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Individual Investor Portfolio - September 2013 Quarterly Update and Review

As of the second quarter the Individual Investor Fund has been renamed to the "Individual Investor Portfolio"; the portfolio has been split into three separate funds; the Transportation Growth Fund, or TGF, the Media & Advertising Growth Fund, or MAGF, and the Small-Mid Cap Growth Fund, or SMCGF. The logic behind this shift is to better reflect performance based on more clearly defined groupings of holdings. A total aggregation of all holdings will still be monitored as part of the quarterly updates. All funds will continue to be managed through a Roth Individual Retirement Account, or Roth IRA.

This transition will continue to be considered as most companies being added within the portfolio will fall into these categorical areas. However, the portfolio has significantly reduced holdings to generate more cash to be reallocated into new holdings with smaller market capitalizations. Additionally, the portfolio's solid performance for the year has allowed for the opportunity to eliminate the worst performing holding.

The third quarter for 2013 has continued to push higher from the second quarter for the primary market indices including the Dow Jones Industrial Average, S&P 500, and NASDAQ. The Dow has more than doubled during the past nine months, while the S&P has increased by a third, and the NASDAQ has returned over fifty percent during the same time period. Full steam ahead!

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Detailed information regarding each company's performance is listed below in the Total Return, YTD, and Previous Performance tables and Management Activities section.

CURRENT HOLDINGS AS OF SEPTEMBER 30, 2013

All enterprise values are as of the last trading day for the third quarter of 2013.

Transportation Growth Fund - TGF

Company

Ticker Symbol

Enterprise Value

Sector

Industry

Laredo Petroleum Holdings, Inc.

(NYSE:LPI)

$5.2 billion

Basic materials

Independent oil & gas

SeaDrill Limited

(NYSE:SDRL)

$33.0 billion

Basic materials

Oil & gas drilling & exploration

Textainer Group Holdings Limited

(NYSE:TGH)

$4.5 billion

Services

Rental & leasing services

Media & Advertising Growth Fund - MAGF

Company

Ticker Symbol

Enterprise Value

Sector

Industry

Millennial Media, Inc.

(NYSE:MM)

$452.4 million

Services

Marketing services

Scripps Networks Interactive, Inc.

(NYSE:SNI)

$13.1 billion

Services

Broadcasting TV

SINA Corporation

(NASDAQ:SINA)

$4.3 billion

Technology

Internet Software & Services

TripAdvisor, Inc.

(NASDAQ:TRIP)

$11.0 billion

Technology

Internet information providers

Youku Tudou, Inc.

(NYSE:YOKU)

$4.4 billion

Technology

Internet information providers

Small & Mid-Cap Growth Fund - SMCGF

Company

Ticker Symbol

Enterprise Value

Sector

Industry

LinkedIn Corporation

(NYSE:LNKD)

$27.7 billion

Technology

Internet information providers

MercadoLibre, Inc.

(NASDAQ:MELI)

$5.8 billion

Services

Business services

V.F. Corporation

(NYSE:VFC)

$24.0 billion

Consumer goods

Textile - apparel clothing

The WhiteWave Foods Company

(NYSE:WWAV)

$4.1 billion

Consumer goods

Food - major diversified

TOTL RETURN, YTD, AND PREVIOUS PERFORMANCE AS OF SEPTEMBER 30, 2013

All of the information regarding the Fund's performance from quarter to quarter is compared by a percentage point basis. For example, if a stock is up 25% through the first half of the year, and then is up 20% in the third quarter of the year, the stock has increased by twenty percentage points. Total return is based on realized and unrealized gains from the initial date a position was taken and varies for each company for the years between 2012 and 2013. Where gains have been realized, percentages are included to be considered against the total return.

Transportation Growth Fund - TGF

Holding

Total Return

Realized Gain % of Total Return

2012 Return

YTD Return

Sequential Quarterly Performance

% of Fund*

% of Portfolio

Laredo Petroleum

55.1%

N/A

(14.4%)

67.1%

+ 51.3

22.9%

10.2%

SeaDrill

28.3%

17.3%

N/A

28.3%

+ 14.4

13.7%

6.1%

Textainer Group

2.7%

75.5%

N/A

2.7%

+ 1.4

12.7%

5.7%

*Does not total 100% due to Zipcar being acquired.

