Value Investor Insight 2006-12

ValueInvestor
December 22, 2006
The Leading Authority on Value Investing
Idiosyncratic Investing
There are many risks in investing, but Lee Ainslie goes to great lengths to limit
his to those hes comfortable with: his and his team's ability to pick stocks.
s a University of North Carolina

M.B.A. student in 1990, Lee Ainslie
saw his career path take a turn after
serving on a project team with one of the
schools board members, Julian Robertson.
Tiger wasn't that famous then, but the
opportunity to work with Julian just felt
right for me, Ainslie says.
Ainslies sound judgment continues to
pay off for his investors. His Maverick
Capital now manages over $9 billion and its
flagship fund, opened to new investors in
1995, has returned an annual 16.5% after
fees, vs. 11.0% for the S&P 500.
Charging his team to know more about
the companies they follow than any noninsider, Ainslie is finding opportunity in
such varied fields today as IT outsourcing,
hotels and electronics retailing. See page 2
INVESTOR INSIGHT
INSIGHT
Inside this Issue

F E AT U R E S
Investor Insight: Lee Ainslie

Deploying a deep team to find mispriced value around the world and
finding it in Accor, Circuit City,
Cognizant and NHN Corp. PAGE 1
Investor Insight: Robert Jaffe
Finding long runways of yet-to-berecognized opportunity in Lamar
Advertising, Cabot Corp., Copart and
Norfolk Southern.
PAGE 1
Lee Ainslie
Maverick Capital
Investment Focus: Eclectic, but often
seeks companies producing high and sustainable free-cash-flow yields relative to their
prospective growth rates and risk profiles.
Uncovering Risk: Sub-Prime

Tempted by the low valuations and
high yields of sub-prime mortgage
lenders? Read this first.
PAGE 17
A Fresh Look: Magic Formula
The last one has done well, so here's a
new portfolio using Joel Greenblatt's
PAGE 18
magic formula.
A Different Twist
Editors Letter
Some of the most important things to
look for when on the prowl for the
next Warren Buffett.
PAGE 19
When big waves of change start hitting industries and companies, markets
inevitably over- or under-react. Thats when Robert Jaffe gets interested.
INVESTMENT HIGHLIGHTS
INVESTOR INSIGHT
Robert Jaffe
Force Capital Management
Investment Focus: Seeks companies for
which significant operational or industry
change is occurring, but is not being
appropriately recognized by the market.
n eight years working closely with

hedge-fund superstar Steven Cohen of
SAC Capital, Robert Jaffe was the
longer-term voice in an intense trading
environment. It doesnt get all the attention, but there was always plenty of fundamental business analysis going on at SAC,
says Jaffe.
Focusing on fundamentals has served
Jaffe well since starting Force Capital in
mid-2002. Now with $1.2 billion in assets,
his core long/short fund has returned an
average 17.0% annually after fees, vs.
13.0% for the S&P 500.
Today Jaffe is finding big runways of
opportunity were not paying for in a
diverse range of industries, including outdoor advertising, specialty chemicals, vehiSee page 10
cle salvage and railroads.
INVESTMENT SNAPSHOTS
PAGE
Accor
Cabot Corp.
13
Circuit City
Cognizant Technology
Copart
14
Lamar Advertising
12
NHN Corp.
Norfolk Southern
8
15
Other companies in this issue:

Accenture, Accredited Home, Boston
Scientific, Corrections Corp., Fieldstone,
Freeport-McMoRan, Fremont General,
Gap, Infosys, Marathon Oil, McKesson,
Motorola, National Semiconductor, New
Century, NovaStar, Nucor, Quest
Diagnostics, Sears, Southern Copper, Teck
Cominco, UnitedHealth, Wipro
www.valueinvestorinsight.com
I N V E S T O R I N S I G H T : Lee Ainslie
Investor Insight: Lee Ainslie

Maverick Capitals Lee Ainslie (along with Steve Galbraith, Chris Laporte, Michael Pausic, Andrew Warford and Brian Zied)
explains why rationality will be returning to equity markets, why hes never had a down year, the reasons behind his Sheet
of Shame, and what he thinks the market is missing in Accor, Circuit City, Cognizant and NHN Corp.
You were only 29 when you started your
own firm. Has your investing strategy
evolved since then?
Lee Ainslie: Before I started Maverick, I
gave a lot of thought to how to maximize
our exposure to what I perceived to be
my investment strengths and minimize
our exposure to my weaknesses. I think
I'm a pretty good stock picker, but I'm
probably not as good at timing market
swings or sector rotations.
So from the beginning we've maintained low net exposure typically
between 25-75% through a balance of
long and short investments within every
region and industry in which we invest.
The goal is to reduce the impact of
macroeconomic factors and to shift most
of the risks to how well we pick stocks.
We operate in six primary industry
sectors: consumer, financials, healthcare,
industrials, media/telecom and technology. Our regions are Japan, emerging markets, Europe, Latin America and North
America. If we're very bullish on a particular region or a particular industry, our
net exposure to it might drift up, but our
long/short ratio which I think is a better
measure of how hedged you really are is
rarely going to go higher than 1.7:1.
Just to demonstrate how much more
telling a long/short ratio is than net exposure, let me walk through a brief example: Say you're 75% long and 25% short
your net exposure is 50% and your
long/short ratio is 3:1. If the market's
down 15%, a very talented manager
might add 5% of alpha on both the long
and short side his longs may only be
down 10%, while his shorts may be down
20%. If you do the math, in that scenario
that manager is down 2.5%. At
Maverick, we are more likely to be 150%
long and 100% short, so we would have
the same net exposure of 50%, but a
long/short ratio of only 1.5:1. In that
December 22, 2006
same scenario, we would be up 5%, even

though we had the exact same net exposure and underlying performance of our
longs and shorts. Our low long/short
ratio makes our performance more
dependent upon our stock-picking skill
and less dependent upon the markets.
How do you typically generate ideas?
LA: : We believe our job is to look out
two or three years, to identify who's winning and who's losing in each industry,
and to recognize the discrepancies
between our views and the market's
views. Given the depth of industry experience and resources our sector heads
have, it would be unusual for someone to
call us with an idea that we don't already
have some knowledge of. As a result, the
vast majority of our ideas come from
thinking through the ramifications of
industry developments or the recognition
of changes within a market as opposed to
the one-off, Here's an idea, let's chase it
down approach.
In cases in which we already have indepth knowledge of a stock, we can react
very quickly when investment merits
change and we conclude something is
playing out differently than we previously thought. When were less familiar with
a stock, the evaluation process will typically take months. Wed like our due diligence to be more thorough than most, but
we don't have any magic formulas to
understand a business. We meet with
competitors, suppliers, customers and
anyone else whom we think may shed
light on the operating trends or strategic
direction of a company.
We also spend a great deal of time
evaluating management. Our core funds
have been closed to new investors since
1997, but we have made exceptions for
investors who we believe can help us
make better investment decisions. Our
Lee Ainslie
Lessons from Tiger

Having trained as a systems engineer, Lee
Ainslie turned to investing in 1990, joining
legendary investor Julian Robertsons Tiger
Management. After three years, at only 29,
he left to start Maverick Capital, staked in
the business by the Wyly family of Texas.
What lessons persist from Ainslies time at
Tiger? First and foremost was the importance of integrity and how your reputation is
everything, he says. Julian also was maniacal on the importance of management:
Have you done your work on management? Yes, sir. Where did the CFO go to
college? Umm, umm. I thought you did
your work? He wanted you to know everything there was to know about the people
running the companies you invested in.
I'd have a stock in the portfolio that I hadnt discussed with Julian for a while and
hed walk in and say, Should we buy more
of this or sell it? He meant it you either
had the conviction to buy more, or he had
other places to put the money.
Not all aspects of Robertsons style have
transferred. Julian's macro bets on an
industry or country or interest rates were an
important driver of Tigers success, says
Ainslie. Im not sure I have those same
skills, so thats not something we do.
Value Investor Insight 2
investors' collective insight on different

individuals and businesses has been
incredibly helpful. Our entire investment
team has also had training in interview
techniques and lie detection. I don't think
you can spend too much effort trying to
understand the quality of management
at the end of the day, it's the most important investment criterion. I've learned
over time that great management teams
deliver positive surprises and bad ones
deliver negative surprises.
What are the main things you look for in
management?
cash flow after the capital spending necessary to maintain a companys competitive
position. Across most businesses we consider that a consistent, important measure
of value, which may make us sound like a
value investor. But over the years weve
owned many growth stocks some would
have considered expensive as well as
many down-and-dirty value stocks.
While we certainly want to buy stocks at
values we consider attractive, we also recognize the value of growth.
ON INVESTING OVERSEAS:
LA: Integrity, intelligence, competitive

drive and, increasingly, a proven desire to
create value for all shareholders. We just
find the odds of success to be too low in
situations where we have to fight to get
management to work on our behalf.
Wed much rather work as partners.
In an ideal world, Id like to be
Beyond management quality, on what

else do you focus?
Steve Galbraith: I'd argue that this idiosyncratic nature is one of the reasons
we've been successful through different
cycles. We were able to make money in
both the building up and the subsequent
bursting of the Internet bubble, for example. [Note: Since 1995, Maverick has
never had a down year and has outperformed the market through each of 12
down markets, defined as having two or
more consecutive months of negative
S&P 500 returns.] We don't want people
here putting themselves in a box because
we only do certain things and not others.
LA: This may sound obvious, but we

work very hard to understand the fundamentals of a business and to identify the
key drivers behind a company's potential
success or failure. We end up focusing on
many of the factors youd expect competitive positioning, returns on capital,
organic growth, etc. but always with an
eye towards identifying the biggest differences between our view and the view of
the market. Everything doesn't have to
be the next Microsoft we may invest in
a company because the market thinks it's
going to fail, and we don't.
What type of valuation do you typically
want to see?
LA: I've always believed that as an
investor you have to be comfortable with
a number of different valuation
approaches and methodologies, and that
part of the art of investing is to recognize
which approach is most appropriate in
different situations. The metric we tend
to look at most frequently is sustainable
free-cash-flow yield in other words, free
December 22, 2006
more selective in the U.S. and

take advantage of more opportunities outside the U.S.
Are there industries or sectors you avoid?

