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Executive Summary	January 17, 2014

The Economy The stellar economic news that marked the end of 2013 has given way to more mixed reports early in 2014, leaving investors to wonder if last year's momentum will continue in the new year. On the positive side, the service sector expanded in December for the 48th straight month, according to the Institute for Supply Management. The rate of the expansion slowed slightly, but was still at a very healthy pace. What was a bit troubling was a sharp decline in new orders, which fell into contraction territory (though just barely) for the first time since mid-2009 as businesses indicated that they drew down their inventories significantly without replacing them. We'll have to see if this was a short-term issue or part of a trend. ISM's service sector employment sub-index indicated that employment conditions improved significantly during the month. Retail sales, meanwhile, rose 0.2% in December, the Commerce Department reported. That put them about 4.3% ahead of where they were a year earlier, a solid year-over-year gain. As for the recent unemployment data, it's been a very mixed bag. While private payroll processor ADP estimated that the private sector added 238,000 jobs in December -- the highest total for any month in 2013 -- the Labor Department put the figure at just 87,000, one of the worst months we've seen in some time. The Labor Department report also showed, however, that the unemployment rate fell from 7.0% to 6.7%, its lowest level since October 2008. The reason was in large part that the number of people in the labor force fell sharply, by 525,000. Many bears will point to that as a result solely or primarily of workers being so discouraged about the job market that they stop looking for work. But as I've noted in the past, the decline in the headline unemployment rate has been accompanied by a decline in the "U-6" unemployment rate, a broader measure that includes discouraged workers. That figure held steady in December at 13.1%, a full 1.3 percentage points lower than it was one year earlier. The U-4 rate, which is the headline rate plus discouraged workers, actually declined from 7.4% to 7.2%. So what gives? I'd recommend checking out a recent Washington Post piece from Brad Plumer, which looks at different factors causing the decline in the labor force. One is indeed discouraged workers, but another factor is demographics that have nothing to do with the strength of the economy -- the Baby Boomer generation is hitting retirement age, and the acceleration of retirements may account for as much as half of the decline in workforce participation since the Great Recession, according to some studies, Plumer says. It's a complex issue -- some retirees may have continued to work if more jobs were available, for example, making it hard to classify their withdrawal as demographic-driven or labor market-driven. The increase in people going on the disability rolls, which I've touched on before, is another factor, Plumer says. The bottom line, I think, is that this is a complex issue; don't believe those who say the declining unemployment rate is a mirage. Since our last newsletter, the S&P 500 returned 0.8%, while the Hot List returned -3.2%. So far in 2014, the portfolio has returned -4.3% vs. -0.1% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 248.2% vs. the S&P's 84.5% gain. Reasons for Optimism While flows into domestic equity funds picked up in October and November, they have since fallen off rather sharply. And, while there are fewer disaster-type fears hanging over investors' heads, the general mood is far from ebullient, with many expecting a weak year for stocks after 2013's stellar -- perhaps too stellar? -- performance. I wouldn't be so sure. Of course, in the short term anything can happen, and no one knows just how much the market will return in 2014. After all, think how many people actually predicted that the S&P 500 would return close to 30% in 2013. But I do see reasons for optimism heading forward -- signals that tell me this is not time to cut back on equities if you are a long-term investor. Here a few of those reasons. The Economy: Yes, the economy still has a lot of lingering problems and growth is far from gangbusters. Unemployment -- in terms of both the headline and broader measures -- remains high, most notably. But there were a lot of really good signs in 2013, particularly in the second half of the year. Housing starts were more than 33% above where they stood a year ago in November (the latest data available). New home sales, meanwhile, were up about 18% through November, according to the Census Bureau. Manufacturing activity surged in the second half of the year, increasing in December for the 7th straight month, and at close to the fastest pace in two years, according to ISM. The group's manufacturing sub-indices for both new orders and employment are at high levels. ISM also said the service sector expanded in December for the 48th straight month. And the latest revisions show that GDP increased at a greater than 4% rate in the third quarter, one of the better figures we've seen over the past few years. All of this occurred amid the government budget sequestration that was expected to put a major crimp on growth in 2013. Valuations: On the whole, the market is no longer cheap (though plenty of cheap individual stocks do remain). But it's also not grossly overvalued. The S&P 500's price/earnings ratio based on trailing 12-month operating earnings is about 17; its forward P/E (using projected operating earnings) is about 15. The index trades for about 2.6 times book value, according to Morningstar, and about 1.7 times sales. Those figures have been rising, but they indicate that we are probably merely on the high side of the fair value range -- at worst very slightly overvalued. And that's nothing to be worried about. By definition, you're sometimes going to be on the high side of an average. It seems to me that lingering fears from the 2008 crash, and perhaps even the 2000 crash, are making investors see anything but dirt cheap valuations as a reason to worry. History has shown that simply is not the case. Stocks can and usually do move far beyond their average historical valuations during bull markets -- and they often do so for quite some time. The False Fear: Kenneth Fisher, whose writings form the basis of one of my best performing Guru Strategies, has talked about the "fear of false factors", saying that he takes it as a bullish sign when investors are worried about issues that in reality don't matter that much. (He has used the fiscal cliff as an example.) Right now, I see a false factor being feared -- the notion that the magnitude of last year's gains was so great that this year makes us due for underperformance. The mindset among many investors seems to be that last year's rally was so fast and strong and unexpected that in 2014, investors will quit while they're ahead, take profits, and drive the market downward. But history shows that big years for the market do not, in fact, tend to be followed by some sort of corrective downturn. Since 1960 there have been 18 years in which the S&P has gained more than 20% (prior to 2013). The average return for stocks the next year: 11.4%, a little bit above long-term historical norms. The worst return following one of those big years came in 2000, when the S&P lost 9.1% -- not exactly a disaster. That was one of only five years when a 20%-plus year was followed with a negative return. In half of those 18 occasions, the 20%-plus year was followed by a year in which the S&P went on to gain at least another 15%. Perhaps you're thinking that the current situation is a bit different, in that growth wasn't particularly strong in 2013. Perhaps in those other 20%-plus years, strong growth merited the big gains, while in 2013 the market was "getting ahead of itself", meaning that there's more likelihood of a pullback in 2014. Well, the data tells a different story. In those 18 20%-plus years since 1960, GDP growth on average was a mere 2.5%. In five of those big years it was actually negative. In 1975, for example, the S&P gained 37.2% while the economy shrank by 0.2%. In 1976, the index gained another 23.8%. Interestingly, in 1976 GDP jumped by 5.4%, which you might think would provide good momentum going into 1977. It didn't. In '77 the S&P fell 7.2% -- even though GDP continued to expand by 4.6%. Of course that 1975 to 1977 period was different in many ways from today. Factors like inflation, politics, timing (1975 was the first full year of a bull market whereas in 2014 we'll hopefully reach this bull's five-year mark) were all surely involved in the gains and losses of those years. But isn't that the point? Rarely do stocks move because of one single factor. Instead the market is a complex machine that factors in a myriad of issues and data points. The notion that 2014 would be a down year simply because 2013 was such a good year just has no basis in reality -- and the pessimism that this false fear creates very well may lead to a buying opportunity. As I noted earlier, no one knows what's going to happen in the market in the short term. So many surprises can pop up that aren't even on the radar right now. Given that, and given the exceptional history and upside that equities offer, the question to me is not, "how will stocks do in 2014," but instead, "do I see such risks -- be they economic, valuation-related, or otherwise -- that I would want to pass up a chance to benefit from what has been the best investment vehicle of all time? Right now, I don't see that kind of risk. In fact, to the contrary, I see more potential reward than risk for long-term investors.		Editor-in-Chief: John Reese Since Inception   Hot List 248.2% S&P 500 84.5% Accuracy 56.1% Beta 1.2 YTD   Hot List -4.3% S&P 500 -0.1% Since Last Issue   Hot List -3.2% S&P 500 0.8% Avg. Fundamentals   Market Cap (mil) $19,787 PE Ratio 12.2 5 Yr EPS Growth 27.4% Yield 1.7% Rel. Strength 65 Portfolio Sectors Energy 3 Financial 2 Services 1 Technology 1 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. The Fallen As we rebalance the Validea Hot List, 1 stocks leave our portfolio. These include: Chevron Corporation (CVX). The Keepers 9 stocks remain in the portfolio. They are: Agco Corporation (AGCO), The Tjx Companies, Inc. (TJX), Usana Health Sciences, Inc. (USNA), Cnooc Limited (Adr) (CEO), Lukoil (Adr) (LUKOY), Lear Corporation (LEA), Alliance Fiber Optic Products Inc (AFOP), Hollyfrontier Corp (HFC) and Hci Group Inc (HCI). The Newbies We are adding 1 stocks to the portfolio. These include: Bofi Holding, Inc. (BOFI). Portfolio Changes Additions   BOFI HOLDING, INC. BOFI Deletions   CHEVRON CORPORATION CVX Newcomers to the Validea Hot List BofI Holding, Inc. (BOFI): BofI -- short for "Bank of Internet" -- is the holding company for BofI Federal Bank, a diversified nationwide bank that provides financing for single and multifamily residential properties, small-to-medium size businesses in target sectors, and selected specialty finance receivables. Though it has just