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Executive Summary	May 29, 2009

The Economy While a number of fears -- some well-deserved -- are still hanging over the economy, the past two weeks have seen the rise of some very real economic "green shoots", to use what has become the phrase-of-the-day in financial news. For starters, the credit markets -- whose grinding halt was perhaps the most significant part of the crisis that sent the market reeling last September -- are showing major signs of improvement. In fact, Bloomberg News reported this week that "by almost any measure, credit markets have recovered most of the losses caused by September's collapse of Lehman Brothers". The Libor-OIS spread, which measures banks' reluctance or willingness to lend, fell to just 0.45 percentage point this week, the lowest level in almost 16 months and less than one-eighth of what the spread was in October, when fears were raging, according to Bloomberg. In addition, yesterday the Federal Reserve announced that, for the second week in a row, no investment firms took loans from its emergency lending program in the week ending May 27. Prior to these past two weeks, the last time that happened was early September, according to the Associated Press. The housing market -- whose woes have gone hand in hand with the credit market's -- is giving a much more mixed picture. The National Association of Home Builders said last week that its housing market index rose in May, the second straight month it increased. The report reflected growing optimism among builders, AP reported. Existing home sales, meanwhile, rose almost 3% in March, the National Association of Realtors said this week, another good sign. Much of that increase was due to more action in the lower-priced areas of the market, however. Home prices fell in March in 17 of the 20 metro areas tracked by the S&P/Case-Shiller Home Price Index, falling an average of 2.2%. For the housing market, however, the real bad news came yesterday, when the Mortgage Bankers Association reported that more than 12% of U.S. mortgage holders were in foreclosure or at least one payment past due, the highest level registered since the group started tracking the figure. Equally troubling: Prime fixed-rate loans -- those given to borrowers with good credit -- now represent the largest portion of foreclosures, more than the subprime loans that caused so much trouble over the past year. The reason: As the recession has worn on, more and more people have lost their jobs or had their hours cut, causing them to default. Despite the continued housing troubles, the market kept rising over the past two weeks, as other signs of hope popped up. The Commerce Department reported this week that durable goods orders -- a key measure of business confidence -- rose almost 2% in April, the biggest increase since December 2007. Just as businesses are expressing a more hopeful outlook, so too are consumers. The Conference Board's Consumer Confidence Index jumped in May, rising 35%. It was the second straight month the index has increased, rising to its highest point since September of last year. A Conference Board official said that, while confidence levels are still weak by historical standards, "as far as consumers are concerned, the worst is now behind us" -- a hopeful sign in an economy largely driven by consumer spending. Employment figures also offered a bit of hope recently, with new jobless claims coming in less than expected last week. New claims are thus continuing to trend downward from their March high. All of this was positive enough on balance to help push the S&P 500 up another 1.5% over the past fortnight, as the index continued the climb it began in early March. The Hot List fared even better, jumping 7.7%. That puts the portfolio up 16.0% in 2009, while the S&P is up 0.4%. Since its inception in July 2003, the Hot List also remains well ahead of the market, having gained 90.2% versus the S&P's -9.4% decline. The Missing Piece As the markets have continued to rise, many pundits and strategists have warned that a correction is coming, and have cited the swiftness and steepness of the recent climb as a reason. Time to sell off a lot of stocks, they say, and take whatever profits you've scooped up in the past 11 or so weeks. In our past two newsletters, I've taken issue with such claims. I wouldn't be shocked if there were some sort of correction, but the bottom line is that I still believe the proposition of selling off stocks that remain attractively priced in order to avoid a correction that may or may not come is not worth the risk. All of this begs an important question, however: When should you sell a stock? When it has gained a specific amount? Lost a specific amount? When certain economic indicators turn negative? It's a critical and often overlooked component of portfolio strategy, one so important that I dedicated an entire chapter to it in my latest book, The Guru Investor. Given the current market conditions, I thought it would be a good time to take a look at an excerpt from that critical chapter. (Note: I've edited the following excerpt for length. This portion of the chapter deals with the fundamental reasons for selling stocks. You should be aware that another factor that can come into play in sell decisions -- though to a much lesser degree, in my opinion -- is the tax status of your account.). The Missing Piece: Determining When to Sell While a lot of strategies out there tell you how to buy stocks that will make nice gains, there are few that address the second half of the stock investing equation: when to sell - the proverbial brakes on our car. It's amazing, really, because for many investors, deciding when to sell is a harder decision than deciding what to buy. Cabot Research, a behavioral finance consulting firm, has found that even top-performing mutual fund managers may be missing out on 100 to 200 basis points per year because of poor sell decisions, Institutional Investors Amy Feldman noted in a June 13, 2008 article entitled "Know When To Fold 'em" Seeing as how amateur investors tend to do much worse than the pros (as we learned in Chapter 1), it's likely