Transportation holdings continue to lead the performance of the portfolio through the first 9 months of the year. Laredo Petroleum has set a record for the highest sequential quarterly performance by any of the holdings since the portfolio's inception. SeaDrill has provided both strong appreciation and fixed income.

Media & Advertising Growth Fund - MAGF

Holding

Total Return

Realized Gain % of Total Return

2012 Return

YTD Return

Sequential Quarterly Performance

% of Fund

% of Portfolio

TripAdvisor

67.7%

36.2%

28.5%

81.4%

+ 22.3

13.9%

3.5%

Scripps Networks

46.1%

2.5%

8.3%

35.5%

+ 19.8

19.4%

4.8%

Youku Tudou

38.0%

N/A

N/A

38.0%

+ 41.3

12.7%

2.7%

SINA Corporation

0.1%

N/A

N/A

0.1%

N/A

15.8%

4.0%

Millennial Media

(12.4%)

N/A

N/A

(12.4%)

- 17.9

10.7%

2.9%

The performance for media and advertising holdings should more closely mirror the broader market indices throughout the remainder of the year, due to Velti being eliminated from the fund. SINA Corporation represents a new addition, and Youku Tudou has set the third highest record for sequential quarterly performance since the portfolio's inception.

Small & Mid-Cap Growth Fund - SMCGF

Holding

Total Return

Realized Gain % of Total Return

2012 Return

YTD Return

Sequential Quarterly Performance

% of Fund

% of Portfolio

LinkedIn

82.6%

52.2%

32.5%*

39.1%

+ 17.7

15.7%

2.4%

MercadoLibre

63.1%

17.6%

20.2%

72.3%

+ 34.8

10.6%

3.5%

V.F. Corporation

30.9%

5.5%

N/A

30.9%

+ 5.0

13.8%

4.6%

WhiteWave

20.8%

N/A

(6.0%)

28.5%

+ 33.7

11.9%

4.0%

* LinkedIn's return is based on a 2-year average for 2012.

The remaining small and medium capitalization holdings continue to be the most stable and consistent performing part of the portfolio. MercadoLibre and WhiteWave have both rallied significantly during the third quarter.

BENCHMARK COMPARISON AND PERFORMANCE

The portfolio in its entirety has returned 13.9% YTD. This is an increase of 9.6 percentage points over the second quarter. Comparatively, the S&P 500 has returned 17.9%, a 5.3 percentage increase and the Russell 2500 has returned 24.6%, a 10.0 percentage point increase. The VMGMX fund has returned 24.1%, a 10.2 percentage increase and the FMCSX fund has returned 27.2% a 11.9 percentage point increase. While the portfolio has made up some ground relative to the S&P 500, it continues to be outperformed by other peers.

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When considering the performance of the individual funds within the portfolio, the TGF is outperforming all above-listed benchmarks; however, the MAGR significantly offsets this, heavily influenced by Velti's impact. The SMCGF is up 15.8% YTD as compared to 13.0% overall for 2012; the MAGF is down 14.8% as compared to a 11.3% return for 2012; while the TGF is up 36.3% compared to an overall negative 6.2% performance for 2012.

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Management Activities

All charts in this section are used from Yahoo! Finance.

Recent transactions where entire positions were sold included CH Robinson, Clean Harbors, Discovery, FedEx, Hipcricket Inc., Liquidity Services, Precision Castparts, SAP, and Velti:

Holding

Total Return

Realized Gain % of Total Return

2012 Return

YTD Return

Sequential Quarterly Performance

% of Relative Fund

% of Portfolio

Discovery

39.1%

N/A

25.4%

21.6%

- 0.1

10.0%

2.5%

Hipcricket, Inc.

