2012 Value Picks Forbes

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2012: Time for Value

Plenty of headwinds to navigate and the sailing will be far from smooth, but better-

than-expected economic numbers, healthy corporate prot growth, inexpensive

valuations, historically low interest rates, rising dividends and distaste for the asset

class from both Main Street and Wall Street, despite improving consumer and

business condence, have us enthusiastic about stocks in 2012. And whether our S&P

500 year-end target of 1400 is on the money, we are especially fond of the prospects

for our 2012 picks—a diversied baker’s dozen—as we look for a renaissance of

Value investing in the seasonally favorable fourth year of the Presidency.

January 2012

Stock investing involves risk and possible loss of principal.



2

Market Outlook

W hile the journey continues to be marked by violent swings in both direc-

tions, it is perhaps a bit surprising that the U.S. equity market indexes

managed to rebound from a frightening mid-year selloff to end 2011 not too far

from breakeven. Of course, just in the last third of the year, we endured an awful

September, a remarkably strong October, the worst Thanksgiving week since 1932

and a spectacular rebound as the calendar turned from November to December, so

stomachs have needed to be strong in order to stay focused on long-term invest -

ment objectives.

Clearly, as Figure 1 will attest, there are plenty of issues about which to be con -

cerned, but it would seem that the primary catalysts for the latest roller-coaster

ride have been the twists and turns in the European sovereign debt mess as wor-

ries about the drama in Greece quickly spread to Italy, Spain and even France.

There has been plenty of political intrigue on the Continent as well, with stocks

lately hanging on every utterance from German Chancellor Angela Merkel, French

President Nicolas Sarkozy or European Central Bank (ECB) head Mario Draghi.

No doubt, the situation across the pond continues to be uid, even as leaders

of 17 euro countries and nine of the 10 European Union countries that don’t use

the euro recently hammered out a comprehensive ‘scal compact’ and the ECB

has done its part by lending freely to nancial institutions all in an to attempt to

calm the debt crisis. Alas, the credit rating agencies have not yet expressed much

enthusiasm and bond yields in Italy and Spain have again been climbing, while

the euro currency just hit a 15 month low against the U.S. dollar.

Certainly, we can’t simply dismiss the turmoil and threat of contagion in Eu -

rope, especially as ‘risk-on’ and ‘risk-off ’ trading has been the order of the day, but

Sovereign Debt Contagion

Credit Rating Agency Downgrades

Health o the World’s Banks

Emerging Market Growth

U.S. Budget Decit

U.S. Tax Policy

Presidential ElectionHousing

Deleveraging

Dollar Volatility

Terrorism

High-Frequency Trading

MF Global

Stock markets have oten climbed a wallo worry, but the current one is unusuallysteep. O course, when it comes toinvesting, what is comortable is rarelyvery protable!

Figure 1:

Challenges Ahead



3

thus far we have yet to see much impact on the U.S. economy. In fact, against the

projections of recession made by several well-respected economists, Q4 numbers

have actually surprised to the upside. Whether it has been auto sales, consumer

condence or jobless claims (see Figure 2), the economic data generally have been

coming in better than expected. Looking ahead, despite a downward revision in the

Q3 GDP growth gure to 1.8%, the latest Leading Economic Indicators tally (see

M o n t h - o v e r - M o n

t h P e r c e n t a g e C h a n g e

-4%

-3%

-2%

-1%

0%

1%

2%

3%

100090807060

grey areas denote recessions

And the latest read on uture economicactivity ound that “November’s increasein the LEI or the U.S. was widespreadamong the leading indicators andcontinues to suggest that the risk o aneconomic downturn in the near term hasreceded.”

Figure 3:

Leading Economic Indicators

0

100

200

300

400

500

600

700

800

10/114/1110/104/1010/094/0910/084/08

grey area denotes a recession

Initial requests or unemploymentbenets have recently broken belowthe important 400,000 level, while thewidely watched monthly unemploymentrate dipped to 8.6% (thanks in part to anumber o olks leaving the workorce) inNovember.

Figure 2:

First-time Jobless Claims

From 01.31.60 to 12.29.11. SOURCE: Al Frank using data rom Capital IQ and the Conerence Board

From 01.04.08 to 12.29.11. Numbers in thousands. SOURCE: Al Frank using data rom the U.S. Department o Labor via Capital IQ



4

Figure 3) rose 0.5% in November, prompting the Conference Board, the measure’s

purveyor, to state, “The LEI is pointing to continued growth this winter, possibly

even gaining a little momentum by spring.” And pundits have been busy boosting

their forecasts for Q4, with the latest consensus projection calling for GDP growth

of 3.3% in the nal quarter of 2011. To be sure, growth will most likely slow in 2012,

but those predicting a U.S. recession next year are steadily shrinking in number.

Despite a subpar economic recovery romthe Great Recession, U.S. corporationshave continued to see solid trends in netincome growth with current record protlevels likely to be improved upon againin 2012.

Figure 4:

Corporate Prots

From 01.31.82 to 10.31.11. SOURCE: Al Frank using data rom the U.S. Bureau o Economic Analysis via Capital IQ

S e a s o n a l l y - a d j u

s t e d

b i l l i o n s o f U . S .