LA: We tend to be less invested in areas in
which there's less differentiation between
the winners and the losers and in which
results are more macro-driven than company-specific. We typically do not have
significant investments in utilities or
REITs, for example.
Do you have any cap-size restrictions?
LA: Were willing to look at a company of
almost any size and we've owned some of
the biggest, but we generally focus our
resources on mid-caps, in the $5-10 billion range. There's no grand design to

that, it just tends to be where we find the
most opportunities. I would add that
there's a larger discrepancy than usual
today between the cap size of our longs
and shorts with longs having larger
market caps and shorts smaller market
caps than usual.
How active are you internationally?
LA: From day one we've had a significant
portion of our assets invested outside the
U.S. it's currently about 30% of our
gross exposure. This is probably too
broad a generalization, but in our view
non-U.S. markets tend to be less efficient
than the U.S. market. If you look at our
core opportunity set, which we define as
the 3,000 or so stocks that trade more
than $10 million a day, on average we
took advantage last year of about 12% of
the available opportunities in the U.S.,
6% in Europe and 3% in Asia. In an
ideal world, I'd like to be more selective
in the U.S. and take advantage of more
opportunities outside the U.S.
That will only happen if we have the
bottom-up ideas that warrant a place in
the portfolio. To increase our chances of
finding those, we've changed how we
organize our international efforts. I used
to think it was more important to have
individual sector team members in the
same office, so they could more easily
learn from each other and compare notes.
Now we're putting more people on the
ground, closer to the companies they
track, in order to improve the quality and
frequency of their external relationships.
While managing eight offices around the
world has its challenges, we believe the
benefits have been significant.
Tell us about one of your specific international ideas, Frances Accor.
Chris Laporte: This is a company that
intrigued us for a long time but was historically confusing and difficult to analyze. Its one of the biggest hotel companies in the world, but less visible to most
Americans because the largest and most
profitable brands are European budget

and mid-scale hotels like Novotel, Ibis
and Formule 1. In the U.S., they own Red
Roof Inns and Motel 6.
Over a third of operating profit comes
from a service-voucher business, a business that doesnt really exist in the U.S.
Companies primarily in Europe and Latin
America issue vouchers to their employees for things like meals, which theyre
able to offer as tax-free compensation to
employees. The companies pay Accor
upfront, and Accor then reimburses the
restaurants and other providers of the
services when the vouchers are redeemed.
Accor is the world leader in this business
and its a real gem revenues have been
growing organically at 10% annually for
more than a decade and EBITDA margins
are around 40%.
What limited the attractiveness of

Accor previously was that the company
also owned a lot of tangential things like
a travel agency, a restaurant business, a
stake in Club Med and an onboard train
catering business, all of which had
mediocre returns. That kept us from having full confidence that the cash being
generated by the core businesses was
actually going to find its way back to
shareholders or be put to use in a productive manner.
What has changed?
CL: First, Colony Capital, a firm we
greatly respect, has invested 1 billion
into the company and now holds two
seats on the board. Second, a new CEO,
Gilles Pelisson from Bouygues, took over
INVESTMENT SNAPSHOT
Accor
(Paris: AC)
Business: Operator of mid-scale/economy

hotel brands such as Mercure, Novotel and
Motel 6. Services unit manages corporate
employee-premium programs.
Share Information
(@12/21/06, Exchange Rate: $1 = 0.7588):
Price
52-Week Range
Dividend Yield
Market Cap
58.60
42.30 58.95
2.0%
12.39 billion
Financials (Year-end 2005):
7.68 billion
10.5%
6.7%
Revenue
Operating Profit Margin
Net Profit Margin
Valuation Metrics
(Current Price vs. TTM):
AC
28.4
P/E
CAC
14.5
AC PRICE HISTORY
60
60
50
50
40
40
30
2004
2005
2006
30
THE BOTTOM LINE
From asset sales and growing free cash flow, the company should generate 6 billion
in cash over the next three years, says Chris Laporte. Even after significant investments in its operating businesses, 4.5 billion, or 21 per share, would then be available for return to shareholders through dividends and share repurchases, he says.
Sources: Company reports, Maverick Capital, other publicly available information
December 22, 2006
earlier this year and has brought about a

dramatic change in how the company is
run. They've been exiting non-core businesses and are taking a much more
aggressive stance on maximizing shareholder capital.
Let me preface how theyre looking to
maximize shareholder capital by first
talking about valuation. Weve always
thought the core hotel business traded at
an unjustified discount to its peers and its
now trading at just under 9x our estimate
of 2007 EBITDA, versus about 13x for
public hotel companies overall. The valuation discrepancy is even larger when
compared with private-market multiples
being paid in deals across the industry,
which often happen at mid-teens multiples of EBITDA.
Accor has traditionally had a lot of
capital tied up in company-owned hotels,
a great number of which theyre starting
to sell off and then lease, manage or franchise back. Theyve committed to an
additional 3.2 billion of hotel asset sales
over the next three years. We think the
fact that theyre selling these properties
for low- to mid-teens multiples will be a
very tangible value catalyst at a time
when the market is valuing their entire
hotel business at much less than that.
The sale of other remaining non-core
assets will bring in another 600 million
and we think theyll sell Red Roof Inns,
which should also generate around 600
million. On top of all that, over the next
three years we estimate the company will
earn 1.6-1.7 billion in cumulative free
cash flow, after necessary capital expenditures. In Europe, were just starting to see
the pick up in revenue per available room
that has been going on for a few years in
the U.S., which gives us some comfort
that Accor has the wind at its back from
positive industry dynamics. Those price
gains drop right to the bottom line.
So, in total, were looking at cash generation of 6 billion over the next three
years, which is almost 50% of todays
market cap of around 12.5 billion.
[Note: Accor shares currently trade
around 59.] The question then is what
theyll do with all that cash. We expect
them to invest 1.5 billion in the core
hotel and services businesses, both of

which have high returns on capital. They
have excellent growth opportunities in
budget and mid-scale hotels their primary expertise in emerging markets like
China, India and Eastern Europe. In services, we expect them to make acquisitions, which they should be able to do at
EBITDA multiples of only 6x to 8x the
level at which smaller, disadvantaged
players have been willing to sell.
As for the remaining 4.5 billion
more than 21 per share we believe the
company is committed to returning it to
shareholders through dividends and share
repurchases once asset sales are complete.
change, bringing in an outsider, Phil

Schoonover from Best Buy, who was soon
promoted to CEO.
Schoonover has re-energized the company, based on the playbook he knew
from Best Buy. His biggest focus has been
on improving conversion rates generating increased revenue from the customers
in the store. Customers had become wary
of commissioned salespeople and Circuit
City struggled a bit as they moved away
from that sales strategy. Theyre doing a
much better job of training salespeople to
give the customer what they want and
rewarding them based on store-level
rather than individual performance.
You could have imagined a path not

unlike the one Colony Capital and new
management have taken, but you didnt
invest until they were there and taking
that path. Did you miss out on some of
the early improvement in the stock?
INVESTMENT SNAPSHOT
LA: Classic value investors will often

invest just on the basis of valuation, with
the confidence that value will eventually
be recognized. I've never been very comfortable with that approach. There's a
world of difference between seeing potential one of these days and believing that
it's actually going to happen.
What do you think the market is missing
in Circuit City [CC]?
Brian Zied: If you look back to the 1980s
and most of the 1990s, Circuit City was
the category killer in consumer electronics, putting companies out of business in
its wake. They won primarily on breadth
of selection and the knowledge and skill
of their commissioned sales staff.
As time went on, management changed
and Circuit City seemed to take its success
for granted. When Best Buy nearly went
bankrupt in the mid-90s, Circuit City
could probably have pushed them over the
edge. They didn't, and Best Buy started a
dramatic turnaround at the same time
Circuit City started focusing on things like
CarMax and other distractions. It wasn't
until just over two years ago that the company woke up and realized it had to
December 22, 2006
This renewed focus on the consumer is

starting to show up in the numbers. For
the last several quarters, Circuit City has
increased same-store sales in the 8%
range, roughly twice the rate of Best Buy. I
expect that theyll continue to deliver better comps than Best Buy, which is not a
knock on Best Buy, but a reflection of
Circuit City's recovery from a lower base.
How big a problem is the price-cutting
particularly in TVs that Circuit City
recently announced was hurting profits?
BZ: We don't necessarily think the issues
behind the recent announcement impact
Circuit City
(NYSE: CC)
Valuation Metrics
Business: Retailer of consumer electronics and related services with nearly 1,600
retail outlets throughout the United States
and Canada.
Share Information
Largest Institutional Owners
(@ 12/21/06):
Price
52-Week Range
Dividend Yield
Market Cap
S&P 500
20.6
14.5
(@9/30/06):
19.46
18.25 31.54
0.8%
$3.41 billion
Financials (TTM):
Revenue
Net Profit Margin
CC
21.5
n/a
P/E
P/CF
$12.27 billion
1.9%
1.2%
Company
% Owned
Fidelity Mgmt & Research

Goldman Sachs
D.E. Shaw
Vanguard Group
Calamos Advisors
14.6%
13.1%
3.7%
3.0%
2.9%
Short Interest (@ 11/8/06):
Shares Short/Float
6.9%
CC PRICE HISTORY
35
35
30
30
25
25
20
20
15
15
10
10
2004
2005
2006
THE BOTTOM LINE
Brian Zied expects strong increases in same-stores sales, a new store-expansion

program and a focused effort to improve traditionally lagging margins to result in double-digit earnings growth for some time. At todays price, the shares trade for only
8.5x the $2.35 he estimates the company can earn in 2008.
Sources: Company reports, other publicly available information
the earnings power of the company.

