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Executive Summary June 10, 2011

The Economy

The economy is continuing push forward, but recent data shows that it's been an uphill climb in the past month or so.

That's been evident in the job market. The private sector added 83,000 jobs last month, according to the latest Labor Department report, which -- while showing things are still heading in the right direction -- was the lowest total in almost a year. Weekly data on new claims for unemployment have remained virtually unchanged over the past two weeks. They remain at a level far lower than they were during the recession, but not low enough to meaningfully dent the unemployment rate, which rose slightly to 9.1% in June. The so-called "U-6" measure of unemployment, which also includes discouraged workers who have stopped looking for a job, actually fell slightly, but still remains high by historical standards, at 15.8%.

Manufacturing activity, meanwhile, continues to increase, though the rate of expansion slowed in May to the lowest level since September 2009, according to the Institute for Supply Management. I wouldn't be too alarmed though -- it was still the 22nd straight month ISM's manufacturing index indicated expansion in the sector, and the slowing of growth was as much a reflection of the past year-and-a-half's extremely impressive numbers as it was of there being a "soft patch" for manufacturing. In fact, ISM's manufacturing index reached significantly lower levels at points during each of the past two economic expansions. (During the late 1990s economic expansion, the index actually indicated manufacturing activity contracted in several months.)

ISM's non-manufacturing (or service sector) index rose in May, and indicated that the service sector expanded for the 18th straight month, a good sign.

One area that remains a big concern: housing. The S&P/Case-Shiller index of home prices declined 4.2% in the first quarter (vs. the fourth quarter of 2010), new data showed (though the seasonally-adjusted decline was less than half that, 1.9%). The unadjusted data represented a new post-housing-boom low. Pending home sales for April, meanwhile, fell 11.6% from March, according to the National Association of Realtors. The housing market has struggled to gain traction since the first-time-homebuyer tax credit program expired. It's important that it does stabilize and improve, not only for the sake of homeowners, but also for the sake of the financial firms that still hold significant amounts of mortgage-backed securities.

Another critical issue that's coming to a head is the end of the second round of the Federal Reserve's quantitative easing efforts. The Fed's money-printing binge has helped bolster markets and asset prices, and it remains to be seen how much the markets will gyrate when the program ends at the end of this month. It's worth noting, however, that the end of QE2 should come as no surprise -- the Fed has said for weeks that it will end as scheduled at the end of June -- so markets should already be counting in much of the impact.

As for the market, since our last newsletter, the S&P 500 returned -2.8%, while the Hot List returned -5.0%. For the year, the portfolio has returned 2.6% vs. 2.5% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 176.8% vs. the S&P's 28.8% gain.

Waiting for Peter Lynch

This past week, an article in the Financial Times entitled, "The Next Generation of Rising Star Fund Managers" caught my eye. The piece looked at five young money managers who, according to some, are the favorites to become the next John Neff or Peter Lynch or Bruce Berkowitz. "The next generation of star fund managers are rising steadily through the ranks," the article explained. "These are the new group of managers that advisers believe will deliver reliable long-term returns for investors in the sectors they manage."

Such articles come along from time to time, because -- like the rest of our society these days -- the investment world has a bit of a star-obsession. The idea of superhero-like stock-pickers captivates the media, not to mention individual investors, who dream of producing star-type returns themselves.

Unfortunately for investors, the Lynches and Neffs and Berkowitz's are few and far between. More often than not, mutual fund managers not only fail to produce guru-like track records; they also fail to even beat the broader market indices. In his book What Works on Wall Street, James O'Shaughnessy, one of the investors whose writings form the basis for my Guru Strategies, looked at what percentage of equity funds beat the S&P 500 over a series of 10-year periods, beginning with the 10-year period that ended in 1991 and ending with the 10-year period that ended in 2003. According to O'Shaughnessy, "the best 10 years, ending December 31, 1994, saw only 26 percent of the traditionally managed active mutual funds beating the [S&P] index." That means that, at their collective best, only about a quarter of fund managers beat the broader market.

Some data shows that those managers who do perform better share something in common: a lengthy tenure. In its year-end "scorecard" report, Standard & Poor's used to provide data on tenure vs. track record. And in its year-end 2006 report (the last for which such information is available), S&P reported that the average manager tenure for U.S. domestic funds was 5.8 years. Those funds that had been in the top half of performers for three consecutive years, meanwhile, averaged 7.1 years. And those who had been in the top half for five straight years? Their managers had been at the helm for an average of 8.6 years. Another S&P study showed that "longer manager tenure was more strongly linked to higher performance than were low expenses or widely diversified fund holdings", according to the Motley Fool's Amanda Kish.

