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Executive Summary	November 8, 2013

The Economy The backlog of reports caused by the partial government shutdown has begun to dislodge, and all in all the data emerging is showing that the economy has been faring pretty well. Industrial production for example, rose 0.6% in September, according to a new Federal Reserve report. For the full third quarter, production was up at an annual rate of 2.3%. There was a caveat to the September numbers, however, which was that most of the gains were due to a 4.4% increase in utility output, which tends to be fairly volatile and impacted greatly by weather from month to month. Still, manufacturing output increased slightly, rising 0.1%, while mining output increased 0.2%. New claims for unemployment meanwhile, have fallen a bit over the past two weeks, moving back down toward the level we saw before the government shutdown. They're now 9.6% below where they stood a year ago. Continuing claims are more than 10% below their year-ago level. New data also showed that overall third-quarter growth was pretty good in the U.S., with gross domestic product rising at a 2.8% pace. There were some aspects of the report that were cause for concern, however. Growth in personal consumption expenditures slowed to 1.5%, down from 1.8% the previous quarter, while business investment dipped significantly to 1.4%, down from 4.7%. Residential investment and auto and food purchases were some of the big drivers behind the overall 2.8% gain. In the housing market, prices continue to rise. The newest data from the S&P/Case-Shiller Home Price Indices showed that the 10-city and 20-city indices increased 1.3% in August (0.9% when seasonally adjusted) versus July. Both indices were 12.8% above their year-ago levels, the highest year-over-year increases seen since 2006. All 20 cities notched gains for the month, on both month-over-month and year-over-year bases. There are, however, signs of headwinds for the housing market. Pending home sales fell 5.6% in September, according to the National Association of Realtors. It was the fourth straight monthly decline, as higher mortgage rates and prices curbed buying power, the Realtor group said. It also cited the government shutdown fears as a likely reason for the decline. Pending sales are now just 1.1% above where they were a year ago. A slowing housing market was one reason that the Federal Reserve decided not to begin tapering its asset purchasing programs at its October meeting. The Fed is going to continue with the current pace of its purchases for now. The European Central Bank did, however, make a significant move since our last newsletter, cutting interest rates to a new record low in order to support the slow recovery occurring in Europe. The ECB also said it would continue to provide major liquidity for European banks well into 2015. Overall, the events of the past fortnight have had a mixed impact on stocks. Since our last newsletter, the S&P 500 returned -0.3%, while the Hot List returned -3.4%. So far in 2013, the portfolio has returned 30.2% vs. 22.5% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 253.1% vs. the S&P's 74.6% gain. Portfolio Update A couple of the Hot List's holdings hit some rough sledding over the past couple weeks. For-profit education firm Bridgepoint Education was down more than 15% since our last newsletter as of late-morning trading on November 7. A big reason was that Deutsche Bank downgraded the stock from Hold to Sell on November 4, saying that Bridgepoint schools will likely have to lower their tuition prices in response to other for-profit schools doing so. The following day, Bridgepoint reported third-quarter results that missed analysts expectations on both earnings and revenue, further hurting shares. (See below for more details.) USANA Health Sciences also had a rough fortnight, with its shares down more than 10%. The catalyst for the declines seems to be the earnings report issued shortly before our previous newsletter, in which the firm lowered its forward guidance. The company said that it was doing so because of some changes that may negatively impact results in the short term, but should help in the longer term. Investors don't seem to be taking the news too well, which is not a surprise given how short-term oriented Wall Street is. One bright spot for the Hot List was Coach Inc., whose shares were up more than 5%. The gains seemed to be a bounce-back that occurred after shares were hit hard because of a disappointing earnings and guidance announcement. That announcement and the accompanying declines occurred shortly before the Hot List bought the stock, so it looks like the portfolio fared quite well on the timing of this buy. As I often note, investors tend to overreact in the short term to negative news, which leads shares of stocks hit by short-term bad news poised for rebounds after the initial declines. Going forward, that would seem to be good news for stocks like Bridgepoint and USANA. Next week, we'll rebalance the portfolio, at which time we'll see if they and the Hot List's other holdings will remain, or if they'll be surpassed by other opportunities.		Editor-in-Chief: John Reese Since Inception   Hot List 253.1% S&P 500 74.6% Accuracy 56.5% Beta 1.2 YTD   Hot List 30.2% S&P 500 22.5% Since Last Issue   Hot List -3.4% S&P 500 -0.3% Avg. Fundamentals   Market Cap (mil) $9,099 PE Ratio 9.7 5 Yr EPS Growth 28.4% Yield 1.8% Rel. Strength 71 Portfolio Sectors Services 3 Energy 2 Financial 2 Capital Goods 1 Conglomerates 1 Consumer Cyclical 1
