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Executive Summary	February 15, 2013

The Economy Just as it did for most of 2012, the economy is continuing to make steady gains as we move deeper into 2013 -- and as it does, the stock market is creeping closer and closer to all-time highs. Since our last newsletter, several solid economic reports have been released. The Labor Department, for example, said the private sector added 166,000 jobs in January. It also released revised 2012 data showing that total nonfarm payrolls increased by 335,000 more than previous estimates, meaning that the economy added about 2.25 million private sector jobs in 2012. Both the headline unemployment rate (7.9%) and the broader "U-6" rate (14.4%) held steady for the month. New claims for unemployment dropped rather sharply in the most recent week. But there continues to be a bit of a strange relationship between the seasonally adjusted and unadjusted data. While adjusted new claims fell by more than 7% from the previous week, on an unadjusted basis they were only about 1.5% below their year-ago level -- worse than the previous week's 3.2% figure. Manufacturing activity, meanwhile, picked up in January, according to the Institute for Supply Management. ISM's manufacturing index showed that the sector expanded in January at its fastest pace since last April. The new orders and employment sub-indices both made nice jumps as well. The service sector also expanded in January, the 37th straight month it has done so, according to ISM. The rate of expansion was about the same as it was the previous month. Decent news also came from the consumer sector. Retail and food service sales increased 0.1% (seasonally adjusted) in January, according to a new Commerce Department report. While the month-over-month gain was minor, the data also showed that sales were 6.2% higher than they were in the same month last year, using unadjusted data. In the previous month that year-over-year increase had fallen to 2.5%, so this was a nice rebound. Real disposable personal income jumped sharply in December, according to new data from the Commerce Department, rising 2.8%. Consumers saved most of that additional income, with the personal savings rate surging from 4.1% to 6.5%, its highest level in nearly three years. But a big reason behind the jump seems to have been the fact that many companies sped up their dividend payments, in expectation of the dividend tax increase that went into effect as part of the fiscal cliff negotiations. It probably is unwise to draw any long-term conclusions from the data. Corporate earnings announcements for the fourth quarter are also continuing to roll in, and all in all the results have been decent. With about two-thirds of companies in the S&P 500 having reported, about 65% have beaten analysts' estimates so far, a rate pretty similar to what we've seen in the past couple years. Since our last newsletter, the S&P 500 returned 1.6%, while the Hot List returned 2.2%. So far in 2013, the portfolio has returned 7.1% vs. 6.7% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 190.4% vs. the S&P's 52.1% gain. What It Takes To Win Over The Long Run There aren't many places you can go 2013 without being made aware of what the stock market did today. Even if you're not plugged into 24-hour financial news networks and not continually logged onto financial websites (which many people are), you'll still get important-sounding updates on the radio or nightly news: "the Dow fell 82 points today," a newscaster might say in a grave voice, making the information sound all the more meaningful. Of course, the day-to-day shifts in your own portfolio can seem even more meaningful, because it's your money that's going up and down. But the truth is that day-to-day fluctuations in stock prices on the whole really aren't that meaningful. In fact, there is evidence that paying a lot of attention to those movements doesn't make you a better, more conscientious investor; it actually hurts you over the long haul. In an article written for the American Association of Individual Investors a couple years back, Mark Hulbert noted that, "According to behavioral finance researchers, constantly looking at how your portfolio is performing is not a benign act. It leads you to focus more of your attention on the short term than you would otherwise, leading you in turn to miss the veritable forest for the trees." Hulbert referenced a study performed by a pioneer of behavioral finance, University of Chicago Professor Richard Thaler. In the 1997 study -- "The Effect of Myopia and Loss Aversion" -- Thaler, Amos Tversky, Daniel Kahneman, and Alan Schwartz had a group of undergraduate students simulate investment decisions, and told them that they would be paid (between $5 and $30) depending on their actual investment success or failure. As part of the study, different students were allowed to check their portfolios at differing time intervals. Who did better? Well, those who were allowed to look at their portfolios the most actually did the worst. They tended to put less money into stocks and more into bonds, which are traditionally thought of as "safer" investments even though stocks clearly outperform them over the long term. "The subjects with the most data did the worst in terms of money earned," the study results stated, "since those with the most frequent data invested the least in stocks (and thus earned the least)." In examining the historical performance of the Hot List and our other top-performing guru-based portfolios, I recently found some interesting evidence that shows why a day-to-day, hyperfocused investment approach can get you in trouble. Going back to their inceptions, I looked at the daily returns of the Hot List, the Top 5 Gurus portfolio, and the Kenneth Fisher-, Motley Fool-, and Benjamin Graham-based portfolios, and how those daily returns compared to the S&P 500's daily return. On average, these five portfolios have returned 13.3% annualized since July 2003 -- while the S&P 500 has returned 4.5% annualized in what generally has been a pretty bad decade or so for stocks. Given that on average these portfolios have tripled the S&P's gain, what percentage of days would you guess that they'd outperformed the index? 60%? 70%? 