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Executive Summary	December 9, 2011

The Economy Over the past few months, a myriad of pundits and prognosticators have continued to predict that the surprisingly resilient US economy is on the verge of -- or has already entered into -- another recession. But as the days and weeks continue to go by, more and more economic data is confirming that the economy is continuing to plug along. After being stuck between 8.8% and 9.2% for all of 2011, the unemployment rate dipped nearly half a percentage point to 8.6% in November, new Labor Department data showed. That the lowest it's been since March 2009 -- more than two-and-a-half years. The so-called U-6 unemployment rate, which includes those working part-time who can't get full-time work and discouraged workers would stopped looking for a job, also fell sharply, hitting its lowest level since March 2009. And the labor market data continues to improve in December. New claims for unemployment fell 5.7% in the week ending Dec. 3. With the exception of one week back in February, they reached their lowest mark since mid-2008. Continuing claims, meanwhile, fell to their lowest level since the week that Lehman Brothers collapsed back in September 2008. Overall, the employment situation remains far from healthy, but the data shows that the picture is brightening somewhat -- ironically, during a period that many had predicted was going to be very weak for the economy. New data also showed that both the manufacturing sector and the service sector continued to expand in November. The manufacturing sector expansion accelerated, with the Institute for Supply Management's manufacturing index rising from 50.8 to 52.7, its highest level since June. It marked the 28th straight month that the sector has expanded, according to ISM, a remarkable streak. The service sector expansion was the 24th straight, meanwhile. While the U.S. data has been solid, investors remain fixated on Europe, where the sovereign debt crisis continues to move markets in the short term. The news and tenor shifts daily, with the latest news as of this writing being that the European Central Bank had cut interest rates by a quarter of a percent, to 1%. It also decided to offer new credit lines to eurozone banks, cut its reserve requirements for banks, and broadened the pool of assets it will accept as collateral for loans, according to The Wall Street Journal. A plan for the ECB to lend money to the International Monetary Fund, which would then lend the money back to eurozone countries -- a way to circumvent regulations that prevent the ECB from issuing the loans directly to countries. But ECB officials seem to be downplaying previous reports that the central bank would ramp up its purchases of government bonds, reports that had initially heartened investors. European leaders are now meeting at a summit intended to try to stop a collapse of the eurozone and its currency, and investors will no doubt be watching every move they make. All in all, the market has responded well to all of the news over the past fortnight. Since our last newsletter, the S&P 500 has returned 6.5%, while the Hot List has returned 6.2%. So far in 2011, the portfolio has returned -17.4% vs. -1.9% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 122.8% vs. the S&P's 23.4% gain. Time To Choose As we head into the home stretch of 2011, the Hot List portfolio is trying to rebound from what so far has been one of its worst years, relative to the broader market. As of Dec. 8, the portfolio was down 15%, while the benchmark S&P 500 was just about flat for the year. Since its 2003 inception, the Hot List has lagged the index in only two other years. One was last year, when it was close to a dead heat with the S&P. The other was 2007, when the portfolio lost 11.6%, and the index gained 3.5%. To be sure, the performance so far this year is disappointing. And disappointment has been the story far and wide across the market for active investment strategies. Earlier this month, CNBC.com reported that just 23% of large-cap fund managers were beating the S&P 500 on the year, citing Bank of America Merrill Lynch data. And just 27% were beating the large-cap Russell 1000 index. While active fund managers in general have a poor track record of beating the market over the long haul, those numbers are particularly bad. And, some of the most successful long-term fund managers are among those struggling. Bruce Berkowitz, David Herro, Mason Hawkins and Stanley Cates -- these and other managers with decade-long track records of far outpacing the market have had bad years. I bring this up not to make excuses or to downplay the Hot List's underperformance this year. I bring it up because it begs two larger, interconnected questions: Why are so many successful strategies failing in 2011, and does that signal a shift in what works and what doesn't work in stock investing? With regard to the first question, the main reason for the underperformance of the Hot List and those top-performing managers seems to revolve around fundamentals and value. I've studied investment strategies for more than a dozen years, and in that time I've found that just about all successful strategies -- whether they lean toward the growth or value school -- include some sort of value component, and rely heavily on fundamentals. But in the short term, fundamentals can fall prey to greed -- as happened during the Internet bubble -- and fear -- as they have recently. And trying to guess just when emotion will overtake (or give way to) fundamentals is a matter of guessing how millions of investors will act on a specific day -- that is, it's nearly impossible. So recently, fear has been in the driver seat, with the European debt crisis superceding everything in investors' minds. Any sign of trouble in that part of the world thus hits the U.S. markets like a ton of bricks -- in large part because the 2008 financial crisis and market plunge remain so fresh in investors' minds. Individual stock fundamentals mean little to most investors, who dump stocks indiscriminately on negative European news, each time thinking another 2008 is upon us. But this isn't 2008. In the U.S., corporations and consumers are in better position than they were three years ago, with both having paid down debt. And corporations have stockpiled near-record amounts of cash, fearful of getting caught again in an overextended position if another downturn hits. In their recent