Have Your Portfolio Managed Using Validea's Investing System Many users know about our research services but are unaware that money management services based on our system are also offered through a separate registered investment advisory firm, Validea Capital Management. If you are thinking about switching advisors or no longer have the time or inclination to manage your investments yourself, find out more about Validea Capital, its portfolio offerings, and its performance below. Request an Investment Consultation Today! ** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. The information above is not intended as personal investment advice and should not be interpreted as such. Guru Spotlight: Warren Buffett With his humble Midwest beginnings, plainspoken wisdom and wit, and incredible wealth, Warren Buffett has become the most-watched investor in the world. But as interesting a character as Buffett is, the more important piece of the Buffett puzzle for investors is this: How did he do it? My Buffett-based Guru Strategy attempts to answer that question. Based on the approach Buffett reportedly used to build his fortune, it tries to use the same conservative, stringent criteria to choose stocks that the "Oracle of Omaha" has used in evaluating businesses. Before we get into exactly how this strategy works, a couple notes about Buffett and my Buffett-based strategy: First, while most of my Guru Strategies are based on published writings of the gurus themselves, Buffett has not publicly disclosed his exact strategy (though he has hinted at pieces of it). My Buffett-inspired model is based on the book Buffettology, written by Mary Buffett, Warren's ex-daughter-in-law, and David Clark, a Buffett family friend, both of whom worked closely with Buffett. Second, while most of my Buffett-based method centers on a company's fundamentals, there are a few non-statistical criteria to keep in mind. For example, Buffett likes to invest in companies that have very recognizable brand names, to the point that it is difficult for competitors to take away their market share, no matter how much capital they have. One example of a current Berkshire holding that meets this criterion is Coca-Cola, whose name is engrained in the culture of America, as well as other parts of the world. In addition, Buffett also likes firms whose products are simple for an investor to understand -- food, diapers, razors, to name a few examples. In the end, however, for Buffett, it comes down to the numbers -- those on a company's balance sheet and those that represent the price of its stock. In terms of the numbers on the balance sheet, one theme of the Buffett approach is solid results over a long period of time. He likes companies that have a lengthy history of steady earnings growth, and, in most cases, the model I base on his philosophy requires companies to have posted increasing earnings per share each year for the past ten years. There are a few exceptions to this, one of which is that a company's EPS can be negative or be a sharp loss in the most recent year, because that could signal a good buying opportunity (if the rest of the company's long-term earnings history is solid). Another part of Buffett's conservative approach: targeting companies with manageable debt. My model calls for companies to have the ability to pay off their debt within five years, based on their current earnings. It really likes stocks that could pay off their debts in less than two years. Smart Management, and an Advantage Two qualities Buffett is known to look for in his buys are strong management and a "durable competitive advantage". Both of those are qualitative things, but Buffett has used certain quantitative measures to get an idea of whether a firm has those qualities. Two of those measures are return on equity and return on total capital. The model I base on Buffett's approach likes firms to have posted an average ROE of at least 15% over the past 10 years and the past three years, and an ROTC of at least 12% over those time frames. Another way Buffett examines a firm's management is by looking at how the it spends the company's retained earnings -- that is, the earnings a company keeps rather than paying out in dividends. My Buffett-based model takes the amount a company's earnings per share have increased in the past decade and divides it by the total amount of retained earnings over that time. The result shows how much profit the company has generated using the money it has reinvested in itself -- in other words, how well management is using retained earnings to increase shareholders' wealth. The Buffett method requires a firm to have generated a return of 12% or more on its retained earnings over the past decade. The Price Is Right? The criteria we've covered so far all are used to identify "Buffett-type" stocks. But there's a second critical part to Buffett's analysis: price -- can he get the stock of a quality company at a good price? One way my Buffett-based model answers this question is by comparing a company's initial expected yield to the long-term treasury yield. (If it's not going to earn you more than a nice, safe T-Bill, why take the risk involved in a stock?) To predict where a stock will be in the future, Buffett uses not just one, but two different methods to estimate what the company's earnings and stock's rate of return will be 10 years from now. One method involves using the firm's historical return on equity figures, while another uses earnings per share data. (You can find details on these methods by viewing an individual stock's scores on the Buffett model on Validea.com, or in my latest book, The Guru Investor.) This