80%? Here are the actual percentages: Hot List Portfolio: 52.78% Top 5 Gurus Portfolio: 51.62% Graham-Based Portfolio: 52.33% Motley Fool-Based Portfolio: 52.16% Fisher-Based Portfolio: 52.08% Average: 52.19% I don't know about you, but I found those numbers extremely intriguing and quite surprising. I would've guessed that they would've been significantly higher, given the exceptional performance of the portfolios. Essentially, that means that in a typical month that had 23 trading days, one of those portfolios would fare better than the market on 12 days, and worse than the market on 11 days. This data is a great example of why you shouldn't hyperfocus on your portfolio's day-to-day fluctuations. Portfolios with exceptional performance over the long term still have plenty of bad days. In fact, as you can see, they can have nearly as many bad days as they have good days. What's more, the timing of the really good and really bad days can be key. In May of 2010, when the European debt crisis was heating up, the Hot List had a day where it underperformed the S&P by 8.79%. It followed that up with three more days in which it underperformed the index. But if you'd sold at that point, you'd have missed out on a 9.37% gain the next day, one of the portfolio's best days ever. During the 2008 financial crisis, the potential for horrible timing decisions was extremely high. Starting on November 20, the Hot List had a string of five straight days where it underperformed the S&P. But if you ditched the portfolio during that run, you'd have missed out -- big-time. The day after that five-day losing streak, the portfolio rose 4.66% -- and the next day it had its biggest one-day gain ever, surging 20.05% in a single day. Those aren't the only examples. Often after a few very bad days, stocks will then have a big bounce-back, as investors realize they've overreacted. That can be particularly true for value-focused portfolios like many of ours. Bailing on the market after a few bad days can thus result in a double whammy for your portfolio -- you get hit by the bad days, jump out of stocks, and then don't get the benefit of the big gains on the bounce-back days. That's a problem that plagues many average investors, and it's part of the reason that so many underperform the broader market over the long haul. I think data like this also validates our approach to selling. As you know, we rebalance our portfolios on a disciplined, unbending schedule, which for our main portfolios is every 28 days. (There are exceptions, like when a company appears to have acted fraudulently so we can't trust its fundamentals, or a holding hits a stop-loss target.) We do this because we know how tempting it is to react to short-term movements of a stock or the broader market. By keeping this quantitative, disciplined system in place, we ensure that we never let our own emotions -- which so often lead investors astray -- interfere with good, long-term investment approaches. That systematic buying and selling is, I believe, one of the biggest reasons that the Hot List and the vast majority of our other guru-inspired portfolios have fared so well over the long haul. Sticking to that kind of disciplined approach is difficult, particularly at first, and particularly in today's world. In the past decade it has become exponentially easier to keep an eye on how your stocks or the broader market are performing -- forget day-to-day market updates; now you can get a minute to minute, or even second to second update on how every stock you own is doing. To be sure, it's good to stay relatively up-to-date on your holdings -- and you should definitely be aware of how the companies behind the shares you own are performing, business-wise. But monitoring how much those shares have risen or fallen every hour, every day, or even every week is, in my opinion, counterproductive. When your money's at stake, viewing inevitable short-term fluctuations so frequently can wreak havoc on your emotions, leading you to sell good stocks on short-term dips. Whether you are investing via the Hot List of some other approach, I'd thus recommend that you have some sort of rebalancing system in place for yourself, so that you don't make emotion-driven decisions that can eat away at your returns. Remember, over the long term, minute to minute or second to second or day-to-day fluctuations don't mean nearly as much as people think they do. Great stocks of great companies have terrible days, and great portfolios filled with great stocks have terrible days. What matters are the fundamentals and financials of the companies in your portfolio. That's because, over the long-term, fundamentals and financials win out. Good companies with cheap shares will net you solid returns more often than not, and that's all it takes to do very well over the long haul. That point is critical to remember -- and easier to forget the more you hyperfocus on your portfolio's short-term fluctuations.		Editor-in-Chief: John Reese Since Inception   Hot List 190.4% S&P 500 52.1% Accuracy 56.3% Beta 1.2 YTD   Hot List 7.1% S&P 500 6.7% Since Last Issue   Hot List 2.2% S&P 500 1.6% Avg. Fundamentals   Market Cap (mil) $12,662 PE Ratio 9.4 5 Yr EPS Growth 21.3% Yield 1.9% Rel. Strength 71 Portfolio Sectors Services 3 Financial 2 Healthcare 1 Conglomerates 1 Consumer Cyclical 1 Energy 1 Technology 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. The Fallen As we rebalance the Validea Hot List, 6 stocks leave our portfolio. These include: Guess?, Inc. (GES), Rue21, Inc. (RUE), Oracle Corporation (ORCL), Jos. A. Bank Clothiers Inc (JOSB), Hibbett Sports, Inc. (HIBB) and Northrop Grumman Corporation (NOC). The Keepers 4 stocks remain in the portfolio. They are: Ross Stores, Inc. (ROST), The Tjx Companies, Inc. (TJX), Usana Health Sciences, Inc. (USNA) and Main Street Capital Corporation (MAIN). The Newbies We are adding 6 stocks to the portfolio. These include: Western Digital Corp. (WDC), World Acceptance Corp. (WRLD), Questcor Pharmaceuticals, Inc. (QCOR), Lukoil (Adr) (LUKOY), Lear Corporation (LEA) and Starz (STRZA). Portfolio Changes Additions   WESTERN DIGITAL CORP. WDC WORLD ACCEPTANCE CORP. WRLD QUESTCOR PHARMACEUTICALS, INC. QCOR LUKOIL (ADR) LUKOY LEAR CORPORATION LEA STARZ STRZA Deletions   GUESS?, INC. GES RUE21, INC. RUE ORACLE CORPORATION ORCL JOS. A. BANK CLOTHIERS INC JOSB HIBBETT SPORTS, INC. HIBB NORTHROP GRUMMAN CORPORATION NOC Newcomers to the Validea Hot List Lukoil OAO (LUKOY): Russia-based Lukoil ($57 billion market cap) is the world's largest privately owned oil and gas company based on