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Executive Summary	October 25, 2013

The Economy The end of the two-and-a-half-week partial government shutdown and the temporary debt ceiling increase has provided some clarity as to the U.S. policy landscape, for a few months at least. But it hasn't given a whole lot of insight into how the economy has been faring recently. Though closed areas of the government opened shop again after Congress and the President mercifully struck a budget deal, several economic reports continue to be delayed because of the shutdown. That means the housing starts, retail sales, and industrial production data we'd normally examine will remain a mystery for a while longer. We did, however, get the September jobs report. The results were mediocre, with the private sector adding 126,000 jobs during the month. The government added 22,000 more, making for a total of 148,000 -- in line with the steady-but-unspectacular job market improvement we've seen over the past few years. The unemployment rate (calculated using a different survey) did fall to 7.2% -- the lowest level since November 2008 -- though the number of people not in the labor force rose by 136,000. Once again, while many theorize that those no longer in the labor force have simply given up looking for work, that may not explain it -- the "U-6" unemployment rate, which takes into account discouraged workers who've given up looking for a job, also fell in September, from 13.7% to 13.6%. Average weekly hours and earnings increased by 0.1% and 0.2%, respectively. In the housing market, the data continues to look good. Residential construction was one area contributing significantly to the job growth numbers in September (though, interestingly, not as much as nonresidential construction, which made a big jump). Existing home sales actually fell 1.9% in September, though they remain 15.1% above where they were a year ago, according to the National Association of Realtors. Median sales prices, meanwhile, were nearly 12% above their year-ago level, posting another impressive year-over-year increase. Since our last newsletter, the S&P 500 returned 3.5%, while the Hot List returned 4.8%. So far in 2013, the portfolio has returned 34.8% vs. 22.8% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 265.5% vs. the S&P's 75.1% gain. Shutdown Lessons Well, that was fun now, wasn't it? Watching our elected leaders squabble like children and, for nearly three weeks, fail to do the barest of bare minimums required by their jobs -- that is, keep the government operating. Of course, it was an embarrassment, and a particularly troublesome period for many investors. After hitting 1,725 on Sept. 18, the S&P 500 tumbled some 70 points over the next three weeks amid the budget debacle. While the S&P's decline wasn't huge -- about 4% -- you can be sure that many lost more than that, as they jumped in and out of stocks as the headlines alternated between hopeful and dire. But as much of a worry and frustration as it may have been, consider this: The S&P had eclipsed its pre-deal highs by Oct. 17 -- the day the shutdown ended. The brunt of the trouble for the market lasted less than a month. That's not unusual. Throughout history, investors have feared the worst when crises have hit, and usually their fears turn out to be worse than the reality. One of the gurus I follow, David Dreman, provided some very interesting research on this topic in his book Contrarian Investment Strategies: The Next Generation. In his book, Dreman looked at "11 major postwar crises", which included the Berlin blockade, Korean War, Kennedy assassination, Gulf of Tonkin crisis, 1979-1980 oil crisis, and 1990 Persian Gulf War. He showed how, one year after all but one (the Berlin Blockade, when the market dropped), the market was up between 22.9 percent and 43.6 percent, except for a 7.2 percent rise after the Gulf of Tonkin crisis. The average gain was 25.8 percent. Two years after the crisis, the average gain was 37.5 percent. It's worth noting that following the September 11, 2001 terrorist attacks, which occurred after Dreman wrote Contrarian Investment Strategies, it took just one month for the S&P 500 to climb back to pre-September 11 levels; a year after the attacks, however, the index had fallen below pre-September 11 levels, the dot-com meltdown no doubt being a factor. Then there was the financial crisis. On September 12, 2008, the last trading day before Lehman Brothers collapsed and the crisis exploded, the S&P closed at 1,251.70. It took about six months after that seminal moment for stocks to bottom and a little over two years for them to get back to pre-Lehman levels -- not bad when you consider that many thought America might never recover. Today (Oct. 24), the S&P is trading at about 1,750, meaning stocks are about 40% higher than they were the