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Executive Summary	October 24, 2014

The Economy While markets have remained roiled and troubles are continuing in Europe and China, the US economy has kept on chugging over the past couple weeks. For starters, new claims for unemployment continue to decline. In fact, the four-week moving average of new claims is now at its lowest level since May 2000. In the most recent week, new claims were 18% below year-ago levels; continuing claims were 19% below where they stood a year ago. Industrial production also jumped 1.0% in September, according to a new Federal Reserve report. Manufacturing output rose 0.5%, the Fed said, and mining output increased 1.8%. Utility output, which tends to be seasonally driven, jumped nearly 4%. Housing starts also rose in September by 6.3%, according to the Census Bureau, and now stand 19% above year-ago levels. Permit issuance for new construction edged forward 1.5%, meanwhile, putting it about 8% above its year-ago pace. Retail sales were a disappointment, declining 0.3% in September, however, according to another government report. Still, the year-over-year increase of 5.8% was one of the best annual increases we've seen in a long time. Inflation, meanwhile, remains tame. The Consumer Price Index rose just 0.1% in September, according to the Labor Department. That put it a mere 1.7% ahead of its year-ago pace. And gas prices continue to deflate. As of October 23, the price for a gallon of regular unleaded was just $3.08, according to AAA. That's down 8 cents over the past week and 26 cents over the past month. The plummeting fuel prices are certainly giving consumers a little more money in their pockets. Overseas, Chinese growth continues to slow, coming in at 7.3% in the third quarter. While that's hardly anemic, it's the lowest the Asian growth giant has seen since the financial crisis. China is on track to have its lowest annual growth rate in nearly two-and-a-half decades this year. And fear continues to hover over Europe, where even Germany -- the Eurozone's growth engine in recent years -- has seen some very weak data recently. The latest data released yesterday showed, however, that European private sector business activity picked up slightly in October, The Wall Street Journal reported, though firms cut prices at the fastest pace in more than four years. Since our last newsletter, the S&P 500 returned 1.2%, while the Hot List returned 5.7%. So far in 2014, the portfolio has returned -16.5% vs. 5.5% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 204.0% vs. the S&P's 95.0% gain. Good Strategy, Rough Stretch There's no getting around it: 2014 has been a rough year for the Hot List. With a little over two months left in the year, the portfolio having its worst annual relative performance vs. the S&P 500 since its 2003 inception. Given the tough stretch, I think it's a good time to reexamine just how the Hot List is constructed, why it's constructed that way, and why we remain confident in the approach going forward. In doing so, we'll also get a better understanding of what has caused this year's poor performance. We'll start with the fact that the Hot List is a consensus-based strategy. That means it draws from all of my Guru Strategies to find the portfolio's 10 holdings. The system looks for the stocks with the most combined interest from those 12 strategies, but with a twist. The twist is that we weight the strategies with the best historical risk-adjusted performance (as measured through our individual guru portfolios) more heavily in the Hot List scoring system. The result is a portfolio of the stocks with the most combined interest from our best strategies. By using multiple strategies, we attempt to both minimize risk and maximize returns. The risk minimization comes in the fact that a number of my individual strategies are uncorrelated. That means that when one particular strategy is having a bad year, another uncorrelated strategy is likely to be counterbalancing it with better performance. And the consensus approach should help maximize returns because in order to get high marks from multiple strategies, a stock has to be strong across a myriad of financial and fundamental variables. And those are the types of stocks that tend to do well over the long haul. The next key element of the Hot List is its size. With 10 stocks, it's a pretty concentrated portfolio, which means it can be quite volatile over short-term periods. But we have found that, over the long term, that's big enough to diversify away a good deal of stock-specific risk. And by running a concentrated portfolio, we focus only on what we consider to be the best ideas in the market. Often, mutual funds will hold hundreds of stocks, which in the end means that they basically mirror the returns of the broader market. Our goal is not to be the market, it's to beat the market, and to do that you have to be different from the market. Of course, when running such a concentrated portfolio, you can experience greater-than-market volatility, so discipline is key. We exercise discipline in two main ways: One is that we stick to the numbers, buying and selling stocks only based on their fundamentals and financials -- not hunches about industry trends or one week's worth of stock price performance or rumors about new, exciting products. The other way we stay disciplined involves our rebalancing system. The stocks within the Hot List are updated once every 28 days on Friday. Each time we update the portfolio, we perform a simulated transaction in which we sell the stocks that were previously in the portfolio and then buy the ten stocks that currently score highest based on the portfolio's underlying criteria. By performing the updates to the portfolio using this method, we are able to not only get the new stocks in and the old stocks out, but also to ensure that the stocks are equally weighted on each update date. This equal weighting is a risk control, as we don't put too many of our eggs in one single basket. And the fixed rebalancing periods ensure that we don't let fickle emotions drive our buy and sell decisions. History has shown that far too many investors act