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Executive Summary	May 14, 2010

The Economy The state of the economy over the past two weeks really depends on which economy you're talking about -- the U.S. economy or the global economy. In the U.S., the positive news and data continues to roll in as the economic recovery progresses. Overseas, however, some significant tremors are rumbling through Europe. And for investors, the question is how much the latter will impact the former. The main source of the tremors is, of course, Greece, but other European countries, including Spain, Portugal, Italy, and Ireland, also were showing serious debt-created cracks. That led to a nearly $1 trillion liquidity package being created for struggling European Union members, financed by EU countries and the International Monetary Fund, of which the U.S. is a part. Some initial reports are estimating that the U.S. is on the hook for about $55 billion in loans, since it is responsible for about one-sixth of the IMF's contribution to the loan. (The IMF is responsible for one-third of the $950 billion package.) The U.S. has also agreed to open currency swap lines with the European Central Bank to help ease liquidity fears. So far, initial reports indicate the direct risk to the U.S. for its involvement in the European crisis is minimal -- the IMF, which usually is the preferred creditor in its dealings and thus gets paid back first, says none of its members have ever lost money on their IMF contributions. But it appears no official word has come on whether the IMF will be the senior party in this debt arrangement. In today's global economy, the risks to the U.S. (and U.S. companies) goes beyond the direct participation in the European bailout. Troubles in Europe certainly have the potential to impact the rest of the world if European demand for goods and services declines. For now, however, confidence seems high that the EU nations' debt problems are being brought under control. While Europe is in crisis, it's a different story at home. The U.S. economic data continues to impress, with one of the recent highlights being the April jobs report. The Labor Department said the economy added 290,000 jobs during the month, the biggest gain in more than four years. New data also showed 230,000 jobs were added in March, up from initial estimates of 162,000. The economy has now shown positive job growth for four straight months and five of the last six. The unemployment rate did rise, however, from 9.7% to 9.9%. But that appears to be because many job-seekers who'd given up on finding work restarted their searches as the employment situation improved. New data also showed that initial claims for unemployment dipped in the most recent week (ending May 8), though the decline was less than analysts expected. Since our last newsletter, we've also learned that the U.S. economy grew at a 3.2% clip in the first quarter. While slower than the previous quarter's 5.6% pace, it was still a strong figure, and it marked the third straight quarter of expansion after a full year of contraction. And it's important to note the source of the growth. While inventory replenishment drove the fourth-quarter 2009 surge in GDP, personal consumption expenditures played a much bigger role in the recent first-quarter growth. They jumped by 3.6% -- the biggest increase in three years. And given that the U.S. economy is driven largely by consumer spending, that's the number that needs to keep growing to sustain the recovery over the longer haul. Good news also came from the manufacturing sector, which expanded for the ninth straight month in April, at the swiftest pace in almost six years, according to the Institute for Supply Management. The group's new orders sub-index also showed rapid acceleration, as did its employment sub-index, which grew for the fifth straight month. ISM's non-manufacturing (or services) index also showed expansion, for the fourth straight month, though its employment sub-index indicated a services job market contraction for the 28th straight month. Another positive sign: First-quarter earnings are coming in quite strong. Through last week, with 437 of 500 companies in the S&P 500 having reported, an impressive 77% had topped expectations, with the average being a 15% upside surprise, The Wall Street Journal reported. And the growth isn't just from cost-cutting -- 66% of the reporting companies announced revenues that beat expectations, the Journal said. Of course, the government's bailout and stimulus efforts have a lot to do with corporate America's rebound -- and they also have a lot to do with its giant deficits. Treasury Department data released this week showed that the federal government ran up a deficit last month for only the third time in the past 30 Aprils; traditionally, the month has been a surplus month, CNNMoney reported, because of the April 15 tax filing deadline. This year's April deficit was more than $82 billion, a record for the month. Still, there were more positive signs in the past two weeks. Some even came in the housing market, which had been showing mixed data in recent months. According to the National Association of Realtors, pending home sales rose 5.3% in March. That data involves a period prior to the April 30 expiration of the first-time homebuyer tax credit, however; in coming months we'll see if the housing market can push forward with that carrot no longer dangling. The positive data for the U.S. economy and the flare-up of the European debt crisis have made for a very volatile fortnight, one that was made even wilder by an apparent trading input error that briefly wreaked havoc on an already turbulent market on May 7. All in all, the S&P 500 has fallen -4.1% since our last newsletter. The Hot List, meanwhile, lost -6.1%. For the year, the portfolio is now up 3.9% vs. 3.8% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 150.4% vs. the S&P's 15.7% gain. A Major Shakeup The Hot List is undergoing a major overhaul on today's regularly scheduled rebalancing. It's selling 