that the average, nonprofessional investor suffers even greater losses because of poor sell decisions. Part of the reason investors struggle with selling is that advice on the topic is somewhat lacking in the investment world. A survey performed by Cabot and the CFA Institute found that more than 70 percent of professional investors used a selling approach that was not highly disciplined or driven by research and objective criteria, Feldman noted in her piece, so it seems most of the pros aren't offering a whole lot of guidance here. But another part of why sell decisions are so hard involves an old, familiar foe: our own brains. Just as our brains tell us to avoid unpopular stocks and jump on hot stocks when we're buying, they also cause havoc when we're trying to figure out when we should sell a stock. If you've ever put money into the market, you've almost surely found this out the hard way. A few phenomena make selling and sticking to a selling plan a difficult task. For starters, there's the "fear of regret." When we make an error in judgment, we feel badly; often, we'll beat ourselves up with "woulda-coulda-shoulda" thinking, which is never pleasant. And that's certainly true when we take a loss on a stock. Hindsight is always 20/20, and we end up thinking that we could have easily avoided what turned out to be a bad move. Because of the unpleasantness of those feelings, one theory on why people sell at the wrong time is that they avoid selling stocks that have lost value, instinctively wanting to postpone those feelings of pain and regret, even if those stocks now have little prospect of rebounding. This is similar to the concept of "myopic loss aversion" that we examined in the previous chapter. In his 1999 paper, "The End of Behavioral Finance," Professor Richard H. Thaler of the Chicago University explains that loss aversion refers to the observed tendency for decision makers to weigh losses more heavily than gains; losses hurt roughly twice as much as gains feel good. Locking in losses thus hurts a lot so we'll avoid selling stocks for a loss even after they no longer have good prospects to delay that hurt. Why are losses so painful? The fact that they are a shot to our egos seems to be part of the reason. Professors Kent Daniel and Sheridan Titman state that people tend to ignore or underweight information that lowers their self-esteem in "Market Efficiency in an Irrational World," which appeared in the 1999 volume of the Financial Analyst Journal. "For example," they write, "investors may be reluctant to sell their losers because it requires that they admit to making a mistake, which could lead to a loss in confidence and have deleterious consequences. For similar reasons, investors may systematically overweight information that tends to support their earlier decisions and to filter out information that suggests the earlier decisions were mistakes." Essentially, we'll twist the facts to avoid admitting mistakes so that we feel better about ourselves, and our stock-picking abilities. That keeps us from feeling badly about ourselves, but it also keeps us from learning from those mistakes. Another common mistake many investors make is holding on to winners too long. In his 2001 book Navigate the Noise: Investing in the New Age of Media and Hype, Richard Bernstein notes that growth fund managers often do just that because they are encouraged to do so by all the good news regarding companies' prospects. A perfect example would seem to be the tech stock boom of the late 1990s. Blinded by the hype, most of those people who had made huge sums of money ignored logic and held on to their stocks too long, only to see them come crashing down. Selling Smart So with all of these challenges, how do you stave off emotion and make good, sensible sell decisions? The same way that you keep emotion at bay when deciding what stocks to buy: By using a disciplined system that makes sell decisions based on cold, hard fundamentals, not emotion-driven hunches, or arbitrary price targets. That's what we've done with our model portfolios, as well as with our investment management business, and we think that's a big reason why the results have been so good. To understand how and why our sell system works, you have to go back to the basic premise behind our buy strategy. And that is that over the long term, investors gravitate toward stocks with strong fundamentals because those are the strongest companies, and that causes those stocks' prices to rise over time. We buy because of the fundamentals not just because the price is high or low or rising or falling. Remember, the only way price comes into the decision to buy is in how it relates to the stock's fundamentals that is, in the form of such variables as the price-sales ratio or price-earnings ratio. When you're building your portfolio, then, you want to pick the stocks that have the best fundamentals because (sorry to sound like a broken record) over the long run, investors gravitate toward stocks with strong fundamentals because they are the strongest companies. Okay, great, you're saying, but that's buying stocks; we've already covered that. What does this have to do with selling stocks? Well, it has everything to do with selling. If you're buying stocks because they have strong fundamentals, and (everyone now), over the long term, stocks with strong fundamentals tend to rise, you should hold on to a stock as long as it continues to meet the fundamental criteria you used to select it. Whether the stock has dropped sharply since you bought it or whether it has skyrocketed is no matter; what matters is where the stock's fundamentals stand right now. Price, just as with buying, matters only in terms of how it relates to the fundamentals (what the stock's P/E or P/S ratios are, for example). Many investors will sell a stock because its price has fallen and they think they need to cut their losses, or because the price has risen and they think the "smart" thing to do is to take the profits rather than risk the stock coming back down. But those are arbitrary, emotional decisions. Remember, you bought the stock because its strong fundamentals made it a good bet to gain