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Executive Summary	August 30, 2013

The Economy The U.S. economy appears to have hit some bumps in the road, but it may well be just a short-term "pre-tapering" adjustment. New home sales, for example, fell 13.4% in July, according to the Census Bureau. Mortgage rates, which have jumped over the past month or two amid expectations that the Federal Reserve will soon start tapering its massive stimulus efforts, were cited as a big reason for the decline. The longer-term trend is still a good one, though -- July sales were 6.1% above their year-ago pace, and median sale prices were 8.3% higher than they were a year ago. Durable goods orders, which can also be impacted by rate increases, fell 7.3% in July, meanwhile, according to the Commerce Department. The decline was the largest in nearly a year for durable goods orders, which had risen in each of the three previous months. Orders for non-defense capital goods fell 3.3%, ending a streak of four straight monthly increases. While disappointing, we shouldn't draw too many conclusions, however. Durable goods orders can be extremely volatile from month-to-month; excluding the highly volatile transportation sector, orders were down just 0.6% for the month. While new home sales were down, the housing market did offer some good news. Housing starts were up 5.9% in July, according to the Census Bureau. They are now about 21% above year-ago levels. Permit issuance for new construction, meanwhile, was up 2.7%, and is now about 17.5% above its year-ago level. The latest jobs data also showed strong year-over-year gains. New claims for unemployment remained about the same over the past two weeks, but are 11.3% below where they were a year ago. Continuing claims were also pretty much flat, and are nearly 10% lower than they were a year ago. Inflation picked up a bit in July, another Labor Department report showed -- a good sign. The Consumer Price Index rose 0.2% vs. June, and is now running at a reasonable 2.0% over the past year; core inflation (which excludes food and energy costs) also picked up slightly, though it is running at only about 1.7% over the past year. Unfortunately, wages didn't keep pace. Average hourly earnings slipped 0.1%, and average weekly hours worked declined 0.3%. When inflation is factored in, real weekly earnings fell 0.5% in July. Oil prices have also made a big move upward, thanks to concerns about the conflict in Syria. Over a four-trading-day stretch ending Aug. 27, West Texas Intermediate crude prices jumped 5%. Moves in gas prices, which had been declining over the past month, usually lag crude price movements. We'll see how the crude surge impacts consumers at the pumps in the coming weeks and months. Since our last newsletter, the S&P 500 returned -1.4%, while the Hot List returned -2.7%. So far in 2013, the portfolio has returned 22.5% vs. 14.9% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 232.3% vs. the S&P's 63.7% gain. The Sultan of Swat, Syria, and Storytelling In baseball lore, few events are as celebrated as Babe Ruth's "called shot". The story goes like this: In the fifth inning of Game 3 of the 1932 World Series, Ruth came to the plate, and, while engaged in some serious back-and-forth jawing with Chicago Cubs players, pointed to Wrigley Field's centerfield bleachers as if to say, "That's where I'm hitting the next pitch." Then, incredibly, he did just that, crushing a home run that gave the Yankees the lead -- and Ruth's legend one of its signature moments. There's just one small problem: The called-shot story may well be completely false -- over the years, plenty of eyewitnesses, including some of Ruth's teammates, have cast doubt on it. But once one reporter portrayed it that way, others followed, and soon the facts didn't really matter. Many, if not most, baseball fans simply accepted it as true. That's not uncommon. As human beings, we want to believe in stories. In a world full of unpredictability and chaos, we look to stories to give us understanding, to give us a sense of order. (Barry Ritholtz recently had a great column on this on The Big Picture blog that I'd recommend checking out.) That's all well and good when it comes to a baseball legend. But in the investing world, putting stories ahead of facts is very dangerous. Since the 2008 financial crisis, for example, investors have been giving credence to a number of fear-filled stories. One of the most prominent: the tale of the tapped-out American consumer. According to this story, the housing market crash, stock market implosion, and near-collapse of the entire financial system dealt U.S. consumers a knockout blow in 2008, one from which they wouldn't be able to recover for years, perhaps even decades. Huge declines in consumer spending would mean years of struggle for the economy, and for retail firms in particular. Like most tall tales, the tapped-out-consumer story was grounded in some truth -- Americans did cut back spending significantly amid the crisis, and they were overleveraged. But amid the fear-filled climate of 2008 and 2009, the tale spun a bit out of control, in part because it provided a great story arc -- after years of overspending and living high on the hog, Americans