notion of predicting what a company's earnings will be in 10 years may seem to run counter to Buffett's nonspeculative ways. But while using these methods to predict a company's earnings for the next 10 years in her book, Mary Buffett notes: "In most situations this would be an act of insanity. However, as Warren has found, if the company is one of sufficient earning power and earns high rates of return on shareholders' equity, created by some kind of consumer monopoly, chances are good that accurate long-term projections of earnings can be made." Solid Performer My Buffett-based 10-stock portfolio wasn't one of my original portfolios, instead coming online in late 2003. Since then, it's returned 115.1 %, vs. 66.6% for the S&P 500 (figures through Nov. 4). That's 8.0% annualized, vs. just 5.3% for the S&P. The portfolio has been a very strong performer over the last two years. While the broader market was flat in 2011, the Buffett-based portfolio jumped 10.2%. In 2012, it gained more than 15%, again topping the index. This year, it has gained 28.8% vs. the S&P's 24.0%. In the end, Buffett-type stocks are not the kind of sexy, flavor-of-the-month picks that catch most investors' eyes; instead, they are proven businesses selling at good prices. That approach, combined with a long-term perspective, tremendous discipline, and an ability to keep emotions at bay (allowing him to buy when others are fearful), is how Buffett has become the world's greatest investor. Whatever the size of your portfolio, those qualities are worth emulating. Now, here's a look at my Buffett portfolio's current holdings. It's an interesting group, and some of the holdings might not seem like "Buffett-type" plays on the surface. But they have the fundamental characteristics that make them the type of stocks Buffett has focused on while building his empire. The TJX Companies, Inc. (TJX) PT Telekomunikasi Indonesia (TLK) Monster Beverage Corp. (MNST) Coach, Inc. (COH) Ross Stores, Inc. (ROST) CNOOC Limited (CEO) Hibbett Sports, Inc. (HIBB) First Cash Financial Services (FCFS) Advance Auto Parts (AAP) NetEase Inc. (NTES) News about Validea Hot List Stocks USANA Health Sciences (USNA): USANA announced that it is building a state-of-the-art $40 million facility in Beijing that will house manufacturing and production operations. The facility will be nearly 319,000 square feet, making it the largest in all of USANA's 19 international markets. USANA has negotiated land usage rights for the new building with the Beijing Economic and Technological Development Area, which houses a number of high-tech industries. The company anticipates that construction will begin in 2014, and that the facility will be operational during the latter part of 2015. Bridgepoint Education (BPI): Bridgepoint reported third-quarter revenue of $185.6 million, down from $252.1 million for the same period a year ago. Net income was $10.1 million, compared with $29.8 million, while fully diluted earnings per share was $0.18, down from $0.53. Both the revenue and EPS results missed analysts expectations. Shares fell about 3% the day of the announcement. Bridgepoint also announced that it has entered into a license agreement with a subsidiary of Forbes Media LLC, under which Ashford University's College of Business will be named the Forbes School of Business. Bridgepoint has licensed certain trademarks and print and online content from Forbes, as well as other intellectual property, for use in Ashford's bachelor's and master's business programs, the company said. The agreement has an initial 12-year term, with an option to renew for subsequent 12-year terms at Bridgepoint's election, subject to certain conditions. Bridgepoint paid $15 million as part of the agreement, and will pay royalties based on a percentage of annual revenues attributable to Ashford University's business-related programs, subject to a $2.5 million annual minimum. 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 HCI HCI GROUP INC Insurance (Prop. & Casualty) 100 BPI BRIDGEPOINT EDUCATION INC Schools 95 AFSI AMTRUST FINANCIAL SERVICES, INC. Insurance (Prop. & Casualty) 74 LUKOY LUKOIL (ADR) Oil & Gas - Integrated 67 USNA USANA HEALTH SCIENCES, INC. Conglomerates 66 HFC HOLLYFRONTIER CORP Oil & Gas Operations 66 XIN XINYUAN REAL ESTATE CO., LTD. (ADR) Construction Services 65 LEA LEAR CORPORATION Auto & Truck Parts 63 COH COACH, INC. Retail (Apparel) 36 STMP STAMPS.COM INC. Retail (Catalog & Mail Order) 34 Ticker Market Cap Date Added Start Price Current Price Return HCI $478 6/7/2013 $34.20 $41.62 21.7% BPI $910 8/2/2013 $16.59 $16.67 0.5% AFSI $2,935 7/5/2013 $35.78 $39.43 10.2% LUKOY $54,995 9/27/2013 $64.52 $64.00 -0.8% USNA $932 12/21/2012 $33.83 $67.59 99.8% HFC $8,638 4/12/2013 $46.83 $43.40 -7.3% XIN $673 10/25/2013 $6.77 $6.87 1.5% LEA $6,218 5/10/2013 $60.48 $77.06 27.4% COH $14,494 10/25/2013 $49.89 $51.68 3.6% STMP $715 8/30/2013 $41.88 $45.72 9.2%