value; if its fundamentals are still strong, why wouldn't it still be a good bet to gain more value? If the stock's fundamentals have slipped, however, so that it no longer meets the criteria you used to buy it, it's time to sell and replace it with another stock that does meet your criteria (and one that thereby has better prospects of rising in value). The selling assessment is thus an ongoing reevaluation of where a stock stands right now. You must continually reassess what the stock's prospects are going forward, not what they were a month ago, six months ago, or whenever you bought it. The next question, then, is what "continually assess" means. Should you check once a day to make sure your holdings still meet your criteria? Once a week? Once a month? Once a year? Since mid-2003 we've been running model portfolios based on each of our Guru Strategies. For each model, we've constructed separate portfolios that use different rebalancing periods - monthly, quarterly or annually. The model portfolio returns reported at the end of each guru chapter are those of our 10- and 20-stock portfolios using the monthly rebalancing period. On average, this monthly rebalancing tends to produce the highest raw return; the quarterly and annual portfolios, while still ahead of the market, tend to produce less excess return over the time period for which we have results. As of May 23, 2008, the average annualized gain for the 10 guru-based strategies discussed in this book was 16.2 percent when the portfolios were rebalanced monthly, 15.4 percent when rebalanced quarterly, and 10.4 percent when rebalanced annually. The prevalence of inexpensive discount brokerages has made trading very cost-effective today (especially for larger portfolios) and, for many reading this, a monthly portfolio rebalancing is attractive and can be done easily and cheaply with the right online broker. Nevertheless, it's important to understand that the monthly rebalancing approach does require more a bit more work, time, and commitment. If you're a busy professional, a retiree who likes to travel or a stay-at-home-mom with young children a less frequent rebalancing approach might work better for you and give you a better chance at following the strategy more consistently. So the important point here, whether you use a one-month rebalancing or a different time frame that works for you, is this -- you need to re-examine your portfolio at set intervals, to assess how your holdings stand relative to the reasons you bought them. If they no longer meet the criteria you used to pick them, you should consider replacing them with new stocks that do make the grade. You can also use your rebalancing period to reweight your portfolio in case some of your holdings have gained or lost a bunch, and now make up a disproportionate part of your portfolio. The idea here is to keep things close to equally weighted. It doesn't have to be perfect, though; if one stock gains a little ground so that it makes up a few more percentage points of your portfolio than the other stocks, you don't need to go selling a couple shares and getting hit with trading charges just to even things out exactly. To keep this simple, you might want to set a reweighting target percentage. For example, anytime a holding's weight in your portfolio becomes 10 percent more or less than your target weight, you buy or sell shares of it to bring it back to that target. By sticking to a firm rebalancing plan, you keep emotion and hype from impacting your selling decisions. You sell at regular intervals, and you sell based on fundamentals. Just as with buying stocks, there's no place for hunch-playing or knee-jerk reactions here. There are a couple rare occasions, however, when you should sell a stock without waiting for the rebalancing date to arrive. If a firm is involved or allegedly involved in a major accounting or earnings scandal, you should sell the stock immediately, because you can no longer trust its publicly disclosed financial data. In addition, if a firm has become a serious bankruptcy risk since the last rebalancing, you should also sell its stock immediately. Nobody's Perfect Another thing to keep in mind when it comes to selling stocks is that no investor, not even the greatest investors in the world, are right all the time. Remember what Martin Zweig says: "In the long run, a 60 percent success rate translates into huge gains, a 50 percent rate into solid gains, and even a 40 percent rate can beat the market." When it comes to the stock market, no one is right all the time or even nearly all the time. Even the great Warren Buffett makes bad investments. Just read Berkshire Hathaway's annual report, and Buffett will often speak candidly about where he's gone wrong. While you'll never be right all the time, you can be right more than you're wrong, however. In the end, the key is to develop a fundamental-based selling and rebalancing plan and stick with it, no matter what. When your portfolio does lose ground from time to time, you'll inevitably feel the urge to sell certain stocks and go after others on a whim or a hunch to make up ground. But if you have a detailed, quantitative selling system in place, you can help keep short-term emotions from wreaking havoc with your long-term performance.		Editor-in-Chief: John Reese Since Inception   Hot List 90.2% S&P 500 -9.4% Accuracy 55.6% Beta 1.2 YTD   Hot List 16.0% S&P 500 0.4% Since Last Issue   Hot List 7.7% S&P 500 1.5% Avg. Fundamentals   Market Cap (mil) $14,955 PE Ratio 11.0 5 Yr EPS Growth 34.5% Yield 2.0% Rel. Strength 61 Portfolio Sectors Energy 3 Services 3 Technology 1 Basic Materials 1 Capital Goods 1 Consumer Cyclical 1