D o l l a r s

$0

$500

$1,000

$1,500

$2,000

100500959085

Corporate Profits Corporate Profits after Tax

grey areas denote recessions

Annualized Standard

Series Return Deviation

Actual

Large Company Stocks 9.9% 20.4%

Small Company Stocks 12.1% 32.6%

Long Term Corporate Bonds 5.9% 8.3%

Long-Term Government Bonds 5.5% 9.5%

Intermediate Government Bonds 5.4% 5.7%

Treasury Bills 3.6% 3.1%

Infation 3.0% 4.2%

Ination-Adjusted (Real)

Large Company Stocks 6.7% 20.4%

Small Company Stocks 8.8% 32.0%

Long Term Corporate Bonds 2.9% 9.5%

Long-Term Government Bonds 2.4% 10.6%

Intermediate Government Bonds 2.3% 6.8%

Treasury Bills 0.6% 3.9%

SUMMARY STATISTICS—SBBI DATA SERIES

As the market results or Stocks, Bonds,Bills and Infation (SBBI) illustrate,equities have won the long-termperormance derby, though return isoten commensurate with risk.

Figure 5:

SBBI Summary Statistics

From 11.01.25 through 12.31.10. SOURCE: Al Frank using data rom Morningstar



5

The news from Corporate America has also been positive on the whole. Sales

and earnings for U.S. corporations in Q3 again topped expectations. In fact, as

shown in Figure 4, the Bureau of Economic Analysis said that corporate prots

on both a pre- and post-tax basis now stand at all-time high levels and Standard

& Poor’s (as of December 22) is estimating that bottom-up operating earnings per

share for its broad-based S&P 500 index will climb from $83.77 in 2010 to $97.05

this year to $106.81 in 2012. To be fair, there have been some recent high-prole

company-specic disappointments (DuPont, Intel, Best Buy, Oracle, Walgreen) on

the earnings front, so we like that our all-cap strategy is favoring historically-less-

volatile, dividend-paying stocks, while maintaining modestly higher-than-usual

cash balances in our portfolios.

Little doubt, market volatility will remain high, but we continue to fancy the

long-term prospects of our broadly-diversied portfolios of undervalued stocks.

Supporting our optimistic stance, we like that stock valuations are attractive (the

trailing P/E ratio on the S&P 500 is 13), interest rates are extremely low (the yield

on the 10-year U.S. Treasury has again dipped below 2%), dividend payouts have

been on the rise (342 members of the S&P 500 either increased or initiated a divi -

dend in 2011) and investor sentiment is hardly enthusiastic (despite a Santa Claus

rally, the most recent AAII Bull/Bear survey is in line with historical averages and

equity mutual fund outows have continued to be hefty).

We aren’t in the business of making short-term market calls, as our investment

time horizon is at least three-to-ve years, but it would not be surprising for the

statistically favorable fourth year of the Presidency (the third year is actually the

best, with the rst and second years the weakest performers) to see equity returns

equal to or modestly above the 9.9% to 12.1% that has been the average for stocks

over the last eight-plus decades (see Figure 5). For those who must have a ‘num-

ber’, we’d go with 1400 on the S&P 500 for our year-end 2012 market target!

Why Value

Everyone loves a sale, right? No doubt, the economic downturn has made bar-

gain hunters out of many more folks, but very few of us would prefer to pay more

than we have to for a gallon of gas, a carton of milk or a new washing machine, no

matter our net worth. Indeed, ‘deal-of-the-day’ Web site operator Groupon launched

a very successful business three years ago that simply provides discounted cou-

pons for goods and services at local and national businesses.

Happily, for those who embrace value investing, the common sense that so

many utilize in their everyday lives often seems to be absent when it comes to the

stock market. Consider Groupon itself, which has just gone public in an offering

that valued the entire enterprise at $12.7 billion, this despite the company losing

$414 million in 2010 on revenue of $313 million. Believe it or not, Groupon’s initial

valuation was more than twice that of the social networking company LinkedIn,

which was actually protable at the time of its $45 per share IPO earlier in 2011.

While Groupon is still (temporarily in our view) defying gravity, not surpris-

ingly, LinkedIn shares have come back down to earth, after opening for trading

at $85 and quickly soaring well into the triple-digits. After all, while LinkedIn is a

nice little company, the current valuation of more than 14 times revenue and more



6

than 200 times earnings, even with the big pullback, suggests that most of those

holding the shares are simply hoping to ride the momentum associated with a hot

stock and sell to what we would call a greater fool.

To be sure, we like what Warren Buffett says of value investing, “You either get

it or you don’t.” While we think it should jibe with the way most people live their

lives, those who need a little more convincing about the merits of a value-based ap-

proach need only look at the historical evidence. There have been more than a few

shorter-term periods where it hasn’t held true, but the long-term numbers show a

tremendous performance advantage in favor of value-priced stocks. Data provider

Morningstar cites a couple of reasons for this phenomenon: The market eventually

comes to realize the full value of a company’s securities that were once underval -

ued (the Graham and Dodd view) and the market generally overreacts to bad news

and underreacts to good news, providing more room for value stocks (which are

more likely to have reported bad news) to improve and outperform growth stocks

that already have high expectations built in.