7 of its 10 holdings and replacing them with seven new picks -- not surprising given the volatility we've seen over the past month. The big ups and downs have shifted a lot of firm's valuation metrics, as has the recent rush of first-quarter earnings releases. The departing stocks include a couple winners (EMCOR Group and ITT Educational Services), and a handful of losers (lululemon athletica, Telestone Technologies, Telefonica, Sanofi-Aventis, and The Brink's Company). The newcomers are a diverse bunch that run the gamut from a healthcare giant (AstraZeneca) that has a $63 billion market cap and 8% dividend yield to a $190-million-small-cap, federally chartered financial (Federal Agricultural Mortgage Corp.) that offers loans to agricultural and rural customers. Also in the mix: a paper company, a specialty vehicle maker; a niche health insurance firm; a for-profit private education company; and a key player in the video game industry. While these firms come from a variety of different areas of the market, they all share at least one thing in common -- very strong fundamentals. All have long-term EPS growth rates between 17% and 46%, for example, and all trade at yield-adjusted P/E/Growth ratios of 0.4 or lower (which would fall into the "best-case" category of my Peter Lynch-based model). What Makes Stocks Tick The market turbulence has helped shake these bargains loose in the past week or two. It's also done something on a broader level: It has highlighted just how many factors impact stock market returns. Politics, both at home and overseas, interest rates, earnings, and, of course, good old fear and greed -- all of these and more have been in play over the past couple weeks, pushing and pulling the market upward and downward. To me, all of that begs the question: What really drives stock market returns over the long haul? It's a tough question, but one that a recent study attempted to answer. The study -- "What Drives Long-Term Equity Returns?" -- was performed by MSCI Barra, creator of the MSCI market indices. It broke historical stock market returns down into four main sources: inflation; dividend income; real book value growth (how much the company's underlying business and assets grow); and price-to-book growth (how the amount of money investors are willing to pay for every dollar of that book value changes over time). The study covered the period from 1975 through the third quarter of 2009, and its findings were very intriguing. According to Barra, over that period, inflation played the greatest role in stock market returns, both in the U.S. and on a global scale. In the U.S. (measured by the MSCI USA index), stocks averaged an 11.4% annual gain over that 35-year period; inflation accounted for more than a third (4.2 percentage points) of that. Global stock returns (measured by the MSCI World Index), meanwhile, averaged 11.1% per year; inflation also accounted for 4.2 percentage points of that gain. The second-greatest factor that goes into equity returns also might surprise you: dividend income. Dividend payouts made up 3.2 percentage points of the U.S.'s 11.4% annual gains in the 35-year period covered by the study; they also made up 2.9 percentage points of the global 11.1% annual return. Coming in third was real book value growth, accounting for 1.8 percentage points in the U.S. and 2.1 percentage points globally. And bringing up the rear was price-to-book growth, which accounted for 1.7 percentage points in the U.S. and 1.5 points globally. One of the study's other interesting findings was that the price-to-book growth was by far the most volatile component of equity returns. In the 1990s, for example, it accounted more than half (10.4 percentage points) of the U.S. market's 19% average annual return. In the 2000s, however, it dragged returns into negative territory all by itself, falling almost 10% while the other three components all showed positive growth. So, what are the implications of MSCI's study? While the study examines returns of stocks as a group, I think a few key points pertain to investors buying individual stocks as well. The first is that fundamentals and financials matter. Real book value growth and dividend income accounted for about 45% of returns both in the U.S. and globally, according to the study, and you're not going to grow book value or have cash to pay out dividends unless you are running a strong, efficient business. That's why my guru-based models focus on firms with the best balance sheets and most attractive fundamentals in the market. The second point is that inflation is a far greater factor than most people believe. In the past, I've noted how David Dreman (one of the gurus upon whose approach I base my strategies) has conducted research showing that inflation eats away at the returns of bonds, bills, and even gold over the long haul. Because stocks represent companies, and companies can adjust their prices as inflation rises, they are less impacted. With the massive stimulus and bailout efforts that the U.S., Europe, and other parts of the world have recently enacted, it stands to reasons that inflation will rear its head at some point in the next couple years, if not sooner. And stocks should offer protection that most other assets can't. The third and last point I'll make is that pricing matters. If you take away the price-to-book growth component in MSCI Barra's study (that is, the change in what people were willing to pay for the same dollar of book value), the other drivers of equity prices accounted for an 8.6% annual gain during the 1990s. In the 2000s, the ex-price/book growth factors accounted for gains of 8.0% -- nearly the same. Yet in the 90's, stocks gained an average of 19% per year, while in the 2000s they lost an average of 1.9% per year. According to the study, the huge difference in the market's returns in those two decades thus weren't due to the collective performance of U.S. businesses; it was instead due almost entirely to the amount of money investors were willing to pay for the same dollar of book