23.2%

N/A

N/A

23.2%

+ 27.4

6.8%

1.7%

SAP

18.2%

7.1%

24.5%

(8.9%)

- 0.5

5.7%

1.9%

Precision Castparts

14.7%

N/A

N/A

14.7%

- 7.2

7.8%

3.5%

FedEx

13.1%

N/A

N/A

13.1%

+ 10.3

7.9%

3.5%

Clean Harbors

8.9%

N/A

6.3%

2.5%

+ 10.6

21.6%

7.1%

Liquidity Services

3.2%

N/A

16.3%

(4.8%)

+ 7.1

20.7%

6.9%

CH Robinson

(4.9%)

N/A

N/A

(4.9%)

+ 1.4

8.4%

3.7%

Velti

(75.2%)

N/A

(8.6%)

(73.2%)

- 17.3

11.5%

2.9%

The following positions were sold in order to reallocate funds to companies with smaller enterprise values and higher growth potential; Discovery, SAP, Precision Castparts, FedEx, and CH Robinson. Liquidity Services was sold based on the company's volatility and significant reliance on acquisitions for growth. Hipcricket was sold to reduce exposure to the mobile advertising market. Velti was sold (not soon enough) as the company faces the prospect of going bankrupt in the near future.

Positions were not added to any existing holdings during the quarter.

All existing positions that had no buying or selling activity included LinkedIn, Laredo Petroleum, MercadoLibre, Millennial Media, Scripps Networks, SeaDrill, Textainer Group, TripAdvisor, V.F. Corporation, WhiteWave, and Youku Tudou:

LinkedIn, while still arguably overvalued, is continuing to grow strongly. Growth is slowing a little, as advertising revenues declined significantly in 2013 as compared to 2012. Premium subscriber revenues and the talent solutions segment continue to be the primary drivers for growth.

Key trends for the second quarter include the following; nine consecutive quarters of increased registered membership growth (over 238 million), nine consecutive quarters of increased talent solutions customers (over 20,000), and solid growth in page views (12.3 billion) and significant growth in unique monthly visitors (189 million).

The company is estimated to generate $1.5 billion in annual revenue for the year. The company has been growing free cash flow per share at a rate of 67% per year; LinkedIn has no debt. The portfolio position was first initiated in LinkedIn on the IPO date near $85/share. The company seems priced to perfection even below the $200 level.

The company trades at steep premiums with respect to price/book (25.69) and enterprise value to sales (22.25).

Please refer to "LinkedIn Is A Part Of The Individual Investor Fund Portfolio, Should It Be A Part Of Yours?", for a previous overview of the company's prospects in January of this year.

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Laredo Petroleum has climbed to its highest level near $30/share. The company announced in May that it would exit its Anadarko Basin properties via an asset sale providing more resources towards the Permian Basin properties. While Laredo is losing a valuable producing property, the potential for the Permian is what the company is ultimately focusing on.

Laredo spent roughly $920 million on capital expenditures during 2012. For 2013 the capital program remains constant at $725 million, with an expected increase to $900 million during 2014. The biggest impact to profitability and cash flows has been the capital investment program. Debt to equity increased from 146% to 165% in the second quarter, driven by increases in long-term debt to roughly $1.5 billion. Interest expenses are growing at a 125% compound annual growth rate or CAGR as a result. The trend in operating cash flows has improved from the first quarter as Laredo generated its highest quarterly cash flow over the past two and a half years. Oil and natural gas prices have increased from the first quarter as well.

Laredo's potential value lies in the company's methodical and conservative approach towards a strong technically driven plan to take advantage of the Permian property's resources. The company is currently generating over $630 million in revenues; based on June 2013 estimated proved reserves (183 million barrels of oil equivalent), the company is working towards developing a sixteen times amount (3,000 million barrels of oil equivalent) of total resource potential.

The stock has had a strong run-up since the publishing of "Laredo Petroleum, A Company That Will Provide Strong Returns For Patient Investors". Additionally, investors considering the company should review the wealth of data and information from the company's September 2013 investor presentation (justification for the stock run-up).

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MercadoLibre continues to display solid growth and performance despite concerns with Brazil's slowing economy. The company is estimated to grow revenues 25% per year for 2013 and 2014, and earnings 23% per year over the same period.