emotionally, causing them to buy high and sell low. There's one last characteristic of the Hot List I'd like to touch on, and it's a big reason -- the biggest, perhaps -- for our underperformance this year. It's that, generally, our models tend to focus more on small and mid-sized stocks than large firms. In some cases, the reasons for this are explicit. The Motley Fool-inspired model, for example, has criteria that include trailing 12-month sales of no more than $500 million and average daily dollar trading volume of no more than $25 million, so it specifically targets smaller firms. Other models don't have such hard and fast rules, but tend to key on smaller names because that's where opportunities often lie. Why do small stocks usually offer lots of opportunities? There are several reasons. As several of the gurus upon whose writings I base my strategies have noted, smaller stocks tend to be followed by fewer analysts, for one thing, and thus can fly under the radar in a way that the bigger firms can't. Big institutions that make up a sizeable portion of the market also can't buy small stocks because they need to deploy huge sums of cash to move the needle on their portfolios, and they can't get enough shares of a $500-million-market-cap firm to make that happen. The lack of attention and limited supply of potential buyers make small-caps more subject to mispricing than larger stocks, meaning that good, fundamental-focused value investors can take advantage. The proof is in the data. From 1927 through 2009, U.S. large-cap growth stocks averaged a 9.08% annual compound return, according to the data of Dartmouth College professor and noted stock researcher Kenneth French. Small-cap growth stocks, meanwhile, averaged 9.23%, and large-cap value plays fared even better, averaging 11.21%. But well ahead of the pack are small-cap value picks, which averaged a 14.17% return per year. (For the breakpoint between small and large stocks, French and colleague Eugene Fama use the mean market equity of New York Stock Exchange stocks. Growth stocks are defined as those in the bottom 30% of the market based on book/market ratios; value stocks are those in the top 30%.) In 2014, small caps have had some forces working against them, however. Earlier in the year, fears about a slowdown in the US economy had many avoiding smaller firms' shares, the assumption being that a downturn would first hit the little guys. More recently, there've been concerns about small-cap valuations. The Russell 2000 was trading for nearly 20 times projected earnings at the end of last year, significantly above its 16.9 average since 1994, according to Russell Indexes and The Wall Street Journal. With the index in the black and approaching new all-time highs in Q3, it seemed that investors began to fear that valuations might be getting too lofty. Added to this mix have been interest-rate fears. With the Federal Reserve in the final stages of winding down its quantitative easing program, many have begun to speculate that the central bank will soon start to raise rates. Rate hikes can have a greater impact on smaller firms than larger firms, and a recent Credit Suisse report showed that small stocks have been hit harder by rate-increase-triggered market pullbacks, according to the Journal. Interest rates also may have been at play in another way. Top-rated economist Francois Trahan told WealthTrack in a recent interview that he thinks cuts in European interest rates have been a major factor in large cap outperformance. The cuts benefited large caps because they tend to be more indebted and exposed to Europe and thus benefit more than smaller firms from rate declines. Investors were thus targeting the big guys and passing on the little guys, Trahan says. All of this has led to a very rough year for small caps, even though the S&P 500 is well in the black for 2014. In fact, the Russell 2000 index of small and mid-cap stocks actually entered into correction territory recently; from its July 3 peak to October 13, it was down nearly 13% (though it has rebounded over the past week or so). Individual names within the small-cap space have been hit much harder. According to Royce Funds, through the end of the 3rd quarter, 49% of Russell 2000 constituents were down at least 20% from their respective 52-week highs; 11% were down more than 30% over the past 12 months. Amid all this, small stocks have had a big impact on the Hot List. Five of the portfolio's 10 worst performers this year have been small caps, with another two being relatively small mid-caps. To be sure, some of these had stock-specific issues (see below on CTC Media). But the broader small-cap selloff certainly has been a big drag on the portfolio. There are numerous reasons to think that the small-cap underperformance is temporary and may in fact be short-lived, however. First, of course, there is the long-term historical outperformance of small caps, which has been dramatic. But there are other factors as well. Trahan says for example that some powerful longer-term forces bode very well for US small cap stocks. When it comes to dealing with the types of problems that reared their head in 2008, the US is well ahead of the rest of the world, he said. Our debt, for example -- both government and consumer -- is down significantly. We're producing more oil than ever, he adds, significantly reducing our trade deficit. And after a long period of corporate underinvestment, we should be entering into a period of major capital spending, Trahan says. China, Europe, and other parts of the world, meanwhile, are much earlier in the process in terms of addressing their issues. The big takeaway from all this, Trahan says, is that the US dollar has been on the rise and should continue to strengthen for some time thanks to the US's strong relative position in the world. He says that means smaller firms -- which tends to do much more of their business in the US than do larger firms -- should fare quite well in coming years while larger, multinational companies will be dealing with weakness in the rest of the world. Royce Funds also provides some intriguing data showing that good stock picking strategies should be primed to excel in