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Executive Summary	June 22, 2012

The Economy Investors were heartened this week as the results of Greece's highly anticipated elections indicated that the country isn't headed for a Eurozone exit, which many feared would have been highly destabilizing for the continent. Hopefully that news will bolster confidence and help give the global economy a jumpstart, because much of the U.S. economic data that has been rolling in over the past two weeks has been lackluster. One example: Industrial production fell 0.1% in May, according to a new report from the Federal Reserve, as gains in mining and utility output were more than wiped out by 0.4% decline in manufacturing output. Overall, industrial production is still 4.7% higher than it was last year at this time, but the May results were nonetheless disappointing. Retail sales also fell, declining 0.2% in May, according to a Commerce Department report. It was the first time in 11 months that sales dipped, though they remain 5.3% above where they were a year ago. There was also a bit of a silver lining in the numbers: Part of the reason for the decline was a decrease in gas prices. Still, consumers didn't seem to be putting the money they saved from gas price declines to work in other ways. The housing market did offer some hopeful signs for the economy, however. While housing starts fell 4.8% in May, privately owned housing units authorized by permit jumped 7.9%, indicating we should see a pick-up in homebuilding. In addition, a National Association of Home Builders/Wells Fargo survey found homebuilder confidence to have reached a five-year high in June. Unemployment claims, meanwhile, remained fairly steady since our last newsletter. New claims increased very slightly while continuing claims decreased very slightly, and both remain well below where they were a year ago. New claims are about 9% below their year-ago levels, while continuing claims are about 11.5% lower than they were a year ago. Of course the hubbub surrounding Greece and the Eurozone continues to dominate most investors' minds. The outcome of Greece's elections last week showed that the country seems committed to staying in the Eurozone, though it wants some of the terms of its bailout deals altered. Eurozone countries also recently reached a preliminary bailout deal for Spain -- where medium-term borrowing costs hit Euro-era record highs this week -- though the details need to be worked out. It could be in the $100 billion range. All in all, the situation in Europe remains the great state of flux; for now the impact on the U.S. economy doesn't seem to be as damaging as many have feared. We'll have to see if the Greek elections and Spanish bailout help confidence enough to stabilize the situation and prevent greater spillover of Europe's problems to the U.S. Rating agency Moody's, for one, is concerned it might -- in downgrading 15 banks and securities firms with global capital markets operations this week, it cited the situation in Europe as one of several reasons. Amid all this, the S&P 500 returned 0.8% since our last newsletter, while the Hot List returned 2.2%. So far in 2012, the portfolio has returned 7.9% vs. 5.4% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 144.0% vs. the S&P's 32.5% gain. Where Are The Values? One of the questions that I and other investment managers are most frequently asked in interviews is, "Where are you finding the most value in the market right now?" It's a question that I think is particularly interesting and constructive to consider when talking about the Hot list and my models, because of their purely quantitative nature. Because there is no subjectivity, no guesswork or hunch-playing, my models and the Hot List portfolio can give an unbiased look at where the numbers say the best opportunities lie at any given time. Often, however, the Hot List remains pretty well diversified. Right now, for example, five sectors and seven different industries are represented in the 10-stock portfolio. Only the retail-apparel industry, with two firms (TJX Companies and Guess?, Inc.), and the consumer financial services industry, with three firms (Discover Financial Services, Altisource Portfolio Solutions, and World Acceptance Corp.), have more than one holding in the portfolio. That's not to say that it won't sometimes load up on a particular area of the market. Back in early 2009, for example, the Hot List included five capital goods stocks, taking advantage as overwrought fears about the U.S. economy being headed for oblivion pushed those cyclical firms' shares to unrealistically low levels. But generally the portfolio seems to hold a variety of stocks. By using some of the other tools on my website, however, we can take a deeper look into where larger pockets of value may exist in the market. For example, the site's Advanced Guru Stock Screener allows you to search for stocks that get Guru Strategy approval and separate them by sector. Currently, 83 stocks get approval from two or more models (applying certain baseline liquidity and size requirements). Here's the breakdown among sectors: Services: 27 Energy: 11 Healthcare: 9 Technology: 