Margins took a hit from falling LCD and
plasma TV prices caused primarily by
manufacturers overproducing TVs and
then aggressively trying to take share. The
consumer electronics business has dealt
with price deflation for decades and it's
been manageable when the deflation is
predictable, which it wasn't in this case.
We expect more measured and predictable TV price declines going forward,
which will expand the category, drive
penetration and support a profitable business for Circuit City in 2007 and beyond.
Electronics products are confusing and
getting more so. Most people really do
need some help to work through all the
options and they want someone to honestly tell them when the extra features in
the $799 TV set arent worth it over the
$499 one. That builds a level of consumer
loyalty that Circuit City and Best Buy
should benefit from. Weve seen research
that competitors like Wal-Mart dont
even register with 80% of Circuit City
and Best Buy customers, which we think
has to do with service levels and with the
breadth of selection that Wal-Mart just
cant match.
Another more general point on the
impact of declining prices for things like
TVs is the fact that what really happens
for a very long time is that people trade
up. If a 42-inch plasma TV used to cost
$4,000 but now goes for $1,500, theres a
very good chance that the person who
would spend $4,000 for a TV before will
still pay $4,000 today, just for a much
bigger TV. We saw that dynamic happen
for ten years with personal computers
its only recently reached the point where
average prices paid are coming down as
people dont see the benefit in buying
more computer. I dont think were anywhere near that point with TVs.
One could argue the easy money has been
made in Circuit City, with the shares having dramatically rebounded from as low
as $4 in early 2003 to a recent $19.50.
Why are you still confident in the upside?
LA: I think its a common mistake to be
too focused on the rearview mirror and
December 22, 2006
not pursue something because you

missed it. We try to stay focused on
looking forward and ignore whether a lot
of money has been made or lost in a name
in the past.
BZ: The opportunity here is in several key
areas. Although theyve been doing a better job of converting customers to sales,
the actual number of customers coming in
the stores is not that much higher. As they
improve the customer experience, word
ON OUTSOURCING:
People confuse outsourcing

with call centers, but Indian
companies like Cognizant are
moving up the value chain.
of mouth improves and the company

markets itself better, we expect additional
growth from attracting new people to the
stores.
Theyre growing the store base again,
adding 45 stores in 2007 and another 65
in 2008, after being stagnant for a while.
In retail, you need to keep your store base
growing to be in the new malls and the
up-and-coming locations. If you go too
long without refreshing your store base,
you wake up one day and have too many
stale stores in less-attractive locations.
On the product side, the TV cycle will
continue to be a very big tailwind, as
prices continue to come down for plasmascreen and LCD TVs and household penetration goes way up. In addition, the
companys Firedog services group has a
great opportunity to sell integrated services for PCs, TVs and audio products.
Finally, the company has significant
potential to improve margins. It will have
an EBIT [earnings before interest and
taxes] margin of 1.0-1.4% this year, while
Best Buys is closer to 6.5%. If you look
structurally at each company, you see that
Best Buy has an advantage in sales per
square foot, but Circuit City actually has
an advantage in its product mix, with less
focus on lower-margin personal computwww.valueinvestorinsight.com
ers and entertainment software, and more

focus on TV and video categories. As
Circuit City grows and becomes more
efficient, we see no reason they cant
eventually get close to Best Buys margins.
By 2008, we expect Circuit Citys margins to be closer to 3.5% and earnings per
share to have risen from $0.70 this year
to $2.30 just 8.5x todays share price.
Given that we expect double-digit earnings growth for some time, we consider
this a great bargain. This doesnt even
take into account potential uses for the
more than $5 per share of net cash that is
sitting on the balance sheet.
From consumer electronics to IT outsourcing, describe why youre high on
Indias Cognizant Technology Solutions
[CTSH].
Andrew Warford: One of the strongest
secular themes in the technology space is
the outsourcing of information-technology services to India. The global IT-services market is a $425 billion market and
the Indian firms after eight years of
30%-plus compounded annual growth
have only 3% of this market today. The
tier-1 companies from India are
Cognizant, Infosys, Wipro and Tata.
A lot of people confuse outsourcing
with call centers, but for a player like
Cognizant, that's not a core part of their
business. Its primary business is application development and application maintenance. For example, a Goldman Sachs will
hire Cognizant to develop a trading application and then to support it over time.
One of the big trends we're seeing is
that the tier-1 Indian companies are moving up the value chain from application
development and maintenance to system
implementation things like setting up
big Oracle or SAP applications. Not only
is the system-implementation market five
times the size, but the projects are also
more complex and, therefore, more lucrative. Ten years ago, system-integration
projects required nearly everyone working on them to be on-site, which was a
clear advantage for American firms like
IBM, Accenture and EDS. Now more
than half of the people working on the
integration can be offshore, which plays

to the Indian suppliers' strengths.
nies are well-positioned with services at the

right prices for new customers.
Whats unique about Cognizants position?
With the shares up 50% in the past year,

to a recent $77.50, isnt the market
already discounting rapid growth?
AW: We consider them to have the best

management, highest-quality workforce
and the most-satisfied customers, all of
which should help them incrementally
benefit from the growth drivers for the tier1 Indian players. Not only will they take
share in systems integration, but they will
also expand into new verticals like manufacturing, retail, healthcare and media. In
addition, as outsourcing penetration in
Europe and Asia increases, these compa-
AW: We don't believe the market fully

appreciates the drivers of growth for
Cognizant. Over the past four years, the
company has grown revenues more than
50% per year and we think that will continue. Analysts, on the other hand, are
calling for revenue growth to decelerate
to the high-30% range over the next year.
That's based on our assessment of the
INVESTMENT SNAPSHOT
Cognizant Technology Solutions

(Nasdaq: CTSH)
Valuation Metrics
Business: Information technology outsourcing and consulting, with primary focus

on application development and maintenance for financial-services providers.
Share Information
(@ 12/21/06):
(@9/30/06):
Price
52-Week Range
Dividend Yield
Market Cap
77.45
48.51 82.49
0.0%
$10.98 billion
Financials (TTM):
Revenue
Net Profit Margin
$1.26 billion
18.6%
17.6%
CTSH
52.5
43.9
P/E
P/CF
Company
S&P 500
20.6
14.5
What are the biggest risks?
% Owned

Barclays Global Inv
Calamos Advisors
Wells Fargo
Franklin Resources
AW: Compounding a business of this size

at the growth rates we expect is not a trivial exercise. What gives us confidence is
the track record of this management team,
which has grown the company from
around $2 million in revenue in 1994 to
the $1.4 billion we expect this year.
11.0%
3.0%
2.9%
2.5%
2.4%
Shares Short/Float
3.4%
CTSH PRICE HISTORY

100
100
80
80
60
60
40
40
20
2004
2005
2006
THE BOTTOM LINE
Andrew Warford believes the company will continue to increase its revenue 50%
annually as it moves up the value chain into systems integration and it penetrates
new markets. For a business growing so rapidly, he considers the share multiple of
25x the $3 per share he expects the company to earn in 2008 to be a great value.
December 22, 2006
market and their position, but also on

how they appear to be making strategic
investments for long-term growth. The
way the model works, they hire software
engineers and then train them before
assigning them to customer projects. So
an excellent leading indicator is to look at
headcount growth today, to infer what
the company is expecting down the road.
Cognizant should end this year having
grown headcount by more than 55%.
This is a classic case where you really
have to get the E right in looking at valuation. Weve owned this on and off over
the past four years and for much of that
time the stock would have been considered
by many to be too expensive, but the stock
has done extremely well because people
kept underestimating the level of earnings.
On our estimate of 2008 calendar earnings, which is over $3 per share, the stock
is trading at a mid-20s P/E. For a business
we believe will grow 50% per year for the
next few years, thats a great value.
20
Your next pick, Koreas NHN Corp., is

another high-growth story you think the
market is underestimating. Why?
Michael Pausic: The company was formed
in 2001 after the merger of what was then
a small search-engine company and
Hangame, which produces online games.
As media investors, we've been interested
in the Korean market for some time
because it's arguably the most wired market in the world. Weve wanted to see what
happens to content, CD sales and movie
piracy as a market reaches high broadband
penetration levels. Korea has around 85%
broadband penetration today.
The company's Naver search engine
dominates search in Korea with a 70%plus share of the market, twice the level in
2003. It uses what's called social

search, which is important because there
isn't that much online reference content
in Korean. Users provide answers to the
queries and the best answers are ranked
and then provided first in the search
results. That makes it more of a winnertakes-all search application: the more
users, the better the proprietary content,
which then attracts more users.
From their search and game base,
NHN has also built the #1 Korean portal,
the #1 news site and the #1 shopping
comparison site. The game platform is the
market leader, with more than 25 million
registered users for multi-player online
games and also individual casual games.
Korea is a huge market for electronic
games, with roughly four times the percapita spending of the U.S.
So is the bet primarily on continued
growth in Korea?
ness. Search and advertising revenues