the small-cap space. They note that currently, 25% of all companies in the Russell 2000 index of small stocks are not making any money. "This tells us two things," Francis Gannon of Royce wrote in recent commentary. "One, the index as a whole might not be as expensive as a books because it includes such a large number of companies currently earning nothing. Second, and much more important in our view, is the idea that small cap investors need to really understand what they own. Active management can make an enormous difference in the small-cap space, more so we think than in other asset classes." Gannon also notes that, while lower quality small caps are selling at a major premium to large caps, high-quality small caps don't look nearly as expensive. Royce broke the small-cap space down into quartiles based on return on invested capital. The quartile of small stocks with the lowest ROIC were trading at a 52% premium to large caps at the end of the 3rd quarter; the next-to-last quartile was trading at a 13% premium to large caps. But the second-highest quartile and highest quartile based on return on invested capital were actually trading at a discount to large caps (6% for the second-highest quartile and 9% for the highest quartile). In other words, while small caps as a group may be pricey, the types of fundamentally sound small caps that the Hot List would be invested in are on average trading at very reasonable values. In addition, Gannon notes that since its inception in 1979, the Russell 2000 has been in the red in only five calendar years when the S&P has been in the black. Each of those times, the Russell 2000 has outperformed the following year. Of course, if things remain the way they are this year it's no guarantee that small caps will outperform the S&P next year. But looking at the long-term, I think there are many reasons to think that the types of high quality small and mid-cap stocks that the Hot List often targets will outperform significantly, as I've discussed. That doesn't mean there won't be some major ups and downs along the way. In fact consider one final statistic from Royce: Since its inception 35 years ago, the Russell 2000 has averaged annual returns of 11.8% per year. But in no single calendar year -- not one -- has the index returned between 6% and 16%. In other words, smaller stocks can offer great opportunities to beat the market -- if you have a system in place that allows you to stick with them through the ups and downs. We believe that our disciplined, unemotional approach gives us the framework to do just that. (Perhaps more to the point, it allows us to stick with financially sound, undervalued stocks through ups and downs regardless of their size, as the Hot List certainly finds values among larger stocks, too.) Over the long-term, this system has allowed the Hot List to far outperform the broader market, and I expect it to continue to do so going forward.		Editor-in-Chief: John Reese Since Inception   Hot List 204.0% S&P 500 95.0% Accuracy 54.4% Beta 1.2 YTD   Hot List -16.5% S&P 500 5.5% Since Last Issue   Hot List 5.7% S&P 500 1.2% Avg. Fundamentals   Market Cap (mil) $6,320 PE Ratio 18.4 5 Yr EPS Growth 27.3% Yield 0.5% Rel. Strength 78 Portfolio Sectors Financial 2 Healthcare 2 Services 2 Technology 1 Capital Goods 1 Consumer/Non-Cyclical 1 Energy 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. The Fallen As we rebalance the Validea Hot List, 5 stocks leave our portfolio. These include: Ctc Media, Inc. (CTCM), Liquidity Services, Inc. (LQDT), Silicon Motion Technology Corp. (Adr) (SIMO), Sturm, Ruger & Company (RGR) and Piper Jaffray Companies (PJC). The Keepers 5 stocks remain in the portfolio. They are: Agco Corporation (AGCO), Valero Energy Corporation (VLO), Anika Therapeutics, Inc. (ANIK), Jones Lang Lasalle Inc (JLL) and Omnivision Technologies, Inc. (OVTI). The Newbies We are adding 5 stocks to the portfolio. These include: Credit Acceptance Corp. (CACC), Lannett Company, Inc. (LCI), Zumiez Inc. (ZUMZ), Amtrust Financial Services Inc (AFSI) and Monster Beverage Corp (MNST). Portfolio Changes Additions   CREDIT ACCEPTANCE CORP. CACC LANNETT COMPANY, INC. LCI ZUMIEZ INC. ZUMZ AMTRUST FINANCIAL SERVICES INC AFSI MONSTER BEVERAGE CORP MNST Deletions   CTC MEDIA, INC. CTCM LIQUIDITY SERVICES, INC. LQDT SILICON MOTION TECHNOLOGY CORP. (ADR) SIMO STURM, RUGER & COMPANY RGR PIPER JAFFRAY COMPANIES PJC Newcomers to the Validea Hot List Zumiez (ZUMZ): This Washington State-based retailer sells skateboards, snowboards, and a variety of other "action sports" clothing and accessories. It has a market cap of about $1 billion. Zumiez gets strong interest from my Peter Lynch- and James O'Shaughnessy-based models. To read more about its fundamentals, scroll down to the "Detailed Stock Analysis" section below. AmTrust Financial Services (AFSI): Founded as a workers' compensation insurance firm, this New York City-based company has expanded into a multi-national property and casualty insurer. It specializes in coverage for small businesses. AmTrust ($1.5 billion market cap) gets strong interest from my Peter Lynch- and James O'Shaughnessy-based models and my Momentum Investor strategy. To read more about its fundamentals, see the "Detailed Stock Analysis" section below. Lannett Company, Inc.: This 72-year-old Philadelphia-based firm makes generic prescription pharmaceutical products for customers throughout the United States. Lannett ($1.6 billion market cap) markets its products primarily to drug wholesalers, retail drug chains, distributors, and government agencies. Lannett was a big losing position in the Hot List earlier this year when biotechs were getting beaten down. It has bounced back strongly though, and now it gets strong interest from my Motley Fool- and Peter Lynch-based models, and my Momentum Investor approach. For more on the stock, see the "Detailed Stock Analysis" section below. Monster Beverage Corporation (MNST): This California-based firm makes energy drinks and alternative beverages under such names as Monster Energy, Java Monster, X-Presso Monster, M-3, Worx Energy and Hansen's natural sodas and juices. It gets a 100% score from my Warren Buffett-based model, thanks