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer HCI   |   BPI   |   AFSI   |   LUKOY   |   USNA   |   HFC   |   XIN   |   LEA   |   COH   |   STMP   |   HCI GROUP INC Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool HCI Group Inc, formerly Homeowners Choice, Inc., is a holding company. The Company, through its subsidiaries, is engaged in the property and casualty insurance business. Through Homeowners Choice Property & Casualty Insurance Company, Inc. (HCPC) and subsidiaries, primarily Homeowners Choice Managers, Inc. (HCM), Southern Administration, Inc., Claddaugh Casualty Insurance Company, Ltd., and its subsidiary, HCPCI Holdings LLC, it provides property and casualty homeowners' insurance, condominium-owners' insurance and tenants' insurance to individuals owning property in Florida. Its subsidiaries also include TV Investment Holdings LLC, which owns and operates a marina facility located in Florida; Unthink Technologies Private Limited. During the year ended December 31, 2011, it organized TV Investment Holdings LLC, HCI Holdings LLC and HCI Technical Resources, Inc. Analysis Guru Score: 93% PROFIT MARGIN: [PASS] This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. HCI's profit margin of 25.80% passes this test. RELATIVE STRENGTH: [FAIL] The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. Although HCI's relative strength of 89 is below the acceptable level, yet it is very close. Keep an eye on the stock as it could move into the acceptable range. COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: [PASS] Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for HCI (89.19% for EPS, and 52.72% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] HCI's insiders should own at least 10% (they own 10.64% ) of the company's outstanding shares which is the minimum required. A high percentage typically indicates that the insiders are confident that the company will do well. CASH FLOW FROM OPERATIONS: [PASS] A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. HCI's free cash flow of $9.84 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] HCI's profit margin has been consistent or even increasing over the past three years (Current year: 18.50%, Last year: 10.62%, Two years ago: 7.90%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. R&D AS A PERCENTAGE OF SALES: [NEUTRAL] This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in HCI's case. CASH AND CASH EQUIVALENTS: [PASS] HCI's level of cash $230.2 million passes this criteria. If a company is a cash generator, like HCI, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. "THE FOOL RATIO" (P/E TO GROWTH): [PASS] The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (HCI's is 0.28), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. HCI passes this test. The following criteria for HCI are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] HCI has not been significantly increasing the number of shares outstanding within recent years which is a good sign. HCI currently has 11.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock. SALES: [PASS] Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. HCI's sales of $203.7 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". HCI passes the sales test. DAILY DOLLAR VOLUME: [PASS] HCI passes the Daily Dollar Volume (DDV of $7.6 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf." PRICE: [PASS] This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. HCI with a price of $41.62 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions. INCOME TAX PERCENTAGE: [PASS] HCI's income tax paid expressed as a percentage of pretax income this year was (39.17%) and last year (39.27%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.   BRIDGEPOINT EDUCATION INC Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Bridgepoint Education, Inc. (Bridgepoint) is a provider of postsecondary education services. The Company's academic institutions include Ashford University and University of the Rockies. Its institutions deliver programs primarily online, as well as at their traditional campuses. As of December 31, 2011, the Company had 86,642 total students enrolled in its institutions. Bridgepoint's institutions conduct ongoing faculty and student assessment processes and provide a range of student services. The Company is also focused on developing new technologies, such as through Waypoint Outcomes, Constellation, and the development of its institutions' mobile learning platforms. The Company has developed Constellation to replace third party textbooks with digital course materials. Constellation materials are displayed in a browser-based platform. In January 2012, Bridgepoint introduced Thuze. Analysis Guru Score: 90% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratio between .75 and 1.5 are good values. BPI's P/S ratio of 1.03 based on trailing 12 month sales, falls within the "good values" range for non-cyclical companies and is considered attractive. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. BPI's Debt/Equity of 0.00% is exceptional, thus passing the test. PRICE/RESEARCH RATIO: [PASS] This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. BPI is neither a Technology nor Medical company. Therefore the Price/Research ratio is not available and, hence, not much emphasis should be placed on this particular variable. PRELIMINARY GRADE: Some Interest in BPI At this Point Is BPI a "Super Stock"? NO PRICE/SALES RATIO: [FAIL] The prospective company should have a low Price/Sales ratio. To be considered a "Super Stock", non-cyclical (non-Smokestack) companies should have Price/Sales ratios below .75. However, BPI, who has a P/S of 1.03, does not fall within the "Super Stock" range. It does fall between 0.75 and 1.5, which is considered the "good values" range for non-cyclical companies. Nonetheless, it does not pass this "Super Stock" criterion. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. BPI's inflation adjusted EPS growth rate of 26.74% passes the test. FREE CASH PER SHARE: [PASS] This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. BPI's free cash per share of 2.11 passes this criterion. THREE YEAR AVERAGE NET PROFIT MARGIN: [PASS] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. BPI, whose three year net profit margin averages 16.54%, passes this evaluation.   