were getting their comeuppance. Forget Gucci handbags and Prada shoes; citizens of the most powerful country in the world would soon be on the verge of scavenging for food and weaving clothing out of leaves and branches. What drama! Who knows -- had a few things gone differently, perhaps that scenario would have played out. But it didn't. Consider these facts: While they trended downward from December 2007 to April 2009, real personal consumption expenditures have been on the rebound ever since, and are now 4.7% above that December 2007 peak. Retail sales, meanwhile, are 11.8% above their November 2007 peak. And after climbing above 14% in mid-2007, Americans' collective debt service ratio (the ratio of outstanding mortgage and consumer debt to disposable personal income) has fallen to 10.32% in the fourth quarter of 2012 and 10.49% in this year's first quarter. Those two most recent readings are the lowest the ratio has been at any time since 1980. Still, the tapped-out-consumer story lingers. And that's good. Because when the story and the facts diverge, opportunities are created. Some of the Hot List's biggest winners over the past few years -- such as Jos. A. Bank Clothiers (+78.2% in 2009) -- were unloved retail stocks, and my Guru Strategies are still finding great value in the retail apparel industry. In fact, it's one of the top-ranked industry in the market according to my Validea Industry Index, which ranks industries based on a composite of growth and value factors. The tapped out consumer story is an example of the pundits and talking heads getting the story wrong. But for investors, there's danger in another type of storytelling as well -- that which involves stories that sound important, but, from investing perspective, just don't really matter that much. The crisis in Syria looks like a good example of that. In recent days we've seen lots of headlines about the impact that potential US involvement in Syria could have on stocks. To be sure, many investors have probably sold shares just because fear has started to fill the headlines. But while Syria no doubt matters from a number of perspectives -- political, strategic, and, of course, humanitarian -- the likelihood is that for investors, the crisis won't end up mattering all that much. In fact, in a recent column, MarketWatch's Mark Hulbert said that, historically, the market has suffered only minor losses because of geopolitical crises, and has rebounded quite quickly in many cases. He references a 1989 study performed by economics professors David Cutler of Harvard, James Poterba of MIT, and Larry Summers, who is now in the running to be the next Federal Reserve chief. In it, the professors examined how the stock market fared on 49 days in history when major geopolitical events occurred, such as the Kennedy assassination and Pearl Harbor bombing. "They came up with little evidence that non-economics events had a big effect on the stock market," Hulbert writes. "On average, across all 49 events on their list, the S&P 500 moved just 1.46%, less than one percentage point more than the 0.56% that prevailed on all other days. Because of this small difference, the professors concluded that there's 'a surprisingly small effect of non-economic news' on the stock market." What's more, the Syrian crisis isn't even an out-of-nowhere event like Pearl Harbor or the JFK assassination. As Hulbert notes, it has been building for years now; even the idea of American intervention isn't new, though it has come more to the forefront in recent weeks. Investors have known that US intervention has been a possibility for months, even years now. A good deal of the risk had probably been getting baked into the price of stocks since the start of the crisis. That's not to say that if the US does intervene in Syria, it won't cause short-term problems for stocks. In the short term, emotions rule, and stocks might go through some declines. But if they do, it's just as likely that they will bounce back quickly, with little damage, if any, to your long-term returns -- despite what the headlines may be saying. In fact, disciplined investors who have some extra cash to deploy may even end up profiting from any short-term declines, which could generate some great buying opportunities. Bottom line: If you need a "story" fix, pick up a good book or turn on a spine-tingling, heart-string-tugging, or edge-of-your seat movie. When it comes to investing your money, however, the only story you should focus on is the one that a company's fundamentals and financials are telling.		Editor-in-Chief: John Reese Since Inception   Hot List 232.3% S&P 500 63.7% Accuracy 56.4% Beta 1.2 YTD   Hot List 22.5% S&P 500 14.9% Since Last Issue   Hot List -2.7% S&P 500 -1.4% Avg. Fundamentals   Market Cap (mil) $23,123 PE Ratio 10.9 5 Yr EPS Growth 29.8% Yield 1.3% Rel. Strength 71 Portfolio Sectors Financial 3 Services 3 Capital Goods 1 Conglomerates 1 Consumer Cyclical 1 Energy 1
