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Being an active investor in 2011 took an act of faith. The market, as measured by any of the indices, gyrated up and down like a yo-yo. The U.S. government’s apparent inability to come together with a cohesive and sensible plan to address either the current economic malaise or the looming crisis undermines the markets and the confidence of the public in the institutions that hold us together as a nation. Europe is tottering on the abyss of bankruptcy. If southern Europe and the other periphery members of the European Union fail, the newer members of the Union will surely fail as well. At the moment, the frugal Germans are holding things together. China is not the engine of growth it was just a year ago. Rising salaries and commodity prices are pushing Chinese manufacturing costs higher and slowing the pace of growth. If you look carefully, you may see the beginnings of a “Spring” developing in China today. Civil unrest, which grows daily, will also impact China’s ability to grow its economy.

The markets have reacted in predictably to this uncertainty. On a year-to-date basis, with some exceptions, the major indices are down on the year. The Dow Industrials are up about 2.50%. The Standard & Poor’s 500 is off about 3.02%; the S&P Mid-Cap is down 5.69% and the S&P SC Index is down 2.87%. The broader Russell 1000 is down 3.47%; the Russell 2000 is off 7.86% and the Russell 3000 is off 3.83%.

If the markets, as measured by the indices, did not fare well, it is not to say that there were no opportunities for capital appreciation in 2011. We began the year with a list of 19 companies we thought would do well. Our selections were based on the premise that consistency of performance over an extended period of time would be predictive of future performance. We postulated that companies with strong balance sheets and a history of generating operating income and free cash flow year after year would outperform the market. Our posting presumed the portfolio would be held for a year and then using the same criteria, be rebalanced. We also emphasized that in the real world, this would be an active portfolio requiring changes as circumstances warranted. The results of this static portfolio are encouraging. Returns, excluding dividends, averaged 9.25% for the period 12/31/10 through 12/16/11. Returns ranged from a high of 83.42% for Hanson Natural Corp. (HANS) to a loss of 35.03% for NetApp (NASDAQ:NTAP).

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AAP Advanced Auto Parts $66.15 $68.00 2.80

Advance Auto Parts, Inc. is a specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items primarily operating within the United States. For the twelve month period ending 10/11, sales increased to $6,113.0 million from $5,925.2 million in F11 and $5,412.6 million in F10. In F11, operating cash flow decreased to $666.2 million from F10 levels of $699.7 million but increased again during the TTM to $680.7 million. EPS diluted from continuing operations grew from $2.83 in F10 to $4.77 for the trailing twelve months ending 10/11. Free cash flow, net of dividends, remained stable in the $5.09-$5.011 range. A dividend of $0.24 per share has been paid out over the years. Operating margins have expanded from 8.4% in F10 to 10.4% presently. The company’s payout ratio, 4.9% can be expanded by management. AAP’s debt level of $599.4 million appears manageable when compared to free cash of about $480 million.

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AAPL Apple Inc. $322.56 $381.02 18.12

Apple designs, manufactures and markets a range of personal computers, mobile communication and media devices, and portable digital music players, and sells a range of related software, services, peripherals, networking solutions, and third-party digital content and applications. Apple’s sales for F11 ending 9/11 totaled $108,249 million compared to $65,225.0 million in F10 and $42,905.0 million in F9. Operating cash doubled in F11 to $37,529.0 million from $18,595.0 million in F10. EPS diluted continuing nearly doubled from $15.15 in F10 to $27.67 in F11. Operating margins expanded to 31.2% from 28.2% in F10. Apple has no long term debt and pays no dividend. Should Apple to decide to pay a dividend, they have $25,952.0 million in their pocket.

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BCPC Balchem Corp. $33.81 $39.95 18.16

Balchem Corporation consists of three business segments: ARC Specialty Products; Food, Pharma and Nutrition; and Animal Nutrition and Health. Through ARC Specialty Products, Balchem provides specialty-packaged chemicals for use in healthcare and other industries. The Food, Pharma and Nutrition segment provides proprietary microencapsulation, granulation and agglomeration solutions to a variety of applications in the human food, pharmaceutical and nutrition marketplaces. The Animal Nutrition and Health segment manufactures and supplies products to numerous animal health markets and certain derivative products into industrial applications.

Balchem is increasing its dividend by 20% to $0.18 per share. BCPC has consistently grown its dividend over the years all the while maintaining a payout ratio of about 11%-12%. Sales have grown to $291.9 million for the twelve month period ending 9/11. In F10, sales were $255.1 million and in F09, $219.4 million. Over the past several years, operating cash flow has fluctuated between $39.0 million to $48.1 million. EPS diluted continuing grows each year. In F09, EPS-D-C was $0.93 and increased to $1.28 for the TTM.