should increase from 65% today to over
80% in two years as ad revenues expand
more rapidly. Online ad growth is quite
strong in Korea, where they continue to
take ad share and more effectively monetize search-results pages.
With the stock recently trading around
110,000 won, how are you thinking
about valuation?
MP: The stocks not undiscovered relative
to the Korean market, trading at about
23x next years consensus earnings estimates, vs. 10-12x for the market. But as
with Cognizant, we believe NHN will
grow more rapidly than the market
expects revenues by 40% next year and
earnings by around 70%. So the shares
trade at only 20x our 5,450 won per

share earnings estimate for 2007. Relative
to its growth prospects and the high confidence we have in management to realize
them, this is a tremendous value.
LA: The key is if were right about that
70% earnings growth. If we are, we can
obviously withstand valuation compression which we wouldnt expect, by the
way and still have a very nice return.
Its always more important to us to
value a stock relative to its absolute
prospects than to other stocks. We all
lived through the days when people were
buying Internet companies that were really cheap because they were trading for
only 10x sales. Were very careful to
always ask Well, what if all the comps
are wrong, too?
INVESTMENT SNAPSHOT
NHN Corp.
MP: We actually also see expansion into

new geographies as a key driver of the
investment opportunity. Their strategy is
to establish their operations in a new
market with a subscription-based games
platform and then expand into other
businesses. Today, they have the #1 gaming platform in Japan, and they're moving
one of the co-founders and many of their
best engineers to Japan to expand into the
search business. They will make money in
Japan in the fourth quarter of this year on
existing operations. If theyre successful
in search, capturing even 10% of the
search market there would double the
overall company's current size.
In China, NHN has the #2 casual
game portal with 170 million registered
users. While we dont expect them to
expand into search in China anytime
soon, they have new games coming out
that we believe will drive considerable
growth at a very nice margin. We expect
Chinese revenues to more than double
next year and that before long theyll be
generating at least 15% operating margins there.
Another positive dynamic is that we
see NHN's overall revenue mix moving
toward the higher-margin search busiDecember 22, 2006
(Seoul: 035420)
Business: Operates leading Internet

search engine (Naver) and multi-player
game website (Hangame) in Korea.
Expanding into Japan and China.
Share Information
(@12/21/06, Exch. Rate: $1 = 930.0 Korean Won):
Price
52-Week Range
Dividend Yield
Market Cap
KRW 110,100
KRW 75,240 KRW 115,700
0.0%
n/a
Financials (Q3 2006, annualized):
Revenue
Net Profit Margin
KRW 571.20 billion

40.3%
n/a
Valuation Metrics
(Current Price vs. estimated 2007):
NHN
23.0
P/E
DAX
11.0
NHN PRICE HISTORY

120000
120000
100000
100000
80000
80000
60000
60000
40000
40000
20000
2004
2005
2006
20000
THE BOTTOM LINE
While expanding its dominant search and game-website position in Korea, the company also has excellent growth prospects in Japan and China, says Michael Pausic. At
20x his 5,450 won EPS estimate for 2007, he believes the shares are cheap relative
to its growth prospects and the confidence he has in management to realize them.
Sources: Company reports, Maverick Capital, other publicly available information
Is the prospect of a takeover an important

part of the thesis for NHN?
MP: Not at all. It certainly could happen
and Korea is a strategic growth market,
but I dont think its at all on the agenda of
the founders and I doubt anybody would
buy it without them sticking around.
Tell us generally how do you approach
the decision to sell.
LA: One thing I learned from Julian
Robertson is the concept that there are no
holds. Every day you're either willing
to buy more at the current price or, if you
aren't, you should redeploy the capital to
something you believe does deserve incremental capital. I sometimes hear, If my
target price is $45, why should we sell at
$43? The answer is simple I believe
we have better uses for that capital than
getting the last few percentage points in
the move from $43 to $45.
We distribute every day something we
call the Sheet of Shame. It shows our
ten largest losses, cumulatively from the
inception of the position, year-to-date,
month-to-date and yesterday. It's a way
of focusing our attention on what's not
working. There are only two ways to get
something off the Sheet of Shame which
people are eager to do either eliminate
the position or increase the position and
be right, earning some of the losses back.
SG: That mindset is a source of healthy
tension in the firm. It prompts discussion
and keeps people intellectually honest.
For stocks going against us, we also
have three triggers that force a decision: if
a stock moves 20% or more against us on
a trailing 45-day basis, if a long costs us
25 basis points in a month or if a short
costs us 15 basis points in a month. Its
obviously almost never a surprise when
something gets flagged, but we force ourselves to decide whether this is a great
opportunity or whether weve made a
mistake and should move on. The majority of the time we end up adding to the
position.
Its when were truly negatively surprised that we typically exit the position.
December 22, 2006
If were surprised, that usually means

management is also and that theres
something more fundamentally wrong
with the business than we thought.
Another high-profile stock that hasnt

worked out so well for you is Boston
Scientific [BSX]. Do you wish youd done
anything different in the buying process?
Do you end up actively trading around

your positions?
LA: Yes, though I'd argue that some of

what has happened to the stock in terms
of recalls of some of their products and
controversy surrounding the safety of
drug-eluting stents was well outside the
range of expected outcomes. Our survey
work on doctor response to these issues
proved to be misleading as well, which
may have had something to do with the
sample size we used or may have simply
been the result of doctors proving to be
too optimistic about these issues
I still think this is an unfinished story
and that the potential value, particularly
with their balance sheet and their ability
to generate cash, is significant. Whether
the company realizes that value on its
own is another question.
LA: Yes, which gets back to looking for

the best use of capital at any given time.
For example, UnitedHealth [UNH] is a
position we've owned for years. The
stock coming under pressure this year
ON THESIS CREEP:
We try to avoid buying something for reasons X, Y and Z

and then holding it six months
later for reasons A, B and C.
gave us an opportunity to take advantage

of what we thought was the Street's overreaction to the actual impact on cash that
any of their option problems will have. By
selling some when the scandal first broke
and buying more at the right times after it
fell further, the position has been roughly
breakeven for us this year, even though
the stock price is down 14% year to date.
You seem to have recently given up on
Gap [GPS]. Describe why.
LA: The thesis was similar to Circuit
City's. With sustained success on the top
line, the potential for operating-margin
leverage is very significant. We concluded
this fall would be the turnaround season
for comp-store sales, but as the season
kicked in, the turnaround was much more
mild than we hoped. We could have convinced ourselves there were some positive
signs, but we try to be diligent in avoiding
thesis creep buying something for reasons X, Y and Z and then holding it six
months later for reasons A, B and C. Our
thesis on Gap was predicated on a significant improvement on the top line and we
lost our conviction in the stock when that
was slow to develop.
Youve put a lot of emphasis on building

a deep organization. Why?
LA: We have 155 employees, 52 of which
are investment and trading professionals.
The sector teams are led by senior people
with an average of 15 years experience
and we all work together as peers.
If I believed having 10 people rather
than 52 would allow us to be more successful, we'd quickly make that transition. But with the specialization of the
people we're competing against today, I
think it's very difficult to have a meaningful edge without significant depth and
expertise. We should know more about
every one of the companies in which we
invest than any other non-insider.
The importance of that I don't think
has been as evident in the past two or three
years as it will be in the next two or three
years. With collapsing risk premiums, performance has been driven in many cases by
things other than fundamentals. But I
think that's played out and rationality is
going to be the driver now. Consistently
picking winners and losers is once again
going to require extremely in-depth
knowledge of operating businesses and the
industry dynamics. That takes work. VII
I N V E S T O R I N S I G H T : Robert Jaffe
Investor Insight: Robert Jaffe

Force Capitals Robert Jaffe (with Mark Cohen, Paul Klibanow and Eric Newman) describes why the markets incremental
thinking provides opportunity, the value he finds in alternative real estate, key lessons he learned from SACs Steven Cohen
and the big upside he sees in Lamar Advertising, Cabot Corp., Copart and Norfolk Southern.
Describe your somewhat of a sink-orswim indoctrination as an investor.
Robert Jaffe: My start in the money management business was essentially [hedgefund manager] Steve Cohen of SAC
Capital telling a partner and me in 1993,
Ill give you $5 million and six months
go out there and make as much money as
you can. That was basically it. He gave
us a lot of rope to hang ourselves.
Its charitable to say that we didnt
have a particularly well-defined strategy.
We were incredibly cheap, so looked for
50-cent dollars and then bought as much
of them as we could when we found
them. We paid a lot of attention to relative valuation, trying to understand why
seemingly comparable companies traded
at such different valuations.
Is that still your basic strategy?
RJ: Looking for 50-cent dollars, yes.
Relative valuation we use, but with caution. Its a minefield because youre
counting on everything in your comparison set being properly valued. With
respect to concentration, I regret that
weve gotten away from being so focused,
but the institutional-investor mentality is
just not very tolerant of hedge funds that
arent fairly well diversified and hedged.
A common thread in a lot of our
investments is that they are in industries
weve followed for a long time and in
which theres a transforming event that
we dont think the market fully understands. People tend to think incrementally, so its difficult for them to process the
ramifications of dramatic change. One
example well speak about later is Lamar
Advertising. Ive been interested in the
outdoor-advertising business since it
started to consolidate in the mid-1990s,
but it was always too expensive relative
to radio for me to buy. Today, with all the
December 22, 2006
difficulties in traditional advertising and

with an evolution in outdoor-advertising
technology, theres an exciting story there
that we dont think the market gets.
Another example is Norfolk Southern
and the railroad industry, which well
also talk about later. This industry has
been unwinding 130 years of being regulated, which combined with the strain on
the interstate highway system as international trade explodes, is making railroads
interesting again. Thats just sort of coming together today its taken all this time
to get railroads like Norfolk Southern
back into fighting shape.
We also look for situations on which
we can put a different and more appropriate twist. We started buying cell-phone
tower companies like American Tower a
few years ago when we saw that this was
really just a triple-net-lease real estate
business with triple-A credits which
happened to be trading at big discounts to
other real estate like apartment buildings.
Is there a more current example of something like that?
RJ: We have a position in Corrections
Corporation of America [CXW], which
owns and operates for-profit prisons and
is another example of what we consider
alternative real estate. Were finding it
hard to buy much in more traditional real
estate companies the home builders are
in disarray, REIT yields are very low and
almost anything to do with commercial
real estate has already run wild. But in
Corrections Corp. we essentially see a
real-estate company with triple-A customers operating in an industry in which
there's an extraordinary demand/supply
imbalance today. We dont see any reason
why it should trade at an operating-cashflow yield of around 9%, when comparable REITs trade at cap rates in the 5.56.5% range.
Robert Jaffe
Rolling the Dice