quarterly letter, Hawkins and Cates (whose funds have very strong long-term track records) touched on this. They said the strong positioning of many firms has made it so that, if we do hit another recession, it "would be like stepping off of a curb rather than falling from a skyscraper for these businesses and their values." That's a far cry from 2008, when companies were well overextended, and valuations were inflated. Here's something else to consider: Many of the best performing funds in 2011 have had very little success prior to this year. According to Morningstar, the top performing large-cap value fund this year ranked in the 88th percentile in its class in 2010, and the 72nd percentile in 2009. The second-best performer ranked in the 84th percentile in 2010 and the 97th percentile in 2009. The third-best: 63rd percentile in 2010, 75th percentile in 2009. The fifth-best: 99th percentile in 2010, 100th in 2009. I skipped the fourth-best because it did quite well in 2010, coming in in the 2nd percentile in its class. But in 2009, it was in the 96th percentile. In other words, what worked in 2011 in most cases didn't work in previous years. Some of the year's top funds actually have bad track records going back a decade or more, which lends credence to the notion that what we're seeing this year is something of an anomaly. The thuth is that even good strategies go through bad periods. It's inevitable. If a strategy worked every month or every year, everyone would pile into it, driving the prices of the stocks the strategy identifies up to levels that would lead to diminished returns. That's what Joel Greenblatt astutely notes in his Little Book that Beats the Market. Greenblatt -- upon whose writings I base one of my best-performing strategies -- says that, while his approach has posted exceptional returns over the long haul, it has had one-, two-, and even three-year periods where it has lagged the market. "Although over the short term, Mr. Market may set stock prices based on emotion, over the long term, it is the value of the company that becomes most important to Mr. Market," he says, using the term Benjamin Graham coined for the stock market. "This means that if you buy shares at what you believe to be a bargain price and you are right, Mr. Market will eventually agree and offer to buy those shares at a fair price. In other words, bargain purchases will be rewarded. Though the process doesn't always work quickly, two to three years is usually enough time for Mr. Market to get things right." For the past year, we've been in one of those periods in which Mr. Market hasn't been agreeing with us. Such periods are trying on one's psyche, but how you deal with these periods is what separates successful investors from the also-rans. Remember what James O'Shaughnessy said in his updated version of What Works on Wall Street, which is one of the most extensive studies of investment strategies ever done: "Consistency is the hallmark of great investors and is what separates them from everyone else. If you use even a mediocre strategy consistently, you'll beat almost all investors who jump in and out of the market, change tactics in midstream, and forever second-guess their decisions." In the end, I think at times like this investors need to make a basic choice: If you think that after decades upon decades, stock investing has fundamentally (pardon the pun) changed so that the fundamentals that have mattered for decades -- metrics like return on equity, price/book and price/sales ratios, dividend yield, and return on capital -- no longer matter, then it may be time to scrap your strategy. To me, that's an incredibly risky assumption. Fundamental-based value investing works because it is grounded in real concepts. Fundamentals identify businesses that have track records of successfully using investors' money to generate strong returns, and they then identify which of those companies have shares that are trading on the cheap. Those concepts are at the core of business and investing, and I don't think they have changed, or will change anytime soon. The other choice is to stick to a strategy that has proven itself over the long run, a strategy that you believe makes sense at its core, regardless of what may be happening in the short term. That's the choice I'll make. Even with its recent struggles, the Hot List is still averaging annualized returns of more than 10% over its eight-plus years, while the S&P 500 has returned just 2.8% annualized. That's a track record few fund managers can claim, and the portfolio has built that track record using an approach -- focusing on strong companies with cheap shares -- that I believe still makes sense at its core. So we'll stick with it, and I believe that over the long haul Mr. Market will reward our discipline.		Editor-in-Chief: John Reese Since Inception   Hot List 122.8% S&P 500 23.4% Accuracy 55.9% Beta 1.2 YTD   Hot List -17.4% S&P 500 -1.9% Since Last Issue   Hot List 6.2% S&P 500 6.5% Avg. Fundamentals   Market Cap (mil) $25,053 PE Ratio 8.4 5 Yr EPS Growth 19.5% Yield 4.4% Rel. Strength 52 Portfolio Sectors Services 4 Healthcare 2 Technology 1 Basic Materials 1 Energy 1 Financial 1
Advertisement Validea Capital Management - Private Portfolio Management Based on Strategies of Legends Are you looking for an alternative to your underperforming mutual funds or financial advisor? Click here to download Validea Capital's investment kit and learn more about the firm's guru-based portfolios. Get More Information on Validea Capital! ** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. Thre information above in not intended as personal investment advice and should not be interpreted as such. Guru Spotlight: David Dreman While all the gurus I follow have built their fame and fortunes using different investment approaches, there is at least one striking similarity that most -- if not all -- of them share: They are contrarians. When the rest of Wall Street is zigging, they are zagging; when Wall Street zags, they zig. By having the strength of conviction to march to their own drummers and not follow the crowd, they have been able to key in on the types of strong, undervalued stocks that have made them -- and their clients or shareholders -- very happy. But while most of these gurus are contrarians, one in particular is known for being, well, the most contrarian: David Dreman. Throughout his long career, Dreman has sifted through the market's dregs in order to find hidden gems, and he has