quarters (vs. the respective three quarters from a year ago). EPS growth in the current quarter also should be greater than the long-term growth rate. These criteria made sure that Zweig wasn't getting in late on a stock that had great long-term growth numbers, but which was coming to the end of its growth run. While Zweig's EPS focus certainly puts him on the "growth" side of the growth/value spectrum, his approach was by no means a growth-at-all-costs strategy. Like all of the gurus I follow, he included a key value-based component in his method. He made sure that a stock's price/earnings ratio was no greater than three times the market average, and no greater than 43, regardless of what the market average was. (He also didn't like stocks with P/Es less than 5, because they could be indicative of an outright dog that investors were wisely avoiding.) In addition, Zweig wanted to know that a firm's earnings growth was sustainable over the long haul. And that meant that the growth was coming primarily from sales -- not cost-cutting or other non-sales measures. My Zweig model requires a firm's revenue growth to be at least 85 percent of EPS growth. If a stock fails that test but its revenues are growing by at least 30 percent a year, it passes, however, since that is still a very strong revenue growth rate. Like earnings growth, Zweig believed sales growth should be increasing. My model thus requires that a stock's sales growth for the most recent quarter (vs. the year-ago quarter) to be greater than the previous quarter's sales growth rate (vs. the year-ago quarter). Finally, Zweig also wanted to makes sure a firm's growth wasn't driven by unsustainable amounts of leverage (a key observation given all that's happened recently). Realizing that different industries require different debt loads, he looked for stocks whose debt/equity ratios were lower than their industry average. Macro Issues There's one more thing you should know about Zweig. He relied a good amount on technical factors to adjust how much of his portfolio he put into stocks. Some of the indicators he used to move in and out of the market included the Federal Reserve's discount rate; installment debt levels; and the prime rate. His mottos included "Don't fight the Fed" (meaning investors should be more bullish when interest rates were low or falling) and "Don't fight the tape" (which related to his practice of getting more bullish or bearish based on market trends). Those rules are tough for an individual investor to put into practice; Zweig used what he called a "Super Model" that meshed all of his indicators into a system that determined how bullish or bearish he was. But over the years, I've found that using only the quantitative, fundamental-based criteria Zweig outlined in his book can produce very strong results. My Zweig-inspired 10-stock portfolio has been a very strong performer since its July 2003 inception, returning 87.3%, or 7.0% per year, while the S&P 500 has gained just 39.4%, or 3.6% per year (through Nov. 7). This year has been a difficult one for the portfolio, which is down about 2% while the S&P is up about 11%. But its stellar long-term track record indicates that it should bounce back strong. The model tends to choose stocks from a variety of areas -- it goes where the growth is. Here are the portfolio's current holdings: Altisource Portfolio Solutions S.A. (ASPS) Fred's, Inc. (FRED) Monster Beverage Corp. (MNST) MWI Veterinary Supply (MWIV) Syntel, Inc. (SYNT) Triumph Group Inc. (TGI) World Acceptance Corp. (WRLD) LKQ Corporation (LKQ) Nu Skin Enterprises, Inc. (NUS) Duff & Phelps Corp. (DUF) As you might expect with a growth strategy, the Zweig portfolio tends not to hold on to stocks for a long time. Usually it will hold a stock for a few months, though it is not averse to longer periods if the stock continues to be a prospect for more growth. What I really like about the Zweig strategy is that, while it certainly would qualify as a growth approach, it doesn't look at growth in a vacuum. As you've seen, it examines earnings growth from a variety of angles, making sure that it is strong, improving, and sustainable. In doing so, it allows you to find some fast-growing growth stocks that are not paper tigers, but instead solid prospects for continued long-term success. News about Validea Hot List Stocks The TJX Companies Inc. (TJX): For the four-week period ended October 27, consolidated same-store sales at TJX rose 7.0% vs. the previous year, Zacks Equity Research reported, citing higher customer traffic in the U.S., Europe, and Canada. Total sales were up 11.0%. TJX also raised its third-quarter and full-year outlooks. The firm expects adjusted earnings of about 63 cents per share in the third quarter, up from the higher end of the 56 to 59 cents per share range. It expects adjusted earnings of $2.46 to $2.49 per share for the fiscal year. SolarWinds Inc. (SWI): On Oct. 25, SolarWinds announced third-quarter diluted third-quarter earnings per share of $0.29, up from $0.28 in the year-ago period. Total revenue was a record $71.7 million, up from $53.9 million a year earlier. The firm also said it was raising its full-year 2012 guidance, according to Reuters. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will rebalance the portfolio. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score GES GUESS?, INC. Retail (Apparel) 72 HFC HOLLYFRONTIER CORP Oil & Gas Operations 49 NOC NORTHROP GRUMMAN CORPORATION Aerospace & Defense 48 ALV AUTOLIV INC. Auto & Truck Parts 46 ROST ROSS STORES, INC. Retail (Apparel) 41 TJX THE TJX COMPANIES, INC. Retail (Apparel) 41 MWIV MWI VETERINARY SUPPLY, INC. Medical Equipment & Supplies 25 WRLD WORLD ACCEPTANCE CORP. Consumer Financial Services 18 NUS NU SKIN ENTERPRISES, INC. Personal & Household Prods. 15 SWI SOLARWINDS INC Software & Programming 5 Ticker Market Cap Date Added Start Price Current Price Return GES $1,953 9/28/2012 $25.42 $22.93 -9.8% HFC $8,232 8/31/2012 $40.29 $40.44 0.4% NOC $16,057 7/6/2012 $63.47 $65.42 3.1% ALV $5,380 10/26/2012 $55.99 $56.36 0.7% ROST $12,466 10/26/2012 $60.92 $55.67 -8.6% TJX $29,709 10/26/2012 $40.73 $40.36 -0.9% MWIV $1,365 10/26/2012 $103.75 $107.15 3.3% WRLD $849 8/31/2012 $73.00 $65.68 -10.0% NUS $2,710 8/31/2012 $41.49 $46.18 11.3% SWI $3,850 5/11/2012 $44.75 $51.69 15.5%