Though Morningstar’s SBBI 2011 Classic Yearbook presents the Fama/French

Value vs. Growth performance comparisons on a capitalization-weighted basis

(which we show in Figure 6), we think it even more interesting to study equal-

weighted returns. Both methodologies tell the same story, but equal weight better

mirrors the way that we (and most investors) construct their portfolios. Yes, many

invest in index funds and ETFs, but we doubt that most think to buy two times as

much ExxonMobil ($400 billion market cap) as they do Wal-Mart Stores ($200 bil -

lion) in order to ‘properly’ cap-weight their portfolio.

It should come as no surprise that the screens that we construct to search for

new investment ideas as well as the analytics that we run each day to evaluate

our existing holdings center on ve classic metrics (Sales to Price, EBITDA to EV,

A ew percentage points a year in betterperormance or Value stocks may notseem like much, but those with a long-term time horizon should understand themiracle o compounding.

Figure 6:

Value Trumps Growth

I n d e x

10

100

1k

10k

100k

1m

10m

100090807060504030

Large Growth: 9.3%

Large Value: 11.5%

Small Growth: 8.6%

Small Value: 14.7%

Logarithmic Scale. Value-weighted Returns. Indexed to 100 on 07.31.27. Data through 11.30.11. SOURCE: Al Frank using data rom

Eugene F. Fama and Kenneth R. French



7

Book Value to Price, Earnings Per Share to Price and Dividend Yield) that histori-

cally have proved strong indicators of future investment performance (see Figures

7 and 8). Note that the rst four ratios are inverted (i.e. Price to Sales instead of

Sales to Price) from how they are conventionally displayed as well as how they ap-

pear in The Prudent Speculator , with the result being that we can compare a high

ranking stock on Sales to Price to a high scorer on Dividend Yield. Doesn’t matter

I n d e x

Hi 20%: 19.2%

Quintile 2: 16.5%

Quintile 3: 14.6%

Quintile 4: 12.9%

Lo 20%: 10.4%

100

1k

10k

100k

1m

10m

100090807060

...and as the ratio o earnings to priceincreases provides even more evidencethat value investing is the way to go.

Figure 8:

Fama/French—Earnings/Price

I n d e x

Hi 20%: 19.4%

Quintile 2: 16.5%

Quintile 3: 14.9%

Quintile 4: 13.2%

Lo 20%: 7.7%

100

1k

10k

100k

1m

10m

100090807060

The uniormity o the improving trendin the Fama/French return series asthe multiple o stockholders’ equity tomarket cap rises...

Figure 7:

Fama/French—Book-to-Market

Logarithmic Scale. Equal-weighted Returns. Indexed to 100 on 06.30.51. Data through 07.31.11. SOURCE: Al Frank using data rom


Logarithmic Scale. Equal-weighted Returns. Indexed to 100 on 06.30.51. Data through 07.30.11. SOURCE: Al Frank using data rom




8

either way, but we chose to be consistent with how Fama/French present their ve

divisions (quintiles) as the higher the metric the more undervalued the stock.

Now, we do add a little of our own valuation avoring to the mixture as we

think that companies also should be compared to their industry peers in addition

to the entire investment universe. The bottom line is that there is very clear and

signicant outperformance (the ‘active return’) over the past two decades for the

...and since the turn o the Millennium,stock pickers (either in the small-capRussell 2000 or the large-cap Russell1000 subsets o the Russell 3000index) are likely to have done better than‘passive’ index und investors.

Figure 10:

Russell Index Equal-Weighted vs.

Capitalization-Weighted Returns

50

100

150

200

250

300

350

100806040200

I n d e x

R1K Cap-Weight: 1.3%

R1K Equal-Weight: 9.0%

R2K Cap-Weight: 4.8%

R2K Equal-Weight: 6.0%

Indexed to 100 on 1.31.00. Data through 12.31.11. SOURCE: Al Frank using data rom Russell Investments via Bloomberg

Our own analysis covers only 20 years,but we’ve also ound that the lessexpensive the stock the higher the returnpotential...

Figure 9:

Factor-Based Investing

A n n u a l T

o t a l A c t i v e

R e t u r n

Sales/P

BV/P

EBITDA/EV

Div yield

EPS/P

Valuation quintiles (1=most inexpensive)

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

54321

From 11.30.91 through 11.30.11. Active total return (Quintile return less the return o the Russell 3000 Index). Quintiles are based on Al Frank’s

proprietary coverage universe.Quintiles are calculated or each month and a portolio o each quintile is held or one month. The return gures are the

chained perormance data over all time periods or each quintile. Sales, EBITDA and EPS gures combine trailing data and near-term estimates into a

blended current trailing gure. SOURCE: Al Frank using data rom Capital IQ via ClariFI



9

most undervalued stocks. It is also very interesting to see in Figure 9 that quintiles

1, 2, 3 and 4 all have better equal-weighted returns than the cap-weighted Russell

3000 benchmark (there is not an equal-weighted R3K total return series) no matter

how expensive the metric. Helps, along with the performance numbers shown in

Figure 10, to refute claims that traditional ‘passive’ index strategies are best!