value. (In fact, the book value of U.S. businesses actually grew at a faster rate in the 2000s than it did in the 1990s, according to the study.) The discrepancy in returns during those two decades no doubt is a result of the 1990s ending and 2000s beginning amidst a speculative, technology-stock-driven mania (as well as the fact that the 2000s ended shortly after one of the worst financial crises in history). Buy into the market when stocks are trading at very high valuation levels, and you're likely to have a much harder time making hay than if you bought in when valuations are low. The same is certainly true a good deal of the time when it comes to individual stocks. That's why almost all of the gurus I follow -- even several who used growth-oriented strategies -- included a value component in their analyses. Peter Lynch is a great example. Lynch put together one of the greatest mutual fund track records of all-time in large part by finding stocks whose underlying businesses were growing rapidly -- between 20% and 50% per year. But he wasn't willing to pay indiscriminately for that kind of growth. That's why he pioneered the P/E/G ratio, which divides a stock's P/E ratio by its long-term growth rate. The rationale: It's okay to pay a premium for a stock -- if it's growing earnings rapidly. This focus on value is, I believe, a big part of why the Hot List has fared so well since its July 2003 inception, during a period when the broader market has fared so poorly. And, while the market is up some 70% off its lows, the portfolio is still finding plenty of stocks that are producing strong growth at a reasonable price -- as I noted earlier, each of the seven stocks being added to the portfolio this rebalancing has a P/E/G of 0.4 or lower. Moving forward, there will certainly be bumps in the road -- perhaps some very large ones given all that is happening in the U.S. and world economies. But by focusing on strong companies whose shares are trading at good values, I expect the Hot List will keep outperforming the broader market over the long haul.		Editor-in-Chief: John Reese Since Inception   Hot List 150.4% S&P 500 15.7% Accuracy 56.4% Beta 1.2 YTD   Hot List 3.9% S&P 500 3.8% Since Last Issue   Hot List -6.1% S&P 500 -4.1% Avg. Fundamentals   Market Cap (mil) $7,795 PE Ratio 8.9 5 Yr EPS Growth 27.8% Yield 6.2% Rel. Strength 69 Portfolio Sectors Financial 3 Services 3 Consumer Cyclical 2 Basic Materials 1 Healthcare 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, 7 stocks leave our portfolio. These include: Itt Educational Services, Inc. (ESI), Telefonica S.a. (Adr) (TEF), Emcor Group, Inc. (EME), Sanofi-aventis Sa (Adr) (SNY), The Brink's Company (BCO), Telestone Technologies Corporation (TSTC) and Lululemon Athletica Inc. (LULU). The Keepers 3 stocks remain in the portfolio. They are: Aeropostale, Inc. (ARO), China Automotive Systems, Inc. (CAAS) and Ares Capital Corporation (ARCC). The Newbies We are adding 7 stocks to the portfolio. These include: Oshkosh Corporation (OSK), Astrazeneca Plc (Adr) (AZN), Federal Agricultural Mortgage Corp. (AGM), Lincoln Educational Services Corporation (LINC), Healthspring, Inc (HS), Gamestop Corp. (GME) and Clearwater Paper Corp (CLW). Portfolio Changes Additions   OSHKOSH CORPORATION OSK ASTRAZENECA PLC (ADR) AZN FEDERAL AGRICULTURAL MORTGAGE CORP. AGM LINCOLN EDUCATIONAL SERVICES CORPORATION LINC HEALTHSPRING, INC HS GAMESTOP CORP. GME CLEARWATER PAPER CORP CLW Deletions   ITT EDUCATIONAL SERVICES, INC. ESI TELEFONICA S.A. (ADR) TEF EMCOR GROUP, INC. EME SANOFI-AVENTIS SA (ADR) SNY THE BRINK'S COMPANY BCO TELESTONE TECHNOLOGIES CORPORATION TSTC LULULEMON ATHLETICA INC. LULU Newcomers to the Validea Hot List AstraZeneca PLC (AZN): Based in London, AstraZeneca is one of the world's largest drugmakers. The $63-billion-market-cap firm is active in more than 100 countries, and makes a variety of well-known medications, including Crestor, Symbicort, and Nexium. AstraZeneca gets strong interest from three of my models, those I base on the writings of Peter Lynch, James O'Shaughnessy, and David Dreman. To find out why my models are high on the stock, check out the "Detailed Stock Analysis" section below. Clearwater Paper Corporation (CLW): This Spokane, Wash.-based firm makes a variety of tissue and paperboard products, with the former including facial and bath tissue, paper towels, and napkins, and the latter including paper used in brochures, mailers, and packaging. It also makes lumber products for builders and distributors. Clearwater ($750 million market cap) gets approval from both my Peter Lynch- and Kenneth Fisher-based Guru Strategies. To read more about why the stock makes the grade, see the "Detailed Stock Analysis" section below. Federal Agricultural Mortgage Corp. (AGM): Known as "Farmer Mac", this federally chartered Washington, D.C.-based firm works to establish a secondary market for agricultural real estate and rural housing mortgage loans, rural utilities loans, and USDA-guaranteed farm program and rural development loans. It's a small-cap ($190 million), so it may be subject to more volatility than other stocks, but my Peter Lynch-based model is very keen on the firm. To read more about the stock, scroll down to the "Detailed Stock Analysis" section below. GameStop Corp. (GME): The world's largest video game retailer, GameStop sells all sorts of Nintendo, Xbox, and PlayStation games and game units, as well as a variety of computer games. The Texas-based company has more than 6,000 stores in the U.S. and 17 other countries, operating under the GameStop, EB Games, and Electronics Boutique names. The firm has a $3.5 billion market cap, and has taken in more than $9 billion in sales over the past 12 months. It spent some time in the Hot List earlier this year, gaining 5.4% from Jan. 22 to March 19. GameStop gets approval from my Peter Lynch- and Joel Greenblatt-based strategies. To find out more about the stock's fundamentals, see the "Detailed Stock Analysis" section below. HealthSpring, Inc. (HS): Based in