As with many professional investors, Bob
Jaffes interest in money and markets manifested itself early in a fascination with
gambling. It sounds kind of degenerate
now, but as a teenager I was a passionate
gambler, he says. Poker, craps, betting
on sports whatever I could do I did.
Having earned a Harvard M.B.A. and having had a series of financial jobs as a
currency trader, bond salesman, highyield bond analyst and equity analyst for
Michael Steinhardt Jaffe began to hit his
investing stride when SAC Capitals
Steven Cohen staked him and a partner
as money managers in 1993. We were
really the first analysts focused on fundamental analysis and long-term stock picking for SAC, as opposed to using a trading approach, Jaffe says. He eventually
became SACs director of research, a
position he left in 2001 when he started
his own firm.
Did his early gambling experience provide
any useful lessons? I wouldnt necessarily say that, but I did have enough sense in
high school to always keep my gambling
money and my savings account separate,
says Jaffe. I guess I had a sense of risk
management even then.
As you drill down into specific ideas,

where do you focus first?
Has your approach to valuation evolved

over time?
RJ: Its important to us to be invested in

companies that have proven themselves
to be the best capital allocators. Thats in
no way meant to diminish the importance
of operating excellence, but my experience has been that the best investments
result from having both great execution
and great capital allocation. We own a
small stake in a company called Lithia
Motors [LAD], which is a new-car retailer mostly in the western U.S. The CEO is
a great operator, but a terrible capital
allocator. Unless that changes, Im not
optimistic about our getting the returns
we should.
We still think Sears [SHLD] is a bargain at todays share price [of $168] for
two main reasons. In November of 2004,
[Sears Chairman] Eddie Lampert said If
youre a retailer and you cant get 10%
EBITDA margins, you dont belong in the
business. Look at other struggling
retailers like J.C. Penney, which went
from 2% EBITDA margins to 11% margins over a span of 18 months. So our
first assumption is that Sears can achieve
10% margins, starting on a run-rate basis
next year.
Our second big assumption is based on
the fact that Eddie Lampert is one of the
best capital allocators there is, and we
think hed like to shrink Sears share base
by one-third, to 100 million shares. If
those two things happen and there are
some logistical difficulties in buying back
so many shares the shares are worth
two to three times the current price.
Another area on which we spend a lot
of effort is to define how big the runway
of opportunity is in the business. Were
not looking for short-term or arbitrage
opportunities, but cases where we can see
a reasonable probability of a huge upside,
which were not paying for. Our best
opportunities come from those situations
where we understand the downside from
our entry point, but we also see changes
in the company and business again, for
which the market has a complete lack of
understanding that can dramatically
improve the companys fortunes.
RJ: Yes. It used to be Id only want to buy

things trading at 4x EBITDA or less. If it
traded at 10x, forget it. Thats become
much less relevant to me. Ive seen too
many people make mistakes, myself
included, from ignoring what on the surface appear to be high-multiple stocks or
embracing what on the surface appear to
December 22, 2006
ON BILLBOARD ADVERTISING:
I can be more confident Im

getting what I pay for. People
still have to look out of their
front windshield to drive.
be low-multiple stocks. Its only after you

do the hard work of analyzing where you
think cash flows are going that you often
see high multiples become low multiples
and low multiples become high multiples.
Given that we generally pursue only
ideas we think have big upside, we buy
most of our stocks at 50% or less of what
we think the net present value of the
future cash flows is.
How concentrated is your portfolio?
RJ: We try to have no more than 6-7% on
a cost basis in any one long position. The
ideal number of positions at any given
time for us is 25-30 longs and 35-45
shorts, with a 20-40% net long exposure.
All longs and shorts stand on their own
we dont do paired trading because I
think its very difficult to be right on both
the winner and the loser in a sector.
Tell us more about one of your specific
ideas, Lamar Advertising [LAMR].
Paul Klibanow: Lamar is the countrys
only pure-play outdoor-advertising company. The market is dominated by three
big players Lamar, Clear Channel and
CBS which are of roughly equal size and
control about 85% of all billboards in the

U.S. While CBS and Clear Channel go
more head-to-head for national advertising dollars in bigger markets, Lamar is
focused more on local advertising and
smaller markets, like Baton Rouge or
Louisville. Within each of its markets,
Lamar typically owns about 80% of the
billboard faces.
At the same time the market has consolidated, federal and local regulation
make it very difficult to put up new billboards. Constrained supply is usually
quite a good thing if youre a market
leader which Lamar is in almost all of
its markets and inflation-adjusted pricing has been rising steadily.
RJ: An important part of the thesis here is
whats going on in the traditional advertising business, where its getting harder
and harder to get your message out. If
you advertise on the radio, youre competing with people talking on their cell
phones or listening to their iPods. With
newspapers, youre seeing sharp declines
in readership by people 18 to 30 years
old, so youre missing out on a very
important demographic. And television
advertising is getting killed by Tivo. But if
my ad is on a billboard, theres little
doubt in my mind that the consumer is
going to see it and I can be more confident Im getting what I pay for. So far at
least, people still have to look out of their
front windshield to drive a car.
What is the transforming industry
event you alluded to earlier?
RJ: The changeover of the companys billboards from analog to digital is a massive
opportunity. Think about the opportunity digital billboards provide: For national
advertisers, McDonalds can now buy the
4 a.m. to 7 a.m. slot to promote breakfast
or Anheuser-Busch can advertise
Budweiser during the evening rush hour.
For local advertisers, banks can market
their current interest rates, grocery stores
can promote their latest sale on chicken,
or the gas station down the road can offer
up their latest gas prices.
The economics of the transformation
to digital can be remarkable. It costs

$300,000 or so to transform a board and
based on the work weve done and the
industry experience to date, we believe
that per-board revenues will rise by as
much as 10-12 times after the switch to
digital. With margins on that incremental
revenue as high as 80%, you can pay back
the costs to switch in as little as a year.
PK: Lamar currently has more than
150,000 billboard faces and only about
300 of them are digital. Because 80% of
the revenues come from 20% of the
boards, you certainly wont see all the
billboards switched to digital anytime
soon, but it does mean theres a lot of

leverage from the 20% or so of the
boards we eventually expect to get
upgraded. This is a multi-year process.
How does this translate into share upside
from the current price of around $65?
RJ: There are three main elements to the
story here: First, we believe theres a significant opportunity to re-capitalize the
company, given its strong cash flow and
attractive prospects. If they borrowed
enough to return to the highest amount of
leverage theyve had in the past five or six
years, they could buy back $3 billion
INVESTMENT SNAPSHOT
Lamar Advertising
(Nasdaq: LAMR)
Valuation Metrics
Business: Owner and operator of advertising billboards, highway logo signs and transit advertising displays, located primarily in
mid-size and small U.S. markets.
Share Information
(@ 12/21/06):
Price
52-Week Range
Dividend Yield
Market Cap
S&P 500
20.6
14.5
(@9/30/06):
65.03
44.99 65.37
0.0%
$6.50 billion
Financials (TTM):
Revenue
Net Profit Margin
LAMR
160.0
19.4
P/E
P/CF
$1.09 billion
16.6%
3.9%
Company
% Owned
T. Rowe Price
SPO Advisory
Janus Capital
Goldman Sachs
11.6%
8.9%
7.9%
5.5%
4.1%
Why are you high on Cabot Corp [CBT]?
Shares Short/Float
9.5%
LAMR PRICE HISTORY

80
80
70
70
60
60
50
50
40
40
30
2004
2005
2006
30
THE BOTTOM LINE
Dramatic revenue upside from the conversion of analog to digital billboards and the
potential for significant share buybacks are not being appropriately valued by the market, says Robert Jaffe. With estimated EBITDA growing 20% annually over the next
five years, he believes the companys intrinsic value is at least double the current price.
December 22, 2006
worth of stock, out of a current $6.4 billion market cap.