Why Value Now?Unfortunately (or fortunately for 2012 and beyond), Value stocks had a tough

time of it in 2011, while also suffering dismal relative performance in 2007 and

2008. Interestingly, those lousy returns have coincided with difcult time spans for

the entire market. In fact, history shows that Value stocks have fared worse than

Growth stocks in down markets. We nd in Figure 11 that the Downside Capture

ratio—the amount of the S&P 500’s negative move experienced by the portfolio in

question—is historically greater for Value than for Growth. It doesn’t always hold

true, of course, but the ugly ve months from the market peak in 2011 on April

29 to September 30 saw a total return of -17.7% for the Russell 3000 index. As the

Downside Capture chart illustrates, Large Value stocks have historically ‘captured’

105% of the decline compared to 97% for Large Growth stocks when the market

losses have been worse than 15%. Same comparison holds true with the Capture

numbers for Small Value (113%) and Small Growth (110%).

Those gures would suggest, then, that Large Value stocks might have been

expected to have dropped by 18.6% (105% times 17.7%) and Small Value stocks by

20.0% (113% times 17.7%) over those ve months. Shifting to Russell performance

data, the Russell 3000 Value index indeed suffered a worse fate during that span,

tumbling 19.3% versus a 16.2% loss for the Russell 3000 Growth index, in line with

-150

-125

-100

-75

0% to

-2.5%

-2.5% to

-5%

-5% to

-7.5%

-7.5% to

-10%

-10% to

-15%

<-15%

Large GrowthSmall Growth

Small Value Large Value

D o w n s i d e C a p t u r e b y R a n g e o f S & P 5 0 0 P e r f o r m n c e

Value investors have oten endured boutso sub-par perormance when marketsare headed south...

Figure 11:

Downside Capture

From 08.31.27 through 11.30.11. Downside capture relative to the S&P 500 using monthly total returns. Ranges are o the monthly change in the S&P

500. SOURCE: Al Frank using data rom Eugene F. Fama and Kenneth R. French



10

the Downside Capture stat. The purveyor of those indexes, Russell Investments

breaks down its Russell 3000 benchmark utilizing “valuation style variables: book-

to-price ratio to represent value and I/B/E/S forecast medium-term growth and his-

torical sales per share growth to represent growth.” Those variables are then com-

bined to yield a Composite Value Score with 70% or so of the stocks classied as

all Value or all Growth and 30% weighted proportionately to both Value & Growth.

Whether the data come romMorningstar, Fama/French or Russell,value stocks have over the long-termdelivered the best returns.

Figure 13:

Russell Value vs. Growth

Russell 3000 Value

(11.7% per annum)

Russell 3000 Growth

(10.0% per annum)

T o t

a l R e t u r n

0

1,000

2,000

3,000

4,000

5,000

6,000

10050095908580

Indexed to 100 on 12.29.78. Data through 12.31.11. SOURCE: Al Frank using data rom Russell Investments via Bloomberg

...and we are now in a time span (nothanks to a disastrous 2008) whereValue has lagged Growth or multipleperiods, though the tide has started toturn in the last three months.

Figure 12:

Annualized Russell Returns

-5%

0%

5%

10%

15%

20%

10-yr5-yr3-yr1-YrQTDMTD

Russell 3000 Growth

Russell 3000

Russell 3000 Value

A n n u a l i z e d

R e t u r n

Annualized total returns or periods one year and greater. Cumulative returns or periods less than one year. Data through 12.30.11. SOURCE: Al Frank

using data rom Russell Investments via Bloomberg



11

Alas, in addition to its recent subpar performance, the Russell 3000 Value also

has lagged behind the Russell 3000 Growth index for the past one-, three- and ve-

year periods as depicted in Figure 12. Obviously, this is an unusual occurrence

given that Value has outperformed Growth over the last 10 years and since the

inception of the Russell indexes in 1978 (see gure 13) and going all the way back

to 1927, according to the Fama/French data. In fact, while there can never be any

50

100

150

200

>15%10% to

15%

7.5% to

10%

5% to

7.5%

2.5% to

5%

0% to

2.5%

Large Growth

Small Growth

Small Value

Large Value

U p s i d e C a p t u r e b y R a

n g e o f S & P 5 0 0 P e r f o r m n c e

...that Value must outperorm Growthby a wide margin when the markets aremoving higher.

Figure 15:

Upside Capture

From 08.31.27 through 11.30.11. Upside capture relative to the S&P 500 using monthly total returns. Ranges are o the monthly change in the S&P 500.

SOURCE: Al Frank using data rom Eugene F. Fama and Kenneth R. French

-15%

-10%

-5%

0%

5%

10%

15%

20%

10050095908580

A n n u a l i z e d R e t u r n o f t h e R u s s e l l 3 0 0 0

V a l u e I n d e x

M i n u s t h a t o f t h e R u s s e l l 3 0 0 0

G r o w t h I n d e x

5-year underperformance of value versus growth

5-year outperformance of value versus growth

Subsequent 5-year return, value minus growth

The boxes highlight periods when

value started to underperform growth

on a trailing 5-year basis. Note that

in each case, value had out-

performed growth over the next

five years.

It doesn’t happen very oten that Valuelags over a trailing 5-year period. Ocourse, simple math suggests...

