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Executive Summary	September 14, 2012

The Economy Economic news has been quite mixed over the past couple weeks, with more positive news in the housing market counterbalanced by a poor August jobs report. Investors, however, seem far more interested in what central banks are doing than in what the economy is doing. First, markets surged last week after the European Central Bank announced that it is -- finally -- going to implement a bond-purchasing program designed to stabilize the region's financial system. The program is not limited in terms of scope, and the news sent European stocks as well as American stocks jumping upwards several percentage points. There are still some major hurdles, however. Spain's Prime Minister has said he won't allow the Eurozone or the ECB to dictate how his country will cut its budget deficit as part of the bond-buying program. And while Germany's high court approved the creation of the Eurozone's permanent bailout facility this week, it said it is reserving judgment on the bond-buying plan. At home, the U.S. economy got some bad news in the form of the Labor Department's August jobs report, which showed that the private sector added just 103,000 jobs during the month. But in a way, the report turned out to be bullish news for stocks, as it likely led to the second big central bank move of the past fortnight -- the Federal Reserve's announcement of a new quantitative easing plan. The Fed said this week that in addition to continuing the "Operation Twist" plan through year-end, it will be buying $40 billion in mortgage-backed securities a month. The move is designed to lower long-term interest rates and support mortgage markets, and investors were quite bullish upon hearing the news. The major indices jumped Thursday after the Fed issued its statement. Back to the hard economic data, particularly the August jobs number. It was both disappointing, given that more than 160,000 jobs were added the previous month, and surprising, as private payroll tracker ADP had said that more than 200,000 jobs were added during the month, according to its data. The unemployment rate, however, fell to 8.1%, matching its lowest level since January 2009. And, the so-called "U-6" unemployment rate -- which also includes discouraged workers who haven't looked for a job in the past year, and part-time workers who wish to work full-time -- fell three-tenths of a percentage point, to 14.7%. Those rates fell not because of the level of job creation, but instead because the labor force declined by 368,000. Many pundits have cited this as an indication of just how bad the job market is, saying that many workers are finding such little prospects of obtaining a job that they are giving up the search in droves. There may be more to it than that, though. For one thing, the U-6 figure should capture many discouraged workers who have left the workforce. As Morningstar economist Bob Johnson notes, a more plausible explanation for the workforce dropouts may be the back-to-school season, during which many students leave their summer jobs. "Typically, when students head back to school, these seasonal workers aren't replaced," Johnson notes. "Seasonal adjustment factors are supposed to capture this, but a lot of schools and universities are shifting the start of their school years earlier in August." He notes that a fairly big decline in temporary workers (120,000) supports this thesis. The Wall Street Journal also highlighted some data showing that seasonal hiring may have been a big factor in the August numbers. It cited a report from research firm Stone & McCarthy which found that August jobs numbers have missed economists expectations in 21 of the past 28 years. In all but four years that they missed expectations, the figures were revised upward later on. And the revisions are often quite significant. From 2001 through 2011, Stone & McCarthy found, August payrolls were revised upward by an average of 62,000 -- more than double the average for the next highest month (November). The firm cited seasonal hiring as one potential big factor for this. A closer look at the August report would seem to further support the student-summer-job theory. For example, while the unemployment rate dropped in August, the unemployment rate for those age 16 to 19 jumped nearly a full percentage point. Bottom line: While the August jobs report was disappointing, I wouldn't read too much into it just yet. In other areas, good news has continued to come from the housing market. The National Association of Realtors' Pending Home Sales Index, a forward-looking indicator, rose 2.4% in July (vs. June). The index is now 15% higher than it was a year ago. The manufacturing sector, meanwhile, offered mildly disappointing news. The Institute for Supply Management's manufacturing index showed the sector contracted in August for the third straight month, after having expanded for three years straight. The August reading, like those of the previous two months, showed that the sector was barely in contraction territory, however, coming in at 49.6 (a reading below 50 indicates contraction). There