been very good at it. His Kemper-Dreman High Return Fund was one of the best-performing mutual funds ever, ranking number one out of 255 funds in its peer groups from 1988 to 1998, according to Lipper Analytical Services. And when Dreman published Contrarian Investment Strategies: The Next Generation (the book on which I base my Dreman strategy) in 1998, the fund had been ranked number one in more time periods than any of the 3,175 funds in Lipper's database. Throughout his career, Dreman has keyed in on down-and-out diamonds in the rough, finding winners in such beaten-up stocks as Altria (after the tobacco stock plummeted amid lawsuit concerns) and Tyco (which had been hit hard by an embarrassing CEO fiasco). How -- and why -- did Dreman manage to pick winners from groups of stocks that few other investors would touch? Well, Dreman, perhaps more than any other guru I follow, is a student of investor psychology. And at the core of his research is the belief that investors tend to overvalue the "best" stocks -- those "hot" stocks everyone seems to be buying -- and undervalue the "worst" stocks -- those that people are avoiding like the plague, like Altria and Tyco. In addition, he also believed that the market was driven largely by how investors reacted to "surprises", frequent events that include earnings reports that exceed or fall short of expectations, government actions, or news about new products. And, he believed that analysts were more often than not wrong about their earnings forecasts, which leads to a lot of these surprises. When you put those factors together, you get the crux of Dreman's contrarian philosophy. Surprises happen often, and because the "best" stocks are often overvalued, good surprises can't increase their values that much more. Bad surprises, however, can have a very negative impact on them. The "worst" stocks, meanwhile, are so undervalued that they don't have much further down to go when bad surprises occur. But when good surprises occur, they have a lot of room to grow. By taking a "contrarian" approach -- i.e. targeting out-of-favor stocks and avoiding in-favor stocks -- Dreman found you could make a killing. Specifically, Dreman compared a stock's price to four fundamentals: earnings, cash flow, book value, and dividend yield. If a stock's price/earnings, price/cash flow, price/book value, or price/dividend ratio was in the bottom 20% of the market, it was a sign that investors weren't paying it much attention. And to Dreman, that was a sign that these stocks could end up becoming winners. (In my Dreman-based model, a firm is required to be in the bottom 20% of the market in at least two of those four categories to earn "contrarian" status.) But Dreman also realized that just because a stock was overlooked, it wasn't necessarily a good buy. After all, investors sometimes are right to avoid certain poorly performing companies. What Dreman wanted to find were good companies that were being ignored, often because of apathy or overblown fears about the stock or its industry. To find those good firms, he used a variety of fundamental tests. Among them were return on equity (he wanted a stock's ROE to be in the top third of the 1,500 largest stocks in the market); the current ratio (which he wanted to be greater than the stock's industry average, or greater than 2); pre-tax profit margins (which should be at least 8 percent), and the debt/equity ratio (which should be below the industry average, or below 20 percent). By using those and other fundamental tests in conjunction with his contrarian indicator tests (the low P/E, P/CF, P/B, and P/D criteria we reviewed before), he was able to have great success finding strong but unloved firms that had the potential to take off once investors caught on to their true strength. Because Dreman took advantage of the overreactions of others, he found that one of the best times to invest was during a crisis. "A market crisis presents an outstanding opportunity to profit, because it lets loose overreaction at its wildest," he wrote in Contrarian Investment Strategies. "People no longer examine what a stock is worth; instead, they are fixated by prices cascading ever lower. Further, the event triggering the crisis is always considered to be something entirely new." Dreman's advice: "Buy during a panic, don't sell." This type of contrarian approach isn't for the faint-of-heart. You never know exactly when fear will subside and investors will wake up to a bargain they've been overlooking. And that means the stocks this model targets may very well keep falling in the short term after you buy them, which, for my Dreman-based portfolio, is what happened during the recent financial crisis and bear market. The portfolio, which had trounced the S&P from its inception through 2006, fell on tough times as fears about the economy grew, lagging the S&P by about 15 percentage points in both 2007 and 2008. But, as fears abated and the crisis passed, investors began to recognize the strong stocks they'd been shunning. And the Dreman portfolio reaped the benefits, returning more than 37% in 2009 (vs. 23.5% for the S&P) and 23.1% in 2010 (vs. 12.8% for the S&P). It has struggled in 2011, but remains far ahead of the broader market over the long haul. Since its July 2003 inception, the 10-stock Dreman-based portfolio has returned 67.7%, or 6.3% annualized, vs. 26.0%, or just 2.8%, for the S&P (through Dec. 7). As you might imagine, the portfolio will tread into areas of the market others ignore because of its contrarian bent. Right now, its holdings include some very unloved firms, with a major tilt toward international stocks. Here's the full list of its current holdings: AstraZeneca PLC (AZN) BP PLC (BP) Petroleo Brasileiro SA (PBR) Southern Copper Corporation (SCCO) Assured Guaranty Ltd. (AGO) Total S.A. (TOT) Telecom Argentina S.A. (TEO) Eni S.p.A. (E) Triangle Capital Corporation (TCAP) Banco Macro SA (BMA) News about Validea Hot List Stocks Aeropostale Inc. (ARO): Aeropostale reported third-quarter earnings of $24.1 million, or $0.30 per share, down from $58.5 million, or $0.63 per share, in the year-ago period, The Wall Street Journal reported. Net sales fell just 1% in the period, but input costs rose about 14%, contributing to the earnings decline. The company forecast a fourth-quarter profit of $0.35 to $0.38 a share, below analysts' average estimates of $0.43, according to Thomson Reuters. AstraZeneca PLC (AZN): The European Commission has approved the treatment Onglyza, which is co-marketed by Bristol-Myers Squibb and AstraZeneca, to be used in combination with insulin on diabetes patients, the Associated Press reported. Onglyza already is approved for use in several other combinations to treat diabetes patients, but the pairing with insulin is not approved in the United States, AP stated. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will rebalance the portfolio. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score TX TERNIUM S.A. (ADR) Iron & Steel 100 FRX FOREST LABORATORIES, INC. Biotechnology & Drugs 77 BPI BRIDGEPOINT EDUCATION, INC. Schools 73 CPLA CAPELLA EDUCATION COMPANY Schools 65 PBR PETROLEO BRASILEIRO SA (ADR) Oil & Gas - Integrated 58 WRLD WORLD ACCEPTANCE CORP. Consumer Financial Services 56 ARO AEROPOSTALE, INC. Retail (Apparel) 50 KLIC KULICKE AND SOFFA INDUSTRIES INC. Semiconductors 46 AZN ASTRAZENECA PLC (ADR) Biotechnology & Drugs 43 IPG INTERPUBLIC GROUP OF COMPANIES, INC. Advertising 6 Ticker Market Cap Date Added Start Price Return TX $3,647 9/2/2011 $24.48 $18.19 -25.7% FRX $8,071 9/2/2011 $33.10 $29.62 -10.5% BPI $1,159 3/18/2011 $18.02 $21.55 19.6% CPLA $489 9/2/2011 $30.42 $33.19 9.1% PBR $169,972 9/30/2011 $22.45 $26.62 18.6% WRLD $1,016 11/25/2011 $62.19 $67.91 9.2% ARO $1,370 10/28/2011 $14.30 $16.64 16.4% KLIC $686 11/25/2011 $8.29 $9.03 8.9% AZN $59,673 11/25/2011 $42.53 $45.60 7.2% IPG $4,446 11/25/2011 $8.41 $9.26 10.1%

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer TX   |   FRX   |   BPI   |   CPLA   |   PBR   |   WRLD   |   ARO   |   KLIC   |   AZN   |   IPG   |   TERNIUM S.A. (ADR) Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Ternium SA is a steel company in Latin America that manufactures and processes flat and long steel products for the construction, home appliances, capital goods, container, food, energy and automotive industries. The Company operates in three segments: Flat Steel Products, comprising the manufacturing and marketing of hot rolled coils and sheets, cold rolled coils and sheets, tin plate, welded pipes, hot dipped galvanized and electro-galvanized sheets and pre-painted sheets; Long Steel Products, comprising the manufacturing and marketing of billets (steel in its basic, semi-finished state), wire rod and bars; Others, comprising mainly pig iron, pellets and pre-engineered metal buildings. During the year ended December 31, 2010, Flat Steel Products accounted to 86% of the Company's overall revenues. Approximately 57% of Ternium's sales were generated in North America and 41% in South and Central America. Analysis Guru Score: 50% 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. TX, with a market cap of $3,647 million, passes this criterion. EARNINGS PER SHARE PERSISTENCE: [FAIL] 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. TX, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.18, 0.10, 0.28, 0.14 and 0.31, fails 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. TX's Price/Sales ratio of 0.41, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [FAIL] The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. TX has a relative strength of 17, which is not in the top 50. Therefore, it would fail the overall methodology.   FOREST LABORATORIES, INC. Profile Strategy: Contrarian Investor Based on: David Dreman Forest Laboratories, Inc. (Forest) develops, manufactures and sells branded forms of ethical drug products, most of which requires a physician's prescription. The Company also focuses on the development and introduction of new products, including products developed in collaboration with licensing partners. Its products include those developed by the Company and those acquired from other pharmaceutical companies and integrated into its marketing and distribution systems. The Company's principal products include Lexapro, Namenda, Bystolic, Savella and Teflaro. On April 13, 2011, the Company acquired Clinical Data Inc. (Clinical Data), a specialty pharmaceutical company. Analysis Guru Score: 71% MARKET CAP: [PASS] Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry", and companies of this size have more staying power. FRX has a market cap of $8,071 million, therefore passing the test. EARNINGS TREND: [PASS] A company should show a rising trend in the reported earnings for the most recent quarters. FRX's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.90, 0.91 have been increasing, and therefore the company passes this test. EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: [FAIL] This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. FRX fails this test as its EPS growth rate for the past 6 months (-18.75%) does not beat that of the S&P (3.51%). This methodology would utilize four separate criteria to determine if FRX is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive "Some Interest". P/E RATIO: [PASS] The P/E of a company should be in the bottom 20% of the overall market. FRX's P/E of 7.47, based on trailing 12 month earnings, meets the bottom 20% criterion (below 8.10), and therefore passes this test. PRICE/CASH FLOW (P/CF) RATIO: [FAIL] The P/CF of a company should be in the bottom 20% of the overall market. FRX's P/CF of 6.45 does not meet the bottom 20% criterion (below 4.40), and therefore fails this test. PRICE/BOOK (P/B) VALUE: [FAIL] The P/B value of a company should be in the bottom 20% of the overall market. FRX's P/B is currently 1.56, which does not meet the bottom 20% criterion (below 0.65), and it therefore fails this test. PRICE/DIVIDEND (P/D) RATIO: [FAIL] The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). FRX's P/D is not available, and hence an opinion cannot be rendered at this time. This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below. CURRENT RATIO: [PASS] A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [2.04] or greater than 2). This is one identifier of financially strong companies, according to this methodology. FRX's current ratio of 3.58 passes the test. PAYOUT RATIO: [PASS] A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for FRX is 0.00%. Unfortunately, its historical payout ratio is not available. Nonetheless it passes the payout criterion, as this is a very low payout. RETURN ON EQUITY: [PASS] The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 18.18%, and would consider anything over 27% to be staggering. The ROE for FRX of 23.05% is high enough to pass this criterion. PRE-TAX PROFIT MARGINS: [PASS] This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. FRX's pre-tax profit margin is 31.93%, thus passing this criterion. YIELD: [FAIL] The company in question should have a yield that is high and that can be maintained or increased. FRX's current yield is not available (or one is not paid) at the present time, while the market yield is 2.86%. Hence, this criterion cannot be evaluated. LOOK AT THE TOTAL DEBT/EQUITY: [PASS] The company must have a low debt to equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should be less than 20% or less than the industry average. FRX's Total Debt/Equity of 0.00% is considered exceptional.   