one location -- in San Diego -- its Internet business allows it to have approximately $3.3 billion in assets and approximately 40,000 retail deposit and loan customers across all 50 states. BofI ($1.1 billion market cap) gets high scores from my Peter Lynch- and Motley Fool-based models as well as my Momentum Investor approach. To read more about the stock, scroll down to the "Detailed Stock Analysis" section below. News about Validea Hot List Stocks USANA Health Sciences (USNA): USANA shares tumbled about 10% on Jan. 16 after fellow multi-level marketer Nu Skin Enterprises acknowledged revenue from China will likely be hurt by a government investigation there. According to Investor's Business Daily, China's People's Daily newspaper criticized Nu Skin for aggressive tactics and false marketing, characterizing the firm as a pyramid scheme and claiming it sells 20 more products in China than the government has given it approval for. The State Administration for Industry and Commerce is opening an investigation into the company, which said the claims were inaccurate or exaggerated. Though Nu Skin appears to be the target of the investigation, investors seemed worried USANA might face a similar fate, leading to the selloff. Alliance Fiber Optic Products, Inc. (AFOP): Shares of Alliance surged more than 12% on Jan. 16. There did not immediately appear to have been a company specific catalyst for the move, nor did there appear to be an industry or competitor related catalyst. We will continue to keep an eye on the stock, and may have a better idea of what was behind the jump next newsletter. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will take a closer look at my strategies and investment approach. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score USNA USANA HEALTH SCIENCES, INC. Conglomerates 85 HCI HCI GROUP INC Insurance (Prop. & Casualty) 76 LUKOY LUKOIL (ADR) Oil & Gas - Integrated 66 LEA LEAR CORPORATION Auto & Truck Parts 61 HFC HOLLYFRONTIER CORP Oil & Gas Operations 60 AFOP ALLIANCE FIBER OPTIC PRODUCTS INC Semiconductors 55 BOFI BOFI HOLDING, INC. S&Ls/Savings Banks 54 CEO CNOOC LIMITED (ADR) Oil & Gas Operations 54 TJX THE TJX COMPANIES, INC. Retail (Apparel) 50 AGCO AGCO CORPORATION Constr. & Agric. Machinery 49 Ticker Market Cap Date Added Start Price Current Price Return USNA $819 12/21/2012 $33.83 $59.06 74.6% HCI $578 6/7/2013 $34.20 $50.28 47.0% LUKOY $50,439 9/27/2013 $64.52 $59.26 -8.2% LEA $6,490 5/10/2013 $60.48 $80.43 33.0% HFC $9,452 4/12/2013 $46.83 $47.49 1.4% AFOP $317 12/20/2013 $15.10 $17.30 14.6% BOFI $1,094 1/17/2014 TBD $78.98 TBD CEO $79,104 12/20/2013 $185.20 $177.76 -4.0% TJX $44,187 12/20/2013 $62.49 $62.13 -0.6% AGCO $5,389 12/20/2013 $57.62 $55.35 -3.9%

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 USNA   |   HCI   |   LUKOY   |   LEA   |   HFC   |   AFOP   |   BOFI   |   CEO   |   TJX   |   AGCO   |   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 $5.65 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 $59.06. An investor, purchasing USNA, could expect to receive a 9.21% 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 9.21%, 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 $17.22. 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 $252.07 in ten years. If it can still earn 30.8% on equity in ten years, then expected EPS will be $77.60. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $77.60 and multiply them by the lower of the 5 year average P/E ratio (11.7) or current P/E ratio (current P/E in this case), which is 10.9 and you get USNA's projected future stock price of $842.69. 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 $842.69. These numbers indicate that one could expect to make a 30.4% 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 (11.7) or current P/E ratio (current P/E in this case), which is 10.9. This equals the future stock price of $388.78. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $388.78. 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 $59.06 and the future expected stock price, including the dividend pool, of $388.78. If you were to invest in USNA at this time, you could expect a 20.74% 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 20.7% and 30.4%. 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 25.6% on USNA stock for the next ten years, based on the current fundamentals. Buffett would consider this an exceptional return, thus passing the criterion.   HCI GROUP INC Profile Strategy: Growth Investor Based on: Martin Zweig HCI Group Inc, formerly Homeowners Choice, Inc., is a holding company. The Company, through its subsidiaries, is engaged in the property and casualty insurance business. Through Homeowners Choice Property & Casualty Insurance Company, Inc. (HCPC) and subsidiaries, primarily Homeowners Choice Managers, Inc. (HCM), Southern Administration, Inc., Claddaugh Casualty Insurance Company, Ltd., and its subsidiary, HCPCI Holdings LLC, it provides property and casualty homeowners' insurance, condominium-owners' insurance and tenants' insurance to individuals owning property in Florida. Its subsidiaries also include TV Investment Holdings LLC, which owns and operates a marina facility located in Florida; Unthink Technologies Private Limited. During the year ended December 31, 2011, it organized TV Investment Holdings LLC, HCI Holdings LLC and HCI Technical Resources, Inc. Analysis Guru Score: 92% P/E RATIO: [PASS] The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. HCI's P/E is 9.14, based on trailing 12 month earnings, while the current market PE is 15.