Advertisement Validea Capital Management - Private Portfolio Management Based on Strategies of Legends Are you looking for an alternative to your underperforming mutual funds or financial advisor? Click here to download Validea Capital's investment kit and learn more about the firm's guru-based portfolios. Get More Information on Validea Capital! ** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. Thre information above in not intended as personal investment advice and should not be interpreted as such. The Fallen As we rebalance the Validea Hot List, 4 stocks leave our portfolio. These include: Inter Parfums, Inc. (IPAR), Overstock.com, Inc. (OSTK), Valero Energy Corporation (VLO) and Williams-sonoma, Inc. (WSM). The Keepers 6 stocks remain in the portfolio. They are: Usana Health Sciences, Inc. (USNA), Amtrust Financial Services, Inc. (AFSI), Bridgepoint Education Inc (BPI), Lear Corporation (LEA), Hollyfrontier Corp (HFC) and Hci Group Inc (HCI). The Newbies We are adding 4 stocks to the portfolio. These include: Jpmorgan Chase & Co (JPM), Ross Stores, Inc. (ROST), Joy Global Inc. (JOY) and Stamps.com Inc. (STMP). Portfolio Changes Additions   JPMORGAN CHASE & CO JPM ROSS STORES, INC. ROST JOY GLOBAL INC. JOY STAMPS.COM INC. STMP Deletions   INTER PARFUMS, INC. IPAR OVERSTOCK.COM, INC. OSTK VALERO ENERGY CORPORATION VLO WILLIAMS-SONOMA, INC. WSM Newcomers to the Validea Hot List Ross Stores, Inc. (ROST) : California-based Ross is a discount clothing apparel and home goods retailer, which operates under the Ross Dress for Less and dd's DISCOUNTS names. It has taken in about $9.1 billion in sales in the past year. Ross, which has a $14.8 billion market cap, gets approval from my Peter Lynch- and Warren Buffett-based models. To read more about it, see the "Detailed Stock Analysis" section below. Stamps.com Inc. (STMP): This California-based company ($650 million market cap) allows customers to pay for and print postage for a variety of letters and packages online. The 16-year-old firm gets solid marks from several of my models, including my Peter Lynch- and Motley Fool-based strategies. For more on the stock, see the "Detailed Stock Analysis" section below. Joy Global Inc. (JOY): This Milwaukee-based mining equipment provider ($5.2 billion market cap) has taken in more than $5 billion in sales in the past year. It's a favorite of my Peter Lynch-, Benjamin Graham-, and Joel Greenblatt-based models. To read more about it, see the "Detailed Stock Analysis" section below. JPMorgan Chase & Co. (JPM): New York City-based Chase is involved in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, asset management and private equity. The firm, which has $2.4 trillion is assets, fared better than most big banks during the 2008-09 financial crisis, though its past few years have not been without problems. My Peter Lynch- and James O'Shaughnessy-based models think it's time to give this unloved megacap ($190 billion) a look, though. To read more about it, see the "Detailed Stock Analysis" section below. News about Validea Hot List Stocks Williams-Sonoma Inc. (WSM): On Aug. 28, Sonoma reported second-quarter profit of $48.9 million, or 49 cents a share, up about 13% from $43.4 million, or 43 cents a share, a year earlier, The Wall Street Journal reported. Revenues were up 12% to $982.2 million. Total same-store sales rose 8.4%; the company had been projecting gains in the 4% to 6% range, the Journal said. Sonoma also upped its full-year earnings projection to between $2.69 to $2.79 a share on $4.26 billion to $4.34 billion in revenue, from $2.67 to $2.77 in per-share earnings and $4.22 billion to $4.3 billion in revenue. The Hot List is selling the stock on today's rebalancing, as other stocks' fundamentals have surpassed Sonoma's fundamentals. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will take a closer look at my strategies and investment approach. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score USNA USANA HEALTH SCIENCES, INC. Conglomerates 85 BPI BRIDGEPOINT EDUCATION INC Schools 83 HCI HCI GROUP INC Insurance (Prop. & Casualty) 76 STMP STAMPS.COM INC. Retail (Catalog & Mail Order) 74 ROST ROSS STORES, INC. Retail (Apparel) 69 JPM JPMORGAN CHASE & CO Money Center Banks 67 JOY JOY GLOBAL INC. Constr. & Agric. Machinery 65 LEA LEAR CORPORATION Auto & Truck Parts 61 AFSI AMTRUST FINANCIAL SERVICES, INC. Insurance (Prop. & Casualty) 60 HFC HOLLYFRONTIER CORP Oil & Gas Operations 60 Ticker Market Cap Date Added Start Price Current Price Return USNA $1,076 12/21/2012 $33.83 $78.00 130.6% BPI $905 8/2/2013 $16.59 $16.71 0.7% HCI $354 6/7/2013 $34.20 $30.97 -9.4% STMP $655 8/30/2013 TBD $41.87 TBD ROST $14,824 8/30/2013 TBD $67.79 TBD JPM $190,845 8/30/2013 TBD $50.70 TBD JOY $5,226 8/30/2013 TBD $49.18 TBD LEA $5,563 5/10/2013 $60.48 $68.98 14.1% AFSI $2,716 7/5/2013 $35.78 $36.48 2.0% HFC $9,070 4/12/2013 $46.83 $45.38 -3.1%