9 Consumer Cyclical: 5 Financial: 5 Capital Goods: 4 Consumer Non-Cyclical: 2 Conglomerates: 1 Utilities: 1 Transportation: 0 The services sector is by far the leader, but that shouldn't be surprising, given that the service sector comprises a huge part of our economy. When you consider that, the breakdown actually looks reasonably diverse. When we look at specific industries, the website's Industry Index comes in handy. Right now, the top five industries on the list are Retail-Apparel, with a score of 95; Jewelry & Silverware (90); Life Insurance (89); Construction & Agricultural Machinery (88); and Retail-Drugs (87). At the bottom of the list are Retail-Home Improvement (61); Computer Hardware (69); and Specialty Retail, Paper & Paper Products, and Catalog & Mail Order Retail (all with 73). The industry ratings can sometimes be a bit skewed, however -- the Jewelry & Silverware industry, for example, has just 9 stocks, and one of them (Fossil, Inc.) makes up more than 80% of the industry's market capitalization. Perhaps a more interesting gauge involves looking at where some of my better-performing individual guru-based portfolios are looking these days. I checked the composition of my five top-performing 10-stock portfolios, those picked using my Motley Fool-, Benjamin Graham-, Kenneth Fisher-, James O'Shaughnessy-, and Martin Zweig-inspired models. These portfolios have annualized long-term returns between 8.2% and 12.4% since their July 2003 inceptions (vs. just 3.5% for the S&P 500, all figures through June 20). A handful of stocks pop up in multiple portfolios, so all in all the five models have keyed in on a total of 43 stocks. Here's the sector breakdown: Services: 13 Financial: 5 Healthcare: 5 Basic Materials: 5 Consumer Cyclical: 4 Energy: 4 Technology: 2 Consumer Noncyclical: 2 Conglomerates: 1 Capital Goods: 1 Transportation: 0 Utilities: 0 The services sector again is well in the lead, not surprisingly. After that, financials get a bit more love, percentage-wise, than they do when looking at the Advanced Guru Stock Screener, as do consumer stocks. Energy and tech stocks get a little less attention, percentage-wise. So, what conclusions, if any, can we draw from all of this? Well, if we consider things through the lens of traditionally defensive sectors vs. traditionally aggressive sectors, I'm not sure there's too many conclusions to be drawn. For example, while some traditionally defensive sectors, like healthcare, appear to be offering a lot of value, others, like utilities, offer little. But these days, the traditional distinctions have in many ways been flipped on their heads. Technology, normally an aggressive sector, in some ways acts as a defensive area, with our economy relying so much on technology that many of these companies have been able to produce solid, steady earnings for a decade or more. And financials and healthcare, traditionally two defensive sectors, are both considered by many to be far from safe because of lingering global debt woes and the uncertainty of the sweeping U.S. healthcare reform, respectively. But I think there is a lesson to learn from where my models are finding the most value, and it has to do with fear. Look at the sectors and industries that get the most interest right now. Most -- retailers and service firms, energy companies, basic materials firms, and healthcare companies -- have some sort of significant fears swirling around them. Retailers and service companies are dealing with the alleged "death" of the U.S. consumer (which, so far, has been greatly exaggerated); energy and materials companies are dealing with fears that Europe's debt woes and China's slowdown will lead to a big drop in global commodities demand; healthcare firms are the subject of great fear and anxiety because of the uncertainty surrounding the healthcare overhaul. But as the vast majority of the highly successful gurus I follow have shown, if you want to generate strong, market-beating returns over the long haul you have to be willing to tread into areas of the market where fear reigns. Investors tend to overreact -- both on the upside and downside -- so stocks in fear-dominated areas of the market more often than not get beaten down too far, and offer very good value for those who have the courage to venture into them. Of course, there will be times when stocks in more well-liked areas of the market are attractive, perhaps because they simply are proven, steady performers, or perhaps because of short-term, company specific issues that make them bargains. And, of course, just because a stock looks cheap, that doesn't mean it's a buy -- if a firm isn't financially sound, isn't generating cash, and/or doesn't do a good job growing investors' money, it could well trade at low valuations because it's a dog, and everyone knows it. That's why you always want to make sure that the business behind attractively priced shares is a solid, proven one; by using fundamentals and balance sheet data, you can assess whether the stock is cheap because the company is in real trouble, or whether it's a case of investors overreacting. Making that delineation is how investors like Warren Buffett, Benjamin Graham, Joel Greenblatt, and Kenneth Fisher became gurus, and it's how the Hot List has beaten the market by a wide margin over the long haul.		Editor-in-Chief: John Reese Since Inception   Hot List 144.0% S&P 500 32.5% Accuracy 56.2% Beta 1.2 YTD   Hot List 7.9% S&P 500 5.4% Since Last Issue   Hot List 2.2% S&P 500 0.8% Avg. Fundamentals   Market Cap (mil) $6,636 PE Ratio 18.9 5 Yr EPS Growth 28.1% Yield 0.5% Rel. Strength 84 Portfolio Sectors Services 4 Financial 3 Healthcare 1 Technology 1 Consumer Cyclical 1