For second quarter revenues sequential quarterly growth picked up for all geographic segments with Mexico being the exception. Venezuela still maintains the highest contribution margin which continues to expand quarterly. Brazil's contribution margin increased significantly, and Mexico's margin dropped significantly resulting from increased direct costs.

Other key operating metrics of interest for the quarter include confirmed registered users (90.2 million an increase of 4.5 million from last quarter), GMV ($1.7 billion 33% YOY increase), number of items sold (20.1 million 27% increase YOY), and total payments volume ($578 million 40% YOY increase) and total payment transactions (7.4 million 35% increase YOY). All of these trends showed improvement with registered users being the exception, and a minimal decrease in payment transaction YOY.

MercadoLibre displays solid financials when considering margins, free cash flows, etc., however, the company trades at a premium and in the event guidance is missed or the macro environment changes quickly, the stock may face negative impacts. Similar to LinkedIn, the company trades at steep premiums with respect to price/book (19.28) and enterprise value to sales (although not as extreme 13.83).

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Millennial Media represents the remaining mobile advertising company within the MAGF. As the chart below indicates, the company is well off of its highs. Concerns over the company's growth and competition from larger players such as Facebook, Inc. (NASDAQ:FB) are primary drivers for the price decline. After the company's second quarter earnings report, the stock has plummeted testing all-time lows.

The biggest change for the company has been the recent acquisition of Jumptap. Prior to the acquisition, the company had positive TTM operating cash flows with two quarters of positive free cash flow. The company's balance sheet is substantially strong as receivables are able cover all current liabilities, and are even greater than total liabilities. Millennial's cash is just under three times its total liabilities (a reduction mostly due to the acquisition of Metalresolver). The company also entered into a strategic partnership with Adsmovil, a Cisneros Group company.

A lot has changed since the second quarter for mobile advertising. A slew of companies have gone public including Rocket Fuel Inc., Tremor Video, Inc., and YuMe, Inc. Twitter is expected to IPO in November and recently has acquired MoPub. The recent article published attempts to get at the scalability of Millennial Media and others compared with the likes of Google Inc. and Facebook Inc., "Millennial Media: Is This Company s Piece Of The Advertising Pie Too Small?". With most ad-tech public and private companies operating with no profits, it is important for long-term investors to weigh the opportunities.

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Post second quarter earnings, Scripps Networks has finally broken through the $70 level for 2013. Significant lifestyle media properties include Food Network, HGTV, Travel Channel, DIY Network, Cooking Channel, and Foodnetwork.com and Food.com, among others. Earlier in the year, Scripps entered the streaming foray with an agreement with Amazon.com, Inc. (NASDAQ:AMZN). Similar to Discovery, Scripps provides a unique media property for potential direct streaming services.

YOY growth by operating brands are as follows; GAC 41%, Cooking Channel 28%, DIY 15%, Travel Channel 14%, HGTV 13%, and Food Network 3%. Interesting developments for the second quarter include the following; Scripps continues to grow earnings well, long-term debt totaled just under $1.4 billion (66% debt to equity ratio has stayed fairly stable the past two and a half years). The company has increased its annual dividend and continues to grow free cash flows, however dividends to non-controlling interests has also increased of late.

The stock seems to be fairly valued; any pullback near the $60 level would necessitate consideration.

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Seadrill Limited is an offshore drilling contractor providing global drilling services to the oil and gas industry. The types of drilling units in Seadrill's fleet are semi-submersible drilling rigs, drillships, jack-up rigs, and tender rigs. As Seadrill is a complex company, anyone interested in understanding the business and structure should refer to the recently filed 20-F report.

Seadrill has been aggressively modernizing its fleet for deep sea drilling. Over the past six years, the company has spent over $11 billion for its new buildings program. Backlog for Seadrill is near $19 billion.

The company has increased its operating cash flow by an average of 26% per year over the past five years (YTD $1.3 billion), and has relied upon significant leverage to fund its capital expenditure needs. Seadrill is not without risk as the company operates with a myriad of business entities via different forms of interest and ownership. Debt to equity ratios have historically been above 150% (YTD 154% with debt totaling $11.4 billion).