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer USNA   |   BPI   |   HCI   |   STMP   |   ROST   |   JPM   |   JOY   |   LEA   |   AFSI   |   HFC   |   USANA HEALTH SCIENCES, INC. Profile Strategy: Growth Investor Based on: Martin Zweig USANA Health Sciences, Inc. develops and manufactures science-based nutritional and personal care products. The Company has operations in 15 markets worldwide, where it distributes and sells its products by way of direct selling. The Company reports operations in two geographic regions: North America and Asia Pacific, which is further divided into three sub-regions; Southeast Asia/Pacific, Greater China, and North Asia. North America includes the United States, Canada, Mexico, and direct sales from the United States to the United Kingdom and the Netherlands. Southeast Asia/Pacific includes Australia, New Zealand, Singapore, Malaysia, and the Philippines; Greater China includes Hong Kong, Taiwan and China; and North Asia includes Japan and South Korea. The Company's customer base consists of two types of customers: Associates and Preferred Customers. As of December 31, 2011, the Company had 222,000 active Associates and 64,000 active Preferred Customers worldwide. Analysis Guru Score: 92% P/E RATIO: [PASS] The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. USNA's P/E is 14.31, based on trailing 12 month earnings, while the current market PE is 15.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [FAIL] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. USNA's revenue growth is 11.25%, while it's earnings growth rate is 20.73%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, USNA fails this criterion. SALES GROWTH RATE: [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 (17.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (9.7%) of the current year. Sales growth for the prior must be greater than the latter. For USNA 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. USNA's EPS ($1.72) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. USNA's EPS for this quarter last year ($1.11) pass this test. POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: [PASS] The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. USNA's growth rate of 54.95% passes this test. EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: [PASS] Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for USNA is 10.37%. This should be less than the growth rates for the 3 previous quarters, which are 43.90%, 47.13%, and 42.22%. USNA passes this test, which means that it has good, reasonably steady earnings. This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: [PASS] If the growth rate of the prior three quarter's earnings, 44.40%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 54.95%, (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, 54.95% must be greater than or equal to the historical growth which is 20.73%. USNA would therefore pass this test. EARNINGS PERSISTENCE: [PASS] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. USNA, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.85, 2.17, 2.86, 3.26 and 4.45, passes this test. LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. USNA's long-term growth rate of 20.73%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. TOTAL DEBT/EQUITY RATIO: [PASS] A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. USNA's Debt/Equity (0.00%) is not considered high relative to its industry (142.01%) and passes this test. INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For USNA, this criterion has not been met (insider sell transactions are 148, while insiders buying number 92). 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.   BRIDGEPOINT EDUCATION INC Profile Strategy: Value Investor Based on: Benjamin Graham Bridgepoint Education, Inc. (Bridgepoint) is a provider of postsecondary education services. The Company's academic institutions include Ashford University and University of the Rockies. Its institutions deliver programs primarily online, as well as at their traditional campuses. As of December 31, 2011, the Company had 86,642 total students enrolled in its institutions. Bridgepoint's institutions conduct ongoing faculty and student assessment processes and provide a range of student services. The Company is also focused on developing new technologies, such as through Waypoint Outcomes, Constellation, and the development of its institutions' mobile learning platforms. The Company has developed Constellation to replace third party textbooks with digital course materials. Constellation materials are displayed in a browser-based platform. In January 2012, Bridgepoint introduced Thuze. Analysis Guru Score: 86% SECTOR: [PASS] BPI 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. BPI's sales of $881.0 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. BPI's current ratio of 2.88 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 BPI is $0.0 million, while the net current assets are $353.4 million. BPI passes this test. LONG-TERM EPS GROWTH: [FAIL] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for BPI were negative within the last 5 years and therefore the company fails this criterion. P/E RATIO: [PASS] The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. BPI's P/E of 10.93 (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. BPI's Price/Book ratio is 1.69, while the P/E is 10.93. BPI passes the Price/Book test.   