BRIDGEPOINT EDUCATION, INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool Bridgepoint Education, Inc. (Bridgepoint) is a provider of postsecondary education services. The Company's wholly owned subsidiaries, Ashford University and the University of the Rockies, are regionally accredited academic institutions that offer associate's, bachelor's, master's and doctoral programs in the disciplines of business, education, psychology, social sciences and health sciences. These institutions deliver programs online, as well as at its traditional campuses located in Clinton, Iowa, and Colorado Springs, Colorado. As of December 31, 2010, it offered approximately 1,345 courses, 71 degree programs and 134 specializations. As of December 31, 2010, it had 77,892 students enrolled in its institutions, 99% of whom were attending classes online. 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. BPI's profit margin of 19.48% 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 BPI's relative strength of 89 is below the acceptable level, yet it is very close. Keep an eye on the stock as it could move into the acceptable range. COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: [PASS] Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for BPI (27.87% for EPS, and 27.16% for Sales) are good enough to pass. INSIDER HOLDINGS: [PASS] BPI's insiders should own at least 10% (they own 66.22% ) of the company's outstanding shares which is extremely attractive since the minimum requirement is 10%. A high percentage 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. BPI's free cash flow of $2.74 per share passes this test. PROFIT MARGIN CONSISTENCY: [FAIL] The profit margin in the past must be consistently increasing. The profit margin of BPI has been inconsistent in the past three years (Current year: 17.89%, Last year: 10.37%, Two years ago: 12.11%), which is unacceptable. This inconsistency will carryover directly to the company's bottom line, or earnings per share. R&D AS A PERCENTAGE OF SALES: [NEUTRAL] This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in BPI's case. CASH AND CASH EQUIVALENTS: [PASS] BPI's level of cash $279.1 million passes this criteria. If a company is a cash generator, like BPI, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. 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 BPI was 9.52% last year, while for this year it is 8.19%. Since the AR to sales is decreasing by -1.32% the stock passes this criterion. LONG TERM DEBT/EQUITY RATIO: [PASS] BPI'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 (BPI's is 0.20), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. BPI passes this test. The following criteria for BPI are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] BPI has not been significantly increasing the number of shares outstanding within recent years which is a good sign. BPI currently has 56.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock. SALES: [FAIL] Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. BPI's sales of $904.5 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years. DAILY DOLLAR VOLUME: [PASS] BPI passes the Daily Dollar Volume (DDV of $8.3 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. BPI with a price of $21.55 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] BPI's income tax paid expressed as a percentage of pretax income this year was (41.42%) and last year (42.73%) 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.   CAPELLA EDUCATION COMPANY Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Capella Education Company is an online postsecondary education services company. Through its wholly owned subsidiary, Capella University, the Company offers a range of doctoral, master's and bachelor's programs. As December 31, 2010, it offered over 1,250 online courses and 43 academic programs with 136 specializations to over 39,000 learners. It also offers certificate programs, which consist of a series of courses focused on a particular area of study. In addition, Capella Education Company also offers academic services, such as new learner orientation, technical support, academic advising, research services (particularly for doctoral degree candidates), writing services and online tutoring. It also provides appropriate educational accommodations to learners with documented disabilities through its disability support services team. During the year ended December 31, 2010, it formed the joint-venture Sophia Learning, LLC, as majority owner. Analysis Guru Score: 100% DETERMINE THE CLASSIFICATION: This methodology would consider CPLA a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (9.30) relative to the growth rate (36.33%), 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 CPLA (0.26) 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. CPLA, whose sales are $434.8 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 CPLA is 36.3%, 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 CPLA (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 CPLA (11.27%) 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: [BONUS PASS] 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 CPLA (38.81%) is high enough to add to the attractiveness of this company.   