Advertisement Validea Capital Management - Private Portfolio Management Based on Strategies of Legends Are you looking for an alternative to your underperforming mutual funds or financial advisor? Click here to download Validea Capital's investment kit and learn more about the firm's guru-based portfolios. Get More Information on Validea Capital! ** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. Thre information above in not intended as personal investment advice and should not be interpreted as such. Guru Spotlight: John Neff Most investors wouldn't give a fund described as "relatively prosaic, dull, conservative" a second glance. That, however, is exactly how John Neff described the Windsor Fund that he headed for more than three decades. And, while his style may not have been flashy or eye-catching, the returns he generated for clients were dazzling -- so dazzling that Neff's track record may be the greatest ever for a mutual fund manager. By focusing on beaten down, unloved stocks, Neff was able to find value in places that most investors overlooked. And when the rest of the market caught on to his finds, he and his clients reaped the rewards. Over his 31-year tenure (1964-1995), Windsor averaged a 13.7 percent annual return, beating the market by an average of 3.1 percent per year. Looked at another way, a $10,000 investment in the fund the year Neff took the reins would have been worth more than $564,000 by the time he retired (with dividends reinvested); that same $10,000 invested in the S&P 500 (again with dividends reinvested) would have been worth less than half that after 31 years, about $233,000. That type of track record made the understated, low-key Neff a favorite manager of many other professional fund managers -- an "investor's investor", if you will. How did Neff do it? By focusing first and foremost on value, and a key part of how he found value involved the Price/Earnings Ratio. While others have called him a "contrarian" or "value investor", Neff writes in John Neff on Investing that, "Personally, I prefer a different label: 'low price-earnings investor.' It describes succinctly and accurately the investment style that guided Windsor while I was in charge." To Neff, the P/E ratio was key because it involved expectations. If investors were willing to buy stocks with high P/E ratios, they must be expecting a lot from them, because they are willing to pay more for each dollar of future earnings per share; conversely, if a stock has a low P/E ratio, investors aren't expecting much from it. Much like David Dreman, the great contrarian guru who we examined a few newsletters back, Neff found that stocks with lower P/E ratios -- and lower expectations -- tended to outperform, because any hint of improvement exceeded the low expectations investors had for them. Similarly, stocks with high P/Es often flopped, because even strong results couldn't match investors' expectations. To Neff, however, the P/E wasn't always a lower-is-better ratio. If investors knew that a firm was a dog, they'd rightly avoid its stock, giving it a low P/E ratio but little in the way of future growth prospects. Because of that, he wrote that Windsor targeted stocks with P/E ratios between 40 and 60 percent of the market average. While it was at the heart of his investment philosophy, the P/E ratio was also by no means the only metric Neff used to judge stocks. He wanted to see earnings growth, but here again it was not a case of more-is-better. A stock with too high a growth rate -- more than 20 percent -- could have trouble sustaining that growth over the long haul. He thus preferred to see growth between 7 and 20 percent per year, the kind of steady, unspectacular growth that could be sustained. Sustainable growth also meant growth that was driven by sales -- not one-time gains or cost-cutting measures. Neff thus liked to see companies whose earnings growth and sales growth were rising at similar rates. (My Neff-based model interprets this as sales growth needing to be at least 7 percent per year, or at least 70 percent of EPS growth.) One more key aspect of Neff's strategy involved dividends. He believed that many investors valued stocks strictly on their price appreciation potential, meaning that you can often essentially get their dividend payouts for free. He estimated that about two-thirds of Windsor's 3 percent per year market outperformance during his tenure came from dividends. To make sure that his analysis captured dividend payments, Neff used the Total Return/PE ratio. This measure divides a stock's total return (that is, its EPS growth rate plus its dividend yield) by its P/E ratio. He looked for stocks whose Total Return/PE ratios