was also a big jump in the prices sub-index, which measures the prices businesses pay for raw materials, something to keep an eye on. ISM's service sector index rose, however, and remained in expansion territory for the 32nd straight month. Its employment sub-index made a nice gain as well, though its prices sub-index also made a significant jump. Since our last newsletter, the S&P 500 returned 4.3%, while the Hot List returned 4.2%. So far in 2012, the portfolio has returned 18.0% vs. 16.1% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 166.8% vs. the S&P's 45.9% gain. The Resilience of Equities This week marks the fourth anniversary of the event that was at the heart of the 2008 financial crisis and stock market meltdown: the collapse of Lehman Brothers. While the crisis was years in the making -- the result of years of easy money, bubbling housing prices, and bad debt -- the September 15, 2008 bankruptcy filing by Lehman served as the symbolic breaking point for markets. After the giant investment bank's collapse, the S&P 500 fell nearly 30% in a four-week span, with the crisis deepening, policymakers scurrying to come up with the bailout plan to save other banks, and investors panicking. Since then, stocks have become something of a dirty word. We've heard scores of pundits and prognosticators predict the downfall of both the U.S. economy and the stock market. There's been talk of "new normals", paradigm shifts, and even the "death of equities". For much of the past four years, maligning equities has been the chic thing to do. To be a bull has meant having to do quite a bit of explaining -- and even then, after laying out one's case, to often be derided. But since the Lehman collapse, just how have stock investors who stuck with equities fared compared to those who cashed out and stuffed their money under their proverbial mattresses? Let's take a look at how buy-and-hold investors have done over the past four years, compared to some hypothetical investors who bailed on stocks when some key pieces of bad news hit. We'll start with those who would've crashed out the day Lehman collapsed. On September 15, 2008, the S&P closed at 1192.70. Today (as of midafternoon on September 13), the index is trading at about 1449. That means stocks are more than 21% higher than they were the day that Lehman collapsed. That makes for an annualized gain of about 5% over the past four years -- certainly not eye-popping, but not bad at all considering all that has happened in that time. But while a good deal of investors may have cashed out their chips after Lehman's collapse, more did so the following month. According to Lipper Analytical Services, outflows from stock and mixed equity mutual funds peaked in October 2008, with investors pulling more than $86 billion out of those funds. Let's take the midpoint of that month, October 15, and consider someone who pulled his or her money out of stocks at that point. On October 15, 2008, the S&P closed at 907.84. Using the current S&P level of 1449, that means an investor who cashed out in mid-October 2008 has missed out on a gain of 59.6%. That's an annualized gain of about 12.7%. Of course, numerous investors hung on to stocks beyond that point. According to Lipper, funds flowed out of stock and mixed equity mutual funds for several more months, before hitting another mini-peak in March 2009, when investors yanked nearly $35 billion from those funds. Again using the midpoint of the month (March 16), an investor who cashed out of stocks at that point would have missed out on a 92.2% gain for the S&P. That's a 20.5% annualized gain. For the next year or so, fund flows weren't spectacular, but they weren't bad according to Lipper's data. In May 2010, however, after several months of positive flows into stock and mixed equity funds, there was a big shift. Investors pulled nearly $29 billion out of stock and mixed equity mutual and exchange traded funds that month (Lipper started tracking ETF flows in its monthly reports in September 2009). The trigger certainly seems to have been the European debt crisis. In late April, Greece's debt was downgraded twice within a week by rating agencies, rekindling fears that Greece's problems would spill over into the rest of Europe, and beyond. Let's consider a hypothetical investor who bailed on stocks after the second of those two downgrades, which occurred on April 27. The S&P 500 closed at 1183.71 that day. Had our hypothetical investor sold at that price, he or she would've missed out on a gain for the index of 22.4% since then. That's an annualized gain of close to 9%. For the next year, flows into stock and mixed equity funds again weren't bad. But investors began yanking money from those types of funds in the summer of 2011. The U.S. debt ceiling debacle was dragging on, and then in early August Standard & Poor's downgraded American debt. Investors pulled more than $57 billion from stock and mixed equity mutual and exchange traded funds that month. So, let's take another hypothetical investor, one who bailed on stocks immediately after the U.S. downgrade, which occurred after the markets closed on August 5. Even had that investor