Guru Investor Editor John Reese Announces Publication of New Book The Guru Investor shows you how to implement the strategies of Wall Street legends like Warren Buffett, Peter Lynch and Benjamin Graham in your own portfolio. Buy Your Copy Now! Guru Spotlight: Warren Buffett With his humble mid-west beginnings, plainspoken wisdom and wit, and incredible wealth, it's no wonder that Warren Buffett has become the most-watched investor in the world. But while the juxtaposition of Buffett's fortune (Forbes estimated his net worth at $37 billion earlier this year) with his love of simple pleasures (he's a big fan of Cherry Coke and cheeseburgers) is intriguing, the more important piece of the Buffett puzzle for investors is this: How did he do it? My Buffett-based Guru Strategy attempts to answer that question. Based on the approach Buffett reportedly used to build his fortune, it tries to use the same conservative, stringent criteria to choose stocks that the "Oracle of Omaha" has used in evaluating businesses. Before we get into exactly how this strategy works, a couple notes about Buffett and my Buffett-based strategy: First, while most of my Guru Strategies are based on published writings of the gurus themselves, Buffett has not publicly disclosed his exact strategy (though he has hinted at pieces of it). My Buffett-inspired model is based on the book Buffettology, written by Mary Buffett, Warren's ex-daughter-in-law, and David Clark, a Buffett family friend, both of whom worked closely with Buffett. Second, while most of my Buffett-based method centers on a company's fundamentals, there are a few non-statistical criteria to keep in mind. For example, Buffett likes to invest in companies that have very recognizable brand names, to the point that it is difficult for competitors to take away their market share, no matter how much capital they have. One example of a current Berkshire holding that meets this criterion is Coca-Cola, whose name is engrained in the culture of America, as well as other parts of the world. In addition, Buffett also likes firms whose products are simple for an investor to understand -- food, diapers, razors, to name a few examples. In the end, however, for Buffett, it comes down to the numbers -- those on a company's balance sheet and those that represent the price of its stock. In terms of the numbers on the balance sheet, one theme of the Buffett approach is solid results over a long period of time. He likes companies that have a lengthy history of steady earnings growth, and, in most cases, the model I base on his philosophy requires companies to have posted increasing earnings per share each year for the past ten years. There are a few exceptions to this, one of which is that a company's EPS can be negative or be a sharp loss in the most recent year, because that could signal a good buying opportunity (if the rest of the company's long-term earnings history is solid). Another part of Buffett's conservative approach: targeting companies with manageable debt. My model calls for companies to have the ability to pay off their debt within five years, based on their current earnings. It really likes stocks that could pay off their debts in less than two years. Smart Management, and an Advantage Two qualities Buffett is known to look for in his buys are strong management and a "durable competitive advantage". Both of those are qualitative things, but Buffett has used certain quantitative measures to get an idea of whether a firm has those qualities. Two of those measures are return on equity and return on total capital. The model I base on Buffett's approach likes firms to have posted an average ROE of at least 15% over the past 10 years and the past three years, and an ROTC of at least 12 percent in those time frames. Another way Buffett examines a firm's management is by looking at how the it spends the company's retained earnings -- that is, the earnings a company keeps rather than paying out in dividends. My Buffett-based model takes the amount a company's earnings per share have increased in the past decade and divides it by the total amount of retained earnings over that time. The result shows how much profit the company has generated using the money it has reinvested in itself -- in other words, how well management is using retained earnings to increase shareholders' wealth. The Buffett method requires a firm to have generated a return of 15 percent or more on its retained earnings over the past decade. One more area Buffett examines: capital expenditures. He doesn't like to invest in companies that must spend a lot of money on major facility or equipment upgrades, or that need to spend a lot of money on research and development to stay competitive. My Buffett-based model thus looks for companies that have positive free cash flows, an indication that the company is generating more cash than it is consuming. The Price: Is It Right? The criteria we've covered so far all are used to identify "Buffett-type" stocks. But there's a second critical part to Buffett's analysis: price -- can he get the stock of a quality company at a good price? One way my Buffett-based model answers this question is by comparing a company's initial expected yield to the long-term treasury yield. (If it's not going to earn you more than a nice, safe T-Bill, why take the risk involved in a stock?) To predict where a stock will be in the future, Buffett uses not just one, but two different methods to estimate what the company's earnings and stock's rate of return will be 10 years from now. One method involves using the firm's historical return on equity figures, while another uses earnings per share data. (You can find details on these methods by viewing an individual stock's scores on the Buffett model on Validea.com, or in my new book, The Guru Investor.) This notion of predicting what a company's earnings will be in 10 years may seem to run counter to Buffett's nonspeculative ways. But while using these methods to predict a company's earnings for the next 10 years in her book, Mary Buffett notes: "In most situations this would be an act of insanity. However, as Warren has found, if the company is one of sufficient earning power and earns high rates of return on shareholders' equity, created by some kind of consumer monopoly, chances are good that accurate long-term projections of earnings can be made." A Strong Rebounder My Buffett-based 10-stock portfolio is well ahead of the S&P 500 since its December 2003 inception. Where the model has really excelled, however, is coming out of downturns. In 2004, as we were emerging from the lengthy recession associated with the tech stock bust, the Buffett portfolio