day before Lehman collapsed. That makes for an annualized gain of close to 7% over the past five or so years -- not all that far from historical norms, despite including the core of the worst bear market in 80 years. The Trouble With Timing Of course, if you can successfully sidestep a crisis, you can save your portfolio some significant losses. Had you jumped out of stocks just before Lehman Brothers collapsed in 2008 and jumped back in sometime in March 2009, your returns would of course be far greater than if you stayed the course through the financial crisis. But the problem is that getting the timing right is incredibly hard. Even if you get out at a good time, that's just half of the equation. Then you have to get back in at a good time so that you don't miss the big gains that usually occur when a crisis passes. It's not just a matter of seeing a crisis in the making; it's a matter of seeing it coming, knowing when it will blow up, and knowing when it will recede. That can mean an expert understanding of economics, the financial system, the government, and investor psychology, among other things. One more thing about getting back in at a good time: History shows that when stocks have been falling, investors get much worse at making good timing decisions. Research firm Dalbar, Inc. tracks fund flows to calculate what it calls the "Guess Right Ratio". Essentially this tells you what percentage of the time investors execute a "buy" decision that leads to a positive return. Dalbar's data shows that over the past two decades, investors have collectively had the worst Guess Right Ratios (GRR) during or around bear markets. The worst year was 2002 -- the year that the tech bubble bear ended -- when the GRR was 33%. Next worst were four other years, at 42%. They were: 2000 -- when the tech bubble bear began; 2008 and 2009, when the financial crisis exploded and the turnaround began; and, interestingly, last year. Overall, this seems to indicate that investors tend to make better decisions when the market is in the middle of an upward run, but they are at their worst when the market is falling, or a turnaround is in those big-gain early stages -- precisely when a market timer needs to be accurate to succeed. Intuitively, that sort of data makes a lot of sense. When you're in the middle of a bull market and stocks have been rising, you are probably much more relaxed than you are when stocks have been tumbling. Being more relaxed, you think more clearly, and you make decisions that are taking into account the long term. When stocks are falling, however, your emotions start running high. You see the value of your portfolio tumbling, and, instead of recognizing that a declining market can make for excellent buying opportunities, all you can see are more declines -- your hard earned money disappearing, your child's college education money dwindling, your retirement savings evaporating. In such situations, most people do what they think they have to do to alleviate those fears: they sell stocks, even though it's usually not the right move in the long term. The outlier in the Guest Right Ratio data seems to be last year, 2012. While stocks were having a very strong year (the S&P 500 was up 13.4%, not including dividends) in the fourth year of a bull market that has continued on into this year, investors were collectively making some very bad decisions. When you think about it, however, it actually makes a lot of sense that 2012 would have been a bad year for investor guesses. That's because, while it was a strong year in the middle of a bull market, this particular bull has been fraught with perhaps more worry and pessimism and negative headlines than any I can recall, and that was on full display in 2012. Fears of financial disaster in Europe, fears of the US budget sequestration, fears of the Syria conflict exploding into a global conflict, fears of a Chinese housing crisis and economic slowdown -- all these and others worries dominated the headlines in 2012. Stocks rose, but fears remained high. And maybe that's the real lesson in the Guess Right numbers. Maybe it's not that investors make worse decisions in declining markets or markets that are just starting to turn upward; it's that they make worse decisions when fears are high, and it just so happens, of course, that fears tend to be higher during or right after bearish periods (though, as 2012 showed, that's not always the case). As we head toward 2014, I doubt the fears will abate. That's partially due to the fact that there still are a number of issues on America's and the rest of the globe's plates. But it's partially due to many investors never really having gotten over the scars of 2008 and early 2009. Those wounds were so deep and painful that many investors (and the media) are quick to the assumed that any obstacle is the start of a new crisis and devastating bear market. In today's world of 24-hour financial news coverage and ubiquitous social media, that sort of pessimism is tough to shake. That makes it more important than ever to focus on facts, to stick to the numbers, and to stay disciplined. Don't sell a stock because of a headline; sell because its valuation has gotten too high, or its growth has slowed, or its debt has risen sharply. Similarly, don't buy a stock because of a headline; buy it because its balance sheet is strong, its shares are attractively valued, and its internal returns are high. If you do that, and stick to it, you should produce good returns over the long haul, regardless of the periodic obstacles that will inevitably surface.		