The problem, however, is that even if you find a manager with a good long-term track record, he or she could up and leave at any moment, leaving you stuck with an inexperienced or subpar replacement. A good manager's style can also drift, hurting performance, or he or she can just flat-out make big mistakes (think of Legg Mason's Bill Miller, who beat the market for what is believed to be a record 15 straight years before his portfolio was ravaged by the financial crisis. Once the darling of the fund industry, Miller has suffered so badly since 2006 that his Legg Mason Capital Management Value fund's trailing 10-year returns are now in the 99th-worst percentile in its category, according to Morningstar.)

That's one area where we believe our system offers a big advantage. By using quantitative stock-picking strategies developed by some of history's most successful investors, the Hot List isn't at the mercy of a star manager who could check out any day now, or whose hot hand could turn to ice. Instead, the Hot List uses a disciplined, repeatable system that has a proven track record of success, one that we can -- and intend to -- stick with for the long haul. We let the numbers and data drive the Hot List portfolio, not emotions or whims.

And in the end, that's what a good fund manager or investor does. The best investors aren't all-knowing soothsayers. They don't have some sort of investing sixth sense or instinct that allows them to know which way the market or individual stocks will move from day to day and week to week. Such people don't exist. Instead, they have the discipline, long-term mindset, and intestinal fortitude needed to stick with a proven strategy through the market's inevitable ups and downs.

Don't take my word for it. Think about the words of those few who have actually put up lengthy track records of success. "If you're in the market, you have to know there's going to be declines," Peter Lynch once told PBS Television. "[Bear markets] are gonna happen. When they're gonna start, no one knows. If you're not ready for that, you shouldn't be in the stock market. I mean stomach is the key organ here. It's not the brain. Do you have the stomach for these kind of declines?"

And how about Warren Buffett, perhaps the greatest investor of all-time. "To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information," he wrote in the preface to a revised edition of Benjamin Graham's The Intelligent Investor. "What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework. You must supply the emotional discipline."

So, who will the next truly great fund managers be -- not the ones who string together a couple big years, but the ones who put up lengthy track records of success? I don't know -- and, of course, no one does. But I'd bet that, whoever they are, they will have the same disciplined, analytical temperament that has allowed Buffett, Lynch, and the other gurus I follow to be so successful over the years. That's the type of approach we try to use in handling the Hot List, and we plan on sticking with that approach for the long haul.

Editor-in-Chief: John Reese

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The Fallen

As we rebalance the Validea Hot List, 3 stocks leave our portfolio. These include: Aeropostale, Inc. (ARO), Tech Data Corporation (TECD) and Humana Inc. (HUM).

The Keepers

7 stocks remain in the portfolio. They are: Amtech Systems, Inc. (ASYS), Research In Motion Limited (Usa) (RIMM), Skechers Usa, Inc. (SKX), Sanofi-aventis Sa (Adr) (SNY), At&t Inc. (T), Gamestop Corp. (GME) and Bridgepoint Education, Inc. (BPI).

The Newbies

We are adding 3 stocks to the portfolio. These include: Dollar Tree, Inc. (DLTR), Gt Solar International, Inc. (SOLR) and Ancestry.com Inc (ACOM).

Portfolio Changes

Newcomers to the Validea Hot List

Dollar Tree, Inc. (DLTR): Based in Virginia, Dollar Tree's stores offer a wide variety of discount merchandise, ranging from food items to household goods to toys to lawn- and garden-related items. It has a market cap of about $7.6 billion, and has taken in more than $6 billion in sales in the past year.

Dollar Tree, which gained 17.4% while in the Hot List from Sept. 3, 2010 to March 18 of this year, gets approval from my Peter Lynch- and James O'Shaughnessy-based models. To read more about it, check out the "Detailed Stock Analysis" section below.

GT Solar International (SOLR): Based in Merrimack, New Hampshire, GT has been in the solar power business for 17 years now, and is a leader in polysilicon production technology, and sapphire and silicon crystalline growth systems. Its products might not ring a bell, but they are key technologies involved in solar cell and panel and LED production. The firm has taken in almost $900 million in sales in the past year.

GT Solar gets very high marks from my Joel Greenblatt-inspired model. See the "Detailed Stock Analysis" section below to learn more about the stock.

Ancestry.com Inc. (ACOM): This firm started as a publishing company nearly three decades ago, and has become the world's largest online resource for people researching family history. As of March, it had more than 1.6 million paying subscribers. It has more than 6 billion historical records in its database. The firm has a $1.7 billion market cap, and has taken in about $327 million in sales in the past year.

Thanks in large part to its explosive growth in recent years, Ancestry.com gets solid scores from a couple of my growth-focused models, including my Martin Zweig-inspired approach and the strategy I base on the writings of The Motley Fool's Tom and David Gardner. Scroll down to the "Detailed Stock Analysis" section to learn more about the stock.