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [PASS] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. HCI's revenue growth is 50.75%, while it's earnings growth rate is 31.66%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, HCI passes this criterion. SALES GROWTH RATE: [PASS] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (73.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (52.7%) of the current year. Sales growth for the prior must be greater than the latter. For HCI this criterion has been met. The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria. CURRENT QUARTER EARNINGS: [PASS] The first of these criteria is that the current EPS be positive. HCI's EPS ($1.13) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. HCI's EPS for this quarter last year ($0.27) pass this test. POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: [PASS] The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. HCI's growth rate of 318.52% 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 HCI is 15.83%. This should be less than the growth rates for the 3 previous quarters, which are 91.94%, 105.68%, and 85.14%. HCI 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, 95.09%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 318.52%, (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, 318.52% must be greater than or equal to the historical growth which is 31.66%. HCI would therefore pass this test. EARNINGS PERSISTENCE: [FAIL] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. HCI, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.08, 1.52, 0.81, 1.34, and 3.02, fails this test. LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. HCI's long-term growth rate of 31.66%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For HCI, this criterion has not been met (insider sell transactions are 139, while insiders buying number 26). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.   LUKOIL (ADR) Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher 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%. In December 2013, it consolidated a 100% stake in ISAB Srl. Analysis Guru Score: 90% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. LUKOY's P/S of 0.36 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. LUKOY's Debt/Equity of 11.96% is acceptable, thus passing the test. PRICE/RESEARCH RATIO: [PASS] This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. LUKOY 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 LUKOY At this Point Is LUKOY a "Super Stock"? NO PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.LUKOY's P/S ratio of 0.36 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors. LONG-TERM EPS GROWTH RATE: [FAIL] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. LUKOY's inflation adjusted EPS growth rate of 7.86% fails the test. FREE CASH PER SHARE: [PASS] This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. LUKOY's free cash per share of 4.65 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. LUKOY, whose three year net profit margin averages 8.08%, passes this evaluation.   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 (6.13) 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 (0.24) 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 (6.13) 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 (2.70%) 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 (5.23%) 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.   HOLLYFRONTIER CORP Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher HollyFrontier Corporation (HollyFrontier), formerly Holly Corporation, is a petroleum refiner, which produces light products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. HollyFrontier operates in two segments: Refining and Holly Energy Partners, L.P. (HEP). The Refining segment includes the operations of its El Dorado, Tulsa, Navajo, Cheyenne and Woods Cross Refineries and NK Asphalt. The HEP segment involves all of the operations of HEP. As of December 31, 2011, it operated five refineries having a combined crude oil processing capacity of 443,000 barrels per day that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain regions of the United States. The Company merged with Frontier Oil Corporation (Frontier), on July 1, 2011. On November 9, 2011, HEP acquired from the Company certain tankage, loading rack and crude receiving assets located at its El Dorado and Cheyenne Refineries. Analysis Guru Score: 100% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. HFC's P/S of 0.46 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. HFC's Debt/Equity of 16.20% is acceptable, thus passing the test. PRICE/RESEARCH RATIO: [PASS] This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. HFC 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 HFC At this Point Is HFC a "Super Stock"? YES PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.HFC's P/S ratio of 0.46 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. HFC's inflation adjusted EPS growth rate of 207.14% 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. HFC's free cash per share of 3.25 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. HFC, whose three year net profit margin averages 5.49%, passes this evaluation.   