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 GES   |   HFC   |   NOC   |   ALV   |   ROST   |   TJX   |   MWIV   |   WRLD   |   NUS   |   SWI   |   GUESS?, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Guess?, Inc. (GUESS?) designs, markets, distributes and licenses apparel and accessories for men, women and children. The Company operates in five: Europe, North American Retail, Asia, North American Wholesale and Licensing. Its products are sold through retail, wholesale, e-commerce and licensing distribution channels. The lines include full collections of clothing, including jeans, pants, skirts, dresses, shorts, blouses, shirts, jackets, knitwear and intimate apparel. It also grant licenses to manufactures and distributes a range of products, including eyewear, watches, handbags, footwear, kids' and infants' apparel, leather apparel, swimwear, fragrance, jewelry and other fashion accessories. In fiscal 2012, it, along with its distributors and licensees, opened 224 stores in all concepts combined outside of the United Sates and Canada, which consisted of 120 stores in Europe and the Middle East, 89 stores in Asia and 15 stores in the combined area of Central and South America. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider GES a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (9.02) relative to the growth rate (39.29%), 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 GES (0.23) 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. GES, whose sales are $2,633.3 million, needs to have a P/E below 40 to pass this criterion. GES's P/E of (9.02) 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 GES is 39.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for GES (0.99%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for GES (7.89%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for GES (24.42%) 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: P/E/Growth Investor Based on: Peter Lynch 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: 93% DETERMINE THE CLASSIFICATION: This methodology would consider HFC a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (5.36) relative to the growth rate (40.58%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for HFC (0.13) 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. HFC, whose sales are $19,915.6 million, needs to have a P/E below 40 to pass this criterion. HFC's P/E of (5.36) 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 HFC was 4.81% last year, while for this year it is 7.22%. 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 (2.41%) 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 HFC is 40.6%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for HFC (25.21%) 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 HFC (11.05%) 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 HFC (6.00%) 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.   NORTHROP GRUMMAN CORPORATION Profile Strategy: Value Investor Based on: Benjamin Graham Northrop Grumman Corporation (Northrop Grumman) provides products, services, and integrated solutions in aerospace, electronics, information and services to its global customers. As of December 31, 2011, the Company operated in four segments: Aerospace Systems, Electronic Systems, Information Systems and Technical Services. The Company conducts most of its business with the United States Government, principally the Department of Defense (DoD) and intelligence community. It also conducts business with local, state, and foreign Governments and domestic and international commercial customers. Effective as of March 31, 2011, the company completed the spin-off of Huntington Ingalls Industries, Inc. (HII). HII operates the Company's former shipbuilding business. In September 2012, it acquired M5 Network Security Pty Ltd. Analysis Guru Score: 71% SECTOR: [PASS] NOC 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. NOC's sales of $25,248.0 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. NOC's current ratio of 1.39 fails the test. LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for NOC is $3,931.0 million, while the net current assets are $2,212.0 million. NOC fails 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. NOC's EPS growth over that period of 183.5% passes the EPS growth test. P/E RATIO: [PASS] The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. NOC's P/E of 10.70 (using the 3 year PE) passes this test. PRICE/BOOK RATIO: [PASS] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. NOC's Price/Book ratio is 1.47, while the P/E is 10.70. NOC passes the Price/Book test.   AUTOLIV INC. Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Autoliv, Inc. (Autoliv) is a holding company. Autoliv is the supplier of automotive safety systems, with a range of product offerings, including modules and components for passenger and driver-side airbags, side-impact airbag protection systems, seatbelts, steering wheels, safety electronics, whiplash protection systems and child seats, as well as night vision systems, radar and other active safety systems. Autoliv has two main operating segments: airbags/seatbelt (including restraint electronics) products and active safety electronics products. In addition, in April 2010, Autoliv Inc.'s Automotive Holding AS increased its stake in Norma AS from 51% to 93.74%. Additionally, Skandinaviska Enskilda Banken AB and ING Luxembourg SA sold their 6.67% and 10% stake, respectively, held in Norma AS. In November 2011, the Company acquired the airbag cushion cut&sew assets from Milliken. In June 2012, the Company sold its subsidiary Autoliv Mekan AB to Verktygs Allians i Hassleholm AB. 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. ALV's P/S of 0.65 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. ALV's Debt/Equity of 17.79% 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. ALV 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 ALV At this Point Is ALV 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.ALV's P/S ratio of 0.65 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%. ALV's inflation adjusted EPS growth rate of 19.24% 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. ALV's free cash per share of 2.52 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. ALV, whose three year net profit margin averages 5.34%, passes this evaluation.   ROSS STORES, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Ross Stores, Inc., along with its subsidiaries, operates two brands of off-price retail apparel and home fashion stores. As of January 28, 2012, the Company operated a total of 1,125 stores, of which 1,037 were Ross Dress for Less (Ross) locations in 29 states, the District of Columbia, and Guam, and 88 were dd's DISCOUNTS stores in seven states: 48 in California, 19 in Texas, 12 in Florida, four in Arizona, two in Georgia, two in Nevada, and one in Maryland. Ross focuses on customers primarily from middle income households, while dd's DISCOUNTS focuses on customers from more moderate income households. During the fiscal year ended January 28, 2012 (fiscal 2012), it opened 59 new Ross stores and closed ten existing stores. During fiscal 2011, it opened 21 new dd's DISCOUNTS stores. The average approximate dd's DISCOUNTS store size is 23,900 square feet. In April 2011, it purchased a 449,000 square foot warehouse for packaway storage in Riverside, California. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider ROST a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (17.29) relative to the growth rate (31.29%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for ROST (0.55) 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. ROST, whose sales are $9,142.0 million, needs to have a P/E below 40 to pass this criterion. ROST's P/E of (17.29) is considered acceptable. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for ROST is 31.3%, 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 ROST (9.01%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for ROST (2.35%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for ROST (4.01%) 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.   THE TJX COMPANIES, INC. Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher 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. 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. TJX's P/S ratio of 1.23 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. TJX's Debt/Equity of 23.19% 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. TJX 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 TJX At this Point Is TJX 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, TJX, who has a P/S of 1.23, 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%. TJX's inflation adjusted EPS growth rate of 19.15% 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. TJX's free cash per share of 1.08 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. TJX, whose three year net profit margin averages 6.18%, passes this evaluation.   MWI VETERINARY SUPPLY, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch MWI Veterinary Supply, Inc. (MWI) is a distributor animal health products to veterinarians across the United States and United Kingdom. The Company's products include pharmaceuticals, vaccines, parasiticides, diagnostics, capital equipment, supplies, specialty products, veterinary pet food and nutritional products. MWI markets the products to veterinarians in both the companion animal and production animal markets. The Company also offers its customers a variety of value-added services, including e-commerce platform, pharmacy fulfillment, inventory management system, equipment procurement consultation, special order fulfillment, educational seminars and pet cremation. On March 21, 2011, The Company acquired Nelson Laboratories Limited Partnership (Nelson). On October 31, 2011, the Company acquired substantially all of the assets of Micro Beef Technologies, Ltd. (Micro). Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider MWIV a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (25.34) relative to the growth rate (26.50%), 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 MWIV (0.96) 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. MWIV, whose sales are $2,075.2 million, needs to have a P/E below 40 to pass this criterion. MWIV's P/E of (25.34) 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 MWIV was 10.86% last year, while for this year it is 12.11%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (1.25%) 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 MWIV is 26.5%, 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 MWIV (13.50%) to be acceptable (equity is three to ten times debt). This ratio is one quick way to determine the financial strength of the company.   