doubled either the market average or their industry average. In recent years, my Neff-inspired model has been very stringent, with very few companies passing all of its tests. Here's a look at the stocks that currently make up my 10-stock Neff-based portfolio: Xerox Corporation (XRX) Aflac Incorporated (AFL) GameStop Corp. (GME) Oracle Corporation (ORCL) Discover Financial Services (DFS) Spreadtrum Communications (SPRD) The Buckle, Inc. (BKE) Valassis Communications, Inc. (VCI) EZCORP Inc. (EZPW) CACI International Inc. (CACI) I began tracking my Neff-based portfolio at the start of 2004, and it's had some significant ups and downs. From its inception through 2007, the portfolio returned about 67%, about double the S&P 500's 32.4% return. The 2008 crash was especially hard on value stocks, however, and the Neff portfolio fell more than 48% for the year, about 10 percentage points behind the S&P. It bounced back strong in 2009, surging 45.4%, but has struggled over the past couple years. All in all, it is averaging annualized returns of 1.3% since inception, lagging the S&P 500 by 1 percentage point (through June 18). Just like Neff himself, the Neff-based model often treads into the most unloved parts of the market. As you can see above, many of its current holdings have a good amount of fear hanging over them, whether it be company-specific or industry-related. Because of that, a value-focused strategy can languish for lengthy periods of time. But Neff succeeded by staying disciplined and focusing on value. But by ignoring the crowd and focusing on these firms' strong financials and fundamentals, I think the Neff model will end up benefiting significantly from many of these picks. News about Validea Hot List Stocks Discover Financial Services (DFS): Discover's second-quarter net income fell 10% to $532 million, or $1 a share, compared with $593 million, or $1.09 a share, a year earlier, the Associated Press reported. Sales volume on Discover cards was up 5% to $26.1 billion, and credit card balances grew about 4%, AP stated. Delinquency rates and the rate of loans being written off as uncollectible fell to what the firm said were "historic lows". The Next Issue In two weeks, we will publish another issue of the Hot List, at which time we will rebalance the portfolio. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio Ticker Company Name Industry Guru Score TJX THE TJX COMPANIES, INC. Retail (Apparel) 87 CSTR COINSTAR, INC. Recreational Activities 83 LKQ LKQ CORPORATION Auto & Truck Parts 67 STMP STAMPS.COM INC. Retail (Catalog & Mail Order) 64 MWIV MWI VETERINARY SUPPLY, INC. Medical Equipment & Supplies 63 ASPS ALTISOURCE PORTFOLIO SOLUTIONS S.A. Consumer Financial Services 60 SWI SOLARWINDS INC Software & Programming 60 WRLD WORLD ACCEPTANCE CORP. Consumer Financial Services 56 GES GUESS?, INC. Retail (Apparel) 27 DFS DISCOVER FINANCIAL SERVICES Consumer Financial Services 11 Ticker Market Cap Date Added Start Price Current Price Return TJX $31,424 3/16/2012 $37.91 $42.41 11.9% CSTR $2,021 2/17/2012 $56.23 $64.57 14.8% LKQ $5,250 5/11/2012 $35.54 $35.61 0.2% STMP $373 5/11/2012 $26.60 $22.66 -14.8% MWIV $1,228 5/11/2012 $92.38 $96.50 4.5% ASPS $1,640 6/8/2012 $64.94 $70.35 8.3% SWI $3,264 5/11/2012 $44.75 $44.13 -1.4% WRLD $881 6/8/2012 $67.71 $65.20 -3.7% GES $2,543 6/8/2012 $27.51 $28.27 2.8% DFS $17,739 5/11/2012 $34.12 $33.45 -2.0%

Detailed Stock Analysis Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer TJX   |   CSTR   |   LKQ   |   STMP   |   MWIV   |   ASPS   |   SWI   |   WRLD   |   GES   |   DFS   |   THE TJX COMPANIES, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch The TJX Companies, Inc. (TJX) is the off-price apparel and home fashions retailer in the United States and worldwide. As of January 28, 2012, the Company operated in four business segments. It has two segments in the United States, Marmaxx (T.J. Maxx and Marshalls) and HomeGoods; one in Canada, TJX Canada (Winners, Marshalls and HomeSense) and one in Europe, TJX Europe (T.K. Maxx and HomeSense). As a result of the consolidation of the A.J. Wright chain, all A.J. Wright stores ceased operations by the end of February 2011. It completed the consolidation of A.J. Wright, converting 90 of the A.J. Wright stores to T.J. Maxx, Marshalls or HomeGoods banners and closed the remaining 72 stores, two distribution centers and home office. Analysis Guru Score: 91% DETERMINE THE CLASSIFICATION: This methodology would consider TJX a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (19.66) relative to the growth rate (21.47%), 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 TJX (0.92) makes it 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. TJX, whose sales are $23,769.3 million, needs to have a P/E below 40 to pass this criterion. TJX's P/E of (19.66) is considered acceptable. 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 TJX is 21.5%, 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 TJX (23.62%) 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 TJX (2.55%) 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 TJX (2.55%) 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.   