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BBBY Bed Bath & Beyond $49.15 $61.22 24.56

Bed Bath & Beyond Inc., along with its subsidiaries, is a chain of retail stores, operating under the names Bed Bath & Beyond, Christmas Tree Shops, Harmon and Harmon Face Values (Harmon) and buy BABY. In addition, the Company is a partner in a joint venture, which operates two stores in the Mexico City market under the name Home & More. BBBY does not pay a dividend though it generated $3.51 per share in earnings in the twelve months ending 8/11 and $3.07 in F11. Sales grew to $9,122.7 million from $8,758.5 million in F11. Operating cash flow has grown each year since 2009 and now stands at $1,069.4 million. The company has no long term debt and sells at 16X next year’s estimated earnings of $3.82.

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CHRW C.H. Robinson Worldwide $80.19 $66.59 (16.96)

C.H. Robinson Worldwide is a third-party logistics company. The Company provides freight transportation services and logistics solutions to companies of all sizes, in a variety of industries. The market value of CHRW decreased significantly against the broader market in spite of the company reducing the number of shares outstanding and paying a dividend of $1.16 per share over the last twelve months. In fact, dividends have increased in each of the last five years and over the past twelve months. Sales grew to $10,093.4 million in the twelve months ending 9/11 as compared to $9,274.3 in F10 and $7,577.2 million in F09. EPS diluted has grown to $2.57 from $2.13 in F09. The company carries no long term debt and its payout ratio is 44.8%. With a current PE of 25.9X and a PEG of 1.7, the current market price may still be considered high.

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DLTR Dollar Tree $56.08 $82.82 47.68

Dollar Tree, Inc. is an operator of discount variety stores offering merchandise at the fixed price of $1. As of January 29, 2011, the Company operated 4,101 discount variety retail stores. Its stores operate under the names of Dollar Tree, Deal$, Dollar Tree Deal$, Dollar Giant and Dollar Bills. Dollar Tree has a current PE of 22.1X of $3.75 of trailing EPS. With a five year EPS growth rate of 23.7%, the company has a PEG of 0.9. Its PEG based on estimated EPS of $4.02 and estimated growth of 18.7%, is 1.1X. The company pays no dividend though it grew its EPS 32% over the last twelve months and about 31% over the last three years. Sales grow at the rate of 11%-12% a year. The company reports free cash flow of $3.46 per share. The company has long term debt of about $250 million and cash of $280.2 million.

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FDS FactSet Research Systems $93.76 $87.02 (7.19)

FactSet Research Systems Inc. is a provider of global financial and economic information, including fundamental financial data on tens of thousands of companies worldwide. FDS is a small player when compared to its main competitor, Bloomberg. As of 11/11, the company reported sales of $749.7 million as compared to F11 sales of $726.5 million and F10 sales of 641.1 million. The three years growth rate for sales is 8.1%. For the same period, EPS diluted grew to $3.72 from $3.61 in F11 and $3.13 in F10. The three year growth rate for EPS is 13.0%. The company pays a dividend of $1.04 per share that yields 1.2%. Dividends are growing at the rate of 18.6%. The company has no long term debt and has free cash flow, net of dividends, of $3.54 per share.

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FDO Family Dollar Stores $49.71 $57.92 16.52

Family Dollar Stores operates a chain of more than 7,000 general merchandise retail discount stores in 44 states, providing primarily consumers with a selection of merchandise in neighborhood stores. The company’s fiscal year ended 08/11. For F11, sales grew to $8,547.8 million from $7,867.0 million in F10 and $7,400.6 in F09. The three year growth rate for sales is 7.0%. EPS diluted grew to $3.12 from $2.62 in F10 and $2.07 in F09. The EPS growth rate is 23.4%. Analysts estimate that EPS will grow 15.3% over the next 3-5 years. FDO has a PEG to Estimated EPS & Growth ratio of 1.0. FDO also pays a dividend of $0.70 per share that yields 1.2% and grows at the rate of 12.6% per year. The company has long term debt of $532.4 million and cash of $237.4 million. Long term debt is less than 3X free cash flow.

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HANS Hanson Natural Corp. $52.28 $95.89 83.42

Hansen Natural Corporation (Hansen) is a holding company. Hansen develops markets, sells and distributes alternative beverages. Over the trailing twelve months, sales grew 26.3% and for the last three years at 13.0%. EPS diluted grew 25.0% in the past year and 14.7% for the past three years. Sales for the twelve months ending 9/11 were $1,611.9 million compared to $1,303.9 million in F10 and $1,143.3 million in F09. EPS diluted grew from $2.21 in F09 to $2.90 for TTM. Analysts estimate F11 EPS of $3.09 and F12 EPS of $3.70. The forward PE is 31.0X. Hanson has no long term debt and pays no dividend. Operating margins are about 26.8% and net margins 16.8%.