WORLD ACCEPTANCE CORP. Profile Strategy: Patient Investor Based on: Warren Buffett World Acceptance Corporation operates a small-loan consumer finance business in 12 states and Mexico. The Company is engaged in the small-loan consumer finance business, offering short-term small loans, medium-term larger loans, related credit insurance and ancillary products and services to individuals. As of March 31, 2012, the Company offered standardized installment loans through 1,137 offices in South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee, Illinois, Missouri, New Mexico, Kentucky, Alabama, Wisconsin, and Mexico. The Company serves individuals with limited access to consumer credit from banks, credit unions, other consumer finance businesses and credit card lenders. In the United States offices, the Company also offers income tax return preparation services to its customers and others. 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 1.25, 1.49, 1.74, 2.02, 2.51, 2.89, 3.43, 4.45, 5.63, 6.59. Buffett would consider WRLD's earnings predictable. In fact EPS have increased every year. WRLD's long term historical EPS growth rate is 20.8%, based on the 10 year average EPS growth rate. 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 WRLD, over the last ten years, is 19.2%, 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 19.0%, 17.9%, 17.4%, 17.6%, 20.4%, 20.1%, 18.8%, 19.2%, 20.0%, 21.9%, and the average ROE over the last 3 years is 20.3%, thus passing this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON ASSETS: [PASS] Buffett also requires, for financial companies, that the average Return On Assets (ROA) be at least 1% and consistent. Return On Assets is defined as the net earnings of the business divided by the total assets of the business. The average ROA for WRLD, over the last ten years, is 11.2%, which is high enough to pass. It is not enough that the average be at least 1%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROA must be at least 1% for Buffett to feel comfortable that the ROA is consistent. The ROA for the last 10 years, from earliest to latest, is 9.7%, 10.7%, 11.2%, 11.1%, 10.7%, 9.7%, 10.6%, 12.4%, 13.3%, 12.5%, thus passing this criterion. LOOK AT CAPITAL EXPENDITURES: [PASS] Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. WRLD's free cash flow per share of $13.84 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 $32.00 and compares it to the gain in EPS over the same period of $5.34. WRLD's management has proven it can earn shareholders a 16.7% 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. WRLD's shares outstanding have fallen over the past five years from 16,280,001 to 13,000,000, 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 WRLD quantitatively. STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return. CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail] Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $7.19 and divide it by the current market price of $65.68. An investor, purchasing WRLD, could expect to receive a 10.95% initial rate of return. Furthermore, he or she could expect the rate to increase 20.8% per year, based on the 10 year average EPS 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 WRLD's initial yield of 10.95%, which will expand at an annual rate of 20.8%, based on the 10 year average EPS 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] WRLD currently has a book value of $30.41. It is safe to say that if WRLD can preserve its average rate of return on equity of 19.2% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 19.2% and it will have a book value of $176.34 in ten years. If it can still earn 19.2% on equity in ten years, then expected EPS will be $33.89. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $33.89 and multiply them by the lower of the 5 year average P/E ratio (9.2) or current P/E ratio (current P/E in this case), which is 9.1 and you get WRLD's projected future stock price of $309.74. 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 $309.74. These numbers indicate that one could expect to make a 16.8% average annual return on WRLD'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 20.8%, based on the 10 year average EPS growth rate, you can project EPS in ten years to be $47.38. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (9.2) or current P/E ratio (current P/E in this case), which is 9.1. This equals the future stock price of $433.07. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $433.07. 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 $65.68 and the future expected stock price, including the dividend pool, of $433.07. If you were to invest in WRLD at this time, you could expect a 20.8% average annual return on your money. Buffett would consider this a great return. LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [PASS] Based on the two different methods, you could expect an annual compounding rate of return somewhere between 16.8% and 20.8%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 18.8% on WRLD stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   NU SKIN ENTERPRISES, INC. Profile Strategy: Value Investor Based on: Benjamin Graham Nu Skin Enterprises, Inc. is a global direct selling company with operations in 52 markets worldwide. The Company develops and distributes anti-aging personal care products and nutritional supplements under its Nu Skin and Pharmanex brands, respectively. The Company operates through a direct selling model with independent distributors in all of its markets except Mainland China. As of December 31, 2011, the Company had more than 850,000 distributors. The Company has two primary product categories, each operating under its own brand. It markets