The second element is the growth from
the digital conversion. To simplify the
upside we expect, were assuming up to
80% of their current revenues can be
magnified by 10x, at an incremental
EBITDA margin of 80%. That translates
into annual EBITDA growth of more
than 20% over the next five years. Just
from that, we come up with net present
values for the company of between $130
and $200 per share, depending on how
quickly the conversion ramps up.
The third element is further down the
road, which is that we believe they could
eventually convert to a tax-advantaged
REIT structure. Theyll tell you they dont
pass all the tests for conversion, but we
have legal opinions saying they do.
So for us, this has all the makings of a
great investment: an immediate capitalallocation decision that would create
value, a fundamental change in the business that provides big upside and an eventual business-structure change that would
deliver added permanent benefit.
Mark Cohen: Cabots primary business is

in producing carbon black, which is by
weight the biggest ingredient in making
tires. Its an ugly, dirty business, but it
supplies 90% of the companys current
cash flow. There are only three main carbon-black producers Cabot, the Bass
family of Texas and Degussa of Germany
which has brought some price rationality to what has been a cyclical business.
Cabot has an established culture of
taking their strong cash flow from carbon
black and investing it in new, differentiated products. Theyre in Boston and can
attract very smart scientists from Harvard
and MIT to cook up new ideas.
Two of their ancillary products, in
particular, are very interesting. One is a
scarce, high-performance drilling fluid
called cesium formate, which is a lubricant used in oil drilling that is particularly effective in high-pressure, off-shore
drilling where much of the new oil
exploration is going on right now. There
are some wells that simply cannot be

drilled without cesium formate, which is
why Cabot is able to charge for it 10x the
price of conventional drilling fluids. The
company owns roughly 80% of the total
global supply and as the business grows,
we expect it to attract the attention of
one of the large oilfield-services companies, which could better exploit the full
potential of the product. We think this is
eventually a $100 million-a-year cash
flow business three times the current
level that could eventually be sold for
10x that.
The other product that were excited
about is a printer-ink pigment Cabot has
developed that is a key component in the

enormous bet Hewlett-Packard is making
on a new generation of inkjet printers and
copiers, called Edgeline. Up to now, inkjet
printing hasnt had the quality or speed
necessary to compete with laser with higher-end business customers, but in no
small part due to Cabots pigment H-P
believes thats changed with this new line.
Theyve invested more than $4 billion in
the technology and are building a sales
force to go against Ricoh and Xerox. The
first generation of the new machines starts
shipping in volume next quarter.
We like that H-P is highly motivated
for this to work. A key reason its making
INVESTMENT SNAPSHOT
Cabot Corp.
(NYSE: CBT)
Valuation Metrics
Business: Global producer of wide range

of specialty chemicals and performance
materials, including carbon black, metal
oxides, inkjet colorants and drilling fluids.
Share Information
(@ 12/21/06):
(@9/30/06):
Price
52-Week Range
Dividend Yield
Market Cap
41.63
30.50 43.85
1.7%
$2.72 billion
Financials (TTM):
Revenue
Net Profit Margin
$2.54 billion
5.0%
3.5%
CBT
32.0
12.3
P/E
P/CF
Company
S&P 500
20.6
14.5
% Owned
SPO Advisory
SAC Capital
Lazard Asset Mgmt
Cabot-Wellington
Franklin Resources
14.1%
6.5%
5.0%
4.0%
3.2%
3.8%
CBT PRICE HISTORY

50
50
40
40
30
30
20
2004
2005
2006
20
THE BOTTOM LINE
The carbon-black companys ability to reinvest cash flow into more differentiated products is poised to pay off handsomely, says Robert Jaffe, particularly in drilling fluids
and printer-ink pigments. He believes the current share price doesnt include at all the
$20 per share value he sees in an inkjet-printer partnership with Hewlett-Packard.
December 22, 2006
Is there a risk H-P will source the pigment

elsewhere?
MC: Its similar to car manufacturing,
where once your part is sourced into a car
youre rarely taken out. Theyve perfected
these printers over years of development
with the very specific formulation Cabot
provides. Once thats set, its highly
unlikely H-P would change suppliers.
That makes Cabot a long-term razor in a
razor/razor-blade situation.
With the shares just under $42, how are
you looking at valuation?
RJ: Quite simply, we think the carbonblack business and the drilling-fluid business justify the current share price.
Everything on top of that, including the
$20 per share we think the inkjet-pigment
business is worth, is upside.
Shares Short/Float
such a huge investment is because it makes

a higher margin on inkjet products. On
their laser machines, they have to pay royalties to Canon for the laser technology.
Because Cabot is the sole provider of
ink pigment for these H-P machines, we
see significant growth upside over many,
many years. Our model, based on successful penetration of the Edgeline products, puts the present value of this business at $1.2-1.3 billion.
Describe the opportunity you see in

Copart [CPRT].
MC: Copart is in the auto salvage and
auction business. Take a car that's been in
an accident and is deemed a total loss by
the insurance adjuster. It gets towed to
one of Coparts 125 yards, the title is
transferred to the insurance company and
then Copart auctions it off to the highest
bidder, with the proceeds going to the
insurance company. Copart has no inventory risk they just manage the car's
movement, beginning with the auto-body
shop and ending with delivery to the eventual buyer. They primarily make their
money from commissions on sales, so the
better the price received, the better for
both Copart and the insurance companies.
RJ: It sounds very basic, but they actually

provide a lot of value added. The titletransfer process can take a long time and
Copart owns plenty of real estate near
major metropolitan areas where the cars
can be kept. In addition, these insurance
companies want to deal with companies
of scale who can get the best prices and
work with them on a national basis. As
the market leader with about a 35%
share, Copart can do that better than any
competitor.
MC: Copart sells over one million cars
per year. About three years ago, they
transferred their entire auction business
to the Internet. They took an old-fashioned auction process where people had
to drive hundreds of miles and walk in
the mud to look at cars and made it virtual. That provides a huge advantage in
getting good prices, as it dramatically
expands the potential buyer base. Last
quarter, 27% of their auctioned cars
were sold overseas. Most of these end up
in, of all places, Lithuania, which has
kind of become the worlds body shop,
rebuilding and selling the cars in emerging markets.
Reaching such a broad base of buyers
not only keeps the prices Copart receives
up, but also makes them less susceptible
INVESTMENT SNAPSHOT
Copart
(Nasdaq: CPRT)
Valuation Metrics
Business: National provider of salvagevehicle services, consisting primarily of the

storage and sale for insurance companies
of automobiles deemed to be totaled.
Share Information
(@ 12/21/06):
Price
52-Week Range
Dividend Yield
Market Cap
S&P 500
20.6
14.5
(@9/30/06):
29.71
22.37 30.92
0.0%
$2.69 billion
Financials (TTM):
Revenue
Net Profit Margin
CPRT
23.0
17.5
P/E
P/CF
$543.9 million
33.9%
22.1%
Company
% Owned
Neuberger Berman
Wasatch Advisors
Thomas W. Smith
Bamco
Eminence Capital
10.8%
7.7%
4.9%
3.5%
2.9%
2.4%
CPRT PRICE HISTORY

35
35
30
30
25
25
20
20
15
2004
2005
2006
15
THE BOTTOM LINE
Double-digit increases in same-store sales, continued market-share gains from a

superior selling network and technology, and the opening of new locations should
drive increases in annual EPS of at least 25%, says Robert Jaffe. Given such growth,
the 6.5% free-cash-flow yield at which the shares trade is amazing, he says.
December 22, 2006
Thats fairly impressive organic growth.

Are there other reasons beyond rising sale
prices?
MC: Yes. Part of it is that there are more
cars on the road, more wrecks and a higher percentage of wrecks resulting in cars
being totaled. With more technology in
cars, like airbags and electronics, repair
costs have gone up and it more often just
makes sense to declare a car totaled than
to fix it.
More importantly, though, Copart is
taking market share, primarily from the
mom-and-pops that still make up about
40% of the business and which increasingly cant compete with the selling network and technology that Copart has created. We see this as a long-term tailwind
for the company.
On top of this organic growth, the
company also continues to expand its
footprint. Were expecting roughly 6-7%
annual revenue growth from the opening
of new facilities and another 3-4% from
acquisitions.
Recently around $30 up more than
30% in the past year how attractively
priced are the shares?
Shares Short/Float
to the ups and downs in scrap values.

The companys same-store sales have
been growing at low double-digit rates
for years.
RJ: The shares trade at about a 6.5%

free-cash-flow yield, which is amazing
given the 25%-plus annual earnings
growth we expect and the very high
returns on capital the company earns.
Since 1982, the total investment in the
business has only been about $500 million, for a company that will do $250
million in EBITDA this year.
One frustration is that they have $315
million in net cash and dont buy back
stock. They have a Depression-era mentality, but in this case we can live with
that. The founder and CEO, Willis
Johnson, is absolutely obsessed with
making the company more successful.
Were willing to give him the benefit of
the doubt.
Are there any free options on the upside

here like you saw in Cabot?
RJ: Actually, yes, but not nearly as well
developed. Given the companys technology and expertise, theyre looking at ways
to bring more rationality to the sale of
used cars in the U.S., which is a giant
market of around 40 million cars sold per
year. In particular, they are in the process
of building an exchange system for tradein cars between new-car dealers and usedcar dealers. That could be a huge business
if they get it right.
Your final pick, Norfolk Southern [NSC],
is in another less-than-glamorous business, railroads.
Eric Newman: An important part of the
thesis here is the ongoing change in the
competitive environment for railroads.
From about 1830 to the 1950s, railroads
were basically the only means of ground
transport in the U.S. The industry was
then devastated when 40,000 miles of
supply were added to the ground transportation system through interstate highways. Regulated railroads couldnt compete against a trucking industry that
moved things faster, more reliably and
door-to-door.
Today you have a dramatically
changed landscape in ground transport.
Having been deregulated, railroads have
driven costs down through consolidation
and have improved speed and reliability
by investing in new technology. Its now
15-40% cheaper to send goods via rail
and the truckers remaining speed advantage is decreasing due to road congestion.
The highway system has barely grown
over the past 30 years, but the number of
trucks on the road moving freight has
doubled.
In addition, truckers are facing other
major secular headwinds. They have a
labor shortage nobody wants to be a
long-haul trucker anymore and increasing insurance costs and emissions-control
regulations are putting significant pressure on their costs.
On the demand side, the explosion of
international trade, as U.S. manufacturers
December 22, 2006
continue to extend their supply chains

overseas, will continue to keep demand
for ground transport growing nicely.
RJ: All of which bodes well not only for
railroads ability to take market share,
which theyre doing, but also to increase
prices, which theyre also doing. The
CFO of one of the large trucking companies told us recently that the railroads
should raise their prices 10% tomorrow.
Given the high fixed costs of the business,
the operating leverage is high. A 10%
increase in revenue for Norfolk Southern
would translate into a 20-25% increase
next year in EBITDA.
Within the railroad industry, what distinguishes Norfolk Southern?