AMTRUST FINANCIAL SERVICES, INC. Profile Strategy: Contrarian Investor Based on: David Dreman 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: 71% 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. AFSI has a market cap of $2,935 million, therefore passing the test. EARNINGS TREND: [FAIL] A company should show a rising trend in the reported earnings for the most recent quarters. AFSI's EPS for the latest quarter is not greater than the prior quarter, (from earliest to most recent quarter) 1.09, 1.04. 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: [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. AFSI passes this test as its EPS growth rate over the past 6 months (44.44%) has beaten that of the S&P (14.80%). AFSI's estimated EPS growth for the current year is (30.77%), which indicates the company is expected to experience positive earnings growth. As a result, AFSI passes this test. This methodology would utilize four separate criteria to determine if AFSI 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. AFSI's P/E of 11.42, based on trailing 12 month earnings, meets the bottom 20% criterion (below 11.63), 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. AFSI's P/CF of 9.39 does not meet the bottom 20% criterion (below 6.73), 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. AFSI's P/B is currently 2.44, which does not meet the bottom 20% criterion (below 0.97), 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%). AFSI's P/D of 70.42 does not meet the bottom 20% criterion (below 20.49 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. 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 AFSI is 12.33%, while its historical payout ratio has been 13.49%. 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 16.68%, and would consider anything over 27% to be staggering. The ROE for AFSI of 23.81% 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. AFSI's pre-tax profit margin is 14.57%, thus passing this criterion. YIELD: [FAIL] The company in question should have a yield that is high and that can be maintained or increased. AFSI's current yield is 1.42%, while the market yield is 2.58%. AFSI fails this test.   LUKOIL (ADR) Profile Strategy: Value Investor Based on: Benjamin Graham NK Lukoil OAO (Neftyanaya Kompaniya LUKOIL OAO or NK LUKOIL OJSC) is a Russia-based integrated oil and gas company. The Company is engaged in the business of oil exploration, production, refining, marketing and distribution. It is an owner of refineries, gas processing, petrochemical plants and gas stations network located in Russia, Eastern and Western Europe, as well as Africa. The Company's petroleum products are sold in the Russian Federation, the Commonwealth of Independent States (CIS) countries, Eastern and Western Europe, Asia and the United States. NK Lukoil OAO operates through numerous subsidiaries and affiliated companies. In April 2013, the Company acquired a 100% of Samara-Nafta ZAO and completed acquisition of CJSC Kama-Oil. In June 2013, it sold a 99.57% stake in Lukoil Odes'kyi NPZ PAT. The Company's major shareholder is NKO ZAO NRD with a stake of 91.60%. Analysis Guru Score: 71% SECTOR: [PASS] LUKOY 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. LUKOY's sales of $140,336.0 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. LUKOY's current ratio of 1.77 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 LUKOY is $8,774.0 million, while the net current assets are $10,534.0 million. LUKOY 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 LUKOY 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. LUKOY's P/E of 5.00 (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. LUKOY's Price/Book ratio is 0.63, while the P/E is 5.00. LUKOY passes the Price/Book test.   USANA HEALTH SCIENCES, INC. Profile Strategy: Patient Investor Based on: Warren Buffett 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: 93% 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 0.98, 1.50, 2.03, 2.20, 2.65, 1.85, 2.17, 2.86, 3.26, 4.45. Buffett would consider USNA's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 5 years ago. The dips have totaled 30.2%. USNA's long term historical EPS growth rate is 20.7%, based on the average of the 3, 4 and 5 year historical eps growth rates. 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. USNA has no long term debt and therefore would pass this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [PASS] Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for USNA, over the last ten years, is 36.0%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 42.8%, 59.4%, 81.4%, 65.4%, 130.4%, 89.3%, 44.8%, 31.2%, 28.0%, 33.2%, and the average ROE over the last 3 years is 30.8%, thus passing this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: [PASS] Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for USNA, over the last ten years, is 49.5% and the average ROTC over the past 3 years is 30.8%, 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 42.8%, 59.4%, 81.4%, 65.4%, 70.5%, 42.6%, 40.9%, 31.2%, 28.0%, 33.2%, thus passing this criterion. LOOK AT CAPITAL EXPENDITURES: [PASS] Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. USNA's free cash flow per share of $4.84 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 $23.95 and compares it to the gain in EPS over the same period of $3.47. USNA's management has proven it can earn shareholders a 14.5% return on the earnings they kept. This return is acceptable to Buffett, but he would prefer to see a return > 15%. Essentially, management is is doing a good 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. USNA's shares outstanding have fallen over the past five years from 15,350,000 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 USNA 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 $5.44 and divide it by the current market price of $67.59. An investor, purchasing USNA, could expect to receive a 8.05% initial rate of return. Furthermore, he or she could expect the rate to increase 20.7% per year, based on the average of the 3, 4 and 5 year historical eps growth rates, 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 2.75%. Compare this with USNA's initial yield of 8.05%, which will expand at an annual rate of 20.7%, based on the average of the 3, 4 and 5 year historical eps growth rates. 