been able to sell at the open price the next day (1198.48), he or she would still have missed out on the 20.9% gain for the S&P in the little over a year since then. While each of the investors described above is hypothetical, their actions no doubt represent how a good many investors reacted to negative news at various points during the past four years. And many more probably engaged in less extreme measures, perhaps simply reducing their equity exposure at those key points, even if they didn't sell all their stocks. In each case, the underlying problems behind the sell decisions -- the European debt crisis, the United States' own debt woes, questions about the financial sector, etc. -- haven't been resolved. And yet, in each case, the investors who sold at those key "bad news" points have left money on the table. To be sure, the Federal Reserve's dramatic stimulus efforts have played a role in that. But we've also seen genuine, if slow, improvement in the economy, corporate sector, and financial world in the past four years. While things still need to improve, and problems remain, the bottom line is that they are not as bad as many feared they would be. The U.S. has made it through the worst of the crisis, and, while wounded, the economy and stock market are both still on their feet and moving forward. That's nothing new. Throughout history, investors have feared the worst when crises have hit, and usually their fears turn out to be worse than the reality. One of the gurus I follow, David Dreman, who is featured in this week's Guru Spotlight, provided some very interesting research on this topic in his book Contrarian Investment Strategies: The Generation. In his book, Dreman looked at "11 major postwar crises", which included the Berlin blockade, Korean War, Kennedy assassination, Gulf of Tonkin crisis, 1979-1980 oil crisis, and 1990 Persian Gulf War. He showed how, one year after all but one (the Berlin Blockade, when the market dropped), the market was up between 22.9 percent and 43.6 percent, except for a 7.2 percent rise after the Gulf of Tonkin crisis. The average gain was 25.8 percent. Two years after the crisis, the average gain was 37.5 percent. It's worth noting that following the September 11, 2001 terrorist attacks, which occurred after Dreman wrote Contrarian Investment Strategies, it took just one month for the S&P 500 to climb back to pre-September 11 levels; a year after the attacks, however, the index had fallen below pre-September 11 levels, the dot-com meltdown no doubt being a factor. All of that doesn't mean that the economy and stock market will bet bounce back smoothly and swiftly after crises. It took the S&P 500 more than a year and a half to climb back to where it was when Lehman Brothers collapsed in September 2008, and it was a rocky ride. It's been a rocky ride since then, too. But the point is that the economy and stock market are both far more resilient than many people give them credit for being. And if you understand that, you can take advantage of other people's knee-jerk reactions. While the crowd is selling, you can be snatching up the bargain priced stocks that they leave in their wake as they flee the market. It's not easy to exercise that kind of discipline, particularly when it can take some time for those bargain stocks' values to be realized. But it's something that just about all the gurus upon whom I base my strategies practiced while building their impeccable track records. Remember what one of those gurus, mutual fund legend Peter Lynch, said about long-term perspective in an interview with PBS television: "Time is on your side in the stock market. It's on your side. And when stocks go down, if you've got the money, you don't worry about it and you're putting more in, you shouldn't worry about it. You should worry what are stocks going to be 10 years from now, 20 years from now, 30 years from now." Lynch made those comments many years ago, but I think they ring just as true today as they always have. And I think investors who adopt that sort of long-term, disciplined philosophy will end up quite happy with their returns over the long haul.		Editor-in-Chief: John Reese Since Inception   Hot List 166.8% S&P 500 45.9% Accuracy 56.8% Beta 1.2 YTD   Hot List 18.0% S&P 500 16.1% Since Last Issue   Hot List 4.2% S&P 500 4.3% Avg. Fundamentals   Market Cap (mil) $13,766 PE Ratio 15.5 5 Yr EPS Growth 21.1% Yield 1.7% Rel. Strength 67 Portfolio Sectors Capital Goods 2 Services 2 Technology 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: David Dreman While all the gurus I follow have built their fame and fortunes using different investment approaches, there is at least one striking similarity that most -- if not all -- of them share: They are contrarians. When the rest of Wall Street is zigging, they are zagging; when Wall Street zags, they zig. By having the strength of conviction to march to their own drummers and not follow the crowd, they have been able to key in on the types of strong, undervalued stocks that have made them -- and their clients or shareholders -- very happy. But while most of these gurus are contrarians, one in particular is known for being, well, the