surged 37.3%, more than quadrupling the S&P's 9% gain. In addition, after struggling in 2007 and 2008 amid the latest recession and bear market, the portfolio has bounced back strong this year as things have begun to turn around. The portfolio is up 16.8% in 2009 -- including 30.7% in the past three months -- while the S&P is up 0.4% for the year. It's no surprise given Buffett's penchant for pouncing on good, beaten down stocks, which usually abound during tough times as investors let fear get the best of them. (One of Buffett's mantras is that investors "should try to be fearful when others are greedy and greedy only when others are fearful.") These stocks are not the kind of sexy, flavor-of-the-month picks that catch most investors' eyes; instead, they are proven businesses selling at good prices. That approach, combined with a long-term perspective, tremendous discipline, and an ability to keep emotions at bay, is how Buffett has become the world's greatest investor. Whatever the size of your portfolio, those qualities are worth emulating. News about Validea Hot List Stocks NetEase.com Inc. (NTES): On May 20, NetEase reported a first-quarter profit of 416.7 million renminbi ($61 million, or $0.47 per American Depository share), up 55 percent from 269.4 million renminbi a year earlier. Revenue increased 20 percent to 781.7 million renminbi ($114.4 million), the Associated Press reported, adding that analysts were expecting a profit of $0.46 per ADS on sales of $116.3 million. The results were boosted by strong user loyalty for the firm's games and "robust online communities," while the sales numbers missed analysts' expectations because of weak advertising revenue, AP stated. Lufkin Industries Inc. (LUFK): As oil prices continued to climb, Lufkin gained almost 15% over the past two weeks (through yesterday's close), making it the Hot List's biggest gainer since our last newsletter. 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 JOSB JOS. A. BANK CLOTHIERS, INC. Retail (Apparel) 76 AMN AMERON INTERNATIONAL CORPORATION Constr. - Supplies & Fixtures 72 SCHN SCHNITZER STEEL INDUSTRIES, INC. Iron & Steel 72 CTAS CINTAS CORPORATION Personal Services 61 CVX CHEVRON CORPORATION Oil & Gas - Integrated 57 NTES NETEASE.COM, INC. (ADR) Computer Services 55 LUFK LUFKIN INDUSTRIES, INC. Oil Well Services & Equipment 37 BJS BJ SERVICES COMPANY Oil Well Services & Equipment 37 DBRN THE DRESS BARN, INC. Retail (Apparel) 35 DECK DECKERS OUTDOOR CORPORATION Footwear 18 Ticker Market Cap Date Added Start Price Current Price Return JOSB $680 2/20/2009 $23.85 $37.19 55.9% AMN $488 12/26/2008 $56.33 $53.06 -5.8% SCHN $1,499 1/23/2009 $37.18 $53.20 43.1% CTAS $3,760 5/15/2009 $24.94 $24.61 -1.3% CVX $131,928 5/15/2009 $65.88 $65.81 -0.1% NTES $4,384 5/15/2009 $30.45 $34.25 12.5% LUFK $649 5/15/2009 $38.03 $43.68 14.9% BJS $4,477 4/17/2009 $12.93 $15.33 18.6% DBRN $935 5/15/2009 $14.23 $15.55 9.3% DECK $745 5/15/2009 $48.85 $56.77 16.2%

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 JOSB   |   AMN   |   SCHN   |   CTAS   |   CVX   |   NTES   |   LUFK   |   BJS   |   DBRN   |   DECK   |   JOS. A. BANK CLOTHIERS, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool Jos. A. Bank Clothiers, Inc. (Jos. A. Bank) is a designer, retailer and direct marketer (through stores, catalog and Internet) of men's tailored and casual clothing and accessories. It sells all of its products exclusively under the Jos. A. Bank label through its 460 retail stores (as of January 31, 2009, which includes seven outlet stores and 12 franchise stores) located throughout 42 states and the District of Columbia in the United States, as well as through the Company's nationwide catalog and Internet (www.josbank.com) operations. Its products are targeted at the male career professional and emphasize the Jos. A. Bank brand of tailored and casual clothing and accessories. The Company's products, which range from the original Jos. A. Bank Executive collection to the more luxurious Jos. A. Bank Signature collection to the exclusive Jos. A. Bank Signature Gold collection. Jos. A. Bank operates through two segments: Stores and Direct Marketing. 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. JOSB's profit margin of 8.39% 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. JOSB, with a relative strength of 96, 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 JOSB (14.58% for EPS, and 18.96% for Sales) are not good enough to pass. INSIDER HOLDINGS: [FAIL] JOSB's insiders should own at least 10% (they own 3.23%) 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. JOSB's free cash flow of $2.08 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] JOSB's profit margin has been consistent or even increasing over the past three years (Current year: 8.39%, Last year: 8.31%, Two years ago: 7.91%), 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 JOSB's case. CASH AND CASH EQUIVALENTS: [PASS] JOSB's level of cash $122.9 million passes this criteria. If a company is a cash generator, like JOSB, 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 JOSB was 34.24% last year, while for this year it is 30.07%. Since the inventory to sales is decreasing by -4.17% the stock passes this criterion. ACCOUNT RECEIVABLE TO SALES: [PASS] This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for JOSB was 2.15% last year, while for this year it is 1.67%. Since the AR to sales is decreasing by -0.49% the stock passes this criterion. LONG TERM DEBT/EQUITY RATIO: [PASS] JOSB'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's Fool Ratio is between 0.5 and 0.65 (JOSB's is 0.52), the company demonstrates excellence in its fundamentals and have soundly beat the earnings estimates. JOSB passes this test. The following criteria for JOSB are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] JOSB has not been significantly increasing the number of shares outstanding within recent years which is a good sign. JOSB currently has 18.0 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: [FAIL] 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. JOSB's sales of $695.9 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years. DAILY DOLLAR VOLUME: [PASS] JOSB passes the Daily Dollar Volume (DDV of $24.1 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. JOSB with a price of $37.19 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] JOSB's income tax paid expressed as a percentage of pretax income this year was (39.14%) and last year (40.51%) 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.   