EN: Norfolk is one of the four major rail
carriers and primarily focused on the
eastern half of the U.S. Their network
largely runs north-south and east-west,
which makes for a more rational, costeffective way to move goods. CSX, their
main competitor in the east, has been
struggling with a more complex route
structure, cobbled together through several acquisitions.
Having spent heavily over many years
to upgrade and rationalize their network,
we expect Norfolks capital spending
INVESTMENT SNAPSHOT
Norfolk Southern
(NYSE: NSC)
Valuation Metrics
Business: Rail transport of raw materials,

intermediate products and finished goods
within the U.S. through more than 21,000
company-owned route miles in 22 states.
Share Information
(@ 12/21/06):
Price
52-Week Range
Dividend Yield
Market Cap
S&P 500
20.6
14.5
(@9/30/06):
49.72
39.10 57.71
1.5%
$19.45 billion
Financials (TTM):
Revenue
Net Profit Margin
NSC
14.2
9.0
P/E
P/CF
$9.35 billion
27.1%
15.6%
Company
% Owned
JPMorgan Chase
Barclays Global Inv
State Street Corp
Capital Research & Mgmt
4.8%
4.6%
3.4%
3.0%
2.8%
Shares Short/Float
2.0%
NSC PRICE HISTORY

60
60
50
50
40
40
30
30
20
2004
2005
2006
20
THE BOTTOM LINE
Having rationalized its route system and invested heavily in new technology, the company will benefit from an ongoing improvement in its competitive position versus truckers, says Robert Jaffe. Given its bright prospects, Norfolk could leverage its balance
sheet to buy back shares, he says, and double its EPS and share price by 2009.
needs to decrease. Today, after necessary

capital expenditures, the company is
throwing off more than $1 billion per
year in free cash flow.
In addition to being smart operators,
management has also proven to be smart
allocators of capital. When the shares fell
more than 20% in the month after second-quarter earnings came out, they
bought back 4% of the total shares.
Given the level of cash flow and the fact
that reinvestment needs have decreased,
we think theyll continue to reduce the
share count significantly.
Now trading around $50, what potential
do you see for the shares?
RJ: As with Lamar, part of the opportunity lies in a re-capitalization. After buying
half of Conrail in 1998, the companys
net debt to EBITDA got as high as 7x
before they worked it down over several
years to 2x. We believe now that they
should lever themselves again, given that
the business is now far healthier and its
prospects are bright.
We expect Norfolk to increase its
EBITDA by 10% per year over at least
the next three years. If they levered the
company to only 5x net debt to EBITDA
and used the proceeds to buy back shares,

they could reduce the share count in three
years by more than 240 million shares.
The result would be that earnings per
share, by our estimates, would hit $7.50
in 2009, up from around $3.60 this year.
At the current 13x forward multiple at
which the shares trade, wed be looking at
a share price in the next couple of years at
around $100. If they levered up to the
previous 7x level, the upside would be
much higher.
Youve typically been quite an active
short seller. Why?
RJ: First of all, its in our investment charter and our limited partners expect and
want us to do it. Second, I believe the
irrationality in the market generally tends
to be more focused on the long side. As a
result, I think that overall there are more
incorrectly priced short opportunities
than long opportunities.
Finally, I just consider shorting to be
more intellectually stimulating. Like a
lot of things in the markets and in life,
the more intellectual argument is usually
the negative one. Theres something very
satisfying about nailing an overpriced
security.
At SAC, you had a long-term focus in a

short-term environment. How has that
affected your approach to selling?
RJ: We generally expect to hold something for a long time in order to realize
the value we believe is there. But one
thing I learned from Steve Cohen is to be
sensitive to when the market over-appreciates something in the short-term and to
harvest some of your gains. Markets
inevitably react to data points that you
dont think are truly relevant. Trading
around that is a profit opportunity and
helps you better manage risk.
Steve also thought it was the silliest
thing in the world to try to capture the
first and last part of a stocks move
those were the most dangerous parts of
investing. For me, Id like to capture more
of the early part of the move and leave the
latter part for somebody else. The New
York Stock Exchange [NYX], for example, has been a fantastic stock for us and
I still think theres great upside, but Ive
reduced our position because Im nervous
at the valuation of the company today. In
general, if youre right on the fundamentals and can capture the big, fat middle
portion of a stocks move, youre going to
make a lot of money. VII
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December 22, 2006
U N C O V E R I N G R I S K : Sub-Prime Lenders
Rough Neighborhood
Bargain-hunting investors might be attracted by the market turmoil surrounding sub-prime mortgage lenders
and by their resulting low valuations. Before taking the plunge, read this first.
Any screen of stocks trading at low
multiples of earnings or with high dividend yields is likely to include the mortgage lenders listed in the table below.
Each company focuses primarily on making residential real estate loans to lesscredit-worthy customers a highly-lucrative business during the real-estate boom,
but one under a darkening cloud as the
housing downturn deepens.
Dark clouds over an industry, of course,
are more likely to attract value investors
than to repel them. The key question is
whether the gloom is appropriately built
into stock prices. Answering such a question is particularly interesting with mortgage lenders, as most of the ticking time
bombs from bad loans are already on the
books if not clearly evident today.
A recent report by the forensic
accountants at Rockville, Marylands
Center for Financial Research & Analysis
(CFRA), Assessing the Sub-prime
Shakeout, attempts to shed some light
on the risk to future performance currently evident in these sub-prime lenders
Uncovering Risk:
Sub-Prime Mortgage Lenders
financials. Based on an in-depth analysis

of third-quarter numbers, CFRA found
diverging risk profiles among the primary
sub-prime players (see table).
The business model for lenders such as
New Century Financial and NovaStar is
relatively straightforward. They originate
mortgages to borrowers with low credit
ratings and then typically sell in secondary markets a large majority of those
loans at a premium to the face amount of
the mortgage. These one-time premiums,
called gains on sale, make up a large portion of revenue, with much of the rest
coming from interest income on mortgages retained as investments.
In assessing future risk, CFRA focused
on future threats to these two revenue
streams gains on sale and interest
income based on measures of loan-market pricing, credit quality and liquidity.
Equally important, they judged how conservative or aggressive each company
appeared to be in terms of valuing existing
loans and reserving for future events.
Of the five companies, New Century
stands out with the highest risk profile. It

is under-reserved relative to competitors
for things like the need to repurchase bad
loans or to account for the declining value
of loans held for sale. Its percentage of
non-accrual loans (90+ days past due) out
of total loans held for investment is the
highest in the group. On a basic measure
of liquidity, it has unrestricted cash and
marketable securities worth 4.6% of its
total loans held for sale, vs. an average of
11.5% for the other four competitors.
At the other end of the spectrum,
CFRA found Accredited Home Lenders to
be more conservatively positioned for the
future, with relatively high reserves
against loan losses and comparatively better overall credit quality.
Were not making buy or sell recommendations with this analysis, says
CFRA analyst Zach Gast. But the stocks
of these companies have traded more or
less together as the industry has come
under pressure. As the risk levels between
the companies become more differentiated, wed expect that to change. VII
While the share prices of monoline sub-prime mortgage lenders have tended to move together as the
industry has come under pressure, the risk profiles of the individual companies are diverging, according to
a recent detailed analysis by forensic accountants at The Center for Financial Research & Analysis.
C F R A R I S K A N A LY S I S
Ticker
Price
12/21/06
Accredited Home Lenders
LEND
27.56
Low
Low
Low
Moderate
Moderate
Fieldstone
FICC
4.79
Moderate
Moderate
Moderate
High
Moderate
Fremont General
FMT
16.49
Low
Moderate
Low
Moderate
High
New Century
NEW
34.04
High
High
High
High
High
NovaStar
NFI
27.07
High
High
Moderate
Moderate
High
Company
Loan Sale and

Securitization
Income Statement
Loan Sale and

Securitization
Balance Sheet
Balance Sheet
Assets
Liquidity
Credit Quality
Loan Sale and Securitization I/S: Risk based primarily on levels of repurchase provisions for already-sold loans and valuation-allowance provisions during each quarter
Loan Sale and Securitization B/S: Risk based primarily on repurchase reserves, valuation allowances and non-accrual loans as a percentage of loans held for sale
Balance Sheet Assets: Risk based primarily on levels of loss reserves, non-accrual loans and deferred origination costs as a percentage of loans held for investment
Liquidity: Risk based on level of unrestricted cash and marketable securities as a percentage of loans held for sale
Credit Quality: Risk based on delinquency performance of individual securitized pools of each company's loans
Sources: Center for Financial Research & Analysis; publicly available information
December 22, 2006
A F R E S H L O O K : Magic Formula
Magic Formula, Take Two

Joel Greenblatt goes to great lengths to explain that the investing magic formula of his best-selling book
may not work for long periods. Our portfolio constructed with it last year is working just fine.
Value investing works, said Joel
Greenblatt in our review last year of his
best-selling The Little Book That Beats
The Market because it's hard for people
to do. It requires buying into companies
that may look ugly at the moment and it
can not work for years in a row. Most
people aren't capable of sticking it out
through that, he pointed out. (VII,
November 30, 2005)
So we weren't overly optimistic when
we checked on the past year's performance of the ten largest-capitalization
stocks with the best combination of
earnings yield and return on capital that
we screened for at Greenblatt's
w w w. m a g i c f o r m u l a i n v e s t i n g . c o m .
Companies on the list faced a variety of
headwinds: Pfizer from an uncertain
drug pipeline and litigation risk, Nucor
from a potential cyclical steel downturn,
Gannett and Tribune from Internet com-
Magic Formula
Revisted
petition. This was likely to be a portfolio requiring some time to work.