proved oil reserves, and is responsible for about 17% of Russian crude oil production. Its products are sold in Russia and former USSR republics, as well as Europe, Asia, and the U.S. Lukoil gets approval from my James O'Shaughnessy- and Peter Lynch-based models. To read more about it, scroll down to the "Detailed Stock Analysis" section below. Western Digital Corp. (WDC): This California-based firm is a leader in the hard drive and digital storage business. The 40-year-old company has a market cap of about $11.7 billion, and has raked in $15.6 billion in sales in the past year. It gets approval from my Peter Lynch- and Kenneth Fisher-based models. For more on the stock, see the "Detailed Stock Analysis" section below. World Acceptance Corp. (WRLD): Based in Greenville, S.C., World Acceptance ($1 billion market cap) specializes in small, short-term loans, and has close to 1,000 offices in the southern and central U.S., and Mexico. Its loans are generally under $3,000 and have durations of less than 24 months, and much of its business comes from repeat customers. World Acceptance gets strong interest from my Peter Lynch- and Warren Buffett-based models. For more on its fundamentals, see the "Detailed Stock Analysis" section below. Starz (STRZA): Formerly known as Liberty Media Corporation, Starz is a media and entertainment company whose pay-TV network includes the Starz, Encore, and Movieplex, Retroplex and Indieplex channels. The Colorado-based firm has a $2.2 billion market cap and has taken in about $2.5 billion in sales in the past year. Starz gets strong interest from my Peter Lynch-based model, and high scores from a number of other strategies. For more about it, see the "Detailed Stock Analysis" section below. Questcor Pharmaceuticals Inc. (QCOR): California-based Questcor's shares were crushed last September when it was revealed that Aetna would stop reimbursement for most uses of Questcor's main product, a gel used to treat infantile spasms, multiple sclerosis, neuromuscular conditions, and a kidney condition. But as is often the case when bad news hits, investors punished the stock too much, according to my models. The $1.6-billion-market-cap firm gets strong interest from my Peter Lynch- and Joel Greenblatt-based models, in large part because of its attractive valuations. To read more about it, scroll down to the "Detailed Stock Analysis" section below. Lear Corporation (LEA): Michigan-based Lear supplies automotive seating and electrical power management systems. The $5.2-billion-market-cap firm has employees in 36 countries, and in the past year has taken in nearly $15 billion in sales. Lear gets strong interest from my Peter Lynch- and James O'Shaughnessy-based models. For more on its fundamentals, see the "Detailed Stock Analysis" section below. News about Validea Hot List Stocks USANA Health Sciences (USNA): USANA shares have surged since the firm last week reported fourth-quarter earnings of $1.27 per share on revenue of $168.5 million, beating analyst expectations of $1.21 per share and $165.6 million, the Motley Fool reported. USANA also set guidance for the upcoming year of $700 million to $720 million in revenue, and adjusted EPS of $5.10 to $5.25, both of which were quite favorable given analysts' projections of $4.84 and $701.6 million. As of late morning on Feb. 14, shares were up about 10.5% since the Feb. 5 earnings announcement. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will take a closer look at my strategies and investment approach. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score MAIN MAIN STREET CAPITAL CORPORATION Misc. Financial Services 100 LUKOY LUKOIL (ADR) Oil & Gas - Integrated 100 USNA USANA HEALTH SCIENCES, INC. Conglomerates 85 STRZA STARZ Broadcasting & Cable TV 69 LEA LEAR CORPORATION Auto & Truck Parts 62 WRLD WORLD ACCEPTANCE CORP. Consumer Financial Services 60 WDC WESTERN DIGITAL CORP. Computer Storage Devices 59 QCOR QUESTCOR PHARMACEUTICALS, INC. Biotechnology & Drugs 56 ROST ROSS STORES, INC. Retail (Apparel) 43 TJX THE TJX COMPANIES, INC. Retail (Apparel) 43 Ticker Market Cap Date Added Start Price Current Price Return MAIN $1,001 11/23/2012 $30.13 $31.62 4.9% LUKOY $56,756 2/15/2013 TBD $67.03 TBD USNA $627 12/21/2012 $33.83 $43.45 28.4% STRZA $2,236 2/15/2013 TBD $18.61 TBD LEA $5,286 2/15/2013 TBD $55.23 TBD WRLD $966 2/15/2013 TBD $78.30 TBD WDC $11,747 2/15/2013 TBD $48.81 TBD QCOR $1,602 2/15/2013 TBD $27.41 TBD ROST $13,427 10/26/2012 $60.92 $60.38 -0.9% TJX $32,970 10/26/2012 $40.73 $45.21 11.0%

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 MAIN   |   LUKOY   |   USNA   |   STRZA   |   LEA   |   WRLD   |   WDC   |   QCOR   |   ROST   |   TJX   |   MAIN STREET CAPITAL CORPORATION Profile Strategy: Contrarian Investor Based on: David Dreman Main Street Capital Corporation is a United States-based principal investment firm that primarily provides long-term debt and equity capital to lower middle market companies. The Firm targets investments associated with ownership transitions, recapitalizations, strategic acquisitions, business expansion and other growth initiatives for later stage businesses. In addition to providing companies with necessary capital, Main Street provides management with expertise in corporate finance, operations and growth strategy implementation. Analysis Guru Score: 76% MARKET CAP: [FAIL] 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. MAIN has a market cap of $1,001 million, therefore failing the test. EARNINGS TREND: [PASS] A company should show a rising trend in the reported earnings for the most recent quarters. MAIN's EPS for the past 2 quarters, (from earliest to most recent quarter) 0.88, 1.01 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. MAIN's EPS growth rate over the past 6 months (14.77%) has beaten that of the S&P (-5.13%), but MAIN's estimated EPS growth for the current year is (-29.71%) while that of the S&P is (0.15%), therefore failing this test. This methodology would utilize four separate criteria to determine if MAIN 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. MAIN's P/E of 8.85, based on trailing 12 month earnings, meets the bottom 20% criterion (below 9.43), 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. MAIN's P/CF of 13.18 does not meet the bottom 20% criterion (below 4.97), 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. MAIN's P/B is currently 1.81, which does not meet the bottom 