Editor-in-Chief: John Reese Since Inception   Hot List 265.5% S&P 500 75.1% Accuracy 57.2% Beta 1.2 YTD   Hot List 34.8% S&P 500 22.8% Since Last Issue   Hot List 4.8% S&P 500 3.5% Avg. Fundamentals   Market Cap (mil) $9,115 PE Ratio 10.3 5 Yr EPS Growth 28.4% Yield 1.7% Rel. Strength 73 Portfolio Sectors Services 3 Energy 2 Financial 2 Capital Goods 1 Conglomerates 1 Consumer Cyclical 1
Have Your Portfolio Managed Using Validea's Investing System Many users know about our research services but are unaware that money management services based on our system are also offered through a separate registered investment advisory firm, Validea Capital Management. If you are thinking about switching advisors or no longer have the time or inclination to manage your investments yourself, find out more about Validea Capital, its portfolio offerings, and its performance below. Request an Investment Consultation Today! ** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. The information above is not intended as personal investment advice and should not be interpreted as such. The Fallen As we rebalance the Validea Hot List, 2 stocks leave our portfolio. These include: Hibbett Sports, Inc. (HIBB) and The Tjx Companies, Inc. (TJX). The Keepers 8 stocks remain in the portfolio. They are: Usana Health Sciences, Inc. (USNA), Stamps.com Inc. (STMP), Lukoil (Adr) (LUKOY), Amtrust Financial Services, Inc. (AFSI), Bridgepoint Education Inc (BPI), Lear Corporation (LEA), Hollyfrontier Corp (HFC) and Hci Group Inc (HCI). The Newbies We are adding 2 stocks to the portfolio. These include: Coach, Inc. (COH) and Xinyuan Real Estate Co., Ltd. (Adr) (XIN). Portfolio Changes Additions   COACH, INC. COH XINYUAN REAL ESTATE CO., LTD. (ADR) XIN Deletions   HIBBETT SPORTS, INC. HIBB THE TJX COMPANIES, INC. TJX Newcomers to the Validea Hot List Coach Inc. (COH): This New York City-based luxury goods maker and handbag specialist actually wasn't hit too hard during the Great Recession, and it has thrived since then. The $14-billion-market-cap firm has long been a favorite of my Warren Buffett-based model, and currently also gets strong interest from my Peter Lynch- and Joel Greenblatt-based models. To read more about it, check out the "Detailed Stock Analysis" section below. Xinyuan Real Estate Co. Ltd. (XIN): This Chinese developer focuses on large scale residential real estate projects geared toward middle-income consumers. It keys on "Tier II" cities -- larger, more developed urban areas with above average GDP and population growth rates. The 16-year-old company has a market cap of about $700 million. Xinyuan gets strong interest from my Joseph Piotroski-based model and my James O'Shaughnessy-based growth approach. For more about its impressive blend of value and growth, see the "Detailed Stock Analysis" section below. News about Validea Hot List Stocks USANA Health Sciences (USNA): USANA on Oct. 22 reported that net earnings fell 4.2% to $16.8 million (vs. the year-ago period). This firm said the decline was due "primarily to higher Associate Incentives expense, attributable to the enhancements that the Company made to its Associate Compensation Plan". Higher effective tax rates also hurt. Earnings per share were down 1.7% to $1.16, helped in part by share repurchases. Third-quarter net sales increased by 5.2% to $173.7 million, driven by increases in both the Asia Pacific and North America/Europe regions. The company said its quarterly results were negatively impacted by recently implemented changes that are expected to help the firm over the longer term. Wall Street wasn't pleased, however -- shares were down close to 20% in the day-and-a-half following the after-market announcement (as of about noon on Oct. 24). Still, the stock is up over 125% since joining the Hot List last December. Stamps.com (STMP): Stamps.com reported third quarter earnings per share of $0.62, topping analysts' consensus estimate of $0.51. Revenues were $31.2 million, just short of the $31.55 million analysts forecast, StreetInsider reported. The firm upped its full-year guidance to $2.20-$2.40, versus prior estimates of $2-$2.20 and the consensus of $2.18. It now expects full-year revenue of $125-135 million, versus the consensus of $130.14 million. Shares had fallen 6% on Oct. 23 in advance of the after-market announcement, but they surged upward the next morning, jumping 13% as of early afternoon trading. The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will take a closer look at my strategies and investment approach. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score USNA USANA HEALTH SCIENCES, INC. Conglomerates 85 BPI BRIDGEPOINT EDUCATION INC Schools 83 HCI HCI GROUP INC Insurance (Prop. & Casualty) 76 STMP STAMPS.COM INC. Retail (Catalog & Mail Order) 74 XIN XINYUAN REAL ESTATE CO., LTD. (ADR) Construction Services 72 LUKOY LUKOIL (ADR) Oil & Gas - Integrated 66 LEA LEAR CORPORATION Auto & Truck Parts 61 AFSI AMTRUST FINANCIAL SERVICES, INC. Insurance (Prop. & Casualty) 60 HFC HOLLYFRONTIER CORP Oil & Gas Operations 60 COH COACH, INC. Retail (Apparel) 59 Ticker Market Cap Date Added Start Price Current Price Return USNA $1,051 12/21/2012 $33.83 $76.19 125.2% BPI $1,071 8/2/2013 $16.59 $19.76 19.1% HCI $510 6/7/2013 $34.20 $44.61 30.4% STMP $748 8/30/2013 $41.88 $47.83 14.2% XIN $679 10/25/2013 TBD $6.93 TBD LUKOY $55,488 9/27/2013 $64.52 $65.41 1.4% LEA $6,142 5/10/2013 $60.48 $76.16 25.9% AFSI $2,925 7/5/2013 $35.78 $39.29 9.8% HFC $8,746 4/12/2013 $46.83 $43.76 -6.6% COH $13,794 10/25/2013 TBD $49.09 TBD

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer USNA   |   BPI   |   HCI   |   STMP   |   XIN   |   LUKOY   |   LEA   |   AFSI   |   HFC   |   COH   |   USANA HEALTH SCIENCES, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch 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: 91% DETERMINE THE CLASSIFICATION: This methodology would consider USNA a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (13.98) relative to the growth rate (20.73%), 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 USNA (0.67) makes it favorable. SALES AND P/E RATIO: [NEUTRAL] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. USNA, whose sales are $691.9 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 USNA was 6.35% last year, while for this year it is 5.62%. Since inventory to sales has decreased from last year by -0.73%, USNA 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 USNA is 20.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for USNA (0.00%) to be wonderfully low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for USNA (7.42%) 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 USNA (6.64%) 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.   BRIDGEPOINT EDUCATION INC Profile Strategy: Price/Sales Investor Based on: Kenneth Fisher Bridgepoint Education, Inc. (Bridgepoint) is a provider of postsecondary education services. The Company's academic institutions include Ashford University and University of the Rockies. Its institutions deliver programs primarily online, as well as at their traditional campuses. As of December 31, 2011, the Company had 86,642 total students enrolled in its institutions. Bridgepoint's institutions conduct ongoing faculty and student assessment processes and provide a range of student services. The Company is also focused on developing new technologies, such as through Waypoint Outcomes, Constellation, and the development of its institutions' mobile learning platforms. The Company has developed Constellation to replace third party textbooks with digital course materials. Constellation materials are displayed in a browser-based platform. In January 2012, Bridgepoint introduced Thuze. 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. BPI's P/S ratio of 1.22 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. BPI'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. BPI 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 BPI At this Point Is BPI 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, BPI, who has a P/S of 1.22, 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%. BPI's inflation adjusted EPS growth rate of 26.74% 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. BPI's free cash per share of 2.11 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. BPI, whose three year net profit margin averages 16.54%, passes this evaluation.   