Nashville, Tenn., HealthSpring is one of the U.S.'s largest Medicare Advantage-focused coordinated care firms. It owns and operates Medicare Advantage plans in Alabama, Florida, Georgia, Illinois, Mississippi, Tennessee and Texas, and also offers a national stand-alone Medicare prescription drug plan. HealthSpring gets strong interest from my Peter Lynch- and James O'Shaughnessy-based Guru Strategies. To read more about the stock's strong fundamentals, see the "Detailed Stock Analysis" section below. Lincoln Educational Services Corporation (LINC): Lincoln offers high school graduates and working adults various degree and diploma programs. The New Jersey-based small-cap ($650 million) has seen its earnings surge in recent years, as the weak jobs market has sent many job-seekers back to school for more education or training. Lincoln gets approval from my Peter Lynch- and Joel Greenblatt-inspired models. For more on the stock, see the "Detailed Stock Analysis" section below. Oshkosh Corporation (OSK): Not to be confused with the children's clothing company, this Wisconsin-based firm makes specialty vehicles, access equipment, and truck bodies for the defense, concrete placement, refuse hauling, and fire & emergency markets. The $3.5-billion-market-cap firm has taken in almost $8 billion in sales over the past year. Oshkosh gets high marks from my Joel Greenblatt- and David Dreman-based models. To read more about the stock, scroll down to the "Detailed Stock Analysis" section below. News about Validea Hot List Stocks Ares Capital Corp. (ARCC): On May 10, Ares announced a net first-quarter profit of $76.4 million, or 61 cents a share, more than doubling the $35.0 million, or 36 cents a share, it posted in the year-ago quarter. Excluding professional fees related to the acquisition of Allied Capital, earnings were 28 cents a share, Reuters reported, falling short of analysts' estimates of 33 cents per share. China Automotive Systems (CAAS): On May 6, China Automotive announced net first-quarter income attributable to common shareholders of $10.3 million, or $0.34 per diluted share, more than four times the $2.3 million, or $0.08 per diluted share, posted in the year-ago quarter. Net sales jumped 88.5% to $84.2 million, breaking the company's record for first-quarter sales. The company said all of the revenue increase was due to organic growth. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will take an in-depth look at one of my individual guru-based strategies. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score AZN ASTRAZENECA PLC (ADR) Biotechnology & Drugs 84 HS HEALTHSPRING, INC Insurance (Accident & Health) 75 OSK OSHKOSH CORPORATION Auto & Truck Manufacturers 75 ARO AEROPOSTALE, INC. Retail (Apparel) 71 CLW CLEARWATER PAPER CORP Paper & Paper Products 70 CAAS CHINA AUTOMOTIVE SYSTEMS, INC. Auto & Truck Parts 67 LINC LINCOLN EDUCATIONAL SERVICES CORPORATION Schools 65 GME GAMESTOP CORP. Retail (Technology) 65 AGM FEDERAL AGRICULTURAL MORTGAGE CORP. Consumer Financial Services 64 ARCC ARES CAPITAL CORPORATION Misc. Financial Services 50 Ticker Market Cap Date Added Start Price Current Price Return AZN $62,353 5/14/2010 TBD $43.15 TBD HS $1,013 5/14/2010 TBD $17.49 TBD OSK $3,532 5/14/2010 TBD $39.35 TBD ARO $2,640 11/27/2009 $20.99 $28.02 33.5% CLW $747 5/14/2010 TBD $65.12 TBD CAAS $558 4/16/2010 $21.39 $20.65 -3.5% LINC $649 5/14/2010 TBD $24.91 TBD GME $3,466 5/14/2010 TBD $22.68 TBD AGM $185 5/14/2010 TBD $18.24 TBD ARCC $2,804 3/19/2010 $13.51 $14.63 8.3%

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 AZN   |   HS   |   OSK   |   ARO   |   CLW   |   CAAS   |   LINC   |   GME   |   AGM   |   ARCC   |   ASTRAZENECA PLC (ADR) Profile Strategy: Patient Investor Based on: Warren Buffett AstraZeneca PLC (AstraZeneca) is a biopharmaceutical company. The Company focuses on the discovery, development and commercialization of prescription medicines for six areas of healthcare. Its six areas of healthcare includes cardiovascular, gastrointestinal, infection, neuroscience, oncology, and respiratory and inflammation. The Company's products include Crestor, Nexium, Synagis, Seroquel, Arimidex and Symbicort. The Company owns and operates a range of research and development (R&D), production and marketing facilities worldwide. Analysis Guru Score: 72% 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 0.51, 0.78, 1.33, 1.25, 1.76, 2.91, 3.85, 3.74, 4.20, 5.19. Buffett would consider AZN's earnings predictable, although earnings have declined 2 time(s) in the past seven years, with the most recent decline 3 years ago. The dips have totaled 8.9%. AZN's long term historical EPS growth rate is 16.7%, based on the average of the 3, 4 and 5 year historical eps growth rates. LOOK AT THE ABILITY TO PAY OFF DEBT [PASS] Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. AZN has a debt of 9,055.0 million and earnings of 8,179.4 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: [FAIL] 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 AZN, over the last ten years, is 26.4%, 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 9.5%, 14.1%, 20.5%, 16.2%, 20.1%, 33.8%, 38.5%, 36.8%, 38.2%, 36.4%, and the average ROE over the last 3 years is 37.2%, thus failing this criterion. LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: [FAIL] 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 AZN, over the last ten years, is 21.2% and the average ROTC over the past 3 years is 23.1%, 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 8.7%, 13.0%, 19.8%, 15.8%, 18.7%, 31.3%, 36.0%, 21.2%, 22.7%, 25.3%, thus failing 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. AZN's free cash flow per share of $4.95 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 $13.27 and compares it to the gain in EPS over the same period of $4.68. AZN's management has proven it can earn shareholders a 35.3% 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. AZN's shares outstanding have fallen over the past five years from 1,580,900,024 to 1,458,000,000, 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 AZN quantitatively. STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return. CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail] Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $5.61 and divide it by the current market price of $43.15. An investor, purchasing AZN, could expect to receive a 13.00% initial rate of return. Furthermore, he or she could expect the rate to increase 16.7% per year, based on the average of the 3, 4 and 5 year historical eps growth rates, as this is how fast earnings are growing. COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: [PASS] Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 4.60%. Compare this with AZN's initial yield of 13.00%, which will expand at an annual rate of 16.7%, based on the average of the 3, 4 and 5 year historical eps growth rates. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding. CALCULATE THE FUTURE EPS: [No Pass/Fail] AZN currently has a book value of $14.29. It is safe to say that if AZN can preserve its average rate of return on equity of 26.4% and continues to retain 49.54% of its earnings, it will be able to sustain an earnings growth rate of 13.1% and it will have a book value of $48.89 in ten years. If it can still earn 26.4% on equity in ten years, then expected EPS will be $12.92. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $12.92 and multiply them by the lower of the 5 year average P/E ratio (11.7) or current P/E ratio (current P/E in this case), which is 7.7 and you get AZN's projected future stock price of $99.47. 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 $72.84. This gives you a total dollar amount of $172.31. These numbers indicate that one could expect to make a 14.9% average annual return on AZN'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 16.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, you can project EPS in ten years to be $26.25. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (11.7) or current P/E ratio (current P/E in this case), which is 7.7. This equals the future stock price of $202.15. Add in the total expected dividend pool of $72.84 to get a total dollar amount of $274.98. 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 $43.15 and the future expected stock price, including the dividend pool, of $274.98. If you were to invest in AZN at this time, you could expect a 20.3% 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 14.9% and 20.3%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 17.6% on AZN stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.   HEALTHSPRING, INC Profile Strategy: Growth Investor Based on: Martin Zweig HealthSpring, Inc. (HealthSpring) is a managed care organization with a primary focus on Medicare, the federal government-sponsored health insurance program for United States citizens aged 65 and older, qualifying disabled persons and persons suffering from end-stage renal disease. As of December 31, 2009, the Company operated coordinated care Medicare Advantage plans in Alabama, Florida, Illinois, Mississippi, Tennessee, and Texas. As of January 1, 2010, it also commenced operations of Medicare Advantage plans in three counties in Northern Georgia. As of December 31, 2009, the Company's Medicare Advantage plans had over 189,000 members. The Company also offers prescription drug benefits in accordance with Medicare Part D to its Medicare Advantage plan members, in addition to providing other medical benefits (MA-PD) plans. It also offers prescription drug benefits nationally on a stand-alone basis in accordance with Medicare Part D (PDP). 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. HS's P/E is 6.68, based on trailing 12 month earnings, while the current market PE is 14.00. 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. HS's revenue growth is 31.35%, while it's earnings growth rate is 46.12%, based on the average of the 3, 4 and 5 year historical eps growth rates. Sales growth is not at least 85% of EPS growth so the initial part of this criteria is not met, however, since both sales growth and eps growth are greater than 30%, that requirement is waived and the company passes this test. 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 (17.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (25.3%) of the current year. Sales growth for the prior must be greater than the latter. For HS 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. HS's EPS ($0.59) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. HS's EPS for this quarter last year ($0.38) 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. HS's growth rate of 55.26% passes this test. EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: [FAIL] Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for HS is 23.06%. This should be less than the growth rates for the 3 previous quarters which are -19.44%, 45.28% and 33.33%. HS does not pass this test, which means that it does not have good, reasonably steady earnings. This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: [PASS] If the growth rate of the prior three quarter's earnings, 15.34%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 55.26%, (versus the same quarter one year ago) then the stock passes. EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: [PASS] The EPS growth rate for the current quarter, 55.26% must be greater than or equal to the historical growth which is 46.12%. HS would therefore pass this test. EARNINGS PERSISTENCE: [PASS] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. HS, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.24, 1.44, 1.51, 2.12 and 2.41, passes this test. LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. HS's long-term growth rate of 46.12%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For HS, this criterion has not been met (insider sell transactions are 35, while insiders buying number 1). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.   