COINSTAR, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy Coinstar, Inc. (Coinstar) is a provider of automated retail solutions, which offers convenient products and services. the Company's offerings in automated retail include its Redbox business, where consumers can rent or purchase movies and video games from self-service kiosks (Redbox segment), and its Coin business, where consumers can convert their coin to cash or stored value products at self-service coin counting kiosks (Coin segment). Its New Ventures business (New Ventures segment) is focused on identifying, evaluating, building, and developing self-service concepts in the marketplace. On June 9, 2011, the Company completed the sale transaction of the Money Transfer Business to Sigue Corporation (Sigue). 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. CSTR, with a market cap of $2,021 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. CSTR, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.82, 1.10, 1.31, 2.03 and 3.61, 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. CSTR's Price/Sales ratio of 1.02, 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. CSTR, whose relative strength is 89, is in the top 50 and would pass this last criterion.   LKQ CORPORATION Profile Strategy: Growth Investor Based on: Martin Zweig LKQ Corporation (LKQ) provides replacement parts, components and systems needed to repair vehicles (cars and trucks). The Company operates in four segments: Wholesale-North America Wholesale-Europe, Self Service and Heavy-Duty Truck. Buyers of vehicle replacement products have the option to purchase from primarily five sources: new products produced by original equipment manufacturers (OEMs), which are known as OEM products; new products produced by companies other than the OEMs, which are sometimes referred to as aftermarket products; recycled products originally produced by OEMs, which it refers to as recycled products; used products that have been refurbished; and used products that have been remanufactured. October 1, 2011, it acquired Euro Car Parts Holdings Limited (ECP). On May 27, 2011, it acquired AkzoNobel Coatings Inc.'s paint distribution business. In February 2012, the Company announced that it had acquired Pieces Automobiles Lecavalier Inc. 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. LKQ's P/E is 22.76, based on trailing 12 month earnings, while the current market PE is 16.00. Therefore, it passes the first test. REVENUE GROWTH IN RELATION TO EPS GROWTH: [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. LKQ's revenue growth is 27.75%, while it's earnings growth rate is 27.89%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, LKQ passes this criterion. SALES GROWTH RATE: [FAIL] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (31.2%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (39.4%) of the current year. Sales growth for the prior must be greater than the latter. For LKQ 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. LKQ's EPS ($0.54) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. LKQ's EPS for this quarter last year ($0.39) 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. LKQ's growth rate of 38.46% 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 LKQ is 13.94%. This should be less than the growth rates for the 3 previous quarters, which are 23.08%, 32.00%, and 35.71%. LKQ 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, 30.38%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 38.46%, (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, 38.46% must be greater than or equal to the historical growth which is 27.89%. LKQ 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. LKQ, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.53, 0.69, 0.88, 1.15 and 1.42, 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. LKQ's long-term growth rate of 27.89%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. TOTAL DEBT/EQUITY RATIO: [PASS] A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. LKQ's Debt/Equity (51.38%) is not considered high relative to its industry (53.72%) and passes this test. INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For LKQ, this criterion has not been met (insider sell transactions are 81, while insiders buying number 59). 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.   STAMPS.COM INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch 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: 93% DETERMINE THE CLASSIFICATION: This methodology would consider STMP a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (9.23) relative to the growth rate (35.20%), 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 STMP (0.26) is very favorable. SALES AND P/E RATIO: [NEUTRAL] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. STMP, whose sales are $107.1 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. 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 STMP is 35.2%, 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 STMP (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 STMP (4.06%) 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: [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 STMP (14.40%) 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.   