HCI GROUP INC Profile Strategy: P/E/Growth Investor Based on: Peter Lynch HCI Group Inc, formerly Homeowners Choice, Inc., is a holding company. The Company, through its subsidiaries, is engaged in the property and casualty insurance business. Through Homeowners Choice Property & Casualty Insurance Company, Inc. (HCPC) and subsidiaries, primarily Homeowners Choice Managers, Inc. (HCM), Southern Administration, Inc., Claddaugh Casualty Insurance Company, Ltd., and its subsidiary, HCPCI Holdings LLC, it provides property and casualty homeowners' insurance, condominium-owners' insurance and tenants' insurance to individuals owning property in Florida. Its subsidiaries also include TV Investment Holdings LLC, which owns and operates a marina facility located in Florida; Unthink Technologies Private Limited. During the year ended December 31, 2011, it organized TV Investment Holdings LLC, HCI Holdings LLC and HCI Technical Resources, Inc. Analysis Guru Score: 100% DETERMINE THE CLASSIFICATION: This methodology would consider HCI a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (9.56) relative to the growth rate (31.66%), 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 HCI (0.30) 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. HCI, whose sales are $203.7 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 HCI is 31.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] HCI is a financial company so debt to equity rules are not applied to determine the company's financial soundness. EQUITY/ASSETS RATIO: [PASS] This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. HCI's Equity/Assets ratio (33.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion. RETURN ON ASSETS: [PASS] This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. HCI's ROA (14.15%) is above the minimum 1% that this methodology looks for, thus passing the criterion. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for HCI (22.06%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [BONUS PASS] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for HCI (38.71%) is high enough to add to the attractiveness of this company.   STAMPS.COM INC. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool Stamps.com Inc. is a provider of Internet-based postage solutions. The Company's customers use its service to mail and ship a variety of mail pieces, including postcards, envelopes, flats and packages, using a range of United States Postal Service (the USPS) mail classes, including First Class Mail, Priority Mail, Express Mail, Media Mail, Parcel Post, and others. Its customers include individuals, small businesses, home offices, medium-size businesses and enterprises. Analysis Guru Score: 91% 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. STMP's profit margin of 26.58% 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. STMP, with a relative strength of 91, 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 STMP (55.88% for EPS, and 13.74% for Sales) are not good enough to pass. INSIDER HOLDINGS: [PASS] STMP's insiders should own at least 10% (they own 11.03% ) 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. STMP's free cash flow of $0.05 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] STMP's profit margin has been consistent or even increasing over the past three years (Current year: 33.34%, Last year: 25.85%, Two years ago: 6.46%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. 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 STMP's case. CASH AND CASH EQUIVALENTS: [PASS] STMP's level of cash $35.9 million passes this criteria. If a company is a cash generator, like STMP, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. INVENTORY TO SALES: [PASS] This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for STMP was 2.17% last year, while for this year it is 2.94%. Although the inventory to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive. 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 STMP was 10.31% last year, while for this year it is 12.48%. Although the AR to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive. LONG TERM DEBT/EQUITY RATIO: [PASS] STMP's trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don't need to borrow money in order to grow. "THE FOOL RATIO" (P/E TO GROWTH): [PASS] The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (STMP's is 0.44), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. STMP passes this test. The following criteria for STMP are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] STMP has not been significantly increasing the number of shares outstanding within recent years which is a good sign. STMP currently has 16.0 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. STMP's sales of $123.4 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". STMP passes the sales test. DAILY DOLLAR VOLUME: [PASS] STMP 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. STMP with a price of $47.83 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions. INCOME TAX PERCENTAGE: [FAIL] STMP's income tax paid expressed as a percentage of pretax income either this year (-56.11%) or last year (-47.67%) 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%).   