News about Validea Hot List Stocks

Sanofi-Aventis SA (SNY): Sanofi and Regeneron Pharmaceuticals said this week that a study showed that the drug Zaltrap showed significantly better survival rates than a placebo did in testing for patients who'd been previously treated for metastatic colorectal cancer. The drug was combined with another regimen called Folfiri and given to patients who'd been treated with oxaliplatin in the multi-national study, according to MarketWatch.

Skechers USA Inc. (SKX): As of Thursday afternoon, Skechers shares had tumbled 23% since our last newsletter. The catalyst for the drop seemed to be analysts at one firm lowering their price target on the stock. The stock still gets strong interest from my Peter Lynch- and Benjamin Graham-based models, however, and the Hot List is holding onto it, expecting it to rebound.

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

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

ASYS   |   BPI   |   ACOM   |   DLTR   |   T   |   SOLR   |   RIMM   |   SNY   |   GME   |   SKX   |  

Amtech Systems, Inc. (Amtech), incorporated in October 1981, through its wholly owned subsidiaries, supplies horizontal diffusion furnace systems used for solar (photovoltaic) cell and semiconductor manufacturing. The Company provides products and services to two industries: the solar industry and the semiconductor industry. The Company's solar and semiconductor equipment is sold under brand names of Tempress Systems and Bruce Technologies, which have customers in both the solar industry and the semiconductor industry. Within the solar industry, its provide diffusion and automation equipment to solar cell manufacturers and it also offers plasma enhanced chemical vapor deposition (PECVD) and phosphocilicate glass (PSG) equipment. Within the semiconductor industry, it provides equipment to manufacturers of analog, power, automotive and microcontroller chips with geometries greater than 0.3 micron.

Bridgepoint Education, Inc. (Bridgepoint) is a accredited provider of postsecondary education services. The Company offers associate's, bachelor's, master's and doctoral programs in the disciplines of business, education, psychology, social sciences and health sciences. It delivers its programs online, as well as at its traditional campuses located in Clinton, Iowa, and Colorado Springs, Colorado. As of December 31, 2009, it offered approximately 1,150 courses, 60 degree programs and 125 specializations and concentrations. As of December 31, 2009, it had 53,688 students enrolled in its institutions, 99% of whom were attending classes online.

Ancestry.com Inc. is an online resource for family history. It has developed systems for digitizing handwritten historical documents, and has established relationships with national, state and local government archives, historical societies, religious institutions and private collectors of historical content around the world. These digital records and documents, combined with the online search technologies and tools, enable the subscribers to research their family history, build their family trees and make meaningful discoveries about the lives of their ancestors. As of February 10, 2010, the registered users have created over 14 million family trees containing nearly 1.5 billion profiles. They have uploaded and attached to their trees a combination of nearly 32 million photographs, scanned documents and written stories. In addition, the Company continues to deploy tools and technologies to facilitate social networking and crowd sourcing, a means of leveraging collaborative efforts.

Dollar Tree, Inc. is an operator of discount variety stores offering merchandise at the fixed price of $1. At January 29, 2011, the Company operated 4,101 discount variety retail stores. Its stores operate under the names of Dollar Tree, Deal$, Dollar Tree Deal$, Dollar Giant and Dollar Bills. Approximately 3,935 of these stores sell substantially all items for $1 or less in the United States and $1.25 or less in Canada. Substantially all of the remaining stores, operating as Deal$, sell items for $1 or less but also sell items for more than $1. The Company's optimal store is between 8,000 and 10,000 selling square feet. This store size provides the appropriate amount of space for its merchandise offerings while allowing it to provide service. At January 29, 2011, it operated 4,015 stores in 48 states and the District of Columbia, as well as 86 stores in Canada. In November 2010, it acquired 86 Dollar Giant stores based in Vancouver, British Columbia.

AT&T Inc. is a holding company. The Company is a provider of telecommunications services in the United States and worldwide. These include wireless communications, local exchange services, long-distance services, data/broadband and Internet services, video services, managed networking, wholesale services and directory advertising and publishing. It operates in four segments: wireless, which provides both wireless voice and data communications services across the United States and, through roaming agreements, in foreign countries; wireline, which provides landline voice and data communication services, AT&T U-Verse TV, broadband and voice services (U-Verse) and managed networking to business customers; advertising solutions, which publishes Yellow and White Pages directories and sells directory advertising and Internet-based advertising and local search, and other, which provides results from customer information services and all corporate and other operations.