PETROLEO BRASILEIRO SA (ADR) Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Petroleo Brasileiro SA Petrobras (Petrobras) is a Brazilian integrated oil and gas company. It operates in five segments: exploration and production; refining, commercialization and transport of oil and natural gas; petrochemicals; distribution of derivatives, electrical energy, biofuels and other renewable energy sources. Directly or through its subsidiaries, Petrobras is engaged in the research, extraction, refining, processing, commercialization and transport of oil from wells, shales and other rocks, its derivatives, natural gas and other liquid hydrocarbons, as well as in activities related to energy, promoting research, development, production, transport, distribution and commercialization of all forms of energy. As of December 31, 2010, it had 132 production platforms, 16 refineries, 291 vessels, 29,398 kilometers of pipelines, six biofuel plants, 16 thermoelectric plants, one pilot wind farm, 8,477 service stations and two fertilizer plants, as well as presence in 30 countries. Analysis Guru Score: 100% MARKET CAP: [PASS] The Cornerstone Value Strategy looks for large, well known companies whose market cap is greater than $1 billion. These companies exhibit solid and stable earnings. PBR's market cap of $169,972 million passes this test. CASH FLOW PER SHARE: [PASS] The second criterion requires that the company exhibit strong cash flows. Companies with strong cash flow are typically the value oriented investments that this strategy looks for. The company's cash flow per share must be greater than the mean of the market cash flow per share ($1.35). PBR's cash flow per share of $5.25 passes this test. SHARES OUTSTANDING: [PASS] This particular strategy looks for companies whose total number of outstanding shares are in excess of the market average (612 million shares). These are the more well known and highly traded companies. PBR, who has 6,522 million shares outstanding, passes this test. TRAILING 12 MONTH SALES: [PASS] A company's trailing 12 month sales ($133,691 million) are required to be 1.5 times greater than the mean of the market's trailing 12 month sales ($19,768 million). PBR passes this test. DIVIDEND: [PASS] The final step in the Cornerstone Value strategy is to select the 50 companies from the market leaders group (those that have passed the previous four criteria) that have the highest dividend yield. PBR, with a dividend yield of 4.87%, is one of the 50 companies that satisfy this last criterion.   WORLD ACCEPTANCE CORP. Profile Strategy: Patient Investor Based on: Warren Buffett World Acceptance Corporation is engaged in the small-loan consumer finance business, offering short-term small loans, medium-term larger loans, related credit insurance and ancillary products and services to individuals. The Company offered standardized installment loans, through 1,067 offices in South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee, Illinois, Missouri, New Mexico, Kentucky, Alabama, Wisconsin, and Mexico as of March 31, 2011. The Company serves individuals with limited access to consumer credit from banks, savings and loans, other consumer finance businesses and credit card lenders. In the United States offices, the Company also offers income tax return preparation services to its customers and others. During the fiscal year ended March 31, 2011(fiscal 2011), the Company opened 73 new offices. Analysis Guru Score: 100% STAGE 1: "Is this a Buffett type company?" A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage. LOOK FOR EARNINGS PREDICTABILITY: [PASS] Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 1.00, 1.25, 1.49, 1.74, 2.02, 2.51, 2.89, 3.43, 4.45, 5.63. Buffett would consider WRLD's earnings predictable. In fact EPS have increased every year. WRLD's long term historical EPS growth rate is 21.1%, based on the 10 year average EPS growth rate. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [PASS] Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for WRLD, over the last ten years, is 18.9%, 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 18.4%, 19.0%, 17.9%, 17.4%, 17.6%, 20.4%, 20.1%, 18.8%, 19.2%, 20.0%, and the average ROE over the last 3 years is 19.3%, thus passing this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON ASSETS: [PASS] Buffett also requires, for financial companies, that the average Return On Assets (ROA) be at least 1% and consistent. Return On Assets is defined as the net earnings of the business divided by the total assets of the business. The average ROA for WRLD, over the last ten years, is 10.9%, which is high enough to pass. It is not enough that the average be at least 1%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROA must be at least 1% for Buffett to feel comfortable that the ROA is consistent. The ROA for the last 10 years, from earliest to latest, is 9.7%, 9.7%, 10.7%, 11.2%, 11.1%, 10.7%, 9.7%, 10.6%, 12.4%, 13.3%, thus passing this criterion. LOOK AT CAPITAL EXPENDITURES: [PASS] Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. WRLD's free cash flow per share of $11.89 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 $26.41 and compares it to the gain in EPS over the same period of $4.63. WRLD's management has proven it can earn shareholders a 17.5% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work. HAS THE COMPANY BEEN BUYING BACK SHARES: [BONUS PASS] Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. WRLD's shares outstanding have fallen over the past five years from 17,490,000 to 15,000,000, thus passing this criterion. This is a bonus criterion and will not adversely affect the ability of a stock to pass the strategy as a whole if it is failed. The preceding concludes Buffett's qualitative analysis. If and when he gets positive responses to all the above criteria, he would then proceed with a price analysis. The price analysis will determine whether or not the stock should be bought. The following is how he would evaluate WRLD quantitatively. STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return. CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail] Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $6.02 and divide it by the current market price of $67.91. An investor, purchasing WRLD, could expect to receive a 8.86% initial rate of return. Furthermore, he or she could expect the rate to increase 21.1% per year, based on the 10 year average EPS growth rate, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 3.47%. Compare this with WRLD's initial yield of 8.86%, which will expand at an annual rate of 21.1%, based on the 10 year average EPS growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding. CALCULATE THE FUTURE EPS: [No Pass/Fail] WRLD currently has a book value of $27.61. It is safe to say that if WRLD can preserve its average rate of return on equity of 18.9% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 18.9% and it will have a book value of $155.56 in ten years. If it can still earn 18.9% on equity in ten years, then expected EPS will be $29.36. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $29.36 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (11.5) (5 year average P/E in this case), which is 10.1 and you get WRLD's projected future stock price of $295.39. 