XINYUAN REAL ESTATE CO., LTD. (ADR) Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Xinyuan Real Estate Co., Ltd. (Xinyuan) is a developer of large-scale residential real estate projects aimed at providing middle-income consumers with a comfortable and convenient community lifestyle. Xinyuan has expanded its network to cover a total population of over 64.7 million people in eight selected cities, consisting Beijing, Hefei, Jinan, Kunshan, Suzhou, Zhengzhou, Xuzhou and Chengdu. The Company's United States development arm, XIN Development Group International, Inc. (XIN), is a real estate residential developer that entered the United States market with three projects in 2012. XIN's products portfolio consists of multiple rise buildings, sub-high-rise buildings and high-rise buildings, together with auxiliary services and amenities, such as retail outlets, leisure and health facilities, kindergartens and schools. In September 2013, Xinyuan Real Estate Co., Ltd. acquired four land parcels through auction. 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. XIN, with a market cap of $679 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. XIN, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were -0.16, 0.26, 0.33, 0.68 and 1.08, 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. XIN's Price/Sales ratio of 0.79, 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. XIN, whose relative strength is 88, is in the top 50 and would pass this last criterion.   LUKOIL (ADR) Profile Strategy: Value Investor Based on: Benjamin Graham NK Lukoil OAO (Neftyanaya Kompaniya LUKOIL OAO or NK LUKOIL OJSC) is a Russia-based integrated oil and gas company. The Company is engaged in the business of oil exploration, production, refining, marketing and distribution. It is an owner of refineries, gas processing, petrochemical plants and gas stations network located in Russia, Eastern and Western Europe, as well as Africa. The Company's petroleum products are sold in the Russian Federation, the Commonwealth of Independent States (CIS) countries, Eastern and Western Europe, Asia and the United States. NK Lukoil OAO operates through numerous subsidiaries and affiliated companies. In April 2013, the Company acquired a 100% of Samara-Nafta ZAO and completed acquisition of CJSC Kama-Oil. In June 2013, it sold a 99.57% stake in Lukoil Odes'kyi NPZ PAT. The Company's major shareholder is NKO ZAO NRD with a stake of 91.60%. Analysis Guru Score: 71% SECTOR: [PASS] LUKOY 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. LUKOY's sales of $140,336.0 million, based on trailing 12 month sales, pass this test. CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. LUKOY's current ratio of 1.77 fails 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 LUKOY is $8,774.0 million, while the net current assets are $10,534.0 million. LUKOY 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 LUKOY 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. LUKOY's P/E of 5.10 (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. LUKOY's Price/Book ratio is 0.64, while the P/E is 5.10. LUKOY passes the Price/Book test.   LEAR CORPORATION Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Lear Corporation is a tier 1 supplier to the global automotive industry. The Company supplies its products to automotive manufacturers with automotive seat systems and related components, as well as electrical distribution systems and related components. The Company has two segments: seating and electrical power management systems (EPMS). The seating segment includes seat systems and related components, such as seat frames, recliner mechanisms, seat tracks, seat trim covers, headrests and seat foam. The EPMS segment includes electrical distribution systems for traditional powertrain vehicles, as well as for hybrid and electric vehicles. As of December 31, 2011, it had 20 joint ventures located throughout Asia, as well as five in North America, two in Europe and Africa and one with operations in all three regions. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider LEA a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (5.87) relative to the growth rate (25.16%), based on the average of the 2 and 5 year historical and the current year eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for LEA (0.23) is very favorable. SALES AND P/E RATIO: [PASS] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. LEA, whose sales are $15,318.2 million, needs to have a P/E below 40 to pass this criterion. LEA's P/E of (5.87) is considered acceptable. INVENTORY TO SALES: [PASS] When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for LEA was 4.51% last year, while for this year it is 4.99%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (0.49%) is below 5%. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for LEA is 25.2%, based on the average of the 2 and 5 year historical and the current year eps growth rates, which is acceptable. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for LEA (39.60%) to be normal (equity is approximately twice debt). FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for LEA (2.85%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for LEA (5.27%) 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.   AMTRUST FINANCIAL SERVICES, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Amtrust Financial Services, Inc. is a holding company. The Company is a multinational specialty property and casualty insurer focused on generating consistent underwriting profits. The Company operates in four segments: small commercial business, specialty program and personal lines reinsurance. In January 2013, the Company acquired First Nonprofit Companies, Inc. In February 2013, its subsidiary acquired Car Care Plan (Holdings) Limited from Ally Insurance Holdings, Inc. In April 2013, it acquired Sequoia Insurance Company and its subsidiaries, Sequoia Indemnity Company and Personal Express Insurance Company. In May 2013, the Company acquired Mutual Insurers Holding Company (MIHC) and MIHC's subsidiary, First Nonprofit Insurance Company. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: AFSI is considered a "True Stalwart", according to this methodology, as its earnings growth of 14.38% lies within a moderate 10%-19% range and its annual sales of $2,305 million are greater than the multi billion dollar level. This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. AFSI is attractive if AFSI can hold its own during a recession. YIELD ADJUSTED P/E TO GROWTH (PEG) RATIO: [PASS] The Yield-adjusted P/E/G ratio for AFSI (0.73), based on the average of the 3, 4 and 5 year historical eps growth rates, is O.K. EARNINGS PER SHARE: [PASS] The EPS for a stalwart company must be positive. AFSI's EPS ($3.45) would satisfy this criterion. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] AFSI is a financial company so debt to equity rules are not applied to determine the company's financial soundness. EQUITY/ASSETS RATIO: [PASS] This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. AFSI's Equity/Assets ratio (15.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion. RETURN ON ASSETS: [PASS] This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. AFSI's ROA (3.33%) is above the minimum 1% that this methodology looks for, thus passing the criterion. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for AFSI (15.78%) 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 AFSI (4.23%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.   HOLLYFRONTIER CORP Profile Strategy: P/E/Growth Investor Based on: Peter Lynch HollyFrontier Corporation (HollyFrontier), formerly Holly Corporation, is a petroleum refiner, which produces light products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. HollyFrontier operates in two segments: Refining and Holly Energy Partners, L.P. (HEP). The Refining segment includes the operations of its El Dorado, Tulsa, Navajo, Cheyenne and Woods Cross Refineries and NK Asphalt. The HEP segment involves all of the operations of HEP. As of December 31, 2011, it operated five refineries having a combined crude oil processing capacity of 443,000 barrels per day that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain regions of the United States. The Company merged with Frontier Oil Corporation (Frontier), on July 1, 2011. On November 9, 2011, HEP acquired from the Company certain tankage, loading rack and crude receiving assets located at its El Dorado and Cheyenne Refineries. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: This methodology would consider HFC a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (5.64) relative to the growth rate (209.46%), 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 HFC (0.03) 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. HFC, whose sales are $20,358.9 million, needs to have a P/E below 40 to pass this criterion. HFC's P/E of (5.64) 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 HFC was 7.22% last year, while for this year it is 6.57%. Since inventory to sales has decreased from last year by -0.65%, HFC passes this test. EPS GROWTH RATE: [FAIL] 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 HFC is 209.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered too fast. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for HFC (15.80%) 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 HFC (7.43%) 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 HFC (15.82%) 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.   COACH, INC. Profile Strategy: Patient Investor Based on: Warren Buffett Coach, Inc. (Coach) is a marketer of accessories and gifts for women and men. The Company offers a range of modern, fashionable handbags and accessories. Its product offerings include women's and men's bags, accessories, footwear, wearables, jewelry, travel bags, sunwear, watches and fragrance. The Company operates in two segments: North America, which includes sales to North American consumers through Company-operated stores, including the Internet, and sales to wholesale customers and distributors and International, which includes sales to consumers through Company-operated stores in Japan and mainland China, including the Internet, Hong Kong, Macau, Singapore, Taiwan, Malaysia and Korea and sales to wholesale customers and distributors in 25 countries. 