OSHKOSH CORPORATION Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Oshkosh Corporation (Oshkosh) is a designer, manufacturer and marketer of a range of specialty vehicles and vehicle bodies, including defense trucks, access equipment, fire & emergency vehicles and concrete mixers and refuse collection vehicles. The Company operates in four business segments: defense, access equipment, fire & emergency, and commercial. It manufactures defense trucks under the Oshkosh brand name, and is a manufacturer of severe-duty heavy- and medium-payload tactical trucks for the United States Department of Defense (DoD). The Company is also the manufacturer of aerial work platforms under the JLG brand name. Under the Pierce brand name, the Company manufactures fire apparatus assembled on both custom and commercial chassis. The Company manufactures aircraft rescue and fire fighting (ARFF) and airport snow removal vehicles under the Oshkosh brand name and ambulances under the Medtec brand name. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: This methodology would consider OSK a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (7.09) relative to the growth rate (29.11%), based on the average of the 3, 4 and 5 year historical eps growth rates using the current fiscal year eps estimate, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for OSK (0.24) is very favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. OSK, whose sales are $7,969.3 million, needs to have a P/E below 40 to pass this criterion. OSK's P/E of (7.09) is considered acceptable. INVENTORY TO SALES: [PASS] When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for OSK was 13.69% last year, while for this year it is 15.03%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (1.34%) is below 5%. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for OSK is 29.1%, based on the average of the 3, 4 and 5 year historical eps growth rates using the current fiscal year eps estimate, which is acceptable. TOTAL DEBT/EQUITY RATIO: [FAIL] OSK's Debt/Equity (167.54%) is above 80% and is considered very weak. Therefore, OSK fails this test. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for OSK (27.34%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for OSK (-30.30%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.   AEROPOSTALE, INC. Profile Strategy: Value Investor Based on: Benjamin Graham Aeropostale, Inc. is a mall-based specialty retailer of casual apparel and accessories. The Company designs, markets and sells its own brand of merchandise principally targeting 14 to 17 year-old young women and young men. The Company also sells Aropostale merchandise through its e-commerce Website, www.aeropostale.com. During the fiscal year ended January 30, 2010 (fiscal 2009), the Company launched P.S. from Aeropostale, which offers casual clothing and accessories focused on elementary school children between the ages of 7 and 12. During fiscal 2009, the Company completed the closure of its 14 store Jimmy'Z concept. Jimmy'Z Surf Co., Inc., a wholly owned subsidiary of Aeropostale, Inc., was a contemporary lifestyle brand targeting young women and men aged 18 to 25. Analysis Guru Score: 71% SECTOR: [PASS] ARO is neither a technology nor financial Company, and therefore this methodology is applicable. SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. ARO's sales of $2,230.1 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. ARO's current ratio of 2.19 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 ARO is $0.0 million, while the net current assets are $288.2 million. ARO 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. ARO's EPS growth over that period of 1,186.8% passes the EPS growth test. P/E RATIO: [FAIL] 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. ARO's P/E of 17.20 (using the 3 year PE) fails this test. PRICE/BOOK RATIO: [FAIL] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. ARO's Price/Book ratio is 6.06, while the P/E is 17.20. ARO fails the Price/Book test.   CLEARWATER PAPER CORP Profile Strategy: Value Investor Based on: Benjamin Graham Clearwater Paper Corporation is a producer of tissue and paperboard products in the United States. The Company's products are manufactured in the United States and utilize primarily wood pulp. The Company operates in three segments: Consumer Products, Pulp and Paperboard, and Wood Products. Its private label tissue products, such as facial and bath tissue, paper towels and napkins, are used at home and are principally sold in grocery stores in the United States. The Company's paperboard is sold in the packaging industry and it is used by its customers to make packaging for products, including liquids, pharmaceuticals, consumer goods packaging. The Company is vertically integrated and produces the pulp required in its tissue and paperboard businesses. The Company also manufactures wood products, including cedar and lumber products. Analysis Guru Score: 86% SECTOR: [PASS] CLW is neither a technology nor financial Company, and therefore this methodology is applicable. SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. CLW's sales of $1,294.0 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. CLW's current ratio of 4.54 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 CLW is $148.3 million, while the net current assets are $464.2 million. CLW passes this test. LONG-TERM EPS GROWTH: [FAIL] 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. EPS for CLW were negative within the last 5 years and therefore the company fails this criterion. 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. CLW's P/E of 10.50 (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. CLW's Price/Book ratio is 2.01, while the P/E is 10.50. CLW passes the Price/Book test.   