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JOY Joy Global $86.75 $75.17 (13.35)

Joy Global Inc. is a manufacturer and servicer of mining equipment for the extraction of coal and other minerals, and ores. The company’s fiscal year ended 10/11. Year-over-year sales growth was strong at 25.0% but much weaker, at 8.8%, over the past three years. Sales grew to $4,403.9 million in F11 from $3,524.3 in F10 and $3,598.3 million in F09. EPS diluted grew 30.0% to $5.72 in F11 as compared to $4.40 in F10 and $4.41 in F09. The three year EPS diluted growth rate is 18.4%. Analysts project 3-5 year EPS growth at 17.9% and next year’s EPS of $7.23. JOY pays a dividend of $0.70 per share which provides a yield of 0.9%. The company reported free cash flow, net of dividends, of $3.01 for F11, down from $4.17 in F09. JOY has long term debt of $1,356.4 million and cash of $288.3 million.

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NTAP NetApp $54.96 $35.71 (35.03)

NetApp is a provider of storage and data management solutions. The Company has a portfolio of application, virtualization, cloud, and service provider solutions. The company reports a trailing EPS of $1.64 and PE of 21.8X. Analysts project F12 EPS at $2.39 and a forward PE of 14.9X. Sales grew 23.9% over the trailing twelve months to $5,683.1 million compared to the year-ago period of $4,588.2 million and F11 sales of $5,122.6 million. The three year sales growth rate is 15.7%. EPS grew to $1.64 for the trailing twelve months compared to $1.55 in the year-ago period and $1.87 in F11. Analysts forecast 3-5 year EPS growth of 16.1%. The company does not pay a dividend and has $1,175.8 million in long term debt and $4,641.6 million in cash.

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NVO Novo Nordisk A/V (ADR) $112.57 $111.53 (0.92)

Novo Nordisk A/S is a healthcare company. It is engaged in the discovery, development, manufacturing and marketing of pharmaceutical products. It is also engaged in diabetes care. It has a range of diabetes product portfolios, including a portfolio of modern insulins and the first human once-daily GLP-1 analog. NVO provides a dividend yield of 1.7% on a dividend of $0.44 per share. In F10, the dividend was $1.80 per share. Previously, NVO paid dividends on a regular basis but stopped this practice in the quarter ending 6/10. Current sales are about $11,589.0 million as compared to $10,945.4 million in F10. Trailing EPS is $5.03 as compared to $3.91 in the year-ago period and $4.43 in F10. The three year growth for sales is 13.3% and 22.5% for EPS diluted. The company has long term debt of $90.4 million and cash of $3,224.5 million. The company is free cash flow positive and is growing free cash at 32% per year.

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NVEC NVE Corp $57.83 $55.23 (4.50)

NVE Corporation develops and sells devices that use spintronics, a nanotechnology that relies on electron spin rather than electron charge to acquire, store and transmit information. The Company manufactures spintronic products, including sensors and couplers that are used to acquire and transmit data. NVEC has a trailing PE of 20.6X on EPS of $2.68. A year ago, EPS was $2.61. For next year, the one analyst that follows this company estimates EPS at $2.76. The estimated 3-5 year EPS growth rate is 25.0%. In the past five years, EPS grew at the rate of 47.9%. A year ago, sales were $29.8 million. For the last twelve months, sales grew to $31.0 million. The three year sales growth rate is 15.0%. NVEC does not pay a dividend and it has no long term debt. The current ratio is 14.5X.

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ORCL Oracle Corp. $31.30 $29.21 (6.68)

Oracle Corporation, incorporated in 2005, is an enterprise software company. The Company develops, manufactures, markets, distributes and services database and middleware software, applications software and hardware systems, consisting primarily of computer server and storage products. Oracle has seen a ramp up in its sales growth rate. For the trailing twelve months, sales grew at the rate of 24.7% as compared to the three year growth rate of 16.7%. sales are up to $36,495.0 million versus $29,269.0 million one year ago. In F11, sales were $35,622.0 million and in F10, $26,820.0 million. EPS diluted also grew briskly in the last twelve months, at the rate of 40.8%, well above the three year average of 16.4%. EPS went to $1.76 for the twelve months ending 8/11 compared to $1.25 one year ago, $1.67 in F11 and $1.21 in F10. Oracle pays a dividend of $0.22 per share which provides a yield of 0.8%. The dividend grew 10% this past year. The company has $14,789.0 million in long term debt that is off-set by $31,660.0 in cash. Free cash, net of the dividend, is $2.17 per share. The company is consistently profitable with stable operating margins in the 33%-35% range.