most contrarian: David Dreman. Throughout his long career, Dreman has sifted through the market's dregs in order to find hidden gems, and he has been very good at it. His Kemper-Dreman High Return Fund was one of the best-performing mutual funds ever, ranking number one out of 255 funds in its peer groups from 1988 to 1998, according to Lipper Analytical Services. And when Dreman published Contrarian Investment Strategies: The Next Generation (the book on which I base my Dreman strategy) in 1998, the fund had been ranked number one in more time periods than any of the 3,175 funds in Lipper's database. Throughout his career, Dreman has keyed in on down-and-out diamonds in the rough, finding winners in such beaten-up stocks as Altria (after the tobacco stock plummeted amid lawsuit concerns) and Tyco (which had been hit hard by an embarrassing CEO fiasco). How -- and why -- did Dreman manage to pick winners from groups of stocks that few other investors would touch? Well, Dreman, perhaps more than any other guru I follow, is a student of investor psychology. And at the core of his research is the belief that investors tend to overvalue the "best" stocks -- those "hot" stocks everyone seems to be buying -- and undervalue the "worst" stocks -- those that people are avoiding like the plague, like Altria and Tyco. In addition, he also believed that the market was driven largely by how investors reacted to "surprises", frequent events that include earnings reports that exceed or fall short of expectations, government actions, or news about new products. And, he believed that analysts were more often than not wrong about their earnings forecasts, which leads to a lot of these surprises. When you put those factors together, you get the crux of Dreman's contrarian philosophy. Surprises happen often, and because the "best" stocks are often overvalued, good surprises can't increase their values that much more. Bad surprises, however, can have a very negative impact on them. The "worst" stocks, meanwhile, are so undervalued that they don't have much further down to go when bad surprises occur. But when good surprises occur, they have a lot of room to grow. By taking a "contrarian" approach -- i.e. targeting out-of-favor stocks and avoiding in-favor stocks -- Dreman found you could make a killing. Specifically, Dreman compared a stock's price to four fundamentals: earnings, cash flow, book value, and dividend yield. If a stock's price/earnings, price/cash flow, price/book value, or price/dividend ratio was in the bottom 20% of the market, it was a sign that investors weren't paying it much attention. And to Dreman, that was a sign that these stocks could end up becoming winners. (In my Dreman-based model, a firm is required to be in the bottom 20% of the market in at least two of those four categories to earn "contrarian" status.) But Dreman also realized that just because a stock was overlooked, it wasn't necessarily a good buy. After all, investors sometimes are right to avoid certain poorly performing companies. What Dreman wanted to find were good companies that were being ignored, often because of apathy or overblown fears about the stock or its industry. To find those good firms, he used a variety of fundamental tests. Among them were return on equity (he wanted a stock's ROE to be in the top third of the 1,500 largest stocks in the market); the current ratio (which he wanted to be greater than the stock's industry average, or greater than 2); pre-tax profit margins (which should be at least 8 percent), and the debt/equity ratio (which should be below the industry average, or below 20 percent). By using those and other fundamental tests in conjunction with his contrarian indicator tests (the low P/E, P/CF, P/B, and P/D criteria we reviewed before), he was able to have great success finding strong but unloved firms that had the potential to take off once investors caught on to their true strength. Because Dreman took advantage of the overreactions of others, he found that one of the best times to invest was during a crisis. "A market crisis presents an outstanding opportunity to profit, because it lets loose overreaction at its wildest," he wrote in Contrarian Investment Strategies. "People no longer examine what a stock is worth; instead, they are fixated by prices cascading ever lower. Further, the event triggering the crisis is always considered to be something entirely new." Dreman's advice: "Buy during a panic, don't sell." This type of contrarian approach isn't for the faint-of-heart. You never know exactly when fear will subside and investors will wake up to a bargain they've been overlooking. And that means the stocks this model targets may very well keep falling in the short term after you buy them, which, for my Dreman-based portfolio, is what happened during the recent financial crisis and bear market. The portfolio, which had trounced the S&P from its inception through 2006, fell on tough times as fears about the economy grew, lagging the S&P by about 15 percentage points in both 2007 and 2008. But, as fears abated and the crisis passed, investors began to recognize the strong stocks they'd been