20% criterion (below 0.78), and it therefore fails this test. PRICE/DIVIDEND (P/D) RATIO: [PASS] 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%). MAIN's P/D of 17.57 meets the bottom 20% criterion (below 20.00 or yield above 3.7% ), and it therefore passes this test. This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below. PAYOUT RATIO: [PASS] A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for MAIN is 46.60%, while its historical payout ratio has been 147.24%. Therefore, it passes the payout criterion. RETURN ON EQUITY: [PASS] The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 16.73%, and would consider anything over 27% to be staggering. The ROE for MAIN of 22.59% 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. MAIN's pre-tax profit margin is 132.76%, thus passing this criterion. YIELD: [PASS] The company in question should have a yield that is high and that can be maintained or increased. MAIN's current yield is 5.69%, while the market yield is 2.71%. MAIN passes this test.   LUKOIL (ADR) Profile Strategy: Contrarian Investor Based on: David Dreman NK Lukoil OAO (Neftyanaya Kompaniya LUKOIL OAO or NK LUKOIL OJSC) is a Russia-based integrated oil and gas company. The Company is engaged in the business of oil exploration, production, refining, marketing and distribution. It is an owner of refineries, gas processing, petrochemical plants and gas stations network located in Russia, Eastern and Western Europe. The Company's petroleum products are sold in the Russian Federation, the Commonwealth of Independent States (CIS) countries, Eastern and Western Europe, Asia and the United States. NK Lukoil OAO operates through numerous subsidiaries and affiliated companies. As of December 31, 2011, the Company's major shareholder was ING Bank (Eurasia) ZAO with a stake of 75.93%. Analysis Guru Score: 79% 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. LUKOY has a market cap of $56,756 million, therefore passing the test. EARNINGS TREND: [PASS] A company should show a rising trend in the reported earnings for the most recent quarters. LUKOY's EPS for the past 2 quarters, (from earliest to most recent quarter) 1.32, 4.55 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. LUKOY fails this test as its EPS growth rate for the past 6 months (-5.20%) does not beat that of the S&P (-5.13%). This methodology would utilize four separate criteria to determine if LUKOY 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. LUKOY's P/E of 5.43, based on trailing 12 month earnings, meets the bottom 20% criterion (below 9.43), and therefore passes this test. PRICE/CASH FLOW (P/CF) RATIO: [PASS] The P/CF of a company should be in the bottom 20% of the overall market. LUKOY's P/CF of 4.13 meets the bottom 20% criterion (below 4.97) and therefore passes this test. PRICE/BOOK (P/B) VALUE: [PASS] The P/B value of a company should be in the bottom 20% of the overall market. LUKOY's P/B is currently 0.70, which meets the bottom 20% criterion (below 0.78), and it therefore passes this test. PRICE/DIVIDEND (P/D) RATIO: [PASS] 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%). LUKOY's P/D of 18.42 meets the bottom 20% criterion (below 20.00 or yield above 3.7% ), and it therefore passes this test. This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below. CURRENT RATIO: [PASS] A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.40] or greater than 2). This is one identifier of financially strong companies, according to this methodology. LUKOY's current ratio of 2.11 passes the test. PAYOUT RATIO: [FAIL] A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for LUKOY is 16.86%, while its historical payout ratio has been 15.96%. Therefore, it fails the payout criterion. RETURN ON EQUITY: [FAIL] 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 largest cap stocks, which is 16.73%, and would consider anything over 27% to be staggering. The ROE for LUKOY of 13.98% is not 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. LUKOY's pre-tax profit margin is 8.61%, thus passing this criterion. YIELD: [PASS] The company in question should have a yield that is high and that can be maintained or increased. LUKOY's current yield is 5.43%, while the market yield is 2.71%. LUKOY passes this test. LOOK AT THE TOTAL DEBT/EQUITY: [PASS] The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry of 32.90%. LUKOY's Total Debt/Equity of 9.03% is considered acceptable.   USANA HEALTH SCIENCES, INC. Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher USANA Health Sciences, Inc. develops and manufactures science-based nutritional and personal care products. The Company has operations in 15 markets worldwide, where it distributes and sells its products by way of direct selling. The Company reports operations in two geographic regions: North America and Asia Pacific, which is further divided into three sub-regions; Southeast Asia/Pacific, Greater China, and North Asia. North America includes the United States, Canada, Mexico, and direct sales from the United States to the United Kingdom and the Netherlands. Southeast Asia/Pacific includes Australia, New Zealand, Singapore, Malaysia, and the Philippines; Greater China includes Hong Kong, Taiwan and China; and North Asia includes Japan and South Korea. The Company's customer base consists of two types of customers: Associates and Preferred Customers. As of December 31, 2011, the Company had 222,000 active Associates and 64,000 active Preferred Customers worldwide. Analysis Guru Score: 80% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratio between .75 and 1.5 are good values. USNA's P/S ratio of 0.97 based on trailing 12 month sales, falls within the "good values" range for non-cyclical companies and is considered attractive. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. USNA's Debt/Equity of 0.00% is exceptional, thus passing the test. PRICE/RESEARCH RATIO: [PASS] This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. USNA is neither a Technology nor Medical company. Therefore the Price/Research ratio is not available and, hence, not much emphasis should be placed on this particular variable. PRELIMINARY GRADE: Some Interest in USNA At this Point Is USNA a "Super Stock"? NO PRICE/SALES RATIO: [FAIL] The prospective company should have a low Price/Sales ratio. To be considered a "Super Stock", non-cyclical (non-Smokestack) companies should have Price/Sales ratios below .75. However, USNA, who has a P/S of 0.97, does not fall within the "Super Stock" range. It does fall between 0.75 and 1.5, which is considered the "good values" range for non-cyclical companies. Nonetheless, it does not pass this "Super Stock" criterion. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. USNA's inflation adjusted EPS growth rate of 18.41% passes the test. FREE CASH PER SHARE: [FAIL] This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. USNA's free cash per share is not available. Hence, an opinion cannot be rendered on this criterion at the current time. THREE YEAR AVERAGE NET PROFIT MARGIN: [PASS] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. USNA, whose three year net profit margin averages 9.26%, passes this evaluation.   STARZ Profile Strategy: Book/Market Investor Based on: Joseph Piotroski Starz, formerly Liberty Media Corporation, is an integrated global media and entertainment company with operating units that provide subscription video programming on domestic United States pay television channels (Starz Channels), global content distribution (Starz Distribution) and animated television and movie production (Starz Animation). As of January 14, 2013, its network included Starz, Encore, and Movieplex, Retroplex and Indieplex. Its businesses included Anchor Bay Entertainment, Starz Worldwide Distribution, and Starz Digital Media. Starz Animation produces animated television (TV) and movie content for studios and networks. Starz Distribution develops, produces and acquires entertainment content, distributing it to consumers globally on digital versatile disk (DVD). On January 11, 2013, Liberty Media Corporation (Liberty) and Starz announced the completion of the spin-off of Liberty from Starz. Analysis Guru Score: 80% BOOK/MARKET RATIO: [PASS] The first criteria of this strategy requires that a company be in the top 20% of the market based on the Book/Market ratio (which is the inverse of the Price/Book ratio). STRZA, which has a book to market ratio of 2.86, meets this criterion and thus this strategy will use the following rules to determine if it is a financially distressed firm or is unfairly trading at a discount to its book value. The study conducted by Piotroski found that excess returns can be earned by holding a portfolio of high Book/Market stocks. He also found, however, that it is very important to separate companies that trade at a discount because they are financially distressed from companies that are unfairly trading at a discount. The following criteria are used to help provide this distinction. RETURN ON ASSETS: [PASS] As a first step to determining whether a firm is not financially distressed, this methodology requires that the return on assets for the most recent fiscal year be positive. STRZA's return on assets was 9.66% in the most recent year, therefore it passes this test. CHANGE IN RETURN ON ASSETS: [PASS] The next requirement is that the return on assets for the most recent fiscal year must be greater than the return on assets for the previous fiscal year. STRZA's return on assets was 9.66% in the most recent year and 8.71% in the previous year, therefore it passes this test. CASH FLOW FROM OPERATIONS: [PASS] In addition to the return on assets, the cash flow from operations for the most recent fiscal year must also be positive. This eliminates companies that are burning cash and therefore are more likely to be financially distressed. STRZA's cash flow from operations was $276.00 million in the most recent year, therefore it passes this test. CASH COMPARED TO NET INCOME: [FAIL] This methodology requires that cash from operations for the most current fiscal year must be greater than net income for the most current fiscal year. STRZA's cash from operations was $276.00 million in the most recent year, while its net income was $746.40 million, therefore it fails this test. CHANGE IN LONG TERM DEBT/ASSETS: [PASS] The long term debt to assets ratio for the most recent fiscal year must be less than or equal to the previous fiscal year. STRZA's LTD/Assets was 0.07 in the most recent year and 0.19 in the previous year, therefore it passes this test. CHANGE IN CURRENT RATIO: [PASS] As an additional test of firm solvency, the current ratio for the most recent fiscal year must be greater than the current ratio for the previous fiscal year. STRZA's current ratio was 3.18 in the most recent year and 1.41 in the previous year, therefore it passes this test. CHANGE IN SHARES OUTSTANDING: [PASS] The issuance of new stock is considered by this methodology to be a sign that a company is not able to generate enough internal cash to fund its business. Therefore, shares outstanding for the most recent fiscal year must be less than or equal to shares outstanding for the previous fiscal year. STRZA's shares outstanding was 112.4 million in the most recent year and 115.8 million in the previous year, therefore it passes this test. CHANGE IN GROSS MARGIN: [FAIL] As a sign that a company is expanding its profitability, this strategy requires that gross margin for the most recent fiscal year be greater than gross margin for the previous fiscal year. STRZA's gross margin was 100.00% in the most recent year and 100.00% in the previous year, therefore it fails this test. CHANGE IN ASSET TURNOVER: [PASS] The final criterion of this strategy requires that asset turnover for the most recent fiscal year be greater than asset turnover for the previous fiscal year. STRZA's asset turnover was 0.39 in the most recent year and 0.19 in the previous year, therefore it passes this test.   LEAR CORPORATION Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Lear Corporation is a tier 1 supplier to the global automotive industry. The Company supplies its products to automotive manufacturers with automotive seat systems and related components, as well as electrical distribution systems and related components. The Company has two segments: seating and electrical power management systems (EPMS). The seating segment includes seat systems and related components, such as seat frames, recliner mechanisms, seat tracks, seat trim covers, headrests and seat foam. The EPMS segment includes electrical distribution systems for traditional powertrain vehicles, as well as for hybrid and electric vehicles. As of December 31, 2011, it had 20 joint ventures located throughout Asia, as well as five in North America, two in Europe and Africa and one with operations in all three regions. Analysis Guru Score: 100% MARKET CAP: [PASS] The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. LEA, with a market cap of $5,286 million, passes this criterion. EARNINGS PER SHARE PERSISTENCE: [PASS] The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. LEA, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were -4.47, -2.66, 4.05, 5.08 and 12.85, passes this test. PRICE/SALES RATIO: [PASS] The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. LEA's Price/Sales ratio of 0.36, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [PASS] The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. LEA, whose relative strength is 75, is in the top 50 and would pass this last criterion.   