HCI GROUP INC Profile Strategy: Growth Investor Based on: Martin Zweig HCI Group Inc, formerly Homeowners Choice, Inc., is a holding company. The Company, through its subsidiaries, is engaged in the property and casualty insurance business. Through Homeowners Choice Property & Casualty Insurance Company, Inc. (HCPC) and subsidiaries, primarily Homeowners Choice Managers, Inc. (HCM), Southern Administration, Inc., Claddaugh Casualty Insurance Company, Ltd., and its subsidiary, HCPCI Holdings LLC, it provides property and casualty homeowners' insurance, condominium-owners' insurance and tenants' insurance to individuals owning property in Florida. Its subsidiaries also include TV Investment Holdings LLC, which owns and operates a marina facility located in Florida; Unthink Technologies Private Limited. During the year ended December 31, 2011, it organized TV Investment Holdings LLC, HCI Holdings LLC and HCI Technical Resources, Inc. Analysis Guru Score: 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. HCI's P/E is 6.64, based on trailing 12 month earnings, while the current market PE is 15.00. 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. HCI's revenue growth is 50.75%, while it's earnings growth rate is 31.66%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, HCI 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 (52.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (48.4%) of the current year. Sales growth for the prior must be greater than the latter. For HCI 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. HCI's EPS ($1.40) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. HCI's EPS for this quarter last year ($0.74) 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. HCI's growth rate of 89.19% 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 HCI is 15.83%. This should be less than the growth rates for the 3 previous quarters which are 0.00%, 91.94% and 105.68%. HCI 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, 84.75%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 89.19%, (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, 89.19% must be greater than or equal to the historical growth which is 31.66%. HCI would therefore pass this test. EARNINGS PERSISTENCE: [FAIL] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. HCI, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.08, 1.52, 0.81, 1.34, and 3.02, fails 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. HCI's long-term growth rate of 31.66%, based on the average of the 3, 4 and 5 year historical eps growth rates, 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 HCI, this criterion has not been met (insider sell transactions are 136, while insiders buying number 26). 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.   STAMPS.COM INC. Profile Strategy: Growth Investor Based on: Martin Zweig Stamps.com Inc. is a provider of Internet-based postage solutions. The Company's customers use its service to mail and ship a variety of mail pieces, including postcards, envelopes, flats and packages, using a range of United States Postal Service (the USPS) mail classes, including First Class Mail, Priority Mail, Express Mail, Media Mail, Parcel Post, and others. Its customers include individuals, small businesses, home offices, medium-size businesses and enterprises. Analysis Guru Score: 77% 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. STMP's P/E is 20.71, based on trailing 12 month earnings, while the current market PE is 15.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [FAIL] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. STMP's revenue growth is 8.71%, while it's earnings growth rate is 53.95%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, STMP fails 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 (13.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (13.5%) of the current year. Sales growth for the prior must be greater than the latter. For STMP 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. STMP's EPS ($0.53) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. STMP's EPS for this quarter last year ($0.34) 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. STMP's growth rate of 55.88% passes this test. EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: [FAIL] Compare the earnings growth rate of the past four quarters with long-term EPS growth rate. Earnings growth in the past 4 quarters should be at least half of the long-term EPS growth rate. A stock should not be considered if it posted several quarters of skimpy earnings. STMP had 2 quarters of skimpy growth in the last 2 years. 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, -27.67%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 55.88%, (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, 55.88% must be greater than or equal to the historical growth which is 53.95%. STMP would therefore pass this test. EARNINGS PERSISTENCE: [FAIL] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. STMP, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.52, 0.38, 0.38, 1.73, and 2.30, fails 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. STMP's long-term growth rate of 53.95%, 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. STMP's Debt/Equity (0.00%) is not considered high relative to its industry (86.57%) 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 STMP, this criterion has not been met (insider sell transactions are 150, while insiders buying number 203). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.   