The company's second quarter results generated significant earnings. This was due to the sale of tender rigs which generated close to $2 billion. SeaDrill was able to significantly expand its addition to new builds during the second quarter as a result and maintain its strongest free cash flow position over the past 10 quarters.

Seadrill offers a current 6.8% dividend yield for investors willing to take on the company's risks.

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Textainer Group is the world's largest lessor of intermodal containers based on fleet size. The company operates in the following core segments, container ownership, container management, and container resale. Textainer has a long track record in the industry operating since 1979; the company's top 25 customers, as measured by revenues, have leased containers from Textainer for an average of over 25 years.

Textainer has invested roughly $3.3 billion over the past eight years to expand its container business operations. Over that same time period the company has generated $1.3 billion in operating cash flow. This has necessitated the company to use leverage with an average increase of 24% per year (YTD $2.5 billion total debt obligations).

The company's average fleet utilization rate has dropped below 95% for the first time over the previous 10 quarters. Textainer's debt to equity ratio has climbed to 220%. The company currently pays a 4.5% dividend yield.

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TripAdvisor offers a business model focused on travel user-generated content and is the leading travel site based on travel reviews and opinions. The primary distinguishing factor between TripAdvisor and other travel site operations is that TripAdvisor does not directly receive commissions for merchant bookings, but rather primarily relies upon click-based advertising revenues.

Key trends based on second quarter results include the following; achievement of over 100 million reviews and opinions and consistent sequential quarterly growth in unique visitors per month via mobile devices at 27% (79 million). TripAdvisor has generated over $850 million in revenues and over $220 million in profits YTD.

Debt to equity has steadily declined from 150% to below 45% over the past two and a half years. Similar to LinkedIn, free cash flow per share is growing over 74% per year, however, price/book (12.92) and enterprise value to sales (12.80) are at premiums.

Please refer to TripAdvisor: The Future Travel Industry Online Advertising King for an overview of the industry and company's prospects earlier this year.

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V.F. Corporation, organized in 1899, is a worldwide leader in branded lifestyle apparel, footwear and related products. The company owns a significant amount of well-established brands including The North Face, Timberland, Vans, Kipling, Napapiijri, Reef, Eastpak, JanSport, SmartWool, lucy, Eagle Creek, Wrangler, Lee, Lee Casuals, Riders, Rustler, Timber Creek by Wrangler, Rock & Republic, Red Kap, Bulwark, Horace Small, Majestic, Nautica, 7 For All Mankind, Splendid, and Ella Moss.

Interesting developments for the second quarter include the following; long-term debt remained consistent at $1.4 billion (36% debt to equity ratio consistent with historical trends), acquisitions over the past couple years have pushed goodwill and intangibles above 50% of total assets, dividends paid out have increased from $333-366 million and dividends per share have continued to increase, and gross margin has improved considerably since December 2011 (+ 330 basis points).

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WhiteWave manufactures and sells products in three categories; plant-based foods and beverages, coffee creamers and beverages, and premium dairy. Many consumers are quite familiar with WhiteWave's products including Silk (57% market share), Alpro in Europe (38% market share), International Delight (30% market share), Land O Lakes half & half (22% market share), and Horizon Organic (43% market share).

Interesting developments for the second quarter include the following; improvements to gross margin (+ 150 basis point improvement over the past year and a half), declines in long-term debt totaling roughly $766-707 million (99-82% debt to equity ratio), and a decline in goodwill and intangibles near 50%. Growth YOY for North America remained constant at 11%, Europe increased to 13%.

WhiteWave has completed its spin-off from Dean Foods Company (NYSE:DF) majority ownership. The company's earnings growth has stalled recently and based on estimates, is posed to grow roughly 16% per year since 2009. Now that WhiteWave can focus on its direct businesses, the company has the potential to diversify its product offerings. Speculation has surfaced regarding WhiteWave now being an acquisition target.

The company seems to be fairly valued at the moment, any revisit to the sub-$15 levels would provide an excellent entry point.

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Youku Tudou represents the first Chinese-based company to be added to the portfolio. The company offers a unique opportunity to own a leading Internet television company. The company is engaged in the development of professionally produced content (similar to Hulu), user-generated content (similar to YouTube), and in-house productions (new emerging trend for digital produced content).