shunning. And the Dreman portfolio reaped the benefits, returning more than 37% in 2009 (vs. 23.5% for the S&P) and 23.1% in 2010 (vs. 12.8% for the S&P). Since its July 2003 inception, the 10-stock Dreman-based portfolio has nearly doubled the S&P 500, returning 82.6%, or 6.8% annualized, vs. 43.7%, or just 4.0%, for the S&P (through Sept. 9). As you might imagine, the portfolio will tread into areas of the market others ignore because of its contrarian bent. Right now, its holdings include some very unloved firms, including several financials and one from China. Here's the full list of its current holdings: HollyFrontier Corp. (HFC) AOL, Inc. (AOL) CYS Investments Inc. (CYS) Assurant, Inc. (AIZ) Banco Santander, S.A. (SAN) Statoil ASA (STO) Cosan Limited (CZZ) Yanzhou Coal Mining Co. (YZC) Bank of America Corp. (BAC) Exelis Inc. (XLS) News about Validea Hot List Stocks The TJX Companies (TJX): TJX reported August sales of $1.9 billion, up 10% over the $1.7 billion in sales from the year-ago period. Consolidated comparable store sales were up 8% over last year. TJX said it now expects its fiscal third-quarter earnings to come in on the high end of its previous estimates of $0.56 to $0.59 per share. Northrop Grumman (NOC): Grumman said it will be teaming with Flight Technologies Sistemas SA to develop national security technologies for Brazil, the Jacksonville Business Journal reported. The two firms will work on security solutions for Brazil's integrated border monitoring system, which uses radars, communications systems, and drones to detect smuggling, terrorism and drug trafficking activity. 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 APOL APOLLO GROUP INC Schools 69 HFC HOLLYFRONTIER CORP Oil & Gas Operations 64 SWI SOLARWINDS INC Software & Programming 57 WRLD WORLD ACCEPTANCE CORP. Consumer Financial Services 53 NOC NORTHROP GRUMMAN CORPORATION Aerospace & Defense 52 TJX THE TJX COMPANIES, INC. Retail (Apparel) 49 TGI TRIUMPH GROUP INC Aerospace & Defense 45 NUS NU SKIN ENTERPRISES, INC. Personal & Household Prods. 44 AZN ASTRAZENECA PLC (ADR) Biotechnology & Drugs 43 ALV AUTOLIV INC. Auto & Truck Parts 32 Ticker Market Cap Date Added Start Price Current Price Return APOL $3,273 7/6/2012 $36.55 $28.87 -21.0% HFC $8,091 8/31/2012 $40.29 $39.75 -1.3% SWI $4,339 5/11/2012 $44.75 $58.47 30.7% WRLD $999 8/31/2012 $73.00 $76.44 4.7% NOC $16,566 7/6/2012 $63.47 $67.01 5.6% TJX $34,273 3/16/2012 $37.91 $46.56 22.8% TGI $2,976 8/31/2012 $59.43 $59.60 0.3% NUS $2,684 8/31/2012 $41.49 $44.83 8.1% AZN $58,432 8/31/2012 $46.79 $47.34 1.2% ALV $6,023 8/3/2012 $56.58 $63.13 11.6%

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 APOL   |   HFC   |   SWI   |   WRLD   |   NOC   |   TJX   |   TGI   |   NUS   |   AZN   |   ALV   |   APOLLO GROUP INC Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Apollo Group, Inc. (Apollo Group) is a private education provider. The Company offers educational programs and services both online and on-campus at the undergraduate, master's and doctoral levels through its wholly owned subsidiaries, The University of Phoenix, Inc. (University of Phoenix); Institute for Professional Development (IPD); The College for Financial Planning Institutes Corporation (CFFP), and Meritus University, Inc. (Meritus). Apollo Group also formed a joint venture with The Carlyle Group (Carlyle), called Apollo Global, Inc. (Apollo Global), to pursue investments primarily in the international education services industry. As of August 31, 2011, Apollo Group owned 85.6% of Apollo Global, with Carlyle owning the remaining 14.4%. During the year ended December 31, 2011, the Other Schools segment includes IPD and CFFP, as well as Meritus University, Inc. (Meritus), which ceased operations. Analysis Guru Score: 90% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. APOL's P/S of 0.74 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. APOL's Debt/Equity of 13.94% 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. APOL 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 APOL At this Point Is APOL a "Super Stock"? NO PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.APOL's P/S ratio of 0.74 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: [FAIL] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. APOL's inflation adjusted EPS growth rate of 9.75% fails 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. APOL's free cash per share of 5.18 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. APOL, whose three year net profit margin averages 12.82%, passes this evaluation.   