MWI VETERINARY SUPPLY, INC. Profile Strategy: Growth/Value Investor Based on: James P. O'Shaughnessy MWI Veterinary Supply, Inc. (MWI) is a distributor animal health products to veterinarians across the United States and United Kingdom. The Company's products include pharmaceuticals, vaccines, parasiticides, diagnostics, capital equipment, supplies, specialty products, veterinary pet food and nutritional products. MWI markets the products to veterinarians in both the companion animal and production animal markets. The Company also offers its customers a variety of value-added services, including e-commerce platform, pharmacy fulfillment, inventory management system, equipment procurement consultation, special order fulfillment, educational seminars and pet cremation. On March 21, 2011, The Company acquired Nelson Laboratories Limited Partnership (Nelson). On October 31, 2011, the Company acquired substantially all of the assets of Micro Beef Technologies, Ltd. (Micro). 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. MWIV, with a market cap of $1,228 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. MWIV, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 1.40, 1.62, 2.02, 2.70 and 3.40, 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. MWIV's Price/Sales ratio of 0.68, 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. MWIV, whose relative strength is 85, is in the top 50 and would pass this last criterion.   ALTISOURCE PORTFOLIO SOLUTIONS S.A. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Altisource Portfolio Solutions S.A.( Altisource), together with its subsidiaries, is a provider of services focused on technology-enabled, knowledge-based functions related to real estate and mortgage portfolio management, asset recovery and customer relationship management. The Company operates in three segments: Mortgage Services, Financial Services and Technology Services. In April 2011, the Company acquired Springhouse, LLC (Springhouse). In July 2011, the Company acquired the assembled workforce of a sub-contractor (Tracmail) in India. Analysis Guru Score: 74% DETERMINE THE CLASSIFICATION: This methodology would consider ASPS a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (21.77) relative to the growth rate (78.64%), 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 ASPS (0.28) 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. ASPS, whose sales are $474.1 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. 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 ASPS is 78.6%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered too fast. TOTAL DEBT/EQUITY RATIO: [NEUTRAL] ASPS 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. ASPS's Equity/Assets ratio (72.00%) 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. ASPS's ROA (40.72%) 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 ASPS (5.26%) 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 ASPS (1.82%) 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.   SOLARWINDS INC Profile Strategy: Growth Investor Based on: Martin Zweig SolarWinds, Inc. (SolarWinds) designs, develops, markets, sells and supports enterprise information technology (IT), infrastructure management software to IT professionals in organizations of all sizes. The Company's product offerings range from individual software tools to more comprehensive software products that solve problems encountered by IT professionals. Its products are designed to help management of their infrastructure, including networks, applications, storage and physical and virtual servers, as well as products for log and event management. It offers a portfolio of products for IT infrastructure management. Its products operate in three categories: Free Tools, Transactional Products and Core Products. In January 2011, it acquired Hyper9, Inc. (Hyper9). In July 2011, it acquired TriGeo Network Security, Inc. (TriGeo). In October 2011, it acquired DNS Enterprise, Inc. (DNS). In December 2011, it acquired certain assets of DameWare Development LLC (DameWare). Analysis Guru Score: 85% P/E RATIO: [FAIL] The P/E of a company must be greater than 5 to eliminate weak companies, not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. SWI's P/E is 48.63, based on trailing 12 month earnings, while the current market P/E is 16.00. Therefore, it fails 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. SWI's revenue growth is 33.74%, while it's earnings growth rate is 34.99%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, SWI 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 (38.8%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (34.3%) of the current year. Sales growth for the prior must be greater than the latter. For SWI 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. SWI's EPS ($0.23) pass this test. QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive. SWI's EPS for this quarter last year ($0.16) 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. SWI's growth rate of 43.75% 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 SWI is 17.50%. This should be less than the growth rates for the 3 previous quarters which are 63.64%, 