ALLIANCE FIBER OPTIC PRODUCTS INC Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Alliance Fiber Optic Products Inc. (AFOP) designs, manufactures and markets a range of fiber optic components, and integrated modules incorporating these components, for communications equipment manufacturers and service providers. The Company offers a range of products, including interconnect devices that are used to connect optical fibers and components, couplers and splitters that are used to divide and combine optical power, and dense wavelength division multiplexing (DWDM) devices that separate and combine multiple specific wavelengths. The Company's optical passive products include wavelength division multiplexing (WDM), coarse wavelength division multiplexers (CWDM) and DWDM components and modules that utilize thin film filter technologies to separate optical signals, variable attenuators, optical switches and other optical devices utilizing micro optic lensing technology including integrated electro-optical modules incorporating these products. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider AFOP a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (18.22) relative to the growth rate (44.50%), 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 AFOP (0.41) 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. AFOP, whose sales are $66.4 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. INVENTORY TO SALES: [PASS] When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for AFOP was 16.09% last year, while for this year it is 14.87%. Since inventory to sales has decreased from last year by -1.22%, AFOP 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 AFOP is 44.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for AFOP (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 AFOP (-0.98%) 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 AFOP (10.12%) 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.   BOFI HOLDING, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch BofI Holding, Inc. is a holding company for BofI Federal Bank, a diversified financial services company. The Bank operate its bank from a single location in San Diego, California, serving approximately 40,000 retail deposit and loan customers across all 50 states. As of June 30, 2012, it had total assets of $2,386.8 million, loans of $1,799.7 million, mortgage-backed and other investment securities of $483.0 million, total deposits of $1,615.1 million and borrowings of $547.2 million. It distributes its deposit products through a range of retail distributions channels, and its deposits consist of demand, savings and time deposits accounts. It distributes its loan products through its retail, correspondent and wholesale channels, and the loans it retains are primarily first mortgages secured by single family real property and by multifamily real property. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider BOFI a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (25.72) relative to the growth rate (30.90%), 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 BOFI (0.83) makes it 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. BOFI, whose sales are $141.0 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 BOFI is 30.9%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] BOFI 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. BOFI's Equity/Assets ratio (9.00%) 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. BOFI's ROA (1.47%) 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 BOFI (0.97%) 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 BOFI (17.28%) 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.   CNOOC LIMITED (ADR) Profile Strategy: Patient Investor Based on: Warren Buffett CNOOC Limited is an investment holding company. The Company, along with its subsidiaries, is a producer of offshore crude oil and natural gas and an independent oil and gas exploration and production company. Its subsidiaries are engaged in exploration, development, production and sales of oil and natural gas. It has three segments: independent operations, operations under joint arrangement and trading business. The Company has four producing areas in offshore China, which include the Bohai Bay, Western South China Sea, Eastern South China Sea and East China Sea. It also has oil and gas assets in Indonesia, Iraq, Australia, Africa, North America and South America. As of December 31, 2012, its subsidiaries included CNOOC China Limited, CNOOC International Limited, China Offshore Oil (Singapore) International Pte Ltd and others. Analysis Guru Score: 100% STAGE 1: "Is this a Buffett type company?" A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage. LOOK FOR EARNINGS PREDICTABILITY: [PASS] Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.05, 0.06, 0.10, 0.12, 0.12, 0.16, 0.11, 0.20, 0.26, 0.23. Buffett would consider CEO's earnings predictable, although earnings have declined 2 time(s) in the past seven years, with the most recent decline 1 years ago. The dips have totaled 42.8%. CEO's long term historical EPS growth rate is 17.0%, 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. CEO has a debt of 13,895.5 million and earnings of 10,935.7 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 CEO, over the last ten years, is 25.9%, 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 24.6%, 28.8%, 33.9%, 30.3%, 24.3%, 27.6%, 16.9%, 25.2%, 26.7%, 20.5%, and the average ROE over the last 3 years is 24.1%, 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 CEO, over the last ten years, is 22.7% and the average ROTC over the past 3 years is 22.6%, 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 20.6%, 22.0%, 27.7%, 25.5%, 22.4%, 25.4%, 15.2%, 24.1%, 24.9%, 18.8%, 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. CEO's free cash flow per share of $8.33 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 $0.97 and compares it to the gain in EPS over the same period of $0.18. CEO's management has proven it can earn shareholders a 18.6% 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. CEO's shares outstanding have fallen over the past five years from 44,669,199,219 to 448,000,000, 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 CEO 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 $24.41 and divide it by the current market price of $177.76. An investor, purchasing CEO, could expect to receive a 13.73% initial rate of return. Furthermore, he or she could expect the rate to increase 17.0% 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 CEO's initial yield of 13.73%, which will expand at an annual rate of 17.0%, 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] CEO currently has a book value of $121.75. It is safe to say that if CEO can preserve its average rate of return on equity of 24.1% and continues to retain 70.58% of its earnings, it will be able to sustain an earnings growth rate of 17.0% and it will have a book value of $586.34 in ten years. If it can still earn 24.1% on equity in ten years, then expected EPS will be $141.41. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $141.41 and multiply them by the lower of the 5 year average P/E ratio (9.8) or current P/E ratio (current P/E in this case), which is 7.3 and you get CEO's projected future stock price of $1,028.03. 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 $188.00. This gives you a total dollar amount of $1,216.02. These numbers indicate that one could expect to make a 21.2% average annual return on CEO's stock at the present time. Buffett would consider this a great return. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 17.0%, based on the average of the 3, 4 and 5 year historical eps growth rates, you can project EPS in ten years to be $117.20. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (9.8) or current P/E ratio (current P/E in this case), which is 7.3. This equals the future stock price of $852.05. Add in the total expected dividend pool of $188.00 to get a total dollar amount of $1,040.04. 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 $177.76 and the future expected stock price, including the dividend pool, of $1,040.04. If you were to invest in CEO at this time, you could expect a 19.32% 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 19.3% and 21.2%. 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 20.3% on CEO stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   THE TJX COMPANIES, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch The TJX Companies, Inc. (TJX) is the off-price apparel and home fashions retailer in the United States and worldwide. As of January 28, 2012, the Company operated in four business segments. It has two segments in the United States, Marmaxx (T.J. Maxx and Marshalls) and HomeGoods; one in Canada, TJX Canada (Winners, Marshalls and HomeSense) and one in Europe, TJX Europe (T.K. Maxx and HomeSense). As a result of the consolidation of the A.J. Wright chain, all A.J. Wright stores ceased operations by the end of February 2011. It completed the consolidation of A.J. Wright, converting 90 of the A.J. Wright stores to T.J. Maxx, Marshalls or HomeGoods banners and closed the remaining 72 stores, two distribution centers and home office. In December 2012, the Company acquired Sierra Trading Post, an off-price Internet retailer. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider TJX a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (21.02) relative to the growth rate (23.77%), 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 TJX (0.88) 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. TJX, whose sales are $27,337.7 million, needs to have a P/E below 40 to pass this criterion. TJX's P/E of (21.02) 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 TJX 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: [PASS] This methodology would consider the Debt/Equity ratio for TJX (30.90%) 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 TJX (3.75%) 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 TJX (1.72%) 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.   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 (9.79) relative to the growth rate (26.14%), 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 (0.37) is very favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. AGCO, whose sales are $10,630.6 million, needs to have a P/E below 40 to pass this criterion. AGCO's P/E of (9.79) 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 17.78% last year, while for this year it is 17.10%. Since inventory to sales has decreased from last year by -0.68%, AGCO 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 AGCO is 26.1%, 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 (33.69%) 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 (5.96%) 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 (-3.96%) 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 CVX CHEVRON CORPORATION Oil & Gas - Integrated 48 BBBY BED BATH & BEYOND INC. Retail (Specialty) 47 BVN COMPANIA DE MINAS BUENAVENTURA SAA Gold & Silver 46 QCOR QUESTCOR PHARMACEUTICALS INC Biotechnology & Drugs 46 HIBB HIBBETT SPORTS, INC. Retail (Specialty) 46 CKEC CARMIKE CINEMAS, INC. Motion Pictures 45 OUTR OUTERWALL INC Recreational Activities 45 TBI TRUEBLUE INC Business Services 44 SAVE SPIRIT AIRLINES INCORPORATED Airline 43 SSL SASOL LIMITED (ADR) Chemical Manufacturing 39

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