As o 11.30.11. SOURCE: Al Frank using data rom FactSet Research Systems

Figure 14:

Time or Value



12

As o 11.30.11. All data are total returns, except or that o all recommended stocks, which excludes dividends. Data or periods greater than

one year are annualized. The Dow Jones Industrial Average (DJIA or Dow) is a price-weighted average o 30 actively traded “blue chip” stocks,

primarily industrials, but includes nancials and other service-oriented companies. The Russell 3000 Index measure the perormance o the

largest 3,000 U.S. companies. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged index o 500 stocks that is generally rep-

resentative o the perormance o larger companies in the U.S. 1The Russell 3000 Index lacks sucient history to match that o Al Frank’s TPS

Portolio. We thereore have shown the S&P 500 Index or comparison purposes. SOURCE: Al Frank using data rom FactSet Research Systems

TPS Portolio is Al Frank’s actual investment portolio. Though not presently leveraged, it has been so in the past. Buckingham Portolio is John

Buckingham’s actual investment portolio. Though not presently leveraged, it has been so in the past. Millennium Portolio is unleveraged and

hypothetical. PruFolio is unleveraged and hypothetical.

All portolio returns are calculated on a total return basis and refect the reinvestment o dividends, i any, margin leverage and margin interest

charges, trading costs and subscription costs. There are inherent limitations with in hypothetical or model portolio results as the securities are

not actually purchased or sold. They may not refect the impact, i any, o material market conditions which could have has an impact on AFAMs

decision making i the hypothetical portolios were real. Hypothetical perormance is shown or illustrative purposes only and should not be in-

terpreted as an indication o perormance o any AFAM portolio. The use o leverage magnies gains and losses and increases risk to a portolio.

guarantees, history would suggest (see Figure 14) that now is an especially favor-

able time to be steering money to Value-oriented strategies. While returns in 2011

were hardly disastrous, a great time to embrace the stocks recommended in The

Prudent Speculator is after we’ve underperformed. This was denitely the case

following our dismal performance in 1990 and 1998, and even after 2008, as we

enjoyed a very nice rebound in 2009 and 2010.

While Value has now underperformed Growth on a trailing basis since May

2008, the simple laws of mathematics require that Value stocks generally must

have outperformed Growth stocks in rising markets. This is conrmed by the Up-

side Capture statistics illustrated in Figure 15: in nearly every instance Small and

Large Value stocks have had greater participation in the market’s gain. For ex -

ample, when the S&P 500 has risen by more than 15%, Large Value stocks have

on average captured 156% of the advance versus an 87% Upside Capture ratio for

Large Growth stocks. The Small stock Value/Growth Upside Capture comparison

is also wide at 184% to 143%.

Unfortunately, we don’t receive advance notice when stocks will climb, even

though the odds denitely favor rising markets. History shows that there is a

strongly positive long-term bias as the Russell 3000 Value index has turned in a

11.7% annualized rate of return since 1978 while the Russell 3000 Growth has re-

turned 10.0% and Small-Capitalization and Large Capitalization stocks have seen

annualized returns of 12.1% and 9.9%, respectively, going all the way back to 1927.

We are always striving to improve (reduce) our Downside Capture while not losing

our Upside, but we know that it is tough to stay the course with Value-oriented

strategies when the markets are struggling, but we believe our top-of-table long-

term performance record relative to our Hulbert Financial Digest newsletter com-

petition and the benchmark-besting long-term numbers for our four newsletter

portfolios (see below) are testament to the merits of our approach.

Since The Prudent Speculator’s launch in March 1977, its 1,753 stock recommendations have returned, on average, an annualized 16.87%,

not including dividends.

Inception Since Index

Date Inception Return Index

Buckingham 01.21.03 11.11% 6.68% Russell 3000

Millennium 12.31.99 7.62% 1.19% Russell 3000

PruFolio 12.29.00 12.78% 2.02% Russell 3000

TPS 03.10.77 18.37% 10.81% S&P 5001

NEWSLETTER PORTFOLIO PERFORMANCE



13

W e’ve put together a baker’s dozen of our most fa-

vored undervalued stocks for 2012 and beyond. All

trade for signicant discounts to our determination of

long-term fair value and/or offer favorable risk/reward pro-

les. Note that, while we always seek substantial capital

Sotware & Services ATVI Activision Blizzard $12.32 $19.38 14.8 2.9 5.2 9.7 0 1.3% 14,079 -1.0

Utilities EXC Exelon Corp. $43.37 $56.47 10.1 1.5 2.5 6.8 87 4.8% 28,754 4.2

Materials FCX Freeport-McMoRan $36.79 $67.28 6.3 1.6 2.5 2.5 23 5.4% 34,877 -38.7

Capital Goods GD General Dynamics $66.41 $97.67 9.3 0.7 nm 5.1 29 2.8% 23,649 -6.4

Semis & Cap Equip. INTC Intel Corp. $24.25 $35.23 10.4 2.4 4.2 4.8 15 3.5% 124,112 15.3

Diversied Fins JPM JPMorgan Chase $33.25 $54.18 7.1 1.1 1.0 16.4 166 3.0% 126,313 -21.6

Commercial Services MAN ManpowerGroup $35.75 $68.62 12.2 0.1 2.5 18.7 11 2.2% 2,907 -43.0

Transportation NM Navios Maritime Hldg $3.57 $6.66 3.5 0.5 0.6 6.0 136 6.7% 363 -32.4