AMERON INTERNATIONAL CORPORATION Profile Strategy: Value Investor Based on: Benjamin Graham Ameron International Corporation (Ameron) is a multinational manufacturer of engineered products and materials for the chemical, industrial, energy, transportation and infrastructure markets. It has three segments: Fiberglass-Composite Pipe Group, Water Transmission Group and Infrastructure Products Group. The Fiberglass-Composite Pipe Group manufactures and markets filament-wound and molded fiberglass pipe, tubing, fittings and well screens.The Water Transmission Group manufactures and supplies concrete and steel pressure pipe, concrete non-pressure pipe, protective linings for pipe and fabricated steel products, such as large-diameter wind towers. The Infrastructure Products Group consists of two operating segments, which are aggregated: the Hawaii Division and the Pole Products Division. In October 2007, Ameron acquired the business of Polyplaster, Ltda., a Brazilian fiberglass-pipe operation. Analysis Guru Score: 100% SECTOR: [PASS] AMN 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. AMN's sales of $663.8 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. AMN's current ratio of 3.03 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 AMN is $35.5 million, while the net current assets are $283.0 million. AMN 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. AMN's EPS growth over that period of 120.1% 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. AMN's P/E of 9.25 (using the current PE) passes this test. PRICE/BOOK RATIO: [PASS] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. AMN's Price/Book ratio is 1.03, while the P/E is 9.25. AMN passes the Price/Book test.   SCHNITZER STEEL INDUSTRIES, INC. Profile Strategy: Value Investor Based on: Benjamin Graham Schnitzer Steel Industries, Inc. is a recycler of ferrous and non-ferrous metals. The Company is a recycler of used and salvaged vehicles, and a manufacturer of finished steel products. The Company provides an end of life cycle solution for a variety of products through its vertically integrated businesses, including sale of used auto parts, procuring autobodies and other metal products and manufacturing them into finished steel products. It operates in three business segments: the Metals Recycling Business (MRB), the Auto Parts Business (APB) and the Steel Manufacturing Business (SMB). In September 2007, the Company acquired a mobile metals recycling business that provides additional sources of scrap metal to the Everett, Massachusetts facility. In February 2008, it acquired the remaining 50% equity interest in Pick-N-Pull Auto Dismantlers, LLC Nevada. In August 2008, the Company acquired a self-service used auto parts business with three locations in the Southern United States. Analysis Guru Score: 100% SECTOR: [PASS] SCHN 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. SCHN's sales of $3,218.4 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. SCHN's current ratio of 2.64 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 SCHN is $130.6 million, while the net current assets are $268.1 million. SCHN 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. SCHN's EPS growth over that period of 2,646.9% 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. SCHN's P/E of 10.51 (using the current PE) passes this test. PRICE/BOOK RATIO: [PASS] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. SCHN's Price/Book ratio is 1.60, while the P/E is 10.51. SCHN passes the Price/Book test.   CINTAS CORPORATION Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Cintas Corporation (Cintas) provides specialized products and services to businesses of all types throughout the United States and Canada. The products and services provided by Cintas include uniforms and apparel, mats, mops and towels, restroom and hygiene service, first aid, safety, fire protection, branded promotional products, document shredding and storage, cleanroom resources and flame resistant clothing. The Company operates in four operating segments: Rental Uniforms and Ancillary Products, Uniform Direct Sales, First Aid, Safety and Fire Protection Services and Document Management Services. 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. CTAS, with a market cap of $3,760 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. CTAS, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.58, 1.69, 1.92, 2.09 and 2.15, 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. CTAS's Price/Sales ratio of 0.96, 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. CTAS, whose relative strength is 79, is in the top 50 and would pass this last criterion.   CHEVRON CORPORATION Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Chevron Corporation (Chevron) manages its investments in subsidiaries and affiliates, and provides administrative, financial, management and technology support to the United States and International subsidiaries that engage in fully integrated petroleum operations, chemicals operations, mining operations of coal and other minerals, power generation and energy services. Exploration and production (upstream) operations consist of exploring for, developing and producing crude oil and natural gas, and also marketing natural gas. Refining, marketing and transportation (downstream) operations relate to refining crude oil into finished petroleum products; marketing crude oil and the many products derived from petroleum, and transporting crude oil, natural gas and petroleum products by pipeline, marine vessel, motor equipment and rail car. In April 2009, Reliance Industries Limited bought back Chevron Corporation's 5% stake in Reliance Petroleum Limited. Analysis Guru Score: 100% MARKET CAP: [PASS] The Cornerstone Value Strategy looks for large, well known companies whose market