ROSS STORES, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Ross Stores, Inc., along with its subsidiaries, operates two brands of off-price retail apparel and home fashion stores. As of January 28, 2012, the Company operated a total of 1,125 stores, of which 1,037 were Ross Dress for Less (Ross) locations in 29 states, the District of Columbia, and Guam, and 88 were dd's DISCOUNTS stores in seven states: 48 in California, 19 in Texas, 12 in Florida, four in Arizona, two in Georgia, two in Nevada, and one in Maryland. Ross focuses on customers primarily from middle income households, while dd's DISCOUNTS focuses on customers from more moderate income households. During the fiscal year ended January 28, 2012 (fiscal 2012), it opened 59 new Ross stores and closed ten existing stores. During fiscal 2011, it opened 21 new dd's DISCOUNTS stores. The average approximate dd's DISCOUNTS store size is 23,900 square feet. In April 2011, it purchased a 449,000 square foot warehouse for packaway storage in Riverside, California. Analysis Guru Score: 75% 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. ROST, with a market cap of $14,824 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. ROST, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.16, 1.77, 2.31, 2.86 and 3.53, 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. ROST's Price/Sales ratio of 1.50, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [FAIL] 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. ROST has a relative strength of 39. This does not pass the final criterion. As a result, this methodology would not consider the stock even though it passed the previous three criteria.   JPMORGAN CHASE & CO Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool JPMorgan Chase & Co. (JPMorgan Chase) is a financial holding company. The Company is a global financial services firm and a banking institution in the United States, with global operations. The Company is engaged in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, asset management and private equity. JPMorgan Chase's principal bank subsidiaries are JPMorgan Chase Bank, National Association (JPMorgan Chase Bank, N.A.), and Chase Bank USA, National Association (Chase Bank USA, N.A.). JPMorgan Chase's activities are organized into four business segments, as well as Corporate/Private Equity. The Company's consumer business is the Consumer & Community Banking segment. The Corporate & Investment Bank, Commercial Banking, and Asset Management segments consists of the Company's wholesale businesses. Analysis Guru Score: 72% 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. JPM's profit margin of 24.64% passes this test. RELATIVE STRENGTH: [FAIL] The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. JPM, with a relative strength of 73, fails 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 JPM (32.23% for EPS, and -6.77% for Sales) are not good enough to pass. INSIDER HOLDINGS: [FAIL] JPM's insiders should own at least 10% (they own 0.51%) 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. JPM's free cash flow of $5.20 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] JPM's profit margin has been consistent or even increasing over the past three years (Current year: 37.96%, Last year: 30.96%, Two years ago: 27.23%), 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 JPM's case. CASH AND CASH EQUIVALENTS: [PASS] JPM's level of cash $53,723.0 million passes this criteria. If a company is a cash generator, like JPM, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. "THE FOOL RATIO" (P/E TO GROWTH): [PASS] The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (JPM's is 0.27), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. JPM passes this test. The following criteria for JPM are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] JPM has not been significantly increasing the number of shares outstanding within recent years which is a good sign. JPM currently has 3,814.0 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. JPM's sales of $53,835.0 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: [FAIL] JPM does not pass the Daily Dollar Volume (DDV of $972.2 million) test. It exceeds the maximum requirement of $25 million. Stocks that fail the test are too liquid for a small individual investor and many institutions have already discovered it. PRICE: [PASS] This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. JPM with a price of $50.70 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] JPM's income tax paid expressed as a percentage of pretax income this year was (26.40%) and last year (29.06%) 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.   