Energy NXY Nexen $15.91 $31.31 9.9 1.5 1.1 3.5 53 1.3% 8,391 -30.5

Retailing RSH RadioShack Corp. $9.71 $18.12 7.4 0.2 1.5 3.8 83 5.1% 969 -47.5

Energy SFL Ship Finance Int’l $9.34 $14.21 5.2 2.5 0.9 10.6 220 10.7% 739 -56.6

Pharma/Biotech/Sci TMO Thermo Fisher Sci $44.97 $95.23 11.3 1.5 nm 12.4 40 0.0% 17,011 -18.8

Capital Goods TPC Tutor Perini Corp. $12.34 $34.40 7.3 0.2 2.6 5.6 55 0.0% 584 -42.4

Price Target Price Multiples EV/ Debt/ Div Mkt 2011

Industry Group Ticker Company 12/30/11 Price EPS S TBV1 EBITDA2 TE3 Yld Cap Per

Prudent Speculator 2012 Favorites

gains, we require lower appreciation potential for stocks

that we deem to have more stable earnings streams, more

diversied businesses and stronger balance sheets. The

natural corollary is that riskier companies must offer far

greater upside to warrant a recommendation.

Activision Blizzard (ATVI)

Activision Blizzard is one of the largest developers,

publishers and distributors of video games for consoles,

PCs and handheld devices. The company sells its games

globally and owns popular franchises such as Call of Duty,

with its newest edition selling more than 8.4 million cop-

ies in November alone, and the discontinued Guitar Hero

series, as well as some of the most popular PC games, in-

cluding World of Warcraft and Starcraft. Many of the com-

pany’s games generate such a strong following that mul-

tiple expansion packs and sequels are released. We also

like that Activision has a very strong balance sheet that

sports over $2.50 per share of cash and no long-term debt.

In addition, the company generates strong free cash ow

which allows management to both invest in the growth of

its businesses and to also partake in shareholder friendly

activities such as stock buybacks and dividend payouts.

Shares currently yield 1.3% and offer long-term oriented

investors an appealing investment opportunity at a rela-

tively attractive valuation.

Exelon Corp. (EXC)

Chicago-based Exelon is the largest U.S. utility by

market capitalization. The company is the largest nuclear

generator with 17,000 megawatts of nuclear power pri

marily located in the Midwest and Mid-Atlantic regions

Exelon’s diversied power generation also includes coal

hydro and gas. Additionally, the company has two large

energy delivery subsidiaries, ComEd in Illinois and PECO

in Pennsylvania, which together serve over 5 million cus

tomers. With the EPA recently announcing tougher air

quality rules that will be in place in the next few years, we

would expect that more than a few coal red plants wil

choose to shut down versus installing expensive emis

sions controls, which should benet large nuclear power

generators like Exelon. The rm’s ability to produce low-

cost electricity with minimal emissions should help pro

duce attractive, sustainable and expanding shareholder

value for years to come, even if power prices take some

time to rebound. We like that EXC boasts strong free cash

ow and stands on sound nancial footing. Shares are

As o 12.30.11. N/A=Not applicable. nm=Not meaningul. 1Tangible book value. 2Enterprise value-to-earnings beore interest taxes depreciation and amortization. 3Tangible equity. SOURCE: Al Frank using data rom Capital IQ and FactSet

Research Systems



14

trading at relatively attractive forward earnings and EV/

EBITDA multiples versus its peer group. Furthermore,

the stock currently offers a 4.8% dividend yield.

Freeport-McMoRan Copper & Gold (FCX)

Freeport-McMoran is a major international mining

company with assets in North and South America, Indo-

nesia and the Democratic Republic of the Congo (DRC).

The company’s main products are copper (77% of sales),

gold (13%) and molybdenum (6%). The relationship be-

tween FCX’s earnings power and copper prices was

strengthened considerably following the 2007 acquisition

of Phelps Dodge. Despite the plunge in the price of cop -

per since the summer, we remain positive on the long-

term fundamentals since inventories remain tight and

long-term demand should be driven by strong emerging

market growth. Since December 2010, FCX management

has paid four quarterly dividends and two special divi-

dends. We think this trend could continue as cumulative

free cash ow projections over the next 2 years stand at

more than $7 billion. With a focus on organic opportuni -

ties as opposed to acquisitions, and with a reputation for

solid execution, we consider FCX a core holding in the

metals and mining industry. Just considering quarterly

dividends, FCX shares yield 2.7%, however including spe-

cial dividends brings the payout to more than 5%.

General Dynamics (GD)

General Dynamics is a self-described market leader in

business aviation; land and expeditionary combat vehi-

cles and systems, armaments, and munitions; shipbuild-

ing and marine systems; and mission-critical information

systems and technology. Some of its major defense con-

tracts include Virginia-class nuclear-powered submarines

and Ohio class replacements, Arleigh Burke-class Aegis

ships, the Abrams M1A2 tank and the Stryker 8-wheeled

assault vehicle. However, General Dynamics is more than

just a defense contractor, thanks to solid returns from its

business aviation unit, Gulfstream, which produces jets.

The unit has solid prospects as the space rebounds and

is seeing strong interest from emerging market regions.