in part to its having upped EPS in all but one year of the past decade. Scroll down to the "Detailed Stock Analysis" section to learn more about the stock. Credit Acceptance Corporation (CACC): Credit Acceptance provides auto loans to consumers through a network of dealer-partners. It has a market cap of about $3 billion, and has grown earnings per share at a 28% pace over the long term. Credit Acceptance gets strong interest from my Peter Lynch- and Warren Buffett-inspired models. To read more about the stock, scroll down to the "Detailed Stock Analysis" section below. News about Validea Hot List Stocks Piper Jaffray (PJC): On October 23, Piper reported third-quarter earnings-per-share of $1.03, far ahead of the $0.57 Capital IQ Consensus Estimate, Briefing.com reported. Revenues were up 24.7% vs. the year-ago period, coming in at $155.9 million. That also far outpaced the $133.85 million consensus estimate. The firm reported record revenues in its advisory business. Shares were up more than 10% as of late morning trading the day of the announcement. CTC Media (CTCM): CTC shares were up nearly 19% since our last rebalancing (as of late morning trading on October 23). But the stock's rough stretch from late September to mid-October was enough to trigger our stop-loss provision, meaning we're selling the holding on today's rebalancing. Prior to its recent rebound, CTC shares had tumbled more than 43% from the time it entered the portfolio on September 26 through October 15, on news that proposed amendments to Russia's "On Mass Media" law passed second and third readings in the lower house of the Russian parliament. The legislation would limit the direct or indirect foreign ownership of Russian mass market businesses. 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 ANIK ANIKA THERAPEUTICS, INC. Biotechnology & Drugs 100 VLO VALERO ENERGY CORPORATION Oil & Gas Operations 96 JLL JONES LANG LASALLE INC Real Estate Operations 87 OVTI OMNIVISION TECHNOLOGIES, INC. Semiconductors 76 ZUMZ ZUMIEZ INC. Retail (Apparel) 72 AFSI AMTRUST FINANCIAL SERVICES INC Insurance (Prop. & Casualty) 61 MNST MONSTER BEVERAGE CORP Beverages (Non-Alcoholic) 61 CACC CREDIT ACCEPTANCE CORP. Consumer Financial Services 58 LCI LANNETT COMPANY, INC. Biotechnology & Drugs 55 AGCO AGCO CORPORATION Constr. & Agric. Machinery 49 Ticker Market Cap Date Added Start Price Current Price Return ANIK $562 5/9/2014 $47.62 $38.82 -18.5% VLO $25,348 4/11/2014 $50.96 $48.01 -5.8% JLL $5,729 9/26/2014 $126.57 $127.84 1.0% OVTI $1,523 9/26/2014 $27.02 $26.44 -2.1% ZUMZ $976 10/24/2014 TBD $33.41 TBD AFSI $3,796 10/24/2014 TBD $50.20 TBD MNST $16,366 10/24/2014 TBD $97.63 TBD CACC $2,918 10/24/2014 TBD $135.14 TBD LCI $1,759 10/24/2014 TBD $49.30 TBD AGCO $4,221 12/20/2013 $57.62 $45.00 -21.9%

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 ANIK   |   VLO   |   JLL   |   OVTI   |   ZUMZ   |   AFSI   |   MNST   |   CACC   |   LCI   |   AGCO   |   ANIKA THERAPEUTICS, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool Anika Therapeutics, Inc. (Anika) develops, manufactures and commercializes therapeutic products for tissue protection, healing and repair. These products are based on hyaluronic acid (HA), a naturally occurring, biocompatible polymer found throughout the body. As of December 31, 2011, Anika's wholly owned subsidiary, Anika Therapeutics S.r.l., had over 20 products commercialized, primarily in Europe. These products are also all made from hyaluronic acid, based on two technologies: HYAFF, which is a solid form of HA, and ACP gel, an autocross-linked polymer of HA. Analysis Guru Score: 87% 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. ANIK's profit margin of 36.20% 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 ANIK's relative strength of 86 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 ANIK (50.00% for EPS, and 26.16% for Sales) are good enough to pass. INSIDER HOLDINGS: [FAIL] ANIK's insiders should own at least 10% (they own 2.31%) 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. ANIK's free cash flow of $1.67 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] ANIK's profit margin has been consistent or even increasing over the past three years (Current year: 27.41%, Last year: 16.48%, Two years ago: 13.08%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. R&D AS A PERCENTAGE OF SALES: [PASS] ANIK is either maintaining the same levels of R&D expenditures(currently $7.1 million) or increasing these levels which is a good sign. This allows the company to develop the superior technology and new products that will put everyone else out of business. This criterion is particularly important for high-tech and medical stocks because they are so R&D dependant. CASH AND CASH EQUIVALENTS: [PASS] ANIK's level of cash $63.3 million passes this criteria. If a company is a cash generator, like ANIK, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. INVENTORY TO SALES: [PASS] This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for ANIK was 11.60% last year, while for this year it is 14.65%. Although the inventory to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive. ACCOUNT RECEIVABLE TO SALES: [PASS] This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for ANIK was 30.07% last year, while for this year it is 24.96%. Since the AR to sales is decreasing by -5.11% the stock passes this criterion. LONG TERM DEBT/EQUITY RATIO: [PASS] ANIK's trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don't need to borrow money in order to grow. "THE FOOL RATIO" (P/E TO GROWTH): [PASS] The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (ANIK's is 0.35), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. ANIK passes this test. The following criteria for ANIK are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] ANIK has not been significantly increasing the number of shares outstanding within recent years which is a good sign. ANIK currently has 15.0 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. ANIK's sales of $99.3 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". ANIK passes the sales test. DAILY DOLLAR VOLUME: [PASS] ANIK passes the Daily Dollar Volume (DDV of $11.1 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf." PRICE: [PASS] This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. ANIK with a price of $38.82 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] ANIK's income tax paid expressed as a percentage of pretax income this year was (36.64%) and last year (39.78%) 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.   