JOY GLOBAL INC. Profile Strategy: Patient Investor Based on: Warren Buffett Joy Global Inc. is a manufacturer and servicer of high productivity mining equipment for the extraction of coal and other minerals and ores. The Company's equipment is used in mining regions throughout the world to mine coal, copper, iron ore, oil sands, and other minerals. The Company's underground mining machinery segment (Joy Mining Machinery) is a manufacturer of underground mining equipment for the extraction of coal and other bedded minerals and offers service locations near mining regions worldwide. The Company's surface mining equipment segment (P&H Mining Equipment) is a producer of surface mining equipment for the extraction of ores and minerals and provides operational support for many types of equipment used in surface mining. During the fiscal year ended October 28, 2011, the Company completed the acquisition of LeTourneau. On December 30, 2011, it acquired approximately 41.1% of Int'l Mining Machinery Holdings Limited's common stock to 69.2%. Analysis Guru Score: 72% STAGE 1: "Is this a Buffett type company?" A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage. LOOK FOR EARNINGS PREDICTABILITY: [PASS] Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.16, 0.46, 1.19, 3.36, 2.51, 3.44, 4.41, 4.40, 5.92, 7.18. Buffett would consider JOY's earnings predictable, although earnings have declined 2 time(s) in the past seven years, with the most recent decline 3 years ago. The dips have totaled 25.5%. JOY's long term historical EPS growth rate is 20.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 10.3% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers. LOOK AT THE ABILITY TO PAY OFF DEBT [PASS] Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. JOY has a debt of 1,269.4 million and earnings of 718.0 million, which could be used to pay off the debt in less than two years, which is considered exceptional. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [FAIL] 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 JOY, over the last ten years, is 26.8%, 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 5.1%, 12.2%, 21.7%, 43.0%, 37.3%, 70.3%, 55.8%, 33.9%, 31.9%, 29.5%, and the average ROE over the last 3 years is 31.8%, thus failing this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: [FAIL] Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for JOY, over the last ten years, is 23.0% and the average ROTC over the past 3 years is 21.5%, which is high enough to pass. It is not enough that the average be at least 12%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROTC must be at least 9% for Buffett to feel comfortable that the ROTC is consistent. The ROTC for the last 10 years, from earliest to latest, is 3.3%, 8.4%, 21.7%, 38.9%, 24.1%, 34.9%, 34.0%, 26.2%, 18.8%, 19.6%, thus failing 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. JOY's free cash flow per share of $1.19 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 $28.08 and compares it to the gain in EPS over the same period of $7.02. JOY's management has proven it can earn shareholders a 25.0% 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. JOY's shares outstanding have fallen over the past five years from 108,750,000 to 107,000,000, 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 JOY 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 $6.71 and divide it by the current market price of $49.18. An investor, purchasing JOY, could expect to receive a 13.64% initial rate of return. Furthermore, he or she could expect the rate to increase 10.3% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 2.20%. Compare this with JOY's initial yield of 13.64%, which will expand at an annual rate of 10.3%, based on the analysts' consensus estimated long term growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding. CALCULATE THE FUTURE EPS: [No Pass/Fail] JOY currently has a book value of $28.26. It is safe to say that if JOY can preserve its average rate of return on equity of 26.8% and continues to retain 83.61% of its earnings, it will be able to sustain an earnings growth rate of 22.4% and it will have a book value of $213.70 in ten years. If it can still earn 26.8% on equity in ten years, then expected EPS will be $57.31. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $57.31 and multiply them by the lower of the 5 year average P/E ratio (12.0) or current P/E ratio (current P/E in this case), which is 7.3 and you get JOY's projected future stock price of $420.07. 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 $19.65. This gives you a total dollar amount of $439.72. These numbers indicate that one could expect to make a 24.5% average annual return on JOY's stock at the present time. Buffett would consider this an absolutely fantastic expected return. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 10.3%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $17.93. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (12.0) or current P/E ratio (current P/E in this case), which is 7.3. This equals the future stock price of $131.45. Add in the total expected dividend pool of $19.65 to get a total dollar amount of $151.10. 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 $49.18 and the future expected stock price, including the dividend pool, of $151.10. If you were to invest in JOY at this time, you could expect a 11.88% average annual return on your money. Buffett likes to see a 15% return, and would even go down to 12%. 