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] USNA currently has a book value of $17.56. It is safe to say that if USNA can preserve its average rate of return on equity of 30.8% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 30.8% and it will have a book value of $257.01 in ten years. If it can still earn 30.8% on equity in ten years, then expected EPS will be $79.12. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $79.12 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (12.4) (5 year average P/E in this case), which is 11.7 and you get USNA's projected future stock price of $924.86. 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 $924.86. These numbers indicate that one could expect to make a 29.9% average annual return on USNA'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 20.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, you can project EPS in ten years to be $35.80. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (12.4) (5 year average P/E in this case), which is 11.7. This equals the future stock price of $418.49. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $418.49. 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 $67.59 and the future expected stock price, including the dividend pool, of $418.49. If you were to invest in USNA at this time, you could expect a 20.00% 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 20.0% and 29.9%. 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 25.0% on USNA stock for the next ten years, based on the current fundamentals. Buffett would consider this an exceptional return, thus passing the criterion.   HOLLYFRONTIER CORP Profile Strategy: P/E/Growth Investor Based on: Peter Lynch HollyFrontier Corporation (HollyFrontier), formerly Holly Corporation, is a petroleum refiner, which produces light products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. HollyFrontier operates in two segments: Refining and Holly Energy Partners, L.P. (HEP). The Refining segment includes the operations of its El Dorado, Tulsa, Navajo, Cheyenne and Woods Cross Refineries and NK Asphalt. The HEP segment involves all of the operations of HEP. As of December 31, 2011, it operated five refineries having a combined crude oil processing capacity of 443,000 barrels per day that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain regions of the United States. The Company merged with Frontier Oil Corporation (Frontier), on July 1, 2011. On November 9, 2011, HEP acquired from the Company certain tankage, loading rack and crude receiving assets located at its El Dorado and Cheyenne Refineries. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: This methodology would consider HFC a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (5.59) relative to the growth rate (209.46%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for HFC (0.03) is very favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. HFC, whose sales are $20,358.9 million, needs to have a P/E below 40 to pass this criterion. HFC's P/E of (5.59) is considered acceptable. INVENTORY TO SALES: [PASS] When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for HFC was 7.22% last year, while for this year it is 6.57%. Since inventory to sales has decreased from last year by -0.65%, HFC passes this test. EPS GROWTH RATE: [FAIL] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for HFC is 209.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered too fast. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for HFC (15.80%) to be acceptable (equity is three to ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for HFC (7.49%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for HFC (15.95%) 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.   XINYUAN REAL ESTATE CO., LTD. (ADR) Profile Strategy: Book/Market Investor Based on: Joseph Piotroski Xinyuan Real Estate Co., Ltd. (Xinyuan) is a developer of large-scale residential real estate projects aimed at providing middle-income consumers with a comfortable and convenient community lifestyle. Xinyuan has expanded its network to cover a total population of over 64.7 million people in eight selected cities, consisting Beijing, Hefei, Jinan, Kunshan, Suzhou, Zhengzhou, Xuzhou and Chengdu. The Company's United States development arm, XIN Development Group International, Inc. (XIN), is a real estate residential developer that entered the United States market with three projects in 2012. XIN's products portfolio consists of multiple rise buildings, sub-high-rise buildings and high-rise buildings, together with auxiliary services and amenities, such as retail outlets, leisure and health facilities, kindergartens and schools. In October 2013, the Company announced that it has acquired a residential project in Kunshan, Jiangsu Province. Analysis Guru Score: 90% BOOK/MARKET RATIO: [PASS] The first criteria of this strategy requires that