HOLLYFRONTIER CORP Profile Strategy: Contrarian Investor Based on: David Dreman HollyFrontier Corporation (HollyFrontier), formerly Holly Corporation, is a petroleum refiner, which produces light products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. HollyFrontier operates in two segments: Refining and Holly Energy Partners, L.P. (HEP). The Refining segment includes the operations of its El Dorado, Tulsa, Navajo, Cheyenne and Woods Cross Refineries and NK Asphalt. The HEP segment involves all of the operations of HEP. As of December 31, 2011, it operated five refineries having a combined crude oil processing capacity of 443,000 barrels per day that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain regions of the United States. The Company merged with Frontier Oil Corporation (Frontier), on July 1, 2011. On November 9, 2011, HEP acquired from the Company certain tankage, loading rack and crude receiving assets located at its El Dorado and Cheyenne Refineries. Analysis Guru Score: 90% MARKET CAP: [PASS] Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. HFC has a market cap of $8,091 million, therefore passing the test. EARNINGS TREND: [PASS] A company should show a rising trend in the reported earnings for the most recent quarters. HFC's EPS for the past 2 quarters, (from earliest to most recent quarter) 1.16, 2.39 have been increasing, and therefore the company passes this test. EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: [PASS] This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. HFC passes this test as its EPS growth rate over the past 6 months (125.47%) has beaten that of the S&P (6.21%). HFC's estimated EPS growth for the current year is (3.43%), which indicates the company is expected to experience positive earnings growth. As a result, HFC passes this test. This methodology would utilize four separate criteria to determine if HFC is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest". P/E RATIO: [PASS] The P/E of a company should be in the bottom 20% of the overall market. HFC's P/E of 5.60, based on trailing 12 month earnings, meets the bottom 20% criterion (below 9.01), and therefore passes this test. PRICE/CASH FLOW (P/CF) RATIO: [PASS] The P/CF of a company should be in the bottom 20% of the overall market. HFC's P/CF of 4.69 meets the bottom 20% criterion (below 4.96) and therefore passes this test. PRICE/BOOK (P/B) VALUE: [FAIL] The P/B value of a company should be in the bottom 20% of the overall market. HFC's P/B is currently 1.52, which does not meet the bottom 20% criterion (below 0.73), and it therefore fails this test. PRICE/DIVIDEND (P/D) RATIO: [FAIL] The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). HFC's P/D of 66.23 does not meet the bottom 20% criterion (below 19.23 or yield above 3.7%), and it therefore fails this test. This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below. CURRENT RATIO: [PASS] A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.81] or greater than 2). This is one identifier of financially strong companies, according to this methodology. HFC's current ratio of 2.37 passes the test. PAYOUT RATIO: [PASS] A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for HFC is 20.03%, while its historical payout ratio has been 44.63%. Therefore, it passes the payout criterion. RETURN ON EQUITY: [PASS] The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 17.11%, and would consider anything over 27% to be staggering. The ROE for HFC of 47.11% is high enough to pass this criterion. PRE-TAX PROFIT MARGINS: [PASS] This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. HFC's pre-tax profit margin is 11.89%, thus passing this criterion. YIELD: [FAIL] The company in question should have a yield that is high and that can be maintained or increased. HFC's current yield is 1.51%, while the market yield is 2.72%. HFC fails this test. LOOK AT THE TOTAL DEBT/EQUITY: [PASS] The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 31.25%. HFC's Total Debt/Equity of 24.30% is considered acceptable.   SOLARWINDS INC Profile Strategy: Growth Investor Based on: Martin Zweig 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: 85% P/E RATIO: [FAIL] The P/E of a company must be greater than 5 to eliminate weak companies, not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. SWI's P/E is 59.58, based on trailing 12 month earnings, while the current market P/E is 18.00. Therefore, it fails 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. SWI's revenue growth is 33.74%, while it's earnings growth rate is 34.99%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, SWI passes this criterion. SALES GROWTH RATE: [PASS] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (39.8%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (38.8%) of the current year. Sales growth for the prior must be greater than the latter. For SWI this criterion has been met. The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria. CURRENT QUARTER EARNINGS: [PASS] The first of these criteria is that the current EPS be positive. SWI's EPS ($0.26) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. SWI's EPS for this quarter last year ($0.18) 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. SWI's growth rate of 44.44% 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 SWI is 17.50%. This should be less than the growth rates for the 3 previous quarters which are 64.71%, 4.76% and 43.75%. SWI 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, 35.19%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 44.44%, (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, 44.44% must be greater than or equal to the historical growth which is 34.99%. SWI 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. SWI, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.25, 0.35, 0.52, 0.61 and 0.84, 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. SWI's long-term growth rate of 34.99%, 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. SWI's Debt/Equity (0.00%) is not considered high relative to its industry (15.78%) 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 SWI, this criterion has not been met (insider sell transactions are 117, while insiders buying number 70). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.   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 14,000,000, 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 $6.98 and divide it by the current market price of $76.44. An investor, purchasing WRLD, could expect to receive a 9.13% 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 9.13%, 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 $29.29. 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 $169.85 in ten years. If it can still earn 19.2% on equity in ten years, then expected EPS will be $32.64. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $32.64 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (10.9) (5 year average P/E in this case), which is 9.2 and you get WRLD's projected future stock price of $300.29. 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 $300.29. These numbers indicate that one could expect to make a 14.7% average annual return on WRLD's stock at the present time. Although, the return is slightly below the liking of Buffett, the return would still be somewhat acceptable. 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 $46.00. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (10.9) (5 year average P/E in this case), which is 9.2. This equals the future stock price of $423.18. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $423.18. 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 $76.44 and the future expected stock price, including the dividend pool, of $423.18. If you were to invest in WRLD at this time, you could expect a 18.7% 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 14.7% and 18.7%. 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 16.7% on WRLD stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   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. 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 $25,590.0 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 1.37 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 $3,932.0 million, while the net current assets are $2,092.0 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 11.00 (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 1.55, while the P/E is 11.00. NOC passes the Price/Book test.   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 1.41 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 1.41, 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.   TRIUMPH GROUP INC Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Triumph Group, Inc. (Triumph) designs, engineers, manufactures, repairs, overhauls and distributes a portfolio of aerostructures, aircraft components, accessories, subassemblies and systems. The Company serves a range of the aviation industry, including original equipment manufacturers (OEMs), of commercial, regional, business and military aircraft and aircraft components, as well as commercial and regional airlines and air cargo carriers. The Company offers a range of products and services to the aerospace industry through three groups of operating segments: Triumph Aerostructures Group, whose companies' revenues are derived from the design, manufacture, assembly and integration of metallic and composite aerostructures and structural components for the global aerospace OEM, market; Triumph Aerospace Systems Group, and Triumph Aftermarket Services Group, whose companies serve aircraft fleets. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider TGI a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (10.11) relative to the growth rate (27.23%), 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 TGI (0.37) 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. TGI, whose sales are $3,450.6 million, needs to have a P/E below 40 to pass this criterion. TGI's P/E of (10.11) 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 TGI was 26.91% last year, while for this year it is 24.00%. Since inventory to sales has decreased from last year by -2.90%, TGI passes this test. 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 TGI is 27.2%, 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 TGI (58.99%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for TGI should be good enough to compensate. 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 TGI (4.11%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for TGI (-30.41%) 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.   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 $1,979.0 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 2.16 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 $190.7 million, while the net current assets are $345.8 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 22.80 (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 4.76, while the P/E is 22.80. NUS fails the Price/Book test.   