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 11.9% and 24.5%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 18.2% on JOY stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   LEAR CORPORATION Profile Strategy: Value Investor Based on: Benjamin Graham Lear Corporation is a tier 1 supplier to the global automotive industry. The Company supplies its products to automotive manufacturers with automotive seat systems and related components, as well as electrical distribution systems and related components. The Company has two segments: seating and electrical power management systems (EPMS). The seating segment includes seat systems and related components, such as seat frames, recliner mechanisms, seat tracks, seat trim covers, headrests and seat foam. The EPMS segment includes electrical distribution systems for traditional powertrain vehicles, as well as for hybrid and electric vehicles. As of December 31, 2011, it had 20 joint ventures located throughout Asia, as well as five in North America, two in Europe and Africa and one with operations in all three regions. Analysis Guru Score: 71% SECTOR: [PASS] LEA is neither a technology nor financial Company, and therefore this methodology is applicable. SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. LEA's sales of $15,318.2 million, based on trailing 12 month sales, pass this test. CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. LEA's current ratio of 1.33 fails the test. LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for LEA is $1,056.9 million, while the net current assets are $1,199.5 million. LEA passes this test. LONG-TERM EPS GROWTH: [FAIL] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for LEA were negative within the last 5 years and therefore the company fails this criterion. P/E RATIO: [PASS] The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. LEA's P/E of 9.40 (using the 3 year PE) passes this test. PRICE/BOOK RATIO: [PASS] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. LEA's Price/Book ratio is 2.08, while the P/E is 9.40. LEA passes the Price/Book test.   AMTRUST FINANCIAL SERVICES, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Amtrust Financial Services, Inc. is a holding company. The Company is a multinational specialty property and casualty insurer focused on generating consistent underwriting profits. The Company operates in four segments: small commercial business, specialty program and personal lines reinsurance. In January 2013, the Company acquired First Nonprofit Companies, Inc. In February 2013, its subsidiary acquired Car Care Plan (Holdings) Limited from Ally Insurance Holdings, Inc. In April 2013, it acquired Sequoia Insurance Company and its subsidiaries, Sequoia Indemnity Company and Personal Express Insurance Company. In May 2013, the Company acquired Mutual Insurers Holding Company (MIHC) and MIHC's subsidiary, First Nonprofit Insurance Company. Analysis Guru Score: 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. AFSI, with a market cap of $2,716 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. AFSI, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.24, 1.56, 1.95, 2.29 and 2.34, 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. AFSI's Price/Sales ratio of 1.18, 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. AFSI, whose relative strength is 81, is in the top 50 and would pass this last criterion.   HOLLYFRONTIER CORP Profile Strategy: Value Investor Based on: Benjamin Graham HollyFrontier Corporation (HollyFrontier), formerly Holly Corporation, is a petroleum refiner, which produces light products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. HollyFrontier operates in two segments: Refining and Holly Energy Partners, L.P. (HEP). The Refining segment includes the operations of its El Dorado, Tulsa, Navajo, Cheyenne and Woods Cross Refineries and NK Asphalt. The HEP segment involves all of the operations of HEP. As of December 31, 2011, it operated five refineries having a combined crude oil processing capacity of 443,000 barrels per day that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain regions of the United States. The Company merged with Frontier Oil Corporation (Frontier), on July 1, 2011. On November 9, 2011, HEP acquired from the Company certain tankage, loading rack and crude receiving assets located at its El Dorado and Cheyenne Refineries. Analysis Guru Score: 100% SECTOR: [PASS] HFC 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. HFC's sales of $20,358.9 million, based on trailing 12 month sales, pass this test. CURRENT RATIO: [PASS] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. HFC's current ratio of 2.37 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 HFC is $990.2 million, while the net current assets are $2,568.5 million. HFC 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. HFC's EPS growth over that period of 1,416.3% 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. HFC's P/E of 8.60 (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. HFC's Price/Book ratio is 1.45, while the P/E is 8.60. HFC passes 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 TJX THE TJX COMPANIES, INC. Retail (Apparel) 65 VLO VALERO ENERGY CORPORATION Oil & Gas Operations 63 RGR STURM, RUGER & COMPANY Recreational Products 61 HIBB HIBBETT SPORTS, INC. Retail (Specialty) 60 SIG SIGNET JEWELERS LTD. Retail (Specialty) 58 AGCO AGCO CORPORATION Constr. & Agric. Machinery 57 CVX CHEVRON CORPORATION Oil & Gas - Integrated 56 AFOP ALLIANCE FIBER OPTIC PRODUCTS INC Semiconductors 53 PBR PETROLEO BRASILEIRO PETROBRAS SA (ADR) Oil & Gas - Integrated 50 ORLY O'REILLY AUTOMOTIVE INC Auto & Truck Parts 49

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