a company be in the top 20% of the market based on the Book/Market ratio (which is the inverse of the Price/Book ratio). XIN, which has a book to market ratio of 1.75, meets this criterion and thus this strategy will use the following rules to determine if it is a financially distressed firm or is unfairly trading at a discount to its book value. The study conducted by Piotroski found that excess returns can be earned by holding a portfolio of high Book/Market stocks. He also found, however, that it is very important to separate companies that trade at a discount because they are financially distressed from companies that are unfairly trading at a discount. The following criteria are used to help provide this distinction. RETURN ON ASSETS: [PASS] As a first step to determining whether a firm is not financially distressed, this methodology requires that the return on assets for the most recent fiscal year be positive. XIN's return on assets was 9.83% in the most recent year, therefore it passes this test. CHANGE IN RETURN ON ASSETS: [PASS] The next requirement is that the return on assets for the most recent fiscal year must be greater than the return on assets for the previous fiscal year. XIN's return on assets was 9.83% in the most recent year and 7.09% in the previous year, therefore it passes this test. CASH FLOW FROM OPERATIONS: [PASS] In addition to the return on assets, the cash flow from operations for the most recent fiscal year must also be positive. This eliminates companies that are burning cash and therefore are more likely to be financially distressed. XIN's cash flow from operations was $182.72 million in the most recent year, therefore it passes this test. CASH COMPARED TO NET INCOME: [PASS] This methodology requires that cash from operations for the most current fiscal year must be greater than net income for the most current fiscal year. XIN's cash from operations was $182.72 million in the most recent year, while its net income was $153.30 million, therefore it passes this test. CHANGE IN LONG TERM DEBT/ASSETS: [PASS] The long term debt to assets ratio for the most recent fiscal year must be less than or equal to the previous fiscal year. XIN's LTD/Assets was 0.02 in the most recent year and 0.08 in the previous year, therefore it passes this test. CHANGE IN CURRENT RATIO: [FAIL] As an additional test of firm solvency, the current ratio for the most recent fiscal year must be greater than the current ratio for the previous fiscal year. XIN's current ratio was 2.08 in the most recent year and 2.17 in the previous year, therefore it fails this test. CHANGE IN SHARES OUTSTANDING: [PASS] The issuance of new stock is considered by this methodology to be a sign that a company is not able to generate enough internal cash to fund its business. Therefore, shares outstanding for the most recent fiscal year must be less than or equal to shares outstanding for the previous fiscal year. XIN's shares outstanding was 141.9 million in the most recent year and 145.9 million in the previous year, therefore it passes this test. CHANGE IN GROSS MARGIN: [PASS] As a sign that a company is expanding its profitability, this strategy requires that gross margin for the most recent fiscal year be greater than gross margin for the previous fiscal year. XIN's gross margin was 29.00% in the most recent year and 27.00% in the previous year, therefore it passes this test. CHANGE IN ASSET TURNOVER: [PASS] The final criterion of this strategy requires that asset turnover for the most recent fiscal year be greater than asset turnover for the previous fiscal year. XIN's asset turnover was 0.58 in the most recent year and 0.49 in the previous year, therefore it passes this test.   LEAR CORPORATION Profile Strategy: P/E/Growth Investor Based on: Peter Lynch 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: 93% DETERMINE THE CLASSIFICATION: This methodology would consider LEA a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (5.87) relative to the growth rate (25.73%), based on the average of the 2 and 5 year historical and the current year 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 LEA (0.23) is very favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. LEA, whose sales are $15,697.3 million, needs to have a P/E below 40 to pass this criterion. LEA's P/E of (5.87) 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 LEA was 4.51% last year, while for this year it is 4.99%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (0.49%) is below 5%. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for LEA is 25.7%, based on the average of the 2 and 5 year historical and the current year eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for LEA (37.57%) to be normal (equity is approximately twice debt). FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for LEA (2.82%) 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 LEA (5.46%) 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.   COACH, INC. Profile Strategy: Patient Investor Based on: Warren Buffett Coach, Inc. (Coach) is a marketer of accessories and gifts for women and men. The Company offers a range of modern, fashionable handbags and accessories. Its product offerings include women's and men's bags, accessories, footwear, wearables, jewelry, travel bags, sunwear, watches and fragrance. The Company operates in two segments: North America, which includes sales to North American consumers through Company-operated stores, including the Internet, and sales to wholesale customers and distributors and International, which includes sales to consumers through Company-operated stores in Japan and mainland China, including the Internet, Hong Kong, Macau, Singapore, Taiwan, Malaysia and Korea and sales to wholesale customers and distributors in 25 countries. Analysis Guru Score: 100% STAGE 1: "Is this a Buffett type company?" A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage. LOOK FOR EARNINGS PREDICTABILITY: [PASS] Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.62, 0.86, 1.19, 1.69, 2.17, 1.91, 2.33, 2.92, 3.53, 3.61. Buffett would consider COH's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 5 years ago. The dips have totaled 12.0%. COH's long term historical EPS growth rate is 14.