CHINA AUTOMOTIVE SYSTEMS, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch China Automotive Systems, Inc. (China Automotive) is a holding company and has no significant business operations or assets other than its interest in Great Genesis Holdings Limited (Genesis). Through Genesis, the Company manufactures power steering systems and other component parts for automobiles. All operations are conducted through eight Sino-foreign joint ventures in China and a wholly owned subsidiary in the United States. The Company has business relations with more than 60 vehicle manufacturers, including FAW Group and Dongfeng Auto Group, automobile manufacturers in China; Shenyang Brilliance Jinbei Co., Ltd., light vehicle manufacturer in China; Chery Automobile Co., Ltd, state-owned car manufacturer in China, and Xi'an BYD Auto Co., Ltd and Zhejiang Geely Automobile Co., Ltd., car manufacturers. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider CAAS a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (19.96) relative to the growth rate (42.09%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for CAAS (0.47) is very favorable. SALES AND P/E RATIO: [NEUTRAL] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. CAAS, whose sales are $295.1 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. INVENTORY TO SALES: [PASS] When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for CAAS was 17.17% last year, while for this year it is 11.67%. Since inventory to sales has decreased from last year by -5.49%, CAAS passes this test. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for CAAS is 42.1%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for CAAS (63.88%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for CAAS should be good enough to compensate. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for CAAS (2.62%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for CAAS (6.55%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.   LINCOLN EDUCATIONAL SERVICES CORPORATION Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Lincoln Educational Services Corporation is a provider of career-oriented post-secondary education. As of December 31, 2009, the Company operated 43 campuses in 17 states. It offers recent high school graduates and working adults degree and diploma programs in five areas of study health sciences, automotive technology, skilled trades, hospitality services and business and information technology. For the year ended December 31, 2009, the Company's health science program, its automotive technology program, its skilled trades program, its hospitality services program and its business and information technology program accounted for approximately 37%, 31%, 13%, 10%, and 9%, respectively, of its average enrollment. The Company had 29,340 students enrolled as of December 31, 2009 and its average enrollment for the year ended December 31, 2009 was 27,808 students. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider LINC a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (11.65) relative to the growth rate (29.34%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for LINC (0.40) is very favorable. SALES AND P/E RATIO: [NEUTRAL] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. LINC, whose sales are $586.4 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for LINC is 29.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for LINC (15.85%) to be acceptable (equity is three to ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for LINC (7.27%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for LINC (1.43%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.   GAMESTOP CORP. Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher 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. Analysis Guru Score: 90% PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought. GME's P/S of 0.38 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. GME's Debt/Equity of 16.43% 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. GME 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 GME At this Point Is GME a "Super Stock"? NO PRICE/SALES RATIO: [PASS] The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.GME's P/S ratio of 0.38 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors. LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. GME's inflation adjusted EPS growth rate of 28.78% 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. GME's free cash per share of 2.86 passes this criterion. THREE YEAR AVERAGE NET PROFIT MARGIN: [FAIL] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. GME, whose three year net profit margin averages 4.25%, fails this evaluation.   FEDERAL AGRICULTURAL MORTGAGE CORP. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool The Federal Agricultural Mortgage Corporation (Farmer Mac) is a federally chartered corporation that combines private capital and public sponsorship to serve a public purpose. Farmer Mac was created to establish a secondary market for agricultural real estate and rural housing mortgage loans. This secondary market was designed to increase the availability of long-term credit at stable interest rates to America's rural communities, farmers, ranchers and rural homeowners. Farmer Mac conducts these activities through three programs: Farmer Mac I, Farmer Mac II and Rural Utilities. The loans eligible for the Farmer Mac secondary market include mortgage loans secured by first liens on agricultural real estate and rural housing; certain agricultural and rural loans guaranteed by the United States Department of Agriculture, and loans to finance electrification and telecommunications systems in rural areas. Analysis Guru Score: 83% PROFIT MARGIN: [PASS] This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. AGM's profit margin of 35.67% passes this test. RELATIVE STRENGTH: [PASS] The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. AGM, with a relative strength of 90, satisfies this test. COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: [FAIL] Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for AGM (-103.27% for EPS, and 301.66% for Sales) are not good enough to pass. INSIDER HOLDINGS: [PASS] AGM's insiders should own at least 10% (they own 15.12% ) of the company's outstanding shares which is the minimum required. A high percentage typically indicates that the insiders are confident that the company will do well. CASH FLOW FROM OPERATIONS: [PASS] A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. AGM's free cash flow of $9.32 per share passes this test. PROFIT MARGIN CONSISTENCY: [FAIL] The profit margin in the past must be consistently increasing. The profit margin of AGM has been inconsistent in the past three years (Current year: 35.67%, Last year: -102.19%, Two years ago: 2.34%), which is unacceptable. This inconsistency will carryover directly to the company's bottom line, or earnings per share. R&D AS A PERCENTAGE OF SALES: [NEUTRAL] This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in AGM's case. CASH AND CASH EQUIVALENTS: [PASS] AGM's level of cash $654.8 million passes this criteria. If a company is a cash generator, like AGM, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. ACCOUNT RECEIVABLE TO SALES: [PASS] This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for AGM was 83.76% last year, while for this year it is 41.51%. Since the AR to sales is decreasing by -42.25% the stock passes this criterion. "THE FOOL RATIO" (P/E TO GROWTH): [PASS] The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (AGM's is 0.08), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. AGM passes this test. The following criteria for AGM are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] AGM has not been significantly increasing the number of shares outstanding within recent years which is a good sign. AGM currently has 10.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock. SALES: [PASS] Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. AGM's sales of $279.2 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". AGM passes the sales test. DAILY DOLLAR VOLUME: [PASS] AGM passes the Daily Dollar Volume (DDV of $6.0 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf." PRICE: [PASS] This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. AGM with a price of $18.24 passes the price test. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions. INCOME TAX PERCENTAGE: [FAIL] AGM's income tax paid expressed as a percentage of pretax income either this year (34.53%) or last year (13.20%) is below 20% which is cause for concern. Because the tax rate is below 20% this could mean that the earnings that were reported are unrealistically inflated due to the lower level of income tax paid. However, we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%).   ARES CAPITAL CORPORATION Profile Strategy: Growth Investor Based on: Martin Zweig Ares Capital Corporation (Ares Capital) is a specialty finance company, which is a closed-end, non-diversified management investment company. Ares Capital's investment objective is to generate both current income and capital appreciation through debt and equity investments. It invests in United States middle-market companies. It invests primarily in first and second lien senior loans and mezzanine debt, which in some cases includes an equity component like warrants. First and second lien senior loans generally are senior debt instruments that rank ahead of subordinated debt of a given portfolio company. Its investments have ranged between $10 million and $100 million each, although the investment sizes may be more or less than the targeted range. The Company's investment adviser is Ares Capital Management LLC. In April 2010, Ares Capital Corporation completed its merger with Allied Capital Corporation. Analysis Guru Score: 92% P/E RATIO: [PASS] The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. ARCC's P/E is 6.50, based on trailing 12 month earnings, while the current market PE is 14.00. 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. ARCC's revenue growth is 68.62%, while it's earnings growth rate is 19.24%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, ARCC passes this criterion. SALES GROWTH RATE: [PASS] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (18.7%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (10.4%) of the current year. Sales growth for the prior must be greater than the latter. For ARCC this criterion has been met. The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria. CURRENT QUARTER EARNINGS: [PASS] The first of these criteria is that the current EPS be positive. ARCC's EPS ($0.61) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. ARCC's EPS for this quarter last year ($0.36) 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. ARCC's growth rate of 69.44% 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 ARCC is 9.62%. This should be less than the growth rates for the 3 previous quarters, which are 825.00%, 158.14%, and 155.56%. ARCC 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, 181.41%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 69.44%, (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 ARCC is 69.4%, 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, 69.44% must be greater than or equal to the historical growth which is 19.24%. ARCC 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. ARCC, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 1.78, 1.58, 1.34, -1.56, and 1.99, 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. ARCC's long-term growth rate of 19.24%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For ARCC, this criterion has not been met (insider sell transactions are 0, while insiders buying number 1). Despite the lack of an insider buy signal, there also is not an insider sell signal, so the stock passes this criterion.   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 EME EMCOR GROUP, INC. Construction Services 63 JOSB JOS. A. BANK CLOTHIERS, INC. Retail (Apparel) 57 ESV ENSCO PLC Oil Well Services & Equipment 55 NOV NATIONAL-OILWELL VARCO, INC. Oil Well Services & Equipment 55 TDW TIDEWATER INC. Water Transportation 55 FSYS FUEL SYSTEMS SOLUTIONS, INC. Auto & Truck Parts 54 WDC WESTERN DIGITAL CORP. Computer Storage Devices 52 HUM HUMANA INC. Insurance (Accident & Health) 49 ADM ARCHER DANIELS MIDLAND COMPANY Food Processing 49 DECK DECKERS OUTDOOR CORPORATION Footwear 48

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