cap is greater than $1 billion. These companies exhibit solid and stable earnings. CVX's market cap of $131,928 million passes this test. CASH FLOW PER SHARE: [PASS] The second criterion requires that the company exhibit strong cash flows. Companies with strong cash flow are typically the value oriented investments that this strategy looks for. The company's cash flow per share must be greater than the mean of the market cash flow per share ($0.60). CVX's cash flow per share of $15.38 passes this test. SHARES OUTSTANDING: [PASS] This particular strategy looks for companies whose total number of outstanding shares are in excess of the market average (598 million shares). These are the more well known and highly traded companies. CVX, who has 2,000 million shares outstanding, passes this test. TRAILING 12 MONTH SALES: [PASS] A company's trailing 12 month sales ($243,189 million) are required to be 1.5 times greater than the mean of the market's trailing 12 month sales ($17,788 million). CVX passes this test. DIVIDEND: [PASS] The final step in the Cornerstone Value strategy is to select the 50 companies from the market leaders group (those that have passed the previous four criteria) that have the highest dividend yield. CVX, with a dividend yield of 3.95%, is one of the 50 companies that satisfy this last criterion.   NETEASE.COM, INC. (ADR) Profile Strategy: Growth Investor Based on: Martin Zweig NetEase.com, Inc. operates an interactive online community in China, and is a provider of Chinese language content and services through its online games, Internet portal and wireless value-added services businesses. The Company generates revenues from fees it charge users of its online games and from selling advertisements on the NetEase Websites, and to a much lesser extent, of wireless value-added and other fee-based services. The Company's basic service offerings on the NetEase Websites are available without charge to its users. Analysis Guru Score: 85% P/E RATIO: [PASS] The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. NTES's P/E is 17.33, based on trailing 12 month earnings, while the current market PE is 14.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [PASS] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. NTES's revenue growth is 33.79%, while it's earnings growth rate is 34.88%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, NTES passes this criterion. SALES GROWTH RATE: [FAIL] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (20.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (32.7%) of the current year. Sales growth for the prior must be greater than the latter. For NTES this criterion has not been met and fails this test. The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria. CURRENT QUARTER EARNINGS: [PASS] The first of these criteria is that the current EPS be positive. NTES's EPS ($0.02) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. NTES's EPS for this quarter last year ($0.01) pass this test. POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: [PASS] The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. NTES's growth rate of 100.00% passes this test. EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: [FAIL] Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for NTES is 17.44%. This should be less than the growth rates for the 3 previous quarters which are 100.00%, 0.00% and 50.00%. NTES does not pass this test, which means that it does not have good, reasonably steady earnings. This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: [PASS] If the growth rate of the prior three quarter's earnings, 50.00%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 100.00%, (versus the same quarter one year ago) then the stock passes. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: [PASS] The EPS growth rate for the current quarter, 100.00% must be greater than or equal to the historical growth which is 34.88%. NTES would therefore pass this test. EARNINGS PERSISTENCE: [PASS] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. NTES, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.02, 0.04, 0.05, 0.06 and 0.07, passes this test. LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. NTES's long-term growth rate of 34.88%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. TOTAL DEBT/EQUITY RATIO: [PASS] A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. NTES's Debt/Equity (0.00%) is not considered high relative to its industry (109.72%) and passes this test. INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For NTES, this criterion has not been met (insider sell transactions are 0, while insiders buying number 0). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.   LUFKIN INDUSTRIES, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Lufkin Industries, Inc., is a supplier of oil field and power transmission products. The Company is divided into two operating segments: Oil Field and Power Transmission. Through its Oil Field segment, the Company manufactures and services artificial reciprocating rod lift equipment and related products, which are used to extract crude oil and other fluids from wells. Through its Power Transmission segment, the Company manufactures and services high-speed and low-speed increasing and reducing gearboxes for industrial applications. In January 2008, the Company announced the decision to suspend its participation in the commercial trailer markets and to develop a plan to run-out existing inventories, fulfil contractual obligations and close all trailer facilities. In March 2009, the Company acquired International Lift Systems, LLC (ILS), a manufacturer of artificial lift systems serving oil and gas companies. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider LUFK a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (8.00) relative to the growth rate (43.60%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for LUFK (0.18) is very favorable. SALES AND P/E RATIO: [NEUTRAL] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. LUFK, whose sales are $753.3 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. INVENTORY TO SALES: [PASS] When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for LUFK was 16.72% last year, while for this year it is 17.35%. 