VALERO ENERGY CORPORATION Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Valero Energy Corporation (Valero) is an independent petroleum refining and marketing company. Valero's refineries can produce conventional gasoline's, distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products, as well as a slate of premium products, including conventional blendstock for oxygenate blending and reformulated gasoline blendstock for oxygenate blending, gasoline meeting the specifications of the California Air Resources Board, a diesel fuel, and low-sulfur and ultra-low-sulfur diesel fuel. It also owns 10 ethanol plants in the central plains region of the United States with a combined ethanol nameplate production capacity of about 1.1 billion gallons per year. It operates in three business segments: refining, ethanol, and retail. In May 2013, CST Brands Inc announced that the Company which includes Corner Store and Depanneur du Coin, spun off from Valero Energy Corporation. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider VLO a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (8.43) relative to the growth rate (25.16%), based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, 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 VLO (0.34) 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. VLO, whose sales are $139,143.0 million, needs to have a P/E below 40 to pass this criterion. VLO's P/E of (8.43) 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 VLO was 4.28% last year, while for this year it is 4.17%. Since inventory to sales has decreased from last year by -0.11%, VLO passes this test. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for VLO is 25.2%, based on the average of the 3 and 4 year historical eps growth rates using the current fiscal year eps estimate, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for VLO (31.59%) 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 VLO (11.33%) 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 VLO (-5.82%) 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.   JONES LANG LASALLE INC Profile Strategy: Growth Investor Based on: Martin Zweig Jones Lang LaSalle Incorporated (Jones Lang LaSalle), is a financial and professional services firm specializing in real estate. Jones Lang LaSalle has over 200 corporate offices worldwide and operations in more than 1,000 locations in 70 countries. The Company offers integrated real estate and investment management services on a local, regional and global basis to owner, occupier and investor clients. It delivers an array of Real Estate Services (RES) across its three geographic business segments: the Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific. LaSalle Investment Management, a wholly owned member of the Jones Lang LaSalle group that consists of its fourth business segment, is a diversified real estate investment management company. In July 2014, Jones Lang LaSalle Inc acquired CLEO Construction Management (CLEO), a construction project management services firm that specializes in medical facilities. 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. JLL's P/E is 19.38, based on trailing 12 month earnings, while the current market PE is 16.00. 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. JLL's revenue growth is 12.77%, while it's earnings growth rate is 19.60%, based on the average of the 3 and 5 year historical eps growth rates. Therefore, JLL 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 (29.1%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (21.2%) of the current year. Sales growth for the prior must be greater than the latter. For JLL 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. JLL's EPS ($1.58) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. JLL's EPS for this quarter last year ($1.02) 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. JLL's growth rate of 54.90% 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 JLL is 9.80%. This should be less than the growth rates for the 3 previous quarters, which are 27.27%, 36.97%, and 20.69%. JLL 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, 32.89%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 54.90%, (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, 54.90% must be greater than or equal to the historical growth which is 19.60%. JLL 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. JLL, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were -0.11, 3.48, 3.70, 4.63 and 5.98, 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. JLL's long-term growth rate of 19.60%, based on the average of the 3 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. JLL's Debt/Equity (30.72%) is not considered high relative to its industry (152.90%) 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 JLL, this criterion has not been met (insider sell transactions are 193, while insiders buying number 207). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.   OMNIVISION TECHNOLOGIES, INC. Profile Strategy: Growth Investor Based on: Martin Zweig OmniVision Technologies, Inc. (OmniVision) designs, develops and markets integrated and semiconductor image-sensor devices. The Company's main products, image-sensing devices, which the Company refers to as CameraChip image sensors, capture an image electronically and is used in a number of consumer and commercial mass-market applications. The Company's CameraChip image sensors are manufactured using the complementary metal oxide semiconductor (CMOS), fabrication process and are single-chip solutions that integrate several distinct functions, including image capture, image processing, color processing, signal conversion and output of a fully processed image or video stream. The Company has also integrated its CameraChip image sensors with wafer-level optics, which the Company refers to as CameraCubeChip imaging devices. The Company's CameraCubeChip imaging device is a small footprint, total camera solution. 