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 0.62, 0.86, 1.19, 1.69, 2.17, 1.91, 2.33, 2.92, 3.53, 3.61. Buffett would consider COH's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 5 years ago. The dips have totaled 12.0%. COH's long term historical EPS growth rate is 14.5%, based on the average of the 3, 4 and 5 year historical eps growth rates, and it is expected to grow earnings 9.9% 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. COH has a debt of 0.5 million and earnings of 1,028.9 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 COH, over the last ten years, is 38.0%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 29.9%, 30.9%, 37.2%, 32.9%, 49.1%, 35.9%, 45.9%, 52.3%, 50.5%, 42.3%, and the average ROE over the last 3 years is 48.4%, 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 COH, over the last ten years, is 40.4% and the average ROTC over the past 3 years is 48.1%, 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 29.8%, 30.8%, 37.1%, 32.9%, 49.0%, 35.4%, 45.2%, 51.5%, 50.5%, 42.3%, thus passing this criterion. LOOK AT CAPITAL EXPENDITURES: [PASS] Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. COH's free cash flow per share of $2.19 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 $17.55 and compares it to the gain in EPS over the same period of $2.99. COH's management has proven it can earn shareholders a 17.0% 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. COH's shares outstanding have fallen over the past five years from 318,010,010 to 285,000,000, 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 COH 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 $3.61 and divide it by the current market price of $49.09. An investor, purchasing COH, could expect to receive a 7.35% initial rate of return. Furthermore, he or she could expect the rate to increase 9.9% 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 2.75%. Compare this with COH's initial yield of 7.35%, which will expand at an annual rate of 9.9%, 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] COH currently has a book value of $8.43. It is safe to say that if COH can preserve its average rate of return on equity of 38.0% and continues to retain 77.91% of its earnings, it will be able to sustain an earnings growth rate of 29.6% and it will have a book value of $112.83 in ten years. If it can still earn 38.0% on equity in ten years, then expected EPS will be $42.88. CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail] Now take the expected future EPS of $42.88 and multiply them by the lower of the 5 year average P/E ratio (17.1) or current P/E ratio (current P/E in this case), which is 13.6 and you get COH's projected future stock price of $582.34. 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 $13.86. This gives you a total dollar amount of $596.20. These numbers indicate that one could expect to make a 28.4% average annual return on COH's stock at the present time. Buffett would consider this an absolutely fantastic expected return. CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail] If you take the EPS growth of 9.9%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $9.24. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio (17.1) or current P/E ratio (current P/E in this case), which is 13.6. This equals the future stock price of $125.43. Add in the total expected dividend pool of $13.86 to get a total dollar amount of $139.30. 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 $49.09 and the future expected stock price, including the dividend pool, of $139.30. If you were to invest in COH at this time, you could expect a 10.99% 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 11.0% and 28.4%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 19.7% on COH stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the 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 NUS NU SKIN ENTERPRISES, INC. Personal & Household Prods. 57 TLK PT TELEKOMUNIKASI INDONESIA (ADR) Communications Services 54 JOY JOY GLOBAL INC. Constr. & Agric. Machinery 52 CVX CHEVRON CORPORATION Oil & Gas - Integrated 52 MPC MARATHON PETROLEUM CORP Oil & Gas Operations 52 SIG SIGNET JEWELERS LTD. Retail (Specialty) 51 CEO CNOOC LIMITED (ADR) Oil & Gas Operations 50 HIBB HIBBETT SPORTS, INC. Retail (Specialty) 48 WOR WORTHINGTON INDUSTRIES, INC. Iron & Steel 47 TBI TRUEBLUE INC Business Services 47

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