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 (0.64%) is below 5%. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for LUFK is 43.6%, 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 LUFK (0.94%) 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 LUFK (0.43%) 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 LUFK (16.04%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.   BJ SERVICES COMPANY Profile Strategy: Value Investor Based on: Benjamin Graham BJ Services Company is a provider of pressure pumping and oilfield services for the petroleum industry. Pressure pumping services consist of cementing and stimulation services used in the completion of new oil and natural gas wells and in remedial work on existing wells, both onshore and offshore. Oilfield services include casing and tubular services; precommissioning, maintenance and turnaround services in the pipeline and process business, including pipeline inspection; chemical services; completion tools, and completion fluids. The Company conducts its operations through four segments: U.S./Mexico Pressure Pumping Services; Canada Pressure Pumping Services; International Pressure Pumping Services, and Oilfield Services Group. On May 21, 2008, the Company acquired Innicor Subsurface Technologies Inc. Analysis Guru Score: 100% SECTOR: [PASS] BJS 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. BJS's sales of $5,344.2 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. BJS's current ratio of 2.18 passes the test. LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for BJS is $498.8 million, while the net current assets are $992.9 million. BJS 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. BJS's EPS growth over that period of 1,068.9% 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. BJS's P/E of 9.02 (using the current PE) passes this test. PRICE/BOOK RATIO: [PASS] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. BJS's Price/Book ratio is 1.26, while the P/E is 9.02. BJS passes the Price/Book test.   THE DRESS BARN, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch The Dress Barn, Inc. operates women's apparel specialty stores, principally under the names dressbarn, dressbarn woman and maurices. As of July 26, 2008, the Company operated 1,503 stores in 48 states and the District of Columbia, including 656 dressbarn Combo stores (a combination of its dressbarn and dressbarn woman brands), 677 maurices stores, 134 dressbarn stores and 36 dressbarn woman stores. Its dressbarn stores are typically operated as Combo stores, offering both dressbarn and larger-sized dressbarn woman merchandise. The Dress Barn, Inc. also operates stand-alone dressbarn and dressbarn woman stores in certain markets. Its dressbarn brands cater to 35 to 55 year-old women, sizes 4 to 24. The dressbarn stores offer in-season and casual fashion located primarily in convenient strip shopping centers in major trading and markets and surrounding suburban areas. As of July 26, 2008, the Company operated 1,503 stores in 48 states. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider DBRN a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (15.14) relative to the growth rate (30.83%), 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 DBRN (0.49) 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. DBRN, whose sales are $1,477.6 million, needs to have a P/E below 40 to pass this criterion. DBRN's P/E of (15.14) 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 DBRN is 30.8%, 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 DBRN (23.91%) 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 DBRN (7.91%) 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 DBRN (8.14%) 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.   DECKERS OUTDOOR CORPORATION Profile Strategy: Value Investor Based on: Benjamin Graham Deckers Outdoor Corporation is engaged in designing, producing and managing footwear and the category creator in the sport sandal, luxury sheepskin, and footwear segments. The Company sell the products, including accessories, such as handbags, headwear, packs and outerwear, through domestic retailers and international distributors and directly to the consumers, both domestically and internationally, through Websites, call centers, retail concept stores and retail outlet stores. The Company markets its products under four brands: UGG, Teva, Simple and TSUBO. Teva is the Company's brand of the sport sandal market of product line, such as casual open-toe and closed-toe footwear, adventure travel shoes, outdoor cross training shoes, trail running shoes, amphibious footwear, light hikers, and other rugged outdoor footwear styles and accessories. UGG is the brand and the category creator for luxury sheepskin footwear. The Simple brand comprises sustainable footwear and accessories. Analysis Guru Score: 86% SECTOR: [PASS] DECK 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. DECK's sales of $726.1 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. DECK's current ratio of 8.68 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 DECK is $0.0 million, while the net current assets are $328.6 million. DECK 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. DECK's EPS growth over that period of 1,711.1% 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. DECK's P/E of 13.10 (using the 3 year PE) passes 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. DECK's Price/Book ratio is 1.87, while the P/E is 13.10. DECK fails the Price/Book test.   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 OIS OIL STATES INTERNATIONAL, INC. Oil Well Services & Equipment 77 PFE PFIZER INC. Major Drugs 63 LHCG LHC GROUP, INC. Healthcare Facilities 55 INT WORLD FUEL SERVICES CORPORATION Oil & Gas Operations 51 UEPS NET17 1 UEPS TECHNOLOGIES INC Computer Services 50 GCO GENESCO INC. Retail (Apparel) 49 AFAM ALMOST FAMILY, INC. Healthcare Facilities 48 ANF ABERCROMBIE & FITCH CO. Retail (Apparel) 47 ARO AEROPOSTALE, INC. Retail (Apparel) 47 PETS PETMED EXPRESS, INC. Retail (Drugs) 47

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