WORLD ACCEPTANCE CORP. Profile Strategy: Patient Investor Based on: Warren Buffett World Acceptance Corporation operates a small-loan consumer finance business in 12 states and Mexico. The Company 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. As of March 31, 2012, the Company offered standardized installment loans through 1,137 offices in South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee, Illinois, Missouri, New Mexico, Kentucky, Alabama, Wisconsin, and Mexico. The Company serves individuals with limited access to consumer credit from banks, credit unions, 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. 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 1.25, 1.49, 1.74, 2.02, 2.51, 2.89, 3.43, 4.45, 5.63, 6.59. Buffett would consider WRLD's earnings predictable. In fact EPS have increased every year. WRLD's long term historical EPS growth rate is 20.8%, 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 19.2%, 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 19.0%, 17.9%, 17.4%, 17.6%, 20.4%, 20.1%, 18.8%, 19.2%, 20.0%, 21.9%, and the average ROE over the last 3 years is 20.3%, 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 11.2%, 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%, 10.7%, 11.2%, 11.1%, 10.7%, 9.7%, 10.6%, 12.4%, 13.3%, 12.5%, 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 $13.84 is positive, indicating that the company is generating more cash that it is consuming. This is a favorable sign, and so the company passes this criterion. LOOK AT MANAGEMENT'S USE OF RETAINED EARNINGS: [PASS] Buffett likes to see if management has spent retained earnings in a way that benefits shareholders. To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $32.00 and compares it to the gain in EPS over the same period of $5.34. WRLD's management has proven it can earn shareholders a 16.7% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work. HAS THE COMPANY BEEN BUYING BACK SHARES: [BONUS PASS] Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. WRLD's shares outstanding have fallen over the past five years from 16,280,001 to 13,000,000, 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 $7.47 and divide it by the current market price of $78.30. An investor, purchasing WRLD, could expect to receive a 9.54% initial rate of return. Furthermore, he or she could expect the rate to increase 20.8% 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 2.20%. Compare this with WRLD's initial yield of 9.54%, which will expand at an annual rate of 20.8%, 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 $28.68. It is safe to say that if WRLD can preserve its average rate of return on equity of 19.2% and continues to retain 100.00% of its earnings, it will be able to sustain an earnings growth rate of 19.2% and it will have a book value of $166.33 in ten years. If it can still earn 19.2% on equity in ten years, then expected EPS will be $31.96. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $31.96 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (10.5) (5 year average P/E in this case), which is 9.2 and you get WRLD's projected future stock price of $294.07. 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 $294.07. These numbers indicate that one could expect to make a 14.1% average annual return on WRLD's stock at the present time. Although, the return is slightly below the liking of Buffett, the return would still be somewhat acceptable. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 20.8%, based on the 10 year average EPS growth rate, you can project EPS in ten years to be $49.23. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (10.5) (5 year average P/E in this case), which is 9.2. This equals the future stock price of $452.89. Add in the total expected dividend pool of $0.00 to get a total dollar amount of $452.89. 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 $78.30 and the future expected stock price, including the dividend pool, of $452.89. If you were to invest in WRLD at this time, you could expect a 19.19% 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 14.1% and 19.2%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 16.7% on WRLD stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   WESTERN DIGITAL CORP. Profile Strategy: Value Investor Based on: Benjamin Graham Western Digital Corporation (WD) is a provider of solutions for the collection, storage, management, protection and use of digital content, including audio and video. Its principal products are hard drives, which are devices that use one or more rotating magnetic disks (magnetic media) to store and allow access to data. Its hard drives are used in desktop and notebook computers, corporate and cloud computing data centers, home entertainment equipment and stand-alone consumer storage devices. In addition to hard drives, its other products include solid-state drives and home entertainment and networking products. Effective March 8, 2012, it acquired Viviti Technologies Ltd. In May 2012, the Company completed the divestiture of certain 3.5-inch hard drive assets to Toshiba Corporation. As part of its deal with Toshiba, WD also completed its purchase of Toshiba Storage Device (Thailand) Company Limited (TSDT), which manufactured hard drives. Analysis Guru Score: 86% SECTOR: [FAIL] WDC is in the Technology sector, which is one sector that this methodology avoids. Technology and financial stocks were considered too risky to invest in when this methodology was published. At that time they were not the driving force of the market as they are today. Although this methodology would avoid WDC, we will provide the rest of the analysis, as we feel times have changed. SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. WDC's sales of $15,648.0 million, based on trailing 12 month sales, pass this test. CURRENT RATIO: [PASS] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. WDC's current ratio of 2.16 passes the test. LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for WDC is $1,840.0 million, while the net current assets are $3,849.0 million. WDC passes this test. LONG-TERM EPS GROWTH: [PASS] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. WDC's EPS growth over that period of 738.7% passes the EPS growth test. P/E RATIO: [PASS] The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. WDC's P/E of 9.40 (using the 3 year PE) passes this test. PRICE/BOOK RATIO: [PASS] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. WDC's Price/Book ratio is 1.43, while the P/E is 9.40. WDC passes the Price/Book test.   