Through these core products Youku Tudou also provides online video search, localized Youku Tudou community, and Youku Premium (similar to Netflix, commercial free) among others. The company is experiencing strong growth in mobile engagement. Youku Tudou generates most of its revenue from advertising through these different product platforms. Please refer to Youku Tudou: An Investment Opportunity That Won't Last For Long for an earlier review of the company in May of this year.

Youku like Netflix, Hulu, and Amazon purchases professionally developed content. The company is estimated to grow revenues just under 60% over the next two years (over $700 million by 2014), however, Youku has never earned a profit for a given year, nor has the company been able to produce positive free cash flows. Youku has consistently generated positive operating cash flow, and the company has roughly two times cash versus total liabilities, and no debt. For the second quarter, revenues increased over 100% YOY and gross margin increased by + 530 basis points YOY.

Whether or not the company will be able to become profitable is a legitimate concern. It is still speculative as to whether YouTube is profitable. Youku does have a more diversified business model, and with the company's alignments with Sina Corporation's Weibo and other major Chinese social networks, and technology application partnership with Qualcomm, among other items; Youku may be poised for future upside.

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The only company where a new position was taken included SINA Corporation:

SINA Corporation is an Internet media company and serves as the second Chinese-based company to be added to the portfolio. The company's properties include digital media network portals and Weibo.com for social media. The company generates the majority of its revenues from digital advertising, roughly 75%.

For the second quarter highlights include 20% revenue growth YOY, $1.2 billion in cash and short-term investments representing roughly three times total liabilities, minimal intangible assets, and a price/book value of 3.35 and enterprise value to sales of 7.48. Over the most recent TTM, the company has returned to positive free cash flows.

SINA was added to the portfolio based upon the potential of Weibo. Weibo has garnered significant attention, most recently by the Alibaba Group's investment stake. The timing was also meant to align the upcoming IPO of Twitter. SINA's valuation levels are more fairly valued than many other technology companies, however, the company's transition to mobile and increased investment for its Weibo platform are not without risk. These transitions to the business model have definitely had an impact on earnings and cash flows of late, and it will remain to be seen how these investments pay off over time.

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HOLDINGS THAT HAVE BEEN ACQUIRED

Since the portfolio's inception last year, three holdings have been acquired. The table below provides an overview of the realized gains as a result of these acquisitions.

Holding

Date Purchased

Date Acquired

Acquiring Entity

Total Return

Portfolio Fund

Ancestry.com

Fall 2011

December 2012

Permira

(0.4%)

SMCGF

Kayak Software Corp.

October 2012

March 2013

Priceline.com

21.6%

MAGF

Zipcar

2011, 2012, & 2013

March 2013

Avis Budget Group

34.3%

TGF

Over the course of the remainder of the year and based on recent speculation, companies where a buyout would most likely occur include Millennial Media or WhiteWave.

RADAR SCREEN

In past updates the radar screen section has listed companies with brief explanations as to some merits for investment consideration. From now on the following Instablog, Radar Screen will be provided for viewers to consider if interested.

For each quarterly update, the top company being considered will be expanded upon. For this quarter, the top company being considered is HomeAway, Inc. (NASDAQ:AWAY). The company offers added exposure into travel industry under a different model versus TripAdvisor. HomeAway operates an online marketplace for the vacation rental industry worldwide. Its vacation rental properties include homes, condominiums, villas, and cabins to the public on a nightly, weekly, or monthly basis.

HomeAway is the market leader and is valued fairly and potentially at a discount if revenues and margins improve in the near-term; price/book (4.29) and enterprise value (6.76). The company is expecting revenue growth over 20% for 2013 and 2014, and is profitable and generates substantial free cash flow. The company may serve as a potential buy-out candidate as well.

Unlike companies like Priceline or TripAdvisor, the company has created a market that previously did not exist, and does not depend upon advertising revenue.

NEXT UPDATE

The next IIF portfolio update and review will occur at the end of the year, December for 2013.

Source: Individual Investor Portfolio Update: It's Time To Get Focused Back On Growth