ASTRAZENECA PLC (ADR) Profile Strategy: Contrarian Investor Based on: David Dreman AstraZeneca PLC (AstraZeneca) is a global biopharmaceutical company. AstraZeneca discovers, develops and commercializes prescription medicines for six areas of healthcare: Cardiovascular, Gastrointestinal, Infection, Neuroscience, Oncology, and Respiratory and Inflammation. It has a range of medicines that includes treatments for illnesses, such as its antibiotic, Merrem/Meronem and Losec/Prilosec for acid related diseases. AstraZeneca's products include Crestor, Atacand,Seloken/Toprol-XL, Plendil, Onglyza, Zestril, Symbicort and Zoladex. The Company owns and operates a range of research and development (R&D), production and marketing facilities worldwide. AstraZeneca operates in over 100 countries, including China, Mexico, Brazil and Russia. In August 2012, Alliance Pharma plc's subsidiary, Alliance Pharmaceuticals Limited, acquired the antimalRoboto brands. In August 2012, the Company announced the acquisition of Amylin Pharmaceuticals, Inc. by Bristol-Myers Squibb Company. Analysis Guru Score: 76% MARKET CAP: [PASS] Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. AZN has a market cap of $58,432 million, therefore passing the test. EARNINGS TREND: [FAIL] A company should show a rising trend in the reported earnings for the most recent quarters. AZN's EPS for the latest quarter is not greater than the prior quarter, (from earliest to most recent quarter) 1.28, 1.27. Hence the stock fails this test, but the investor should evaluate this company qualitatively to see if it qualifies under this methodology's "exception rule". EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: [FAIL] This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. AZN's EPS growth rate over the past 6 months (12.38%) has beaten that of the S&P (6.21%), but AZN's estimated EPS growth for the current year is (-16.71%) while that of the S&P is (13.81%), therefore failing this test. This methodology would utilize four separate criteria to determine if AZN is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest". P/E RATIO: [PASS] The P/E of a company should be in the bottom 20% of the overall market. AZN's P/E of 7.59, based on trailing 12 month earnings, meets the bottom 20% criterion (below 9.01), and therefore passes this test. PRICE/CASH FLOW (P/CF) RATIO: [FAIL] The P/CF of a company should be in the bottom 20% of the overall market. AZN's P/CF of 5.43 does not meet the bottom 20% criterion (below 4.96), and therefore fails this test. PRICE/BOOK (P/B) VALUE: [FAIL] The P/B value of a company should be in the bottom 20% of the overall market. AZN's P/B is currently 2.70, which does not meet the bottom 20% criterion (below 0.73), and it therefore fails this test. PRICE/DIVIDEND (P/D) RATIO: [PASS] The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). AZN's P/D of 16.61 meets the bottom 20% criterion (below 19.23 or yield above 3.7% ), and it therefore passes this test. This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below. CURRENT RATIO: [FAIL] A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.79] or greater than 2). This is one identifier of financially strong companies, according to this methodology. AZN's current ratio of 1.34 fails the test. PAYOUT RATIO: [PASS] A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for AZN is 44.47%, while its historical payout ratio has been 45.36%. Therefore, it passes the payout criterion. RETURN ON EQUITY: [PASS] The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 17.11%, and would consider anything over 27% to be staggering. The ROE for AZN of 36.00% is high enough to pass this criterion. PRE-TAX PROFIT MARGINS: [PASS] This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. AZN's pre-tax profit margin is 32.51%, thus passing this criterion. YIELD: [PASS] The company in question should have a yield that is high and that can be maintained or increased. AZN's current yield is 6.02%, while the market yield is 2.72%. AZN passes this test. LOOK AT THE TOTAL DEBT/EQUITY: [PASS] The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 52.40%. AZN's Total Debt/Equity of 42.30% is considered acceptable.   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 0.72 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 18.07% 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 0.72 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.   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 MWIV MWI VETERINARY SUPPLY, INC. Medical Equipment & Supplies 54 CNO CNO FINANCIAL GROUP INC Insurance (Life) 50 HCII HOMEOWNERS CHOICE, INC. Insurance (Prop. & Casualty) 47 BRLI BIO-REFERENCE LABORATORIES INC Healthcare Facilities 42 ASPS ALTISOURCE PORTFOLIO SOLUTIONS S.A. Consumer Financial Services 39 STO STATOIL ASA(ADR) Oil & Gas - Integrated 38 MNST MONSTER BEVERAGE CORP Beverages (Non-Alcoholic) 38 PRAA PORTFOLIO RECOVERY ASSOCIATES, INC. Business Services 37 GME GAMESTOP CORP. Retail (Technology) 37 FRX FOREST LABORATORIES, INC. Biotechnology & Drugs 36

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