In fact, this magic-formula portfolio
has done very well, rising an average
17.4%, vs. 13.4% for the S&P 500. Five
companies on the list Nucor, UST,
Harley-Davidson, Pfizer and Avon rose
at least 25%, with Nucor leading the
way, up 73%. Only two stocks were
down: Boston Scientific, plagued by concerns over the effectiveness and safety of
its drug-coated stents and suffering from
merger indigestion after buying competitor Guidant, is off 37%. H&R Block,
hurt by the performance of its large
mortgage-lending unit, Option One, is
off just over 5%.
The composition of our new list of
large-cap magic-formula companies (see
table) is markedly different. Four newcomers Marathon Oil, Teck Cominco,
Southern Copper and Freeport-McMoRan
Buying shares in good companies (with high returns on capital) when

theyre available at bargain prices (resulting in high earnings yields)
is what smart investing is all about, says Joel Greenblatt. From
www.magicformulainvesting.com, the new list below shows the ten
largest-cap companies sporting the best combination of earnings yield
and return on capital, using trailing 12-month earnings numbers.
Pre-Tax
Earnings Yield
Pre-Tax
Return on
Capital
Ticker
Market Cap
($mil)
Price
12/20/06
Motorola
MOT
49,535
20.41
11%
> 100%
Marathon Oil
MRO
33,647
93.54
25%
50 - 75 %
Accenture
ACN
20,094
35.08
9%
> 100%
Nucor
NUE
17,375
55.96
16%
50 - 75 %
Teck Cominco
TCK
16,815
75.95
18%
50 - 75 %
Southern Copper
PCU
16,796
54.69
16%
50 - 75 %
McKesson
MCK
15,025
51.10
9%
> 100%
Company
Freeport-McMoRan
FCX
11,837
58.38
21%
75 - 100%
Quest Diagnostics
DGX
10,220
52.60
10%
> 100%
National Semiconductor
NSM
7,422
22.97
10%
75 - 100%
Notes: Pre-Tax Earnings Yield = Pre-tax Operating Earnings/(Market Value of Equity + Net Interest-Bearing Debt)
Pre-Tax Return on Capital = Pre-tax Operating Earnings/(Net Working Capital + Net Fixed Assets)
Sources: As of December 20, 2006, www.magicformulainvesting.com, from data provided by S&P Compustat
December 22, 2006
have seen their shares increase dramatically in recent years as the mining and
energy industries have boomed. That they
still have relatively high earnings yields
likely reflects market concern that at least
near-term earnings growth is moderating
or at risk.
Two holdovers from last year's list
return, Nucor and laboratory-testing firm
Quest Diagnostics. Quest shares fell 18%
in a single day in early October after
announcing that it was not renewing its
contract with managed-care giant
UnitedHealth, which accounts for roughly 7% of Quest's revenues. Quest CEO
Surya Mohapatra explained that the
terms and conditions requested by
UnitedHealth made it irresponsible for
us to accept. Quest shares have only
modestly recovered since.
In a reflection that maturing, technology-related companies are increasingly likely to warrant value-investor
attention, the new list includes
Motorola, Accenture and National
Semiconductor. Such stocks, however,
can still react strongly to concerns over
slowing near-term growth. Such worries have shaved 25% off National
Semiconductor's share price since May,
while Motorola is down 22% in just the
past ten weeks.
Even the most poorly constructed
stock portfolio can outperform the market over one year. Greenblatt himself
wants to have a three- to four-year outlook on each of the companies he buys.
That's how we keep our conviction
and avoid the emotional trauma of
short-term price moves, which are
inevitable, he told attendees at last
month's Value Investing Congress in
New York, adding that buying cheap
helps on that score as well: You want
the difference between your estimate of
long-term value and the current price to
be so big that you can drive a truck
through it. VII
EDITORS LETTER
Separating the Wheat from the Chaff

It has has always struck us that one
of the weakest arguments that markets are

perfectly efficient goes something like this:
The average professional fund manager
underperforms the market over time, so
the market must be efficient. The first
problem with this line of reasoning is that,
given the number of professionals and the
amount of money they manage, the average manager basically is the market. That
this collective professional manager
who charges fees for his efforts can't beat
the market is hardly a revelation.
The more fundamental flaw is the
veiled implication that over time no one
can beat the market, which flies in the face
of both observation and common sense.
Were this so, investing would hold a
unique place among human endeavors in
which talent and effort didn't result in differentiated performance. Of course people
can beat the market over long periods
some are just better investors than others.
This all came to mind recently after
coming across a 1989 Fortune article profiling ten young money managers under
the title, Are these the new Warren
Buffetts? Just tackling such a daunting
challenge is worthy of respect, but even
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December 22, 2006
more impressive is the number of true

superstars identified: Michael Price
(Mutual Shares), Glenn Greenberg
(Chieftain Capital), Seth Klarman (Baupost
Group), Jim Chanos (Kynikos Associates),
Richard Perry (Perry Capital) and a 27year-old upstart just out of Goldman Sachs,
Edward Lampert. (Jim Cramer also made
the list and is clearly a superstar, though
we're not quite sure why.)
What revealed the potential in these
young money managers? Strong past
investment performance, for one, although
in many cases the track records were quite
short. Despite the efforts of lawyers to
convey the contrary, past performance is
typically one of the better indicators of
future performance and these young managers had already exhibited a gift for making money for their investors. They also
had already gotten the attention of their
peers: The best way to spot a potentially
outstanding investment manager is to ask
another one, wrote Fortune.
Even more important were certain
character traits that these investors tended to share. They invested right alongside
their clients and avoided all potential conflicts of interest. They were smart, obvi-
ously, but also supremely rational The

size of the investor's brain is less important than his ability to detach the brain
from the emotions, the magazine noted.
They were almost all value investors,
though eclectic and flexible in their application of value-investing principles.
Finally, these future stars exhibited a
consistency of conviction worthy of
Warren Buffett himself. The article closes
with a telling anecdote from a Wall Street
banker recalling a dinner with Buffett in
Manhattan: "He had an exceptional
ham-and-cheese sandwich. A few days
later, we were going out again and he
said, `Let's go back to that restaurant.' I
said, `But we were just there' and he said,
`Precisely. Why take a risk with another
place? We know exactly what we're going
to get.' And that is what Warren looks for
in stocks too. He only invests in companies where the odds are great that they
will not disappoint." VII
Whitney Tilson
Co-Editor-in-Chief
John Heins
Co-Editor-in-Chief
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December 22, 2006
Value Investor Insight

Value Investor Insight 2006-12

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ValueInvestor

December 22, 2006

The Leading Authority on Value Investing

s a University of North Carolina

Inside this Issue

Investor Insight: Lee Ainslie

Uncovering Risk: Sub-Prime

n eight years working closely with

Other companies in this issue:

Investor Insight: Lee Ainslie

same scenario, we would be up 5%, even

Lessons from Tiger

Value Investor Insight 2

investors' collective insight on different

LA: Integrity, intelligence, competitive

In an ideal world, Id like to be

Beyond management quality, on what

LA: This may sound obvious, but we

more selective in the U.S. and

Are there industries or sectors you avoid?

resources on mid-caps, in the $5-10 billion range. There's no grand design to

profitable brands are European budget

What limited the attractiveness of

Business: Operator of mid-scale/economy

Financials (Year-end 2005):

THE BOTTOM LINE

December 22, 2006

earlier this year and has brought about a

hotel and services businesses, both of

change, bringing in an outsider, Phil

You could have imagined a path not

LA: Classic value investors will often

This renewed focus on the consumer is

(Current Price vs. TTM):

Largest Institutional Owners

Fidelity Mgmt & Research

Short Interest (@ 11/8/06):

THE BOTTOM LINE

Brian Zied expects strong increases in same-stores sales, a new store-expansion

Value Investor Insight 5

the earnings power of the company.

not pursue something because you

People confuse outsourcing

of mouth improves and the company

ers and entertainment software, and more

integration can be offshore, which plays

nies are well-positioned with services at the

Whats unique about Cognizants position?

With the shares up 50% in the past year,

AW: We consider them to have the best

AW: We don't believe the market fully

Cognizant Technology Solutions

Business: Information technology outsourcing and consulting, with primary focus

(Current Price vs. TTM):

Largest Institutional Owners

What are the biggest risks?

Fidelity Mgmt & Research

AW: Compounding a business of this size

Short Interest (@ 11/8/06):

CTSH PRICE HISTORY

THE BOTTOM LINE

December 22, 2006

market and their position, but also on

Your next pick, Koreas NHN Corp., is