64.71% and 4.76%. SWI 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, 38.78%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 43.75%, (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, 43.75% must be greater than or equal to the historical growth which is 34.99%. SWI 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. SWI, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.25, 0.35, 0.52, 0.61 and 0.84, 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. SWI's long-term growth rate of 34.99%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. TOTAL DEBT/EQUITY RATIO: [PASS] A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. SWI's Debt/Equity (0.00%) is not considered high relative to its industry (15.87%) and passes this test. INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For SWI, this criterion has not been met (insider sell transactions are 98, while insiders buying number 61). 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.   WORLD ACCEPTANCE CORP. Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool World Acceptance Corporation operates a small-loan consumer finance business in 12 states and Mexico. The Company is engaged in the small-loan consumer finance business, offering short-term small loans, medium-term larger loans, related credit insurance and ancillary products and services to individuals. As of March 31, 2012, the Company offered standardized installment loans through 1,137 offices in South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee, Illinois, Missouri, New Mexico, Kentucky, Alabama, Wisconsin, and Mexico. The Company serves individuals with limited access to consumer credit from banks, credit unions, other consumer finance businesses and credit card lenders. In the United States offices, the Company also offers income tax return preparation services to its customers and others. Analysis Guru Score: 76% 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. WRLD's profit margin of 18.64% passes this test. RELATIVE STRENGTH: [FAIL] The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. WRLD, with a relative strength of 75, fails 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 WRLD (20.38% for EPS, and 8.75% for Sales) are not good enough to pass. INSIDER HOLDINGS: [PASS] WRLD's insiders should own at least 10% (they own 17.00% ) 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. WRLD's free cash flow of $13.84 per share passes this test. PROFIT MARGIN CONSISTENCY: [PASS] WRLD's profit margin has been consistent or even increasing over the past three years (Current year: 18.64%, Last year: 18.57%, Two years ago: 16.72%), 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 WRLD's case. CASH AND CASH EQUIVALENTS: [FAIL] WRLD's level of cash and cash equivalents per sales, 1.99 %, does not pass this criteria of roughly 20%(a number we determined to be appropriate based on various examples). WRLD will have a more difficult time paying off debt (if it has any) or acquiring other companies than a company that passes this criteria. 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 WRLD was 121.63% last year, while for this year it is 122.29%. 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. "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 (WRLD's is 0.43), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. WRLD passes this test. The following criteria for WRLD are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] WRLD has not been significantly increasing the number of shares outstanding within recent years which is a good sign. WRLD currently has 15.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock. SALES: [FAIL] Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. WRLD's sales of $540.2 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years. DAILY DOLLAR VOLUME: [PASS] WRLD passes the Daily Dollar Volume (DDV of $9.3 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf." PRICE: [PASS] This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. WRLD with a price of $65.20 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions. INCOME TAX PERCENTAGE: [PASS] WRLD's income tax paid expressed as a percentage of pretax income this year was (37.02%) and last year (36.30%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.   GUESS?, INC. Profile Strategy: P/E/Growth Investor Based on: Peter Lynch Guess?, Inc. (GUESS?) designs, markets, distributes and licenses apparel and accessories for men, women and children. The Company operates in five: Europe, North American Retail, Asia, North American Wholesale and Licensing. Its products are sold through retail, wholesale, e-commerce and licensing distribution channels. The lines include full collections of clothing, including jeans, pants, skirts, dresses, shorts, blouses, shirts, jackets, knitwear and intimate apparel. It also grant licenses to manufactures and distributes a range of products, including eyewear, watches, handbags, footwear, kids' and infants' apparel, leather apparel, swimwear, fragrance, jewelry and other fashion accessories. In fiscal 2012, it, along with its distributors and licensees, opened 224 stores in all concepts combined outside of the United Sates and Canada, which consisted of 120 stores in Europe and the Middle East, 89 stores in Asia and 15 stores in the combined area of Central and South America. Analysis Guru Score: 93% DETERMINE THE CLASSIFICATION: This methodology would consider GES a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (10.45) relative to the growth rate (39.29%), 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 GES (0.27) 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. GES, whose sales are $2,675.1 million, needs to have a P/E below 40 to pass this criterion. GES's P/E of (10.45) is considered acceptable. 