its personal care products under the Nu Skin brand and its nutritional supplements under the Pharmanex brand. During the year ended December 31, 2011, approximately 88% of its revenues came from its markets outside of the United States. On December 13, 2011, the Company acquired LifeGen Technologies, LLC (LifeGen). Analysis Guru Score: 71% SECTOR: [PASS] NUS 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. NUS's sales of $2,076.7 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. NUS's current ratio of 2.01 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 NUS is $182.8 million, while the net current assets are $304.5 million. NUS 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. NUS's EPS growth over that period of 164.1% 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. NUS's P/E of 23.50 (using the 3 year 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. NUS's Price/Book ratio is 4.93, while the P/E is 23.50. NUS fails the Price/Book test.   SOLARWINDS INC Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool SolarWinds, Inc. (SolarWinds) designs, develops, markets, sells and supports enterprise information technology (IT), infrastructure management software to IT professionals in organizations of all sizes. The Company's product offerings range from individual software tools to more comprehensive software products that solve problems encountered by IT professionals. Its products are designed to help management of their infrastructure, including networks, applications, storage and physical and virtual servers, as well as products for log and event management. It offers a portfolio of products for IT infrastructure management. Its products operate in three categories: Free Tools, Transactional Products and Core Products. In January 2011, it acquired Hyper9, Inc. (Hyper9). In July 2011, it acquired TriGeo Network Security, Inc. (TriGeo). In October 2011, it acquired DNS Enterprise, Inc. (DNS). In December 2011, it acquired certain assets of DameWare Development LLC (DameWare). Analysis Guru Score: 76% 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. SWI's profit margin of 30.01% passes this test. RELATIVE STRENGTH: [PASS] The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. SWI, with a relative strength of 93, satisfies this test. 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 SWI (7.14% for EPS, and 32.94% for Sales) are not good enough to pass. INSIDER HOLDINGS: [FAIL] SWI's insiders should own at least 10% (they own 0.63%) of the company's outstanding shares. This does not satisfy the minimum requirement, and companies that do not pass this criteria are less attractive. 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. SWI's free cash flow of $1.45 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] SWI's profit margin has been consistent or even increasing over the past three years (Current year: 31.48%, Last year: 29.37%, Two years ago: 25.34%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. R&D AS A PERCENTAGE OF SALES: [PASS] SWI is either maintaining the same levels of R&D expenditures(currently $21.3 million) or increasing these levels which is a good sign. This allows the company to develop the superior technology and new products that will put everyone else out of business. This criterion is particularly important for high-tech and medical stocks because they are so R&D dependant. CASH AND CASH EQUIVALENTS: [PASS] SWI's level of cash $152.4 million passes this criteria. If a company is a cash generator, like SWI, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. 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 SWI was 20.08% last year, while for this year it is 13.65%. Since the AR to sales is decreasing by -6.43% the stock passes this criterion. LONG TERM DEBT/EQUITY RATIO: [PASS] SWI'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): [FAIL] The "Fool Ratio" is an extremely important aspect of this analysis. The methodology says consider shorting shares when the company's Fool Ratio is greater than 1.30. SWI's PEG Ratio of 1.48 is very high. The following criteria for SWI are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] SWI has not been significantly increasing the number of shares outstanding within recent years which is a good sign. SWI currently has 76.0 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. SWI's sales of $251.0 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". SWI passes the sales test. DAILY DOLLAR VOLUME: [FAIL] SWI does not pass the Daily Dollar Volume (DDV of $46.2 million) test. It exceeds the maximum requirement of $25 million. Stocks that fail the test are too liquid for a small individual investor and many institutions have already discovered it. PRICE: [PASS] This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. SWI with a price of $51.69 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] SWI's income tax paid expressed as a percentage of pretax income this year was (26.37%) and last year (26.82%) 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.   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 MAIN MAIN STREET CAPITAL CORPORATION Misc. Financial Services 61 WFM WHOLE FOODS MARKET, INC. Retail (Grocery) 50 PCS METROPCS COMMUNICATIONS INC Communications Services 48 FINL FINISH LINE INC Retail (Apparel) 46 DCM NTT DOCOMO INC (ADR) Communications Services 46 ACAT ARCTIC CAT INC Auto & Truck Manufacturers 45 WDC WESTERN DIGITAL CORP. Computer Storage Devices 42 HAR HARMAN INTERNATIONAL INDUSTRIES INC./DE/ Audio & Video Equipment 39 MRVL MARVELL TECHNOLOGY GROUP LTD. Semiconductors 39 PII POLARIS INDUSTRIES INC. Recreational Products 38

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