GT Solar International, Inc. through its subsidiaries is a global provider of polysilicon production technology, crystalline ingot growth systems and related photovoltaic manufacturing services for the solar industry. Its customers include various solar companies, as well as companies in the chemical industry. The Company's principal products include chemical vapor deposition (CVD) reactors and related equipment used to produce polysilicon, the key raw material used in silicon-based solar wafers and cells, and directional solidification systems (DSS) furnaces and related equipment used to cast multicrystalline ingots by melting and cooling polysilicon in a controlled process. These ingots are used to make photovoltaic (PV) wafers, which are, in turn, used to make solar cells. It operates under two segments: Polysilicon Business and Photovoltaic Business.

Research In Motion Limited (RIM) is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software and services that support multiple wireless network standards, RIM provides platforms and solutions for seamless access to time-sensitive information, including e-mail, phone, short message service (SMS), Internet and intranet-based applications. RIM's portfolio of products, services and embedded technologies are used by organizations worldwide and include the BlackBerry wireless solution, the RIM Wireless Handheld product line, software development tools and other software and hardware. Its subsidiaries include Research In Motion Corporation, Research In Motion UK Limited and RIM Finance, LLC. On June 2, 2010, Harman International sold its software operating systems unit, QNX Software Systems, to the Company. In June 2011, the Company acquired Scoreloop.

Sanofi-Aventis is a pharmaceutical group engaged in the research, development, manufacture and marketing of healthcare products. The Company's business includes two main activities: pharmaceuticals and human vaccines through sanofi pasteur. It is also present in animal health products through Merial Limited (Merial). In its pharmaceutical activity, it specializes in six therapeutic areas: diabetes, oncology, thrombosis and cardiovascular, central nervous system (CNS), and internal medicine. The global portfolio of sanofi-aventis also consists of a range of other pharmaceutical products. It offers vaccines in five areas: pediatric combination vaccines, influenza vaccines, adult and adolescent booster vaccines, meningitis vaccines and travel and endemic vaccines. In October 2010, Siegfried Holding AG sold its PulmoJet Inhalation Project to the Company. In February 2011, the Company acquired BMP Sunstone Corp. In April 2011, the Company acquired Genzyme Corporation.

GameStop Corp. (GameStop) is a retailer of video game products and personal computer (PC) entertainment software. The Company sells new and used video game hardware, video game software and accessories, as well as PC entertainment software, and related accessories and other merchandise. As of January 30, 2010, the Company operated 6,450 stores in the United States, Australia, Canada and Europe, primarily under the names GameStop and EB Games. GameStop also operates the electronic commerce Website www.gamestop.com and publish Game Informer, a multi-platform video game magazine in the United States based on circulation, with approximately 4 million subscribers. During the fiscal year ended January 30, 2010 (fiscal 2009), GameStop operated its business in four segments: United States, Canada, Australia and Europe.

Skechers U.S.A., Inc. (Skechers) design and market Skechers-branded contemporary footwear for men, women and children under several lines. addition to Skechers-branded lines, the Company also offers several designer, fashion and street-focused footwear lines for men, women and children. These lines are branded and marketed separately from Skechers and appeal to specific audiences. Its brands are sold through department stores, specialty stores, athletic retailers, and boutiques as well as catalog and Internet retailers. Along with wholesale distribution, its footwear is available at its e-commerce Website and its own retail stores. Skechers operates 90 concept stores, 92 factory outlet stores and 37 warehouse outlet stores in the United States, and 22 concept stores and five factory outlets internationally. The Company operates in four reportable segments: domestic wholesale sales, international wholesale sales, retail sales, and e-commerce sales.

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.


The names of individuals (i.e., the 'gurus') appearing in this report are for identification purposes of his methodology only, as derived by Validea.com from published sources, and are not intended to suggest or imply any affiliation with or endorsement or even agreement with this report personally by such gurus, or any knowledge or approval by such persons of the content of this report. All trademarks, service marks and tradenames appearing in this report are the property of their respective owners, and are likewise used for identification purposes only.

Validea is not registered as a securities broker-dealer or investment advisor either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. Validea is not responsible for trades executed by users of this site based on the information included herein. The information presented on this website does not represent a recommendation to buy or sell stocks or any financial instrument nor is it intended as an endorsement of any security or investment. The information on this website is generic by nature and is not personalized to the specific situation of any individual. The user therefore bears complete responsibility for their own investment research and should seek the advice of a qualified investment professional prior to making any investment decisions.

Performance results are based on model portfolios and do not reflect actual trading. Actual performance will vary based on a variety of factors, including market conditions and trading costs. Past performance is not necessarily indicative of future results. Individual stocks mentioned throughout this web site may be holdings in the managed portfolios of Validea Capital Management, a separate asset management firm founded by Validea.com founder John Reese. Validea Capital Management, which is a separate legal entity and an SEC registered investment advisory firm, uses, in part, the strategies on the web site to select stocks for its clients.