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. OVTI's P/E is 12.81, based on trailing 12 month earnings, while the current market PE is 16.00. 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. OVTI's revenue growth is 19.72%, while it's earnings growth rate is 42.07%, based on the average of the 3 and 4 year historical eps growth rates. Therefore, OVTI 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 (8.8%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-1.6%) of the current year. Sales growth for the prior must be greater than the latter. For OVTI 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. OVTI's EPS ($0.78) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. OVTI's EPS for this quarter last year ($0.42) 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. OVTI's growth rate of 85.71% 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 OVTI is 21.03%. This should be less than the growth rates for the 3 previous quarters, which are 147.37%, 35.00%, and 68.75%. OVTI 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, 70.67%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 85.71%, (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, 85.71% must be greater than or equal to the historical growth which is 42.07%. OVTI 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. OVTI, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.13, 2.11, 1.13, 0.80, and 1.70, 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. OVTI's long-term growth rate of 42.07%, based on the average of the 3 and 4 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. OVTI's Debt/Equity (3.42%) is not considered high relative to its industry (40.48%) 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 OVTI, this criterion has not been met (insider sell transactions are 183, while insiders buying number 68). 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.   ZUMIEZ INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Zumiez Inc. (Zumiez) is a specialty retailer of action sports related apparel, footwear, equipment and accessories operating under the Zumiez brand name. As of January 28, 2012, the Company operated 434 stores in the United States and 10 stores in Canada. In addition, the Company operates a Website that sells merchandise online. At January 28, 2012, its stores averaged approximately 2,900 square feet. Its apparel offerings include tops, bottoms, outerwear and accessories, such as caps, bags and backpacks, belts, jewelry and sunglasses. Zumiez's footwear offerings primarily consist of action sports related athletic shoes and sandals. Its equipment offerings, or hardgoods, include skateboards, snowboards and ancillary gear, such as boots and bindings. The Company also offers a selection of other items, such as miscellaneous novelties. 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. ZUMZ, with a market cap of $976 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. ZUMZ, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.30, 0.79, 1.20, 1.35 and 1.52, 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. ZUMZ's Price/Sales ratio of 1.29, 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. ZUMZ, whose relative strength is 75, is in the top 50 and would pass this last criterion.   AMTRUST FINANCIAL SERVICES INC Profile Strategy: P/E/Growth Investor Based on: Peter Lynch 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 business segments: small commercial business, specialty program and personal lines reinsurance. The Company transacts business through 11 insurance company subsidiaries: Technology Insurance Company, Inc. (TIC), Rochdale Insurance Company (RIC), Wesco Insurance Company (WIC), Associated Industries Insurance Company, Inc. (AIIC), Milwaukee Casualty Insurance Company (MCIC), Security National Insurance Company (SNIC), AmTrust Insurance Company of Kansas, Inc. (AICK) and AmTrust Lloyd's Insurance Company of Texas (ALIC). In December 2013, the Company announced that it its wholly owned subsidiary completed the acquisition of Sagicor Europe Limited. In January 2014, the Company acquired Insco Dico Group. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider AFSI a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (12.08) relative to the growth rate (23.76%), 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 AFSI (0.51) makes it favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. AFSI, whose sales are $3,378.5 million, needs to have a P/E below 40 to pass this criterion. AFSI's P/E of (12.08) is considered acceptable. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for AFSI is 23.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] AFSI is a financial company so debt to equity rules are not applied to determine the company's financial soundness. EQUITY/ASSETS RATIO: [PASS] This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. AFSI's Equity/Assets ratio (13.00%) is healthy and above the minimum 5% this methodology looks for, thus passing the criterion. RETURN ON ASSETS: [PASS] This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. AFSI's ROA (2.81%) is above the minimum 1% that this methodology looks for, thus passing the criterion. 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 AFSI (21.51%) 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 AFSI (13.46%) 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.   MONSTER BEVERAGE CORP Profile Strategy: Patient Investor Based on: Warren Buffett Monster Beverage Corporation is a holding company. The Company develops, markets, sells and distributes alternative beverage, such as non-carbonated ready-to-drink iced teas, lemonades, juice cocktails, single-serve juices and fruit beverages, ready-to-drink dairy and coffee drinks, energy drinks, sports drinks, and single-serve still water (flavored and unflavored) with beverages, including sodas that are considered natural, sparkling juices and flavored sparkling beverages. It has two reportable segments, namely Direct Store Delivery (DSD), whose principal products comprise energy drinks, and Warehouse (Warehouse), whose principal products comprise juice-based and soda beverages. The DSD segment develops, markets and sells products primarily through an exclusive distributor network. The Warehouse segment develops, markets and sells products directly to retailers. 