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 GES is 39.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for GES (0.99%) to be exceptionally 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 GES (6.40%) 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 GES (19.10%) 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.   DISCOVER FINANCIAL SERVICES Profile Strategy: Small-Cap Growth Investor Based on: Motley Fool Discover Financial Services (Discover) is a direct banking and payment services company. The Company operates as a bank holding company and a financial holding company. The Company operates the Discover Network, its credit card payments network; the PULSE network (PULSE), its automated teller machine (ATM), debit and electronic funds transfer network, and Diners Club International (Diners Club), its global payments network. It operates in two segments: Direct Banking and Payment Services. Its Direct Banking segment includes Discover card-branded credit cards issued to individuals and small businesses on the Discover Network and other consumer banking products and services, including personal loans, student loans, prepaid cards and other consumer lending and deposit products offered through its Discover Bank subsidiary. In June 2012, Tree.Com Inc sold the operating assets of its Home Loan Center, Inc. business to a wholly owned subsidiary of Discover Financial Services. Analysis Guru Score: 72% 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. DFS's profit margin of 31.97% 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. DFS, 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 DFS (-6.48% for EPS, and 5.26% for Sales) are not good enough to pass. INSIDER HOLDINGS: [FAIL] DFS's insiders should own at least 10% (they own 0.14%) of the company's outstanding shares. This does not satisfy the minimum requirement, and companies that do not pass this criteria are less attractive. 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. DFS's free cash flow of $3.96 per share passes this test. PROFIT MARGIN CONSISTENCY: [FAIL] The profit margin in the past must be consistently increasing. The profit margin of DFS has been inconsistent in the past three years (Current year: 35.09%, Last year: 12.44%, Two years ago: 40.58%), 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 DFS's case. CASH AND CASH EQUIVALENTS: [PASS] DFS has a large amount of cash $649.8 million on hand. Although this criteria does not apply to companies of this size, we define anything greater than $500 million in cash as having 'a lot of cash' to allow analysis of these companies. A company like DFS has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. "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 (DFS's is 0.44), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. DFS passes this test. The following criteria for DFS are less important which means you would place less emphasis on them when making your investment decision using this strategy: AVERAGE SHARES OUTSTANDING: [PASS] DFS has not been significantly increasing the number of shares outstanding within recent years which is a good sign. DFS currently has 529.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock. SALES: [FAIL] Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. DFS's sales of $6,521.5 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years. DAILY DOLLAR VOLUME: [FAIL] DFS does not pass the Daily Dollar Volume (DDV of $174.6 million) test. It exceeds the maximum requirement of $25 million. Stocks that fail the test are too liquid for a small individual investor and many institutions have already discovered it. 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. DFS with a price of $33.45 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions. INCOME TAX PERCENTAGE: [PASS] DFS's income tax paid expressed as a percentage of pretax income this year was (36.58%) and last year (39.73%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.   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 FINL FINISH LINE INC Retail (Apparel) 75 NOC NORTHROP GRUMMAN CORPORATION Aerospace & Defense 71 APOL APOLLO GROUP INC Schools 69 PMT PENNYMAC MORTGAGE INVESTMENT TRUST Real Estate Operations 61 AZN ASTRAZENECA PLC (ADR) Biotechnology & Drugs 54 LXU LSB INDUSTRIES, INC. Chemical Manufacturing 53 ALV AUTOLIV INC.(ADR) Auto & Truck Parts 53 NUS NU SKIN ENTERPRISES, INC. Personal & Household Prods. 52 TSCO TRACTOR SUPPLY COMPANY Retail (Home Improvement) 50 MOS MOSAIC CO Non-Metallic Mining 50

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