The bright prospects for the aviation unit provide appeal-

ing diversication to GD’s defense business, especially

in the wake of expected domestic defense budget cuts.

Nevertheless, the company’s backlog of business of more

than $58 billion, good nancial position and strong cash

ow generation should allow management to continue to

look for value-added acquisitions, as well as to offer share

buybacks and dividend increases. On that last score, GD

currently yields 2.8%.

Intel (INTC)

Intel is clearly the leader in the worldwide micropro-

cessor market. Despite recent weakness in PC sales (due

in part to the ooding in Thailand that caused a shortage

of hard disk drives), long-term demand for microproces-

sors is solid thanks to aging computers and bandwidth-

consuming applications for PCs and servers. Improved

processing speed is core to many of technology’s top

trends and Intel is providing it in PCs, smartphones, tab -

lets and TVs. In addition, the trend toward cloud comput-

ing will require substantial server build-outs to create the

infrastructure necessary to handle the rapidly growing

amount of data movement. Further, we are still intrigued

by the company’s purchase of security software maker

McAfee, and believe that its plans to materially enhance

security features for its chips and hardware will further

differentiate its products and support margins. We favor

the company’s competitive position, strong balance sheet,

rapidly growing free cash ow, current share buyback

plan (with $14.2 billion remaining) and 3.5% yield.

JPMorgan Chase (JPM)

JPMorgan Chase is one of the largest nancial insti-

tutions in the U.S., with more than $2 trillion in assets

and operations in more than 60 countries. The company

is also the top corporate syndicated lender. The bank

specializes in debt markets and it operates large units fo -

cused on securities custody, trust banking, credit cards,

venture capital and asset management. Although JPM is

held in high regard for its navigation through the credit

crunch, recent share price weakness shows it is not im -

mune to investor concerns about the mortgage market,

regulatory changes and the revenue outlook for banks

in general. Despite these challenges, we are positive on

the rm’s strong balance sheet, high quality and stable

leadership team, enhanced risk-management controls

and broad business model. In addition, we like that JPM



15

has been taking share in overall trading revenue and that

it continues to boost exposure to faster growing non-U.S.

markets. JPM shares are currently trading at meaning-

ful discounts to ve year average forward earnings and

book value multiples. Continued economic progress and

a clearer regulatory picture could mean additional buy-

backs and/or dividend increases (the current yield is 3%).

ManpowerGroup (MAN)

Manpower is the 3rd largest stafng rm in the world

with 4,100 ofces in 82 countries providing services to

more than 400,000 clients. The rm maintains a diversi-

ed model by offering services such as temporary staff -

ing, permanent placement, workforce training and out-

placement. Its largest segments in stafng are industrial

and clerical stafng. Its two largest markets are France

(29% of total revenue) and the United States (10%). While

current macro uncertainty has led to slowness in expan-

sion of full-time payrolls, Manpower is seeing tempo -

rary stafng growth in nearly all of its regions, a trend

one would expect to continue as businesses seek greater

exibility in their labor costs. Concerns over a prolonged

European recession have weighed on shares, as the stock

is off nearly 50% from April highs. Shares are currently

trading at relatively inexpensive multiples (sub-10 for-

ward P/E and 13% of sales) while yielding 2.3% and we

believe the company offers long-term oriented investors

solid top- and bottom-line growth prospects.

Navios Maritime (NM)

Navios Maritime is a sea-borne shipping and logistics

company focused on the transport of dry bulk commodi-

ties, including iron ore, coal and grain. Though Navios

recently completed a massive four-year $2.5 billion eet

expansion program, it has still managed to maintain a

respectable net debt-to-total capital ratio of 51%. Despite

a cautious sector outlook and prolonged periods of char-

ter rate declines, Navios should continue to benet from

high contract coverage for its core eet (68.4% in 2012 and

42% in 2013) and from ample dividend support from its

afliated companies. We are also partial to the company’s

63% ownership of a lucrative South American logistics

provider, an entity poised to capitalize on expanding

economies worldwide and the resulting increase in im-

port/export activity. We believe Navios is one of the best

positioned companies in the dry bulk space, yet multiples

such as P/E and price-to-sales are inexpensive relative to

ve-year historic averages. The board of directors has also

approved a $25 million repurchase authorization for 2012

and the current dividend yield of 6.7% is quite attractive.

Nexen Inc. (NXY)

Canada-based Nexen engages in the exploration and

production of conventional offshore oil in the North Sea

Nigeria and the Gulf of Mexico as well as unconventional

natural gas in British Columbia. In addition, the company

is mining oil sands in the Alberta. With Nexen reporting

that it has proven reserves of more than 1 billion barrels

of oil equivalent, material increases in long-term globa

oil demand and projected supply constraints should bode

well for the stock price over the coming years. We like

that the company is maintaining its status as a low-cost

producer and has had recent exploration success with off

shore discoveries in the Gulf of Mexico at Appomattox

Vicksburg and Knotty Head, as well as in Nigeria at Usan

and Owowo. Furthermore, management continues to ag

gressively pay down debt to strengthen the balance sheet

Shares are currently trading at less than 10 times forward

earnings estimates, right near tangible book value and an

EV/EBITDA multiple of 3.5, all relatively attractive met

rics. NXY shares offer a current dividend yield of 1.3%.