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 0.11, 0.32, 0.50, 0.76, 0.55, 1.10, 1.14, 1.53, 1.86, 1.95. Buffett would consider MNST's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 6 years ago. The dips have totaled 27.6%. MNST's long term historical EPS growth rate is 21.2%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 15.8% 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. MNST 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 MNST, over the last ten years, is 34.0%, 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 32.2%, 45.7%, 39.8%, 33.4%, 22.9%, 33.3%, 24.5%, 27.3%, 47.8%, 32.8%, and the average ROE over the last 3 years is 36.0%, 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 MNST, over the last ten years, is 34.0% and the average ROTC over the past 3 years is 36.0%, 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 32.1%, 45.7%, 39.8%, 33.4%, 22.9%, 33.3%, 24.5%, 27.3%, 47.8%, 32.8%, 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. MNST's free cash flow per share of $1.74 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 $9.82 and compares it to the gain in EPS over the same period of $1.84. MNST's management has proven it can earn shareholders a 18.7% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work. HAS THE COMPANY BEEN BUYING BACK SHARES: [BONUS PASS] Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. MNST's shares outstanding have fallen over the past five years from 176,320,007 to 174,000,000, 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 MNST 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 $2.33 and divide it by the current market price of $97.63. An investor, purchasing MNST, could expect to receive a 2.39% initial rate of return. Furthermore, he or she could expect the rate to increase 15.8% 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 MNST's initial yield of 2.39%, which will expand at an annual rate of 15.8%, 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] MNST currently has a book value of $7.51. It is safe to say that if MNST can preserve its average rate of return on equity of 34.0% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 34.0% and it will have a book value of $139.77 in ten years. If it can still earn 34.0% on equity in ten years, then expected EPS will be $47.47. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $47.47 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (42.0) (5 year average P/E in this case), which is 28.0 and you get MNST's projected future stock price of $1,326.74. CALCULATE THE EXPECTED RATE OF RETURN BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now add in the total expected dividend pool to be paid over the next ten years, which is $0.00. This gives you a total dollar amount of $1,326.74. These numbers indicate that one could expect to make a 29.8% average annual return on MNST'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 15.8%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $10.06. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (42.0) (5 year average P/E in this case), which is 28.0. This equals the future stock price of $281.16. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $281.16. 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 $97.63 and the future expected stock price, including the dividend pool, of $281.16. If you were to invest in MNST at this time, you could expect a 11.16% 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 11.2% and 29.8%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 20.5% on MNST stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   CREDIT ACCEPTANCE CORP. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Credit Acceptance Corporation (Credit Acceptance) is a provider of auto loans to consumers. The Company offers auto loans and related products and services to consumers through its network of Dealer-Partners. It refers to dealers who participate in the Company's programs as Dealer-Partners. Credit Acceptance has two programs: the Portfolio Program and the Purchase Program. Under the Portfolio Program, it advances money to Dealer-Partners (referred to as a Dealer Loan) in exchange for the right to service the underlying Consumer Loans. Under the Purchase Program, Credit Acceptance buys the Consumer Loans from the Dealer-Partners (referred to as a Purchased Loan) and keeps all amounts collected from the consumer. Dealer Loans and Purchased Loans are collectively referred to as Loans. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider CACC a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (12.61) relative to the growth rate (27.66%), 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 CACC (0.46) 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. CACC, whose sales are $704.7 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: [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 CACC is 27.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] CACC is a financial company so debt to equity rules are not applied to determine the company's financial soundness. EQUITY/ASSETS RATIO: [PASS] This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. CACC's Equity/Assets ratio (26.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion. RETURN ON ASSETS: [PASS] This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. CACC's ROA (10.12%) is above the minimum 1% that this methodology looks for, thus passing the criterion. 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 CACC (9.86%) 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 CACC (-53.10%) 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.   