QUESTCOR PHARMACEUTICALS, INC. Profile Strategy: Growth Investor Based on: Martin Zweig Questcor Pharmaceuticals, Inc. (Questcor) is a biopharmaceutical company. The Company's primary product is H.P. Acthar Gel (repository corticotropin injection) (Acthar), an injectable drug that is approved by the United States Food and Drug Administration, for the treatment of 19 indications. As of December 31, 2011, H.P. Acthar Gel was approved for the treatment of acute exacerbations of multiple sclerosis in adults, and as monotherapy for the treatment of infantile spasms in infants and children under two years of age. It is also indicated to induce a diuresis or a remission of proteinuria in the nephrotic syndrome without uremia of the idiopathic type or that due to lupus erythematosus, as well as indicated for the treatment of a number of other diseases and disorders. Its other product is Doral (quazepam), which is indicated for the treatment of insomnia. Analysis Guru Score: 85% P/E RATIO: [PASS] The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. QCOR's P/E is 10.50, based on trailing 12 month earnings, while the current market PE is 18.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [PASS] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. QCOR's revenue growth is 38.08%, while it's earnings growth rate is 29.44%, based on the average of the 3 and 4 year historical eps growth rates. Therefore, QCOR passes this criterion. SALES GROWTH RATE: [FAIL] 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 (134.6%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (144.6%) of the current year. Sales growth for the prior must be greater than the latter. For QCOR this criterion has not been met and fails this test. 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. QCOR's EPS ($0.91) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. QCOR's EPS for this quarter last year ($0.35) 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. QCOR's growth rate of 160.00% passes this test. EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: [PASS] Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for QCOR is 14.72%. This should be less than the growth rates for the 3 previous quarters, which are 380.00%, 241.18%, and 209.52%. QCOR passes this test, which means that it has good, reasonably steady earnings. This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: [PASS] If the growth rate of the prior three quarter's earnings, 256.25%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 160.00%, (versus the same quarter one year ago) then the stock fails, with one exception: if the growth rate in earnings between the current quarter and the same quarter one year ago is greater than 30%, then the stock would pass. The growth rate over this period for QCOR is 160.0%, and it would therefore pass this test. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: [PASS] The EPS growth rate for the current quarter, 160.00% must be greater than or equal to the historical growth which is 29.44%. QCOR 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. QCOR, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.51, 0.49, 0.40, 0.54, and 1.21, fails this test. LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. QCOR's long-term growth rate of 29.44%, based on the average of the 3 and 4 year historical eps growth rates, passes this test. TOTAL DEBT/EQUITY RATIO: [PASS] A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. QCOR's Debt/Equity (0.00%) is not considered high relative to its industry (45.81%) and passes this test. INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For QCOR, this criterion has not been met (insider sell transactions are 41, while insiders buying number 71). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.   ROSS STORES, INC. Profile Strategy: Patient Investor Based on: Warren Buffett Ross Stores, Inc., along with its subsidiaries, operates two brands of off-price retail apparel and home fashion stores. As of January 28, 2012, the Company operated a total of 1,125 stores, of which 1,037 were Ross Dress for Less (Ross) locations in 29 states, the District of Columbia, and Guam, and 88 were dd's DISCOUNTS stores in seven states: 48 in California, 19 in Texas, 12 in Florida, four in Arizona, two in Georgia, two in Nevada, and one in Maryland. Ross focuses on customers primarily from middle income households, while dd's DISCOUNTS focuses on customers from more moderate income households. During the fiscal year ended January 28, 2012 (fiscal 2012), it opened 59 new Ross stores and closed ten existing stores. During fiscal 2011, it opened 21 new dd's DISCOUNTS stores. The average approximate dd's DISCOUNTS store size is 23,900 square feet. In April 2011, it purchased a 449,000 square foot warehouse for packaway storage in Riverside, California. 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 0.63, 0.73, 0.56, 0.68, 0.85, 0.95, 1.16, 1.77, 2.31, 2.86. Buffett would consider ROST's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 8 years ago. The dips have totaled 23.3%. ROST's long term historical EPS growth rate is 19.5%, based on the 10 year average EPS growth rate, and it is expected to grow earnings 12.7% 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. ROST has a debt of 150.0 million and earnings of 734.8 million, which could be used to pay off the debt in less than two years, which is considered exceptional. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: [PASS] Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for ROST, over the last ten years, is 30.9%, 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 30.2%, 29.5%, 21.7%, 23.5%, 26.1%, 26.3%, 29.7%, 37.6%, 41.0%, 43.4%, and the average ROE over the last 3 years is 40.7%, 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 ROST, over the last ten years, is 28.1% and the average ROTC over the past 3 years is 36.5%, 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 29.1%, 27.6%, 20.3%, 23.5%, 22.4%, 22.8%, 25.8%, 33.3%, 36.9%, 39.5%, 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. ROST's free cash flow per share of $1.31 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 $10.67 and compares it to the gain in EPS over the same period of $2.23. ROST's management has proven it can earn shareholders a 20.9% 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. ROST's shares outstanding have fallen over the past five years from 268,190,002 to 222,000,000, 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 ROST quantitatively. STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return. CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail] Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $3.31 and divide it by the current market price of $60.38. An investor, purchasing ROST, could expect to receive a 5.48% initial rate of return. Furthermore, he or she could expect the rate to increase 12.7% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 2.20%. Compare this with ROST's initial yield of 5.48%, which will expand at an annual rate of 12.7%, 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] ROST currently has a book value of $7.63. It is safe to say that if ROST can preserve its average rate of return on equity of 30.9% and continues to retain 84.90% of its earnings, it will be able to sustain an earnings growth rate of 26.2% and it will have a book value of $78.41 in ten years. If it can still earn 30.9% on equity in ten years, then expected EPS will be $24.23. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $24.23 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (18.3) (5 year average P/E in this case), which is 15.1 and you get ROST's projected future stock price of $364.85. 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 $10.23. This gives you a total dollar amount of $375.08. These numbers indicate that one could expect to make a 20.0% average annual return on ROST'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 12.7%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $10.95. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (18.3) (5 year average P/E in this case), which is 15.1. This equals the future stock price of $164.92. Add in the total expected dividend pool of $10.23 to get a total dollar amount of $175.15. 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 $60.38 and the future expected stock price, including the dividend pool, of $175.15. If you were to invest in ROST at this time, you could expect a 11.24% average annual return on your money. Buffett likes to see a 15% return, and would even go down to 12%. LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: [PASS] Based on the two different methods, you could expect an annual compounding rate of return somewhere between 11.2% and 20.0%. 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 15.6% on ROST stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   THE TJX COMPANIES, INC. Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher The TJX Companies, Inc. (TJX) is the off-price apparel and home fashions retailer in the United States and worldwide. As of January 28, 2012, the Company operated in four business segments. It has two segments in the United States, Marmaxx (T.J. Maxx and Marshalls) and HomeGoods; one in Canada, TJX Canada (Winners, Marshalls and HomeSense) and one in Europe, TJX Europe (T.K. Maxx and HomeSense). As a result of the consolidation of the A.J. Wright chain, all A.J. Wright stores ceased operations by the end of February 2011. It completed the consolidation of A.J. Wright, converting 90 of the A.J. Wright stores to T.J. Maxx, Marshalls or HomeGoods banners and closed the remaining 72 stores, two distribution centers and home office. In December 2012, the Company acquired Sierra Trading Post, an off-price Internet retailer. Analysis Guru Score: 90% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratio between .75 and 1.5 are good values. TJX's P/S ratio of 1.33 based on trailing 12 month sales, falls within the "good values" range for non-cyclical companies and is considered attractive. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. TJX's Debt/Equity of 22.34% is acceptable, thus passing the test. PRICE/RESEARCH RATIO: [PASS] This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. TJX is neither a Technology nor Medical company. Therefore the Price/Research ratio is not available and, hence, not much emphasis should be placed on this particular variable. PRELIMINARY GRADE: Some Interest in TJX At this Point Is TJX a "Super Stock"? NO PRICE/SALES RATIO: [FAIL] The prospective company should have a low Price/Sales ratio. To be considered a "Super Stock", non-cyclical (non-Smokestack) companies should have Price/Sales ratios below .75. However, TJX, who has a P/S of 1.33, does not fall within the "Super Stock" range. It does fall between 0.75 and 1.5, which is considered the "good values" range for non-cyclical companies. Nonetheless, it does not pass this "Super Stock" criterion. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. TJX's inflation adjusted EPS growth rate of 19.15% passes the test. FREE CASH PER SHARE: [PASS] This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. TJX's free cash per share of 1.08 passes this criterion. THREE YEAR AVERAGE NET PROFIT MARGIN: [PASS] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. TJX, whose three year net profit margin averages 6.18%, passes this evaluation.   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 DORM DORMAN PRODUCTS INC. Auto & Truck Parts 56 HFC HOLLYFRONTIER CORP Oil & Gas Operations 56 CVX CHEVRON CORPORATION Oil & Gas - Integrated 55 NTES NETEASE, INC (ADR) Business Services 49 VALE VALE SA (ADR) Metal Mining 45 ORCL ORACLE CORPORATION Software & Programming 44 INTC INTEL CORPORATION Semiconductors 43 AN AUTONATION, INC. Retail (Specialty) 40 TVL LIN TV CORP Broadcasting & Cable TV 40 STO STATOIL ASA(ADR) Oil & Gas - Integrated 39

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