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 $295.39. These numbers indicate that one could expect to make a 15.8% average annual return on WRLD'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 21.1%, based on the 10 year average EPS growth rate, you can project EPS in ten years to be $40.83. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (11.5) (5 year average P/E in this case), which is 10.1. This equals the future stock price of $410.79. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $410.79. CALCULATE THE EXPECTED RETURN USING THE AVERAGE EPS GROWTH METHOD: [No Pass/Fail] Now you can figure out your expected return based on a current price of $67.91 and the future expected stock price, including the dividend pool, of $410.79. If you were to invest in WRLD at this time, you could expect a 19.7% average annual return on your money. Buffett would consider this a great return. LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [PASS] Based on the two different methods, you could expect an annual compounding rate of return somewhere between 15.8% and 19.7%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 17.8% on WRLD stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   AEROPOSTALE, INC. Profile Strategy: Patient Investor Based on: Warren Buffett Aeropostale, Inc. is a mall-based, specialty retailer of casual apparel and accessories, principally targeting 14 to 17 year-old young women and men through its Aeropostale stores and 7 to 12 year-old kids through its P.S. from Aeropostale stores. The Company designs, sources, markets and sells all of its own merchandise. P.S. from Aeropostale products can be purchased in P.S. from Aeropostale stores, in certain Aeropostale stores, including its new Times Square store in New York City and online at www.ps4u.com. As of January 29, 2011, it operated 965 Aeropostale stores, consisting of 906 stores in 49 states and Puerto Rico, 59 stores in Canada, as well as 47 P.S. from Aeropostale stores in 13 states. In addition, pursuant to a Licensing Agreement, one of its international licensees operated 10 Aeropostale stores in the United Arab Emirates as of January 29, 2011. During March 2011, it announced that it had signed a second licensing agreement. 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 0.23, 0.24, 0.41, 0.65, 0.67, 0.88, 1.15, 1.47, 2.27, 2.49. Buffett would consider ARO's earnings predictable. In fact EPS have increased every year. ARO's long term historical EPS growth rate is 29.6%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 12.6% 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. ARO 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 ARO, over the last ten years, is 35.6%, 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 34.7%, 22.5%, 28.0%, 34.1%, 28.5%, 32.8%, 58.4%, 41.7%, 49.1%, 48.8%, and the average ROE over the last 3 years is 46.5%, 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 ARO, over the last ten years, is 37.9% and the average ROTC over the past 3 years is 46.5%, which is high enough to pass. It is not enough that the average be at least 12%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROTC must be at least 9% for Buffett to feel comfortable that the ROTC is consistent. The ROTC for the last 10 years, from earliest to latest, is 34.7%, 22.5%, 28.0%, 34.1%, 28.5%, 32.8%, 58.4%, 41.7%, 49.1%, 48.8%, 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. ARO's free cash flow per share of $1.76 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 $10.46 and compares it to the gain in EPS over the same period of $2.26. ARO's management has proven it can earn shareholders a 21.6% 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. ARO's shares outstanding have fallen over the past five years from 116,199,997 to 81,000,000, 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 ARO 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 $1.48 and divide it by the current market price of $16.64. An investor, purchasing ARO, could expect to receive a 8.89% initial rate of return. Furthermore, he or she could expect the rate to increase 12.6% 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 3.47%. Compare this with ARO's initial yield of 8.89%, which will expand at an annual rate of 12.6%, 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] ARO currently has a book value of $4.65. It is safe to say that if ARO can preserve its average rate of return on equity of 35.6% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 35.6% and it will have a book value of $97.58 in ten years. If it can still earn 35.6% on equity in ten years, then expected EPS will be $34.72. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $34.72 and multiply them by the lower of the 5 year average P/E ratio (11.6) or current P/E ratio (current P/E in this case), which is 11.5 and you get ARO's projected future stock price of $399.33. 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 $399.33. These numbers indicate that one could expect to make a 37.4% average annual return on ARO'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 12.6%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $4.84. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (11.6) or current P/E ratio (current P/E in this case), which is 11.5. This equals the future stock price of $55.66. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $55.66. 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 $16.64 and the future expected stock price, including the dividend pool, of $55.66. If you were to invest in ARO at this time, you could expect a 12.8% average annual return on your money. Buffett likes to see a 15% return, but nonetheless would accept this 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 12.8% and 37.4%. 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 25.1% on ARO stock for the next ten years, based on the current fundamentals. Buffett would consider this an exceptional return, thus passing the criterion.   