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PETM PetSmart, Inc. $39.82 $50.49 26.80

PetSmart is a specialty provider of products, services and solutions for the lifetime needs of pets. The Company offers product assortment with pet services, including grooming, training, boarding and day camp. All its stores offer complete pet training services and feature pet styling salons that provide grooming services. PETM has a trailing PE of 21.0X on EPS of $2.41 and a forward PE of 19.9X on estimated earnings of $2.54. EPS for the last twelve months is $2.42 compared to $1.86 for the year-ago period. F12 EPS estimates range from $2.45 to $2.58. The consensus is $2.54. Sales jumped to $5,995.6 million in the last twelve months from $5,579.5 million a year ago and $5,693.8 million in F11. Sales are growing at the rate of 7.0% per year and EPS diluted at the rate of 29.6% for the trailing twelve months and 1.0% for the three years. PETM pays a dividend of $0.53 per share, up from $0.48 in F11 and $0.33 in F10. The payout is a sustainable 21.7%. PetSmart has long term debt of $512.0 million and $290.9 million in cash.

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PCLN Priceline $399.55 $457.08 14.40

Priceline.com Incorporated is a global online travel company that offers its customers a range of travel services, including the opportunity to purchase hotel room reservations, car rentals, airline tickets, vacation packages, cruises and destination services in a price-disclosed manner. PCLN reports EPS TTM of $18.90 versus $9.28 a year ago. It grew sales to $4,096.1 million for the TTM from $2,895.4 million a year ago. The three year sales growth rate is 29.8% and the three year EPS diluted growth rate is 50.3%. The trailing PE is 24.2X and the forward PE is 19.8X on consensus EPS of $23.14. The company does not pay a dividend and has just $82.8 million in long term debt with $2,404.7 million in cash. The operating margin expands each year and now stand at 31.3%.

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SBUX Starbucks $32.13 $43.48 35.33

Starbucks Corporation (Starbucks) is the roaster and retailer of specialty coffee in the world, operating in more than 50 countries. Starbucks offers a dividend yield of 1.6% on a dividend of $0.56 per share. The payout ratio is 33.7% which suggests room for increase. For F11 ending 10/11, sales were $11,700.6 million, up from $10,707.4 million in F10. Earning grew 31% to $1.62 from $1.24 in F10. Analysts expect F12 EPS to grow to $1.82. The long term EPS growth rate is projected to be 17.4%. The operating margin is up to 14.8%, the highest it has been in the last five years and the net margin is also at a high at 10.6%. Long term debt is $549.5 million and cash is $2,050.7 million.

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USNA USANA Health Sciences $43.45 $29.91 (31.16)

USANA Health Sciences, Inc. develops and manufactures high-quality, science-based nutritional and personal care products. Analysts estimate that the company’s 3-5 year EPS growth rate is 16.0%. For the past twelve months, EPS diluted grew 14.5% to $3.14 from $2.76, a year-ago. The three year EPS growth rate is a muted 3.0%.However, the three analysts that have EPS estimates for calendar year 2011 the consensus is $3.23 and $3.50 for calendar 2012. Sales grew strongly over the last twelve months to $573.5 million from the year-ago sales of $496.9 million. In F11, sales were $517.6 million and in F10, $436.9 million. USANA does not pay a dividend and it has no long term debt. Its operating margin is 13.1% and the net margin is a stable 8.7%. USNA trades at an EV/EBITDA multiple of 5.45X.

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VAR Varian Medical Systems $69.28 $63.19 (8.79)

Varian Medical Systems, Inc. is engaged in the design, manufacture, sale and service of equipment and software products for treating cancer with radiotherapy, stereotactic radiosurgery and brachytherapy. Varian has an EPS TTM of $3.43 and a PE TTM of 18.4X. The estimated EPS for F12 ending 9/12 is $3.97. The forward PE is 15.9X. The estimated 3-5 year EPS growth rate is 12.7%. For F11, sales were $2,596.7 million or 10.2% higher thanF10 at $2,356.6 million. EPS diluted continuing of $3.44 for F11 is 15.5% above F10 EPS diluted continuing of $2.96. VAR has cash of $583.7 million and long term debt of $6.3 million. The company does not pay a dividend.

Of the 19 companies we started with, ten experienced an increase in price and nine decreased. Six of the nine decliners dropped more than the market indices. Is there a factor that distinguishes one group from another? We think that valuation as measured by Enterprise Value to EBITDA may have been an answer. The ten companies that experienced an increase in stock value had an average EV/EBITDA ratio of 13.05 on 12/31/10. The nine decliners had an average EV/EBITDA ratio of 17.55X.

Source: 2011 Was Good To The Faithful