RadioShack (RSH)

RadioShack is one of the leading U.S. retailers of wire

less products and services as well as consumer electronics

and parts. The company operates 4,500 company-owned

stores in the U.S., with many of the locations in major or

strip malls to maximize convenience. Its retail network

also includes some 1,300 wireless kiosks, 1,200 dealer out

lets and 200 company-owned stores in Mexico. We like tha

management has cut costs and increased store efciency

The company focuses its sales associate training on cus

tomer service and in-depth product knowledge in an at

tempt to improve its customer’s experience so as to drive

repeat business and referrals. While the market is com

petitive, we think the addition of Verizon plans and Apple

products (including the iPhone 4S and iPad 2) should

provide ample opportunity for growth. From a valuation



16

standpoint (P/E ratio is less than 9), RSH shares are com -

pelling, especially after dropping almost 50% in price over

the last year. The dividend was recently doubled, putting

the current yield at 5.1%, while the company said in its

latest earnings announcement that it intends to buy back

$200 million of its stock over the next 12 months.

Ship Finance (SFL)

Shares of the oil tanker owner and operator have been

brutalized over the past month after worries arose about

its exposure to former parent Frontline, which has major

liquidity concerns and which is on the other side of char-

ter contracts for 28 of Ship’s 69 vessels. Happily, those

concerns have been calmed somewhat after Frontline put

forth a restructuring proposal that will actually see $106

million of ‘restructuring compensation’ make its way back

to Ship Finance. Yes, SFL has agreed to amend the terms

of the long-term Frontline contracts in the process and a

near-term hit to $0.25 per share from the lucrative $0.39

quarterly dividend is likely, but we think the outcome is

far better than what the recent 40% share-price hit would

suggest. In addition, while last quarter’s results came in

light relative to investor expectations, the company still

earned $0.35 per share, and the consensus forecast calls

for EPS well north of $1.00 in 2012. The double-digit per-

centage yield (even if we simply annualize the likely new

$0.25 quarterly payout rate) along with the fact that we

believe that shipping rates are more likely to move higher

than lower from currently depressed levels over the long

term add to SFL’s appeal.

Thermo Fisher Scientifc (TMO)

Thermo Fisher Scientic is the product of the 2006

merger of Thermo Electron (primarily an instrument

maker) and Fisher Scientic (a provider of laboratory con-

sumables). The combined company has the largest sales

force in the industry and supplies universities, laborato-

ries and hospitals with high-end analytical instruments

and lab equipment. With many customers looking to sim-

plify procurement functions, TMO’s ‘one stop shop’ strat-

egy is appealing. The company’s comprehensive product

offering is also ripe for various cross-selling opportuni-

ties. TMO also has accelerated investment in emerging

markets, particularly India and China, to better serve

local life-sciences customers. Importantly, these outlays

have not detracted from management’s commitment to

adding shareholder value as evidenced by its proactive

share buyback program, including a recently approved

additional $750 million that can be used before Novem-

ber 2012. With leading positions throughout an $80 billion

market, consistent and heavy investments in research

and development, global growth opportunities, solid free

cash ow generation and a strong balance sheet, we think

that TMO remains a ne addition to portfolios looking for

a large-cap medical specialties name.

Tutor Perini (TPC)

Tutor Perini is one of the largest construction services

rms in the United States. The company has a market

leading position in heavy civil and large complex build -

ing projects, and also provides a variety of services to

the U.S. military, government agencies and corporations.

We are encouraged by management’s success in replac-

ing major Las Vegas-based gaming projects with higher

margin civil and government contracts. In addition, an

increasing percentage of the company’s backlog is made

up of non-xed-price contracts, often referred to as cost-

plus. Such contracts are a benet to margins especially

in a rising commodity price environment. Shares dra-

matically underperformed in 2011 due to weak demand

for civil engineering services and a downward revision to

full-year earnings guidance in the second quarter. How -

ever, we believe that demand will eventually rebound and

that both the numerator and the denominator of the cur-

rent single-digit P/E ratio will expand. Further, it is worth

noting that the solid balance sheet provides management

with operational exibility.



17

Important Information

Opinions expressed are those of Al Frank Asset Management (AFAM) and are

subject to change without notice and are not intended to be a forecast of future

events, a guarantee of future results or investment advice.

Past performance may not be indicative of future results. Therefore, you should

not assume that the future performance of any specic investment or investment

strategy will be protable or equal to corresponding past performance levels.

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funds are distributed through Northern Lights Distributors, LLC.



18

AFAM adheres to the same investment principles and philosophies in managing

individual client accounts, its Value Division proprietary mutual funds and in the

information that appears in its investment advisory newsletter, which is long-term

growth of capital by owning a diversied portfolio of securities that are undervalued

and holding them for their long-term potential appreciation.

As adviser to its own proprietary mutual funds and manager of individual client

accounts, AFAM may purchase, sell or hold positions in the securities that appear

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stocks that appear in this presentation subject to AFAM’s Code of Ethics, Insider

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The Russell 3000 Index measures the performance of the largest 3000 U.S.

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growing equities are reected.

One cannot invest directly in an index.



19

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Past specic recommendations: Investment recommendations provided herein

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