KULICKE AND SOFFA INDUSTRIES INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Kulicke and Soffa Industries, Inc. (K&S) designs, manufactures and sells capital equipment and expendable tools used to assemble semiconductor devices, including integrated circuits (IC), high and low powered discrete devices, light-emitting diodes (LEDs), and power modules. The Company also services, maintains, repairs and upgrades its equipment. Its customers primarily consist of semiconductor device manufacturers, outsourced semiconductor assembly and test providers (OSAT), other electronics manufacturers and automotive electronics suppliers. K&S operates in two main business segments: Equipment and Expendable Tools. K&S manufactures and sells a line of ball bonders, heavy wire wedge bonders, stud bumpers, and die bonders. The Company manufactures and sells a variety of expendable tools for a range of semiconductor packaging applications. Analysis Guru Score: 50% 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. KLIC, with a market cap of $686 million, passes this criterion. EARNINGS PER SHARE PERSISTENCE: [FAIL] 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. KLIC, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.27, -0.46, -1.02, 1.92 and 1.74, fails 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. KLIC's Price/Sales ratio of 0.83, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [FAIL] The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. KLIC has a relative strength of 85, which is not in the top 50. Therefore, it would fail the overall methodology.   ASTRAZENECA PLC (ADR) Profile Strategy: Growth Investor Based on: Martin Zweig AstraZeneca PLC (AstraZeneca) is a global biopharmaceutical company. AstraZeneca discovers, develops and commercializes prescription medicines for six areas of healthcare: Cardiovascular, Gastrointestinal, Infection, Neuroscience, Oncology, and Respiratory and Inflammation. It has a range of medicines that includes treatments for illnesses, such as its antibiotic, Merrem/Meronem and Losec/Prilosec for acid related diseases. AstraZeneca's products include Crestor, Seloken/Toprol-XL, Atacand, Nexium, Synagis, Seroquel IR, Seroquel XR, Arimidex, Zoladex and Symbicort. The Company owns and operates a range of research and development (R&D), production and marketing facilities worldwide. AstraZeneca operates in over 100 countries, including China, Mexico, Brazil and Russia. On March 3, 2010, AstraZeneca completed the acquisition of Novexel S.A. Novexel is a France-based research company focused on the infection therapy area. Analysis Guru Score: 54% 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. AZN's P/E is 6.27, 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. AZN's revenue growth is 5.55%, while it's earnings growth rate is 12.53%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, AZN 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 (4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (3.1%) of the current year. Sales growth for the prior must be greater than the latter. For AZN 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. AZN's EPS ($2.56) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. AZN's EPS for this quarter last year ($1.07) 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. AZN's growth rate of 139.25% passes this test. EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: [FAIL] Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for AZN is 6.26%. This should be less than the growth rates for the 3 previous quarters which are 5.61%, 8.95% and 4.83%. AZN does not pass this test, which means that it does not have good, reasonably steady earnings. This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: [PASS] If the growth rate of the prior three quarter's earnings, 6.79%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 139.25%, (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, 139.25% must be greater than or equal to the historical growth which is 12.53%. AZN 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. AZN, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 3.85, 3.74, 4.20, 5.19, and 5.57, fails this test. LONG-TERM EPS GROWTH: [FAIL] The final important criterion in this approach is that Earnings Growth be at least 15% per year. AZN's long-term growth rate of 12.53%, based on the average of the 3, 4 and 5 year historical eps growth rates, fails the minimum required. TOTAL DEBT/EQUITY RATIO: [FAIL] 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. AZN's Debt/Equity (39.48%) is considered high relative to its industry (39.14%) and fails this test.   INTERPUBLIC GROUP OF COMPANIES, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy The Interpublic Group of Companies, Inc. (Interpublic) is a global advertising and marketing services company. Its companies specialize in consumer advertising, digital marketing, media planning and buying, public relations and specialized communications disciplines. The work it produces for its clients is specific to their needs. Its solutions vary from project-based activity involving one agency and its client to long-term, fully integrated campaigns created by a group of its companies working together on behalf of a client. Its holding company sets company-wide financial objectives and corporate strategy, directs collaborative inter-agency programs, establishes financial management and operational controls, oversees agency's compliance, guides personnel policy, conducts investor relations and oversees mergers and acquisitions. In Mach 2010, the Company completed the acquisition of CuboCC. In September 2011, the Company acquired S2Publicom. Analysis Guru Score: 50% 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. IPG, with a market cap of $4,446 million, passes this criterion. EARNINGS PER SHARE PERSISTENCE: [FAIL] 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. IPG, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were -0.20, 0.26, 0.52, 0.19 and 0.47, fails 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. IPG's Price/Sales ratio of 0.64, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [FAIL] The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. IPG has a relative strength of 44, which is not in the top 50. Therefore, it would fail the overall methodology.   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 BIG BIG LOTS, INC. Retail (Specialty) 59 JOSB JOS. A. BANK CLOTHIERS, INC. Retail (Apparel) 58 CSH CASH AMERICA INTERNATIONAL, INC. Misc. Financial Services 50 DV DEVRY INC. Schools 50 ALLT ALLOT COMMUNICATIONS LTD. Computer Services 50 HITK HI-TECH PHARMACAL CO. Biotechnology & Drugs 48 VALE VALE (ADR) Metal Mining 48 DCM NTT DOCOMO, INC. (ADR) Communications Services 46 LULU LULULEMON ATHLETICA INC. Retail (Apparel) 46 SWI SOLARWINDS, INC. Software & Programming 46

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