LANNETT COMPANY, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool Lannett Company, Inc. is engaged in developing, manufacturing, marketing and distributing generic versions of branded pharmaceutical products. All of the Company's products manufactured and/or sold are prescription products. The Company's products containing Levo are produced and marketed with 12 varying potencies. In addition to generic Levo tablets, the Company also markets and distributes Unithroid tablets, a branded version of Levo, which is produced and marketed with 11 varying potencies. The Company's Levo tablets are used to treat hypothyroidism and other thyroid disorders. The Company's generic Levo tablets and Unithroid tablets are manufactured by Jerome Stevens Pharmaceuticals (JSP). As of June 30, 2012, the Company manufactured and/or distributed 30 products. Analysis Guru Score: 83% PROFIT MARGIN: [PASS] This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. LCI's profit margin of 20.88% passes this test. RELATIVE STRENGTH: [PASS] The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. LCI, with a relative strength of 95, satisfies this test. 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 LCI (433.33% for EPS, and 100.70% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] LCI's insiders should own at least 10% (they own 17.09% ) 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. LCI's free cash flow of $0.54 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] LCI's profit margin has been consistent or even increasing over the past three years (Current year: 20.86%, Last year: 8.82%, Two years ago: 3.21%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. R&D AS A PERCENTAGE OF SALES: [FAIL] LCI has reduced their R&D expenditures(currently $27.7 million) over the past two years which is unacceptable. LCI is jeopardizing the future in order to boost current EPS numbers. This criterion is particularly important for high-tech and medical stocks because they are so R&D dependant. CASH AND CASH EQUIVALENTS: [PASS] LCI's level of cash $146.3 million passes this criteria. If a company is a cash generator, like LCI, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. INVENTORY TO SALES: [PASS] This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for LCI was 21.54% last year, while for this year it is 16.38%. Since the inventory to sales is decreasing by -5.16% the stock passes this criterion. ACCOUNT RECEIVABLE TO SALES: [PASS] This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for LCI was 17.48% last year, while for this year it is 22.40%. Although the AR to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive. LONG TERM DEBT/EQUITY RATIO: [PASS] LCI's trailing twelve-month Debt/Equity ratio (0.34%) is a little higher than what this methodology is looking for, but is still at an acceptable level. The superior companies that you are looking for don't need to borrow money in order to grow. This company has borrowed very little which is still OK. "THE FOOL RATIO" (P/E TO GROWTH): [FAIL] The "Fool Ratio" is an extremely important aspect of this analysis. The methodology says consider holding the shares when the company's Fool Ratio is greater than 0.65 (LCI's is 0.67), but initial purchases in this range are unfavorable. The following criteria for LCI are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] LCI has not been significantly increasing the number of shares outstanding within recent years which is a good sign. LCI currently has 37.0 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. LCI's sales of $273.8 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". LCI passes the sales test. DAILY DOLLAR VOLUME: [FAIL] LCI does not pass the Daily Dollar Volume (DDV of $32.7 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. LCI with a price of $49.30 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] LCI's income tax paid expressed as a percentage of pretax income this year was (36.50%) and last year (35.30%) 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.   AGCO CORPORATION Profile Strategy: P/E/Growth Investor Based on: Peter Lynch AGCO Corporation (AGCO) is a manufacturer and distributor of agricultural equipment and related replacement parts globally. The Company sells a range of agricultural equipment, including tractors, combines, self-propelled sprayers, hay tools, forage equipment and implements. It also manufactures and distributes grain storage and handling equipment systems, as well as protein production systems. Its products are recognized in the agricultural equipment industry and are marketed under a range of brands, including Challenger, Fendt, Massey Ferguson and Valtra. The Company distributes its products through a combination of approximately 3,100 independent dealers and distributors in more than 140 countries. In September 2013, Grain Systems, Inc. (GSI), a global brand of the Company announced that it has purchased Johnson System Inc. (JSI), manufacturer of catwalks, towers and support structures based in Marshall, Michigan. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider AGCO a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (8.23) relative to the growth rate (29.73%), 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 AGCO (0.28) 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. AGCO, whose sales are $10,419.3 million, needs to have a P/E below 40 to pass this criterion. AGCO's P/E of (8.23) 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 AGCO was 17.10% last year, while for this year it is 18.69%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (1.59%) 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 AGCO is 29.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for AGCO (30.42%) 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 AGCO (8.18%) 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 AGCO (1.59%) 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 SIMO SILICON MOTION TECHNOLOGY CORP. (ADR) Semiconductors 70 PJC PIPER JAFFRAY COMPANIES Investment Services 65 FL FOOT LOCKER, INC. Retail (Apparel) 51 TECD TECH DATA CORP Retail (Technology) 47 RGR STURM, RUGER & COMPANY Recreational Products 46 FAF FIRST AMERICAN FINANCIAL CORP Insurance (Prop. & Casualty) 44 HIBB HIBBETT SPORTS, INC. Retail (Specialty) 42 CRR CARBO CERAMICS INC. Oil Well Services & Equipment 41 BCR C.R. BARD, INC. Medical Equipment & Supplies 40 PII POLARIS INDUSTRIES INC. Recreational Products 40

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