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 9.9% 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. COH has a debt of 0.5 million and earnings of 1,028.9 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: [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 COH, over the last ten years, is 38.0%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 29.9%, 30.9%, 37.2%, 32.9%, 49.1%, 35.9%, 45.9%, 52.3%, 50.5%, 42.3%, and the average ROE over the last 3 years is 48.4%, thus passing this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: [PASS] Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for COH, over the last ten years, is 40.4% and the average ROTC over the past 3 years is 48.1%, 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 29.8%, 30.8%, 37.1%, 32.9%, 49.0%, 35.4%, 45.2%, 51.5%, 50.5%, 42.3%, 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. COH's free cash flow per share of $2.91 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 $17.55 and compares it to the gain in EPS over the same period of $2.99. COH's management has proven it can earn shareholders a 17.0% 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. COH's shares outstanding have fallen over the past five years from 318,010,010 to 285,000,000, 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 COH 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 $3.61 and divide it by the current market price of $51.68. An investor, purchasing COH, could expect to receive a 6.99% initial rate of return. Furthermore, he or she could expect the rate to increase 9.9% 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 2.75%. Compare this with COH's initial yield of 6.99%, which will expand at an annual rate of 9.9%, 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] COH currently has a book value of $8.49. It is safe to say that if COH can preserve its average rate of return on equity of 38.0% and continues to retain 77.91% of its earnings, it will be able to sustain an earnings growth rate of 29.6% and it will have a book value of $113.52 in ten years. If it can still earn 38.0% on equity in ten years, then expected EPS will be $43.14. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $43.14 and multiply them by the lower of the 5 year average P/E ratio (17.1) or current P/E ratio (current P/E in this case), which is 14.3 and you get COH's projected future stock price of $616.95. 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 $13.86. This gives you a total dollar amount of $630.81. These numbers indicate that one could expect to make a 28.4% average annual return on COH'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 9.9%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $9.24. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (17.1) or current P/E ratio (current P/E in this case), which is 14.3. This equals the future stock price of $132.08. Add in the total expected dividend pool of $13.86 to get a total dollar amount of $145.95. 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 $51.68 and the future expected stock price, including the dividend pool, of $145.95. If you were to invest in COH at this time, you could expect a 10.94% 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 10.9% and 28.4%. 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 19.7% on COH stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   STAMPS.COM INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch 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: 74% DETERMINE THE CLASSIFICATION: This methodology would consider STMP a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (21.38) relative to the growth rate (53.95%), 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 STMP (0.40) is very favorable. SALES AND P/E RATIO: [NEUTRAL] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. STMP, whose sales are $125.5 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. EPS GROWTH RATE: [FAIL] 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 STMP is 54.0%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered too fast. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for STMP (0.00%) to be wonderfully low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for STMP (1.95%) 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 STMP (4.91%) 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.   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 PZZA PAPA JOHN'S INT'L, INC. Restaurants 64 MKTX MARKETAXESS HOLDINGS INC. Investment Services 59 TLK PT TELEKOMUNIKASI INDONESIA (ADR) Communications Services 55 JOY JOY GLOBAL INC. Constr. & Agric. Machinery 53 MPC MARATHON PETROLEUM CORP Oil & Gas Operations 52 AGCO AGCO CORPORATION Constr. & Agric. Machinery 51 TBI TRUEBLUE INC Business Services 51 NUS NU SKIN ENTERPRISES, INC. Personal & Household Prods